Taxation Law Bar Exam Past Papers (2009-2017) PDF

TAXATION LAW I. General Principles of Taxation A. Definition and concept of taxation B. Nature of taxation Congress passed a sin tax law that increased the tax rates on cigarettes by 1,000%. The law was thought to be sufficient to drive many cigarette companies out of business, and was...

TAXATION LAW I. General Principles of Taxation A. Definition and concept of taxation B. Nature of taxation Congress passed a sin tax law that increased the tax rates on cigarettes by 1,000%. The law was thought to be sufficient to drive many cigarette companies out of business, and was questioned in court by a cigarette company that would go out of business because it would not be able to pay the increased tax. The cigarette company is __________ (1%) (2013 Bar Question) (A) wrong because taxes are the lifeblood of the government (B) wrong because the law recognizes that the power to tax is the power to destroy (C) correct because no government can deprive a person of his livelihood (D) correct because Congress, in this case, exceeded its power to tax SUGGESTED ANSWER: (B) wrong because the law recognizes that the power to tax is the power to destroy In McCulloch v. Maryland Chief Justice Marshall declared that the power to tax involves the power to destroy. This maxim only means that the power to tax includes the power to regulate even to the extent of prohibition or destruction of businesses. The reason is that the legislature has the inherent power to determine who to tax, what to tax and how much tax is to be imposed. Pursuant to the regulatory purpose of taxation, the legislature may impose tax in order to discourage or prohibit things or enterprises inimical to the public welfare. In the given problem, the legislature’s imposition of prohibitive sin tax on cigarettes is congruent with its purpose of discouraging the public form smoking cigarettes which are hazardous to health. C. Characteristics of taxation XYZ Corporation manufactures glass panels and is almost at the point of insolvency. It has no more cash and all it has are unsold glass panels. It received an assessment from the BIR for deficiency income taxes. It wants to pay but due to lack of cash, it seeks permission to pay in kind with glass panels. Should the BIR grant the requested permission? (1%) (2013 Bar Question) (A) It should grant permission to make payment convenient to taxpayers. (B) It should not grant permission because a tax is generally a pecuniary burden. (C) It should grant permission; otherwise, XYZ Corporation would not be able to pay. Page 1 of 195 Law on Taxation (D) It should not grant permission because the government does not have the storage facilities for glass panels. SUGGESTED ANSWER: (B) It should not grant permission because a tax is generally a pecuniary burden. This principle is one of the attributes or characteristics of tax. D. Power of taxation compared with other powers 1. Police power 2. Power of eminent domain E. Purpose of taxation 1. Revenue-raising 2. Non-revenue/special or regulator Money collected from taxation shall not be paid to any religious dignitary EXCEPT when: (2011 Bar Question) (A) the religious dignitary is assigned to the Philippine Army (B) it is paid by a local government unit (C) the payment is passed in audit by the COA (D) it is part of a lawmaker’s pork barrel SUGGESTED ANSWER: (A) the religious dignitary is assigned to the Philippine Army F. Principles of sound tax system 1. Fiscal adequacy 2. Administrative feasibility A law that allows taxes to be paid either in cash or in kind is valid. SUGGESTED ANSWER: True. There is no law which requires the payment of taxes in cash only. However, a law allowing payment of taxes in kind, although valid, may pose problems of valuation, hence, will violate the principle of administrative feasibility. (BAR 2009) 3. Theoretical justice G. Theory and basis of taxation 1. Lifeblood theory Page 2 of 195 Law on Taxation Briefly explain the following doctrines: lifeblood doctrine; necessity theory; benefits received principle; and doctrine of symbiotic relationship. (5%) (2016 BAR) SUGGESTED ANSWER: The following doctrines, explained: a. Lifeblood Doctrine – Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. (CIR v. Algue, Inc., G.R. No. L-28896, February 17, 1988, 158 SCRA 9) b. Necessity Theory – The exercise of the power to tax emanates from necessity, because without taxes, government cannot fulfill its mandate of promoting the general welfare and well being of the people. (CIR v. Bank of Philippine Islads, G.R. No. 134062, April 17, 2007, 521 SCRA 373) c. Benefits received principle – Taxpayers receive benefits from taxes through the protection the State affords to them. For the protection they get arises their obligation to support the government through payment of taxes. (CIR v. Algue, Inc., G.R. No. L-28896, February 17, 1988, 158 SCRA 9) d. Doctrine of symbiotic relationship - Taxation arises because of reciprocal relation of protection and support between the State and taxpayers. The State gives protection and for it to continue giving protection, it must be supported by the taxpayers in the form of taxes. (CIR v. Algue, Inc., G.R. No. L-28896, February 17, 1988, 158 SCRA 9) Which statement below expresses the lifeblood theory? (2012 BAR) a) The assessed taxes must be enforced by the government. b) The underlying basis of taxation is government necessity, for without taxation, a government can neither exist nor endure; c) Taxation is an arbitrary method of exaction by those who are in the seat of power; d) The power of taxation is an inherent power of the sovereign to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues. SUGGESTED ANSWER: b) The underlying basis of taxation is government necessity, for without taxation, a government can neither exist nor endure Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power Page 3 of 195 Law on Taxation derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. (National Power Corporation vs. City of Cabanatuan) Anne Lapada, a student activist, wants to impugn the validity of a tax on text messages. Aside from claiming that the law adversely affects her since she sends messages by text, what may she allege that would strengthen her claim to the right to file a taxpayer’s suit? (2011 Bar Question) (A) That she is entitled to the return of the taxes collected from her in case the court nullifies the tax measure. (B) That tax money is being extracted and spent in violation of the constitutionally guaranteed right to freedom of communication. (C) That she is filing the case in behalf of a substantial number of taxpayers. (D) That text messages are an important part of the lives of the people she represents. SUGGESTED ANSWER: (B) That tax money is being extracted and spent in violation of the constitutionally guaranteed right to freedom of communication. Real property taxes should not disregard increases in the value of real property occurring over a long period of time. To do otherwise would violate the canon of a sound tax system referred to as: (2011 Bar Question) (A) theoretical justice. (B) fiscal adequacy. (C) administrative feasibility. (D) symbiotic relationship. SUGGESTED ANSWER: (B) fiscal adequacy Explain the principles of a sound tax system. (2015 Bar Question) SUGGESTED ANSWER: The principles of a sound tax system are the following: a. Fiscal adequacy which means that the sources of revenue should be sufficient to meet the demands of public expenditures; b. Equality or theoretical justice which means that the tax burden should be proportionate to the taxpayer’s ability to pay (this is the so-called ability to pay principle); and Page 4 of 195 Law on Taxation c. Administrative feasibility which means that the tax law should be capable of convenience, just and effective administration. Which theory in taxation states that without taxes, a government would be paralyzed for lack of power to activate and operate it, resulting in its destruction? (2011 Bar Question) (A) Power to destroy theory (B) Lifeblood theory (C) Sumptuary theory (D) Symbiotic doctrine SUGGESTED ANSWER: (B) Lifeblood theory. The power to tax is the power to destroy. Is this always so? (2011 Bar Question) (A) No. The Executive Branch may decide not to enforce a tax law which it believes to be confiscatory. (B) Yes. The tax collectors should enforce a tax law even if it results to the destruction of the property rights of a taxpayer. (C) Yes. Tax laws should always be enforced because without taxes the very existence of the State is endangered. (D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected. SUGGESTED ANSWER: (D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected. 2. Necessity theory 3. Benefits-protection theory (Symbiotic relationship) 4. Jurisdiction over subject and objects H. Doctrines in taxation 1. Prospectivity of tax laws 2. Imprescriptibility 3. Double taxation Jennifer is the only daughter of Janina who was a resident in Los Angeles, California, U.S.A. Janina died in the U.S. leaving to Jennifer one million shares of Sun Life (Philippines), Inc., a corporation organized and existing under the laws of the Republic of the Philippines. Said shares were held in trust for Janina by the Corporate Secretary of Sun Life and the latter can vote the shares and receive dividends for Janina. The Internal Revenue Service (IRS) of the U.S. taxed the shares on the ground that Janina was domiciled in the U.S. at the time of her death. Page 5 of 195 Law on Taxation  [a] Can the CIR of the Philippines also tax the same shares? Explain. (2.5%) [b] Explain the concept of double taxation. (2.5%) (2016 BAR) SUGGESTED ANSWER: (A) Yes. The property being a property located in the Philippines, it is subject to the Philippine estate tax irrespective of the citizenship or residence of the decedent (Sec. 85, NIRC). However, if Janina is a non-resident alien at the time of her death, the transmission of the shares of stock can only be taxed applying the principle of reciprocity (Sec. 104, NIRC). (8) Double taxation occurs when the same subject or object of taxation is taxed twice when it should be taxed but once. Double taxation is prohibited when it is an imposition of taxes on the same subject matter, for the same purpose, by the same taxing authority within the same jurisdiction, during the same taxing period, with the same kind or character of a tax (84 C.J.S.131-132). It is permissible if taxes are of different nature or character, or the two taxes are imposed by different taxing authorities (Villanueva v. City of Iloilo, G.R. No. L-26521, December 28,1968, 26 SCRA 578). Choose the correct answer. Double Taxation - (1%) (2014 Bar Question) (A) is one of direct duplicate taxations wherein two (2) taxes must be imposed on the same subject matter, by the same taxing authority, within the same jurisdiction, during the same period, with the same kind or character of tax, even if the purposes of imposing the same are different. (B) is forbidden by law; and therefore, it is a valid defense against the validity of a tax measure. (C) means taxing the same property twice when it should be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing. (D) exists when a corporation is assessed with local business tax as a manufacturer, and at the same time, value-added tax as a person selling goods in the course of trade or business. SUGGESTED ANSWER : A. Double taxation is one of direct duplicate taxations wherein two (2) taxes must be imposed on the same subject matter, by the same taxing authority, within the same jurisdiction, during the same period, with the same kind of character of tax, even if the purposes of imposing the same are different. a. Strict sense Differentiate between double taxation in the strict sense and in a broad sense and give an example of each. (2015 Bar Question) Page 6 of 195 Law on Taxation SUGGESTED ANSWER: Double taxation in the strict sense pertains to the direct double taxation. This means that the taxpayer is taxed twice by the same taxing authority, within the same taxing jurisdiction, for the same property and same purpose. On the other hand, double taxation in broad sense pertains to indirect double taxation. This extends to all cases in which there is a burden of two or more impositions. It is the double taxation other than those covered by direct double taxation. b. Broad sense c. Constitutionality of double taxation d. Modes of eliminating double taxation Upon his retirement, Alfredo transferred his savings derived from his salary as a marketing assistant to a time deposit with AAB Bank. The bank regularly deducted 20% final withholding tax on the interest income from the time deposit. Alfredo contends that the 20% final tax on the interest income constituted double taxation because his salary had been already subjected to withholding tax. Is Alfredo’s contention correct? Explain your answer. (3%) (2017 BAR) SUGGESTED ANSWER: No. Double taxation means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, for the same purpose and with the same kind or character of tax. (CIR v. Citytrust Investment Phils., G.R. Nos. 139786, 140857, September 27, 2006) The 20% final tax is imposed on the interest income, while the tax earlier withheld is on the salary or compensation income. Thus, though both pertain to income tax, they do not pertain to the same thing or activity and consequently, no double taxation exists. In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.- based corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-resident alien like Caruso. A. What will be your advice to Caruso in order to lessen the impact of possible double taxation on the same income? (3%) SUGGESTED ANSWER: Page 7 of 195 Law on Taxation Caruso has the option either to claim the amount of income tax withheld in U.S. as a deduction from his gross income in the Philippines, or to claim it as a tax credit (Sec. 34(C)(1)(b), NIRC). B. Would your answer in A. be the same if Caruso became a U.S. immigrant in 2008 and had become a non-resident Filipino citizen? Explain the difference in treatment for Philippine income tax purposes. (3%) SUGGESTED ANSWER: No. The income from abroad of a non-resident citizen is exempt from the Philippine income tax; hence, there is no international double taxation on said income (Sec. 23, NIRC). Bank A deposit money with Bank B which earns interest that is subjected to the 20% final withholding tax. At the same time, Bank A is subjected to the 5% gross receipts tax on its interest income on loan transactions to customers. Which statement below INCORRECTLY describes the transaction? (2012 BAR) a) There is double taxation because two taxes – income tax and gross receipts tax are imposed on the interest incomes described above and double taxation is prohibited under the 1987 Constitution b) There is no double taxation because the first tax is income tax, while the second tax is business tax; c) There is no double taxation because the income tax is on the interest income of Bank A on its deposits with Bank B (passive income), while the gross receipts tax is on the interest income received by Bank A from loans to its debtor-customers (active income); d) Income tax on interest income of deposits of Bank A is a direct tax, while GRT on interest income on loan transaction is and tax. SUGGESTED ANSWER: a) There is double taxation because two taxes – income tax and gross receipts tax are imposed on the interest incomes described above and double taxation is prohibited under the 1987 Constitution There is no double taxation if the law imposes two different taxes on the same income, business or property. First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT [Final Withholding Tax] is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT [Gross Receipts Tax] is the privilege of engaging in the business of banking. Second, although both taxes are national in scope because they are imposed by the same taxing authority - the national government under the Tax Code - and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and Page 8 of 195 Law on Taxation withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned. (Commissioner of Internal Revenue vs. BPI, G.R. No. 147375) Double taxation in its general sense means taxing the same subject twice during the same taxing period. In this sense, double taxation: (2011 Bar Question) (A) violates substantive due process. (B) does not violate substantive due process. (C) violates the right to equal protection. (D) does not violate the right to equal protection. SUGGESTED ANSWER: (C) violates the right to equal protection. Mr. Alas sells shoes in Makati through a retail store. He pays the VAT on his gross sales to the BIR and the municipal license tax based on the same gross sales to the City of Makati. He comes to you for advice because he thinks he is being subjected to double taxation. What advice will you give him? (1%) (2013 Bar Question) (A) Yes, there is double taxation and it is oppressive. (B) The City of Makati does not have this power. (C) Yes, there is double taxation and this is illegal in the Philippines. (D) Double taxation is allowed where one tax is imposed by the national government and the other by the local government. SUGGESTED ANSWER: (D) Double taxation is allowed where one tax is imposed by the national government and the other by the local government. There is double taxation when one tax is imposed by the national government and the other is imposed by a local government unit.4 However, the 1987 Constitution does not forbid double taxation. In Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan (G.R. No. L-31156, February 27, 1976), the Supreme Court declared that double taxation does not violate the uniformity rule nor does it infringe the equal protection guarantee just because one tax is imposed by the national government and the other tax is levied by a local government unit. 4. Escape from taxation a. Shifting of tax burden b. Tax avoidance Page 9 of 195 Law on Taxation Choose the correct answer. Tax Avoidance – (2014 Bar Question) (A) is a scheme used outside of those lawful means and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. (B) is a tax saving device within the means sanctioned by law. (C) is employed by a corporation, the organization of which is prompted more on the mitigation of tax liabilities than for legitimate business purpose. (D) is any form of tax deduction scheme, regardless if the same is legal or not. SUGGESTED ANSWER : B. Tax avoidance is a tax-saving device within the means sanctioned by law. c. Tax evasion Lucky V Corporation (Lucky) owns a IO-storey building on a 2,000 square meter lot in the City of Makati. It sold the lot and building to Rainier. for P80 million. One month after, Rainier sold the lot and building to Healthy Smoke Company (HSC) for P200 million. Lucky filed its annual tax return and declared its gain from the sale of the lot and building in the amount of P750,000.00. An investigation conducted by the BIR revealed that two months prior to the sale of the properties to Rainier, Lucky received P40 million from HSC and not from Rainier. Said amount of P40 million was debited by HSC and reflected in its trial balance as "other inv. - Lucky Bldg." The month after, another P40 million was reflected in HSC's trial balance as "other inv. - Lucky Bldg." The BIR concluded that there is tax evasion since the real buyer of the properties of Lucky is HSC and not Rainier. It issued an assessment for deficiency income tax in the amount of P79 million against Lucky. Lucky argues that it resorted to tax avoidance or a tax saving device, which is allowed by the NIRC and BIR rules since it paid the correct taxes based on its sale to Rainier. On the other hand, Rainier and HSC also paid the prescribed taxes arising from the sale by Rainier to HSC. Is the BIR correct in assessing taxes on Lucky? Explain. (5%) (2016 BAR) SUGGESTED ANSWER: Yes. The sale of the property by Lucky V Corporation (Lucky) to Rainer and consequently the sale by Rainer to HSC being prompted more on the mitigation of tax 'liabilities than for legitimate business purposes, therefore Constitutes tax evasion. The real buyer from Lucky is HBC as evidenced by the direct receipt of payments by the former from the latter where the latter recorded "other investments — Lucky Building". The scheme of resorting to a two-step transaction in selling the property to the ultimate buyer in order to escape paying higher taxes is considered as outside of those lawful means allowed in mitigating tax liabilities which makes Lucky criminally and civilly liable. Page 10 of 195 Law on Taxation Hence, the BIR is correct in assessing taxes on Lucky (CIR v. Estate of Benigno P. Todo, Jr., G.R. No.147188, September 14, 2004, 438 SCRA 290). You are the retained tax counsel of ABC Corp. Your client informed you that they have been directly approached with a proposal by a BIR insider (i.e., a middle rank BIR official) on the tax matter they have referred to you for handling. The BIR insider's proposal is to settle the matter by significantly reducing the assessment, but he will get 50% of the savings arising from the reduced assessment. What tax, criminal and ethical considerations will you take into account in giving your advice? Explain the relevance of each of these considerations. (2013 Bar Question) SUGGESTED ANSWER: As a lawyer, I have the responsibility to give only a lawful advice. Canon I of the Code of Professional Responsibility mandates me to “uphold the Constitution, obey the laws of the land and promote respect for law and legal processes. Rule 1.01 states that “a lawyer shall not engage in unlawful, dishonest, immoral or deceitful conduct.” Rule 1.02 provides that “a lawyer shall not counsel or abet activities aimed at defiance of the law or at lessening confidence in the legal system.” Therefore, I will advise my client not to agree with the proposal of the BIR officer. Agreeing with the proposal will result in criminal prosecution under the following laws: Under the NIRC, the officers of the board who authorized the tax evasion will be liable under Section 253(C), while the corporation shall be liable under Section 256. The BIR official is liable under Section 269 which provides for the violations committed by government enforcement officers. Paragraph (d) of Section 269 provides that one of these violations is “offering or undertaking to accomplish, file or submit a report or assessment on a taxpayer without the appropriate examination of the books of accounts or tax liability, or offering or undertaking to submit a report or assessment less than the amount due the Government for any consideration or compensation, or conspiring or colluding with another or others to defraud the revenues or otherwise violate the provisions of this Code.” Under the Revised Penal Code, the officers of the corporation shall be liable under Article 212 for corruption of public officials while the BIR official is liable for direct bribery. Both my client and the BIR official will also be liable under Republic Act No. 3019 or the Anti- Graft and Corrupt Practices Act. Page 11 of 195 Law on Taxation On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Ms. Pares, sold a 16-storey commercial building known as Haeltown Building to Mr. Belly for P100 million. Mr. Belly, in turn, sold the same property on the same day to Bell Gates, Inc. (BGI) for P200 million. These two (2) transactions were evidenced by two (2) separate Deeds of Absolute Sale notarized on the same day by the same notary public. Investigations by the Bureau of Internal Revenue (BIR) showed that: (1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale between HC and Mr. Belly; (2) as early as May 17, 2014, HC received P40 million from BGI, and not from Mr. Belly; (3) the said payment of P40 million was recorded by BGI in its books as of June 30, 2014 as investment in Haeltown Building; and (4) the substantial portion of P40 million was withdrawn by Ms. Pares through the declaration of cash dividends to all its stockholders. Based on the foregoing, the BIR sent Haeltown Corporation a Notice of Assessment for deficiency income tax arising from an alleged simulated sale of the aforesaid commercial building to escape the higher corporate income tax rate of thirty percent (30%). What is the liability of Haeltown Corporation, if any? (2014 Bar Question) SUGGESTED ANSWER : The tax planning scheme adopted by Haeltown Corporation constitutes tax evasion. According to CIR v. Estate of Benigno Toda (G.R. No. 147188, September 14, 2004), a transaction where a taxpayer made it appear that there were two sales of the property was considered “tainted with fraud.” The sole purpose of acquiring and transferring title of the property on the same day was to create a tax shelter. The sale to Mr. Belly (which is subject to individual capital gains tax) was to mislead the BIR and avoid the higher corporate income tax. 5. Exemption from taxation a. Meaning of exemption from taxation b. Nature of tax exemption c. Kinds of tax exemption d. Rationale/grounds for exemption e. Revocation of tax exemption 6. Compensation and set-off The doctrine of equitable recoupment allows a taxpayer whose claim for refund has prescribed to offset tax liabilities with his claim of overpayment. SUGGESTED ANSWER: Page 12 of 195 Law on Taxation True. The doctrine arose from common law allowing offsetting of a prescribed claim for refund against a tax liability arising from the same transaction on which an overpayment is made and underpayment is due. The doctrine finds no application to cases where the taxes involved are totally unrelated, and although it seems equitable, it is not allowed in our jurisdiction (CIR v. VST, 104 Phil. 1062 ). (BAR 2009) 7. Compromise 8. Tax amnesty a. Definition b. Distinguished from tax exemption Which of the following are NOT usually imposed when there is a tax amnesty? (2011 Bar Question) (A) Civil, criminal, and administrative penalties (B) Civil and criminal penalties (C) Civil and administrative penalties (D) Criminal and administrative penalties SUGGESTED ANSWER: (A) Civil, criminal, and administrative penalties 9. Construction and interpretation a. Tax laws b. Tax exemption and exclusion c. Tax rules and regulations d. Penal provisions of tax laws e. Non-retroactive application to taxpayers Which of the following statement is NOT correct? (2012 BAR) a) In case of doubt, statutes levying taxes are constructed strictly the government; b) The construction of a statute made by his predecessors is not binding upon the successor, if thereafter he becomes satisfied that a different construction should be given; c) The reversal of a ruling shall not generally be given retroactive application, if said reversal will be prejudicial to the taxpayer; d) A memorandum circular promulgated by the CIR that imposes penalty for violations of certain rules need not be published in a newspaper of general circulation or official gazette because it has the force and effect of law. SUGGESTED ANSWER: d) A memorandum circular promulgated by the CIR that imposes penalty for violations of certain rules need not be published in a newspaper of general circulation or official gazette because it has the force and effect of law. Page 13 of 195 Law on Taxation A revenue memorandum circular shall not begin to be operative until after due notice thereof maybe fairly presumed. (Commissioner of Internal Revenue vs. Philippine Airlines, G.R. No. 180066, July 8, 2009) The BIR, through the Commissioner, instituted a system requiring taxpayers to submit to the BIR a summary list of their sales and purchases during the year, indicating the name of the seller or the buyer and the amount. Based on these lists, the BIR discovered that in 2004 ABC Corp. purchased from XYZ Corp. goods worthP5,000,000. XYZ Corp. did not declare these for income tax purposes as its reported gross sales for 2004was only P1,000,000. Which of the following defenses may XYZ Corp. interpose in an assessment against it by the BIR? (1%) (2013 Bar Question) (A) The BIR has no authority to obtain third party information to assess taxpayers. (B) The third party information is inadmissible as hearsay evidence. (C) The system of requiring taxpayers to submit third party information is illegal for violating the right to privacy. (D) None of the above. SUGGESTED ANSWER: (D) None of the above. Section 6(B) of the NIRC authorizes the Commissioner to assess the property tax due from a taxpayer when he believes that the report the taxpayer submitted is false, incomplete, or erroneous. The same provision authorizes the Commissioner to amend the return from his own knowledge and from such information he can obtain through testimony or otherwise, which is deemed prima facie correct and sufficient for all legal purposes. I. Scope and limitation of taxation 1. Inherent limitations Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (4%) (BAR 2009) ANSWER: The inherent limitations on the power to tax are: Taxation is for a public purpose. - The proceeds of the tax must be used (a) for the support of the State or (b) for some recognized objective of the government or to directly promote the welfare of the community. Page 14 of 195 Law on Taxation Taxation is inherently legislative. - Only the legislature has full discretion as to the persons, property, occupation or business to be taxed provided these are all within the State’s territorial jurisdiction. It can also finally determine the amount or rate of tax, the kind of tax to be imposed and the method of collection (1 Cooley 176184). Taxation is territorial. - Taxation may be exercised only within the territorial jurisdiction of the taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may determine the place of taxation” or “ tax situs", Taxation is subject to international comity. - This is a limitation which is founded on reciprocity designed to maintain a harmonious and productive relationships among the various states. Under international comity, a state must recognize the generally- accepted tenets of international law, among which are the principles of sovereign equality among states and of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken in that capacity. a. Public purpose b. Inherently legislative i. Exceptions 1. Delegation to local governments 2. Delegation to the President 3. Delegation to administrative agencies Which statement is WRONG? (2012 BAR) a) The power of taxation may be exercised by the government, its political subdivisions, and public utilities; b) Generally, there is no limit on the amount of tax that may be imposed; c) The money contributed as tax becomes part of the public funds; d) The power of tax is subject to certain constitutional limitations. SUGGESTED ANSWER: a) The power of taxation may be exercised by the government, its political subdivisions, and public utilities c. Territorial i. Situs of taxation a. Meaning Which among the following concepts of taxation is the basis for the situs of income taxation? (2011 Bar Question) (A) Lifeblood doctrine of taxation Page 15 of 195 Law on Taxation (B) Symbiotic relation in taxation (C) Compensatory purpose of taxation (D) Sumptuary purpose of taxation SUGGESTED ANSWER: (B) Symbiotic relation in taxation b. Situs of income tax 1. From sources within the Philippines Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the Republic of Nigeria. Its commercial airplanes do not operate within Philippine territory, or service passengers embarking from Philippine airports. The firm is represented in the Philippines by its general agent, Narotel. SAA sells airplane tickets through Narotel, and these tickets are serviced by SAA airplanes outside the Philippines. The total sales of airplane tickets transacted by Narotel for SAA in 2012 amounted to Pl0,000,000.00. The Commissioner of Internal Revenue (CIR) assessed SAA deficiency income taxes at the rate of 30% on its taxable income, finding that SAA's airline ticket sales constituted income derived from sources within the Philippines. SAA filed a protest on the ground that the alleged deficiency income taxes should be considered as income derived exclusively from sources outside the Philippines since SAA only serviced passengers outside Philippine territory. It, thus, asserted that the imposition of such income taxes violated the principle of territoriality in taxation. Is the theory of SAA tenable? Explain. (5%) (2016 BAR) SUGGESTED ANSWER: No. The activity which gives rise to the income is the sale of ticket in the Philippines, hence, the income from sale of tickets is an income derived from Philippine sources which is subject to the Philippine income tax. Accordingly, there is no violation of the principle of territoriality in taxation (Air Canada v. CIR, G.R. No. 169507, January 11, 2016, 778 SCRA 131). (Note: As the case which is the basis of the answer was decided before the cut – off date for the 2016 Bar Examinations, it is recommended that this question be considered a bonus question, with any answer to be given full credit.) Guidant Resources Corporation, a corporation registered in Norway, has a 50 MW electric power plant in San Jose, Batangas. Aside from Guidant's income from its Page 16 of 195 Law on Taxation power plant, which among the following is considered as part of its income from sources within the Philippines? (2011 Bar Question) (A) Gains from the sale to an Ilocos Norte power plant of generators bought from the United States. (B) Interests earned on its dollar deposits in a Philippine bank under the Expanded Foreign Currency Deposit System. (C) Dividends from a two-year old Norwegian subsidiary with operations in Zambia but derives 60% of its gross income from the Philippines. (D) Royalties from the use in Brazil of generator sets designed in the Philippines by its engineers. SUGGESTED ANSWER: (A) Gains from the sale to an Ilocos Norte power plant of generators bought from the United States. Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. Its commercial airplanes do not operate within Philippine territory, or service passengers embarking from Philippine airports. The firm is represented in the Philippines by its general agent, Philippine Airlines (PAL), a Philippine corporation. KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA’s airline ticket sales constituted income derived from sources within the Philippines. KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory. Is the position of KIA tenable? Reasons. (4%) SUGGESTED ANSWER: KIA’s position is not tenable. The revenue it derived in 1997 from sales of airplane tickets in the Philippines, through its agent PAL, is considered as income from within the Philippines, subject to the 35% tax based on its taxable income pursuant to Section 25(a)( 1) of the Tax Code of 1977. The transacting of business in the Philippines through its local sales agent, makes KIA a resident foreign corporation despite the absence of landing rights, thus, it is taxable on income derived from within. The source of an income is the property, activity or service that produced the income. In the instant case, it is the sale of tickets in the Philippines which is the activity that produced the Page 17 of 195 Law on Taxation income. KIA’s income being derived from within, is subject to Philippine income tax (CIR v. British Overseas Airways Corporation, 149 SCRA 395, ). Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the applicable provision of the old Tax Code (National Internal Revenue Code of1977) then in effect and the prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code ofl997(RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested that an answer based on the provisions of the New Tax Code shall be given full credit. Accordingly, an answer framed in this wise should also be considered as a correct answer, viz: ANOTHER SUGGESTED ANSWER: Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA as an international air carrier is derived from the sale of transportation services. Compensation for services is an income from within if the services are performed in the Philippines (Section 42(A)(3), NIRC). The origination of the flight is determinative of the source of the income of the international air carrier. If the flight originates in the Philippines to a foreign destination, the income is an income from within; if it originates in a foreign country to any destination, the income is from without. In the case at bar, no flight will originate from the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the Philippines (Section 28(A)(3)(a), NIRC). (BAR 2009) 2. From sources without the Philippines Triple Star, a domestic corporation, entered into a Management Service Contract with Single Star, a non-resident foreign corporation with no property in the Philippines. Under the contract, Single Star shall provide managerial services for Triple Star’s Hongkong branch. All said services shall be performed in Hongkong. Is the compensation for the services of Single Star taxable as income from sources within the Philippines? Explain. (2014 Bar Question) SUGGESTED ANSWER: No. Pursuant to the case of Commissioner of Internal Revenue v. Baier-Nickel (G.R. No. 153793, August 29, 2006), the factor which determines the source of income for personal services is the place where the services were actually rendered. Since Single Star, a non-resident foreign corporation, will perform all the managerial services for Triple Star’s branch in Hong Kong, all compensation income arising from the performance of such services will be considered income from sources outside the Philippines, and therefore not subject to Philippine income tax. Page 18 of 195 Law on Taxation  3. Income partly within and partly without the Philippines c. Situs of property taxes 1. Taxes on real property 2. Taxes on personal property d. Situs of excise tax 1. Estate tax 2. Donor’s tax e. Situs of business tax 1. Sale of real property 2. Sale of personal property 3. Value-Added Tax (VAT) d. International comity ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.- based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income — 30% for individual and 35% for corporate non-resident stockholders — was deducted at source and remitted to the BIR. On May 15,1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. the Commissioner denied the claim. On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund. Is the contention of ABCD Corporation correct? Why or why not? (3%) SUGGESTED ANSWER: Yes. The provision of a treaty must take precedence over and above the provisions of the local taxing statute consonant with the principle of the international comity. Tax treaties are accepted limitations to the power of taxation. Thus, the CTA should apply the treaty provision so that the claim for refund representing the difference between the amount actually withheld and paid to the BIR and the amount due and payable under the treaty, should be granted (Hawaiian-Philippine Company v. CIR, CTA Case No. 3887, May 31, 1988). Page 19 of 195 Law on Taxation ANOTHER SUGGESTED ANSWER: The contention of ABCD Corporation that it overpaid the withholding tax is correct provided it can establish: (1) The existence of RP-US Tax Treaty is imposing a lower rate of tax of 25%; (2) the said tax treaty is applicable to its case; and (3) its payment with the BIR of a tax based on a higher rate of 30% and 35%, respectively. (BAR 2009) e. Exemption of government entities, agencies and instrumentalities 2. Constitutional limitations a. Provisions directly affecting taxation i. Prohibition against imprisonment for non-payment of poll tax ii. Uniformity and equality of taxation 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%) (2017 BAR) 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, April 15, 2009) 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. Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future Page 20 of 195 Law on Taxation 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, October 3, 1994, 237 SCRA 324). All of the foregoing requirements of a valid classification having been met and those which are singled out are a class in themselves, there is no violation of the “Equal Protection Clause” of the Constitution. The municipality of San Isidro passed an ordinance imposing a tax on installation managers. At that time, there was only one installation manager in the municipality; thus, only he would be liable for the tax. Is the law constitutional? (1%)(2013 Bar Question) (A) It is unconstitutional because it clearly discriminates against this person. (B) It is unconstitutional for lack of legal basis. (C) It is constitutional as it applies to all persons in that class. (D) It is constitutional because the power to tax is the power to destroy. SUGGESTED ANSWER: (C) It is constitutional as it applies to all persons in that class. The ordinance imposing tax on installation managers does not violate the equal protection clause under Section 1, Article III of the Constitution and the uniformity rule under Section 28, Article VI of the Constitution. The equal protection clause simply means that all persons subject to legislation shall be treated alike under like circumstances and conditions both in privileges conferred and liabilities imposed. On the other hand, the uniformity rule states that a tax is uniform when it operates with the same force and effect in every place where the subject of it is found. It does not signify an intrinsic but simply a geographical uniformity. (See: British American Tobacco v. Camacho, G.R. No. 163583, April 15, 2009) In the given problem, the ordinance applies to all installation manager. In other words, the ordinance does not specifically identify who among the installation managers shall be liable for tax. The fact that there is only one installation manager in the municipality does not mean that the taxing authority singled him out as the only taxable person. Choose the correct answer. Tax laws - (1%) (2014 Bar Question) (A) may be enacted for the promotion of private enterprise or business for as long as it gives incidental advantage to the public or the State (B) are inherently legislative; therefore, may not be delegated (C) are territorial in nature; hence, they do not recognize the generally-accepted tenets of international law (D) adhere to uniformity and equality when all taxable articles or kinds of property of the same class are taxable at the same rate Page 21 of 195 Law on Taxation SUGGESTED ANSWER : D. Tax laws adhere to uniformity and equality when all taxable articles or kinds of property of the same class are taxable at the same rate. iii. Grant by Congress of authority to the president to impose tariff rates iv. Prohibition against taxation of religious, charitable entities, and educational entities What is the rule on the taxability of income that a government educational institution derives from its school operations? Such income is: (2011 Bar Question) (A) subject to 10% tax on its net taxable income as if it is a proprietary educational institution. (B) Exempt from income taxation if it is actually, directly, and exclusively used for educational purposes. (C) subject to the ordinary income tax rates with respect to incomes derived from educational activities. (D) Exempt from income taxation in the same manner as government-owned and controlled corporations. SUGGESTED ANSWER: (B)Exempt from income taxation if it is actually, directly, and exclusively used for educational purposes v. Prohibition against taxation of non-stock, non-profit educational Institutions San Juan University is a non-stock, non-profit educational institution. It owns a piece of land in Caloocan City on which its three 2-storey school buildings stood. Two of the buildings are devoted to classrooms, laboratories, a canteen, a bookstore, and administrative offices. The third building is reserved as dormitory for student athletes who are granted scholarships for a given academic year. In 2017, San Juan University earned income from tuition fees and from leasing a portion of its premises to various concessionaires of food, books, and school supplies. a. Can the City Treasurer of Caloocan City collect real property taxes on the land and building of San Juan University? Explain your answer. (5%) (2017 BAR) SUGGESTED ANSWER: Page 22 of 195 Law on Taxation a. Yes, but only on the leased portion. Article XIV, Section 4(3) of the 1987 Constitution provides that the assets of a non-stock, non-profit educational institution shall be exempt from taxes and duties only if the same are used actually, directly, and exclusively for educational purposes. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. The leased portion of the building may be subject to real property tax since such lease is for commercial purposes, thereby, it removes the asset from the property tax exemption granted under the Constitution. (CIR v. De La Salle University, Inc., G.R. Nos. 196596, 198841, 198941, November 9, 2016) b. Is the income earned by San Juan University for the year 2017 subject to income tax? Explain your answer. (5%) (2017 BAR) SUGGESTED ANSWER: b. No, provided that the revenues are used actually, directly, and exclusively for educational purposes as provided under Article XIV, Section 4(3) of the 1987 Constitution. The requisites for availing the tax exemption under Article XIV, Section 4 (3) are as follows: (1) the taxpayer falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes. Thus, so long as the requisites are met, the revenues may be exempt from tax. (CIR v. De La Salle University, Inc., G.R. Nos. 196596, 198841, 198941, November 9, 2016) A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to provide medical services to the poor. The hospital also accepted paying patients although none of its income accrued to any private individual; all income were plowed back for the hospital's use and not more than 30% of its funds were used for administrative purposes. Is the hospital subject to tax on its income? If it is, at what rate? (2013 Bar Question) SUGGESTED ANSWER: The non-stock, non-profit hospital’s income from paying patients is subject to a preferential income tax of 10%. In Commissioner of Internal Revenue v. St. Luke’s Medical Center, the Supreme Court laid down the rules on the treatment of icome tax of non-profit hospitals. Pursuant to Sec. 30(E) and (G) of the NIRC, these hospitals are exempt from income tax with respect to their activities conducted exclusively for charitable or social welfare purposes. However, they are subject to a preferential income tax rate of 10% under charitable or social welfare purposes. vi. Majority vote of Congress for grant of tax exemption Page 23 of 195 Law on Taxation  vii. Prohibition on use of tax levied for special purpose viii. President’s veto power on appropriation, revenue, tariff bills ix. Non-impairment of jurisdiction of the Supreme Court x. Grant of power to the local government units to create its own sources of revenue xi. Flexible tariff clause xii. Exemption from real property taxes Mr. Amado leased a piece of land owned by the Municipality of Pinagsabitan and built a warehouse on the property for his business operations. The Municipal Assessor assessed Mr. Amado for real property taxes on the land and the warehouse. Mr. Amado objected to the assessment, contending that he should not be asked to pay realty taxes on the land since it is municipal property. Was the assessment proper? (2013 Bar Question) SUGGESTED ANSWER: The assessment was proper. Under Section 217 of the LGC, real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. A related and complementary provision is Section 234(a) of the LGC which provides that a real property owned by the Republic of the Philippines or any of its political subdivisions is exempt from realty taxes, except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. In the given problem, Mr. Arnado, as lessee of the land owned by the Municipality, is the actual user of the land and is liable for the realty taxes. Therefore, the assessment was proper. LLL is a government instrumentality created by Executive Order to be primarily responsible for integrating and directing all reclamation projects for the National Government. It was not organized as a stock or a non-stock corporation, nor was it intended to operate commercially and compete in the private market. By virtue of its mandate, LLL reclaimed several portions of the foreshore and offshore areas of the Manila Bay, some of which were within the territorial jurisdiction of Q City. Certificates of title to the reclaimed properties in Q City were issued in the name of LLL in 2008. In 2014, Q City issued Warrants of Levy on said reclaimed properties of LLL based on the assessment for delinquent property taxes for the years 2010 to 2013. A) Are the reclaimed properties registered in the name of LLL subject to real property tax? Page 24 of 195 Law on Taxation B) Will your answer be the same in (A) if from 2010 to the present time, LLL is leasing portions of the reclaimed properties for the establishment and use of popular fastfood restaurants J Burgers, G Pizza, and K Chicken? (2015 Bar Question) SUGGESTED ANSWER: A. The reclaimed properties are not subject to real property tax because LLL is a government instrumentality. Instrumentality refers to any agency of the National Government, not integrated within the department framework vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. Under the law, real property owned by the Republic of the Philippines (Republic) is exempt from real property tax unless the beneficial use thereof has been granted to a taxable person. When the title of the real property is transferred to LLL, the Republic remains the owner of the real property. Thus, such arrangement does not result in the loss of the tax exemption. B. No. As a rule, properties owned by the Republic of the Philippines are exempt from real property tax except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. LLL leased out portions of the reclaimed properties to a taxable entity, such as the popular fastfood restaurant, hence the reclaimed properties are subject to real property tax. The Philippine-British Association, Inc. (Association) is a non-stock, non-profit organization which owns the St. Michael's Hospital (Hospital). Sec. 216 in relation to Sec. 215 of the LGC classifies all lands, buildings and other improvements thereon actually, directly, and exclusively used for hospitals as "special." A special classification prescribes a lower assessment than a commercial classification. Within the premises of the Hospital, the Association constructed the St. Michael's Medical Arts Center (Center) which will house medical practitioners who will lease the spaces therein for their clinics at prescribed rental rates. The doctors who treat the patients confined in the Hospital are accredited by the Association. The City Assessor classified the Center as "commercial" instead of "special" on the ground that the Hospital owner gets income from the lease of its spaces to doctors who also entertain out-patients. Is the City Assessor correct in classifying the Center as "commercial?" Explain. (5%) (2016 BAR) SUGGESTED ANSWER: No. The Medical Arts Center is an integral part of the Hospital and should be classified for assessment purposes as “special”. The fact alone that the doctors holding clinics in the Center are those duly accredited by the Association who owns the Page 25 of 195 Law on Taxation Hospital, and these doctors are the ones who can treat the Hospital’s patients confined in it, takes away the said Medical Arts Center from being categorized as “commercial” since a tertiary hospital is required by law to have a pool of physicians who comprise the required medical departments in various medical fields (City Assessora Cebu City v. Association of Benevola de Cebu, Inc., G.R. No. 152904, June 2007, 524 SCRA 128). xiii. No appropriation or use of public money for religious purposes Origin of Revenue and Tariff Bills b. Provisions indirectly affecting taxation i. Due process ii. Equal protection What is the “rational basis” test? Explain briefly. (2%) (2010 BAR) SUGGESTED ANSWER: The “rational basis test” is applied to gauge the constitutionality of an assailed law in the face of an equal protection challenge. It has been held that “in areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes constitutional rights must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification”. Under the rational basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate State interest (British American Tobacco v. Camacho and Parayno, GR No. 163583, April 15, 2009). The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons practicing various professions in the city. Among those subjected to the occupation tax were lawyers. Atty. Mariano Batas, who has a law office in Manila, pays the ordinance-imposed occupation tax under protest. He goes to court to assail the validity of the ordinance for being discriminatory. Decide with reasons. (3%) SUGGESTED ANSWER: The ordinance is valid. The ordinance is not discriminatory because it complies with the rule of equality and uniformity in taxation. Equality and uniformity in local taxation means that all subjects or objects of taxation belonging to the same class shall be taxed at the same rate within the territorial jurisdiction of the taxing authority or local government unit and not necessarily in comparison with other units although belonging to the same political subdivision. In fine, uniformity is required only within the geographical limits of the taxing authority. It is not for the Court to judge what particular cities or municipalities should be empowered to impose occupation tax. In the case at bar, the imposition of the occupation tax to persons exercising various professions in Page 26 of 195 Law on Taxation the city is well within the authority ofthe City of Manila (Punsalanet. al. v. City of Manila, 95 Phil. 46 ). (BAR 2009) iii. Religious freedom iv. Non-impairment of obligations of contracts J. Stages of taxation 1. Levy 2. Assessment and collection 3. Payment True or False. The Tax Code allows an individual taxpayer to pay in two equal installments, the first installment to be paid at the time the return is filed, and the second on or before July 15 of the same year, if his tax due exceeds P2,000. (2010 Bar Question) SUGGESTED ANSWER: True. [Sec. 56(A)(A), NIRC] 4. Refund The actual effort exerted by the government to effect the exaction of what is due from the taxpayer is known as: (2011 Bar Question) (A) assessment. (B) levy. (C) payment. (D) collection. SUGGESTED ANSWER: (D) collection Although the power of taxation is basically legislative in character, it is NOT the function of Congress to: (2011 Bar Question) (A) fix with certainty the amount of taxes. (B) collect the tax levied under the law. (C) identify who should collect the tax. (D) determine who should be subject to the tax. SUGGESTED ANSWER: (B) collect the tax levied under the law K. Definition, nature, and characteristics of taxes L. Requisites of a valid tax Page 27 of 195 Law on Taxation M. Tax as distinguished from other forms of exactions N. Kinds of taxes II. National Internal Revenue Code (NIRC) of 1997, as amended A) Income taxation 1. Income tax systems a. Global tax system b. Schedular tax system c. Semi-schedular or semi-global tax system The Philippines adopted the semi-global tax system, which means that: (2012 BAR) a) All taxable incomes, regardless of the nature of income, are added together to arrive at gross income, and all allowable deductions are deducted from the gross income to arrive at the taxable income; b) All incomes subject to final withholding taxes liable to income tax under the schedular tax system, while all ordinary income as well as income not subject to final withholding tax under the global tax system; c) All taxable incomes are subject to final withholding taxes under the schedular tax system; d) All taxable incomes from sources within and without the Philippines are liable to income tax. SUGGESTED ANSWER: b) All incomes subject to final withholding taxes liable to income tax under the schedular tax system, while all ordinary income as well as income not subject to final withholding tax under the global tax system. 2. Features of the Philippine income tax law a) Direct tax b) Progressive An example of a tax where the concept of progressivity finds application is the: (2011 Bar Question) (A) income tax on individuals. (B) excise tax on petroleum products. (C) value-added tax on certain articles. (D) amusement tax on boxing exhibitions. SUGGESTED ANSWER: (A) income tax on individuals. Page 28 of 195 Law on Taxation  c) Comprehensive d) Semi-schedular or semi-global tax system 3. Criteria in imposing Philippine income tax a) Citizenship principle b) Residence principle c) Source principle Alain Descartes, a French citizen permanently residing in the Philippines, received several items during the taxable year. Which among the following is NOT subject to Philippine income taxation? (2011 Bar Question) (A) Consultancy fees received for designing a computer program and installing the same in the Shanghai facility of a Chinese firm. (B) Interests from his deposits in a local bank of foreign currency earned abroad converted to Philippine pesos. (C) Dividends received from an American corporation which derived 60% of its annual gross receipts from Philippine sources for the past 7 years. (D) Gains derived from the sale of his condominium unit located in The Fort, Taguig City to another resident alien. SUGGESTED ANSWER: (A) Consultancy fees received for designing a computer program and installing the same in the Shanghai facility of a Chinese firm. Income from the performance of services is treated as income from within the Philippines, if: (2012 BAR) a) The payment of compensation for the service is made in the Philippines; b) The contract calling for the performance of services is signed in the Philippines; c) The service is actually performed in the Philippines; d) The recipient of service income is a resident of the Philippines. SUGGESTED ANSWER: c) The service is actually performed in the Philippines Section 42, NIRC. 4. Types of Philippine income tax 5. Taxable period a) Calendar period An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his income tax return. Page 29 of 195 Law on Taxation SUGGESTED ANSWER: FALSE. [Sec. 43, NIRC.] b) Fiscal period An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his income tax return. SUGGESTED ANSWER: FALSE. [Sec. 43, NIRC.] c) Short period An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his income tax return. (2010 Bar Question) SUGGESTED ANSWER: False. (Sec. 43, NIRC) Which among the following taxpayers is required to use only the calendar year for tax purposes? (2011 Bar Question) (A) Partnership exclusively for the design of government infrastructure projects considered as practice of civil engineering. (B) Joint-stock company formed for the purpose of undertaking construction projects. (C) Business partnership engaged in energy operations under a service contract with the government. (D) Joint account (cuentas en participacion) engaged in the trading of mineral ores. SUGGESTED ANSWER: (A) Partnership exclusively for the design of government infrastructure projects considered as practice of civil engineering. 6. Kinds of taxpayers a) Individual taxpayers i. Citizens ii. Aliens Pierre de Savigny, a Frenchman, arrived in the Philippines on January 1, 2010 and continued to live and engage in business in the Philippines. He went on a tour of Southeast Asia from August 1 to November 5, 2010. He returned to the Page 30 of 195 Law on Taxation Philippines on November 6, 2010 and stayed until April 15, 2011 when he returned to France. He earned during his stay in the Philippines a gross income of P3 million from his investments in the country. For the year 2010, Pierre’s taxable status is that of: (2011 Bar Question) (A) a non-resident alien not engaged in trade or business in the Philippines. (B) a non-resident alien engaged in trade or business in the Philippines. (C) a resident alien not engaged in trade or business in the Philippines. (D) a resident alien engaged in trade or business in the Philippines. SUGGESTED ANSWER: (B) a non-resident alien engaged in trade or business in the Philippines. iii. Special class of individual employees a) Minimum wage earner b) Corporations i. Domestic corporations ii. Foreign corporations A resident corporation is one that is: (2012 BAR) a) Organized under the laws of the Philippines that does business in another country; b) Organized under the laws of a foreign country that sets up a regional headquarter in the Philippines doing product promotion and information dissemination; c) Organized under the laws of the Philippines that engages business in a special economic zone; d) Organized under the laws of a foreign country that engages in business in Makati City, Philippines. SUGGESTED ANSWER: d) Organized under the laws of a foreign country that engages in business in Makati City, Philippines Section 22 (H), NIRC. Aplets Corporation is registered under the laws of the Virgin Islands. It has extensive operations in Southeast Asia. In the Philippines, Its products are imported and sold at a mark-up by its exclusive distributor, Kim's Trading, Inc. The BIR compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets net income derived from its exports to Kim. Is the BIR correct? (2011 Bar Question) (A) Yes. Aplets is a non-resident foreign corporation engaged in trade or business in the Philippines. Page 31 of 195 Law on Taxation (B) No. The tax should have been computed on the basis of gross revenues and not net income. (C) No. Aplets is a non-resident foreign corporation not engaged in trade or business in the Philippines. (D) Yes. Aplets is doing business in the Philippines through its exclusive distributor Kim's Trading. Inc. SUGGESTED ANSWER: (C) No. Aplets is a non-resident foreign corporation not engaged in trade or business in the Philippine iii. Joint venture and consortium iv. c) Partnerships d) General professional partnerships A general professional partnership (GPP) is one: (2012 BAR) a) That is registered as such with the Securities and Exchange Commission and the Bureau of Internal Revenue; b) That is composed of individuals who exercise a common profession; c) That exclusively derives income from the practice of the common profession; d) That derives professional income and rental income from property owned by it. SUGGESTED ANSWER: c) That exclusively derives income from the practice of the common profession Section 26, NIRC. [Note: The question is unfair because it gives an initial impression that the examiner is asking the statement which best characterizes a GPP but the real question is found after the enumeration of the choices which might not be not be noticed by the examinee.] e) Estates and trusts Johnny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust instrument Santino, Johnny’s 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to P720,000.00. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. What advice will you give the trustee? Explain. (3%) SUGGESTED ANSWER: Page 32 of 195 Law on Taxation I will advise the trustee that she has nothing to pay in annual income taxes because the trust’s taxable income is zero. This is so because the amount of income to be distributed annually to the beneficiary is a deduction from the gross income of the trust but must be reported as income of the beneficiary (Section 61(A), NIRC). [b] Will your advice be the same if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority? Why or why not? (3%) SUGGESTED ANSWER: No, the trustee has to pay the income tax on the trust’s net income determined annually if the income is required to be accumulated. Once a taxable trust is established , its net income is either taxable to the trust, represented by the trustee, or o the beneficiary depending on the provision for distribution of income following the one-layer taxation scheme (Section 61(A), NIRC). (BAR 2009) f) Co-ownerships 7. Income taxation a. Definition b. Nature c. General principles 8. Income a. Definition b. Nature c. When income is taxable i. Existence of income ii. Realization of income Income is considered realized for tax purposes when: (2011 Bar Question) (A) it is recognized as revenue under accounting standards even if the law does not do so. (B) the taxpayer retires from the business without approval from the BIR. (C) the taxpayer has been paid and has received in cash or near cash the taxable income. (D) the earning process is complete or virtually complete and an exchange has taken place. SUGGESTED ANSWER: (D) the earning process is complete or virtually complete and an exchange has taken place. Page 33 of 195 Law on Taxation Aleta sued Boboy for breach of promise to marry. Boboy lost the case and duly paid the court's award that included, among others, Pl00,000 as moral damages for the mental anguish Aleta suffered. Did Aleta earn a taxable income? (1%)(2013 Bar Question) (A) She had a taxable income of P100,000 since income is income from whatever source. (B) She had no taxable income because it was a donation. (C) She had taxable income since she made a profit. (D) She had no taxable income since moral damages are compensatory. SUGGESTED ANSWER: (D) She had no taxable income since moral damages are compensatory. Exemplary and moral damages awarded to a party-litigant are not considered taxable income (America N.A.-Manila Branch vs. Commissioner of Internal Revenue, CTA Case No. 6144, March 14, 2005). Hopeful Corporation obtained a loan from Generous Bank and executed a mortgage on its real property to secure the loan. When Hopeful Corporation failed to pay the loan, Generous Bank extrajudicially foreclosed the mortgage on the property and acquired the same as the highest bidder. A month after the foreclosure, Hopeful Corporation exercised its right of redemption and was able to redeem the property. Is Generous Bank liable to pay capital gains tax as a result of the foreclosure sale? Explain. (2014 Bar Question) SUGGESTED ANSWER : No. Since Hopeful Corporation exercised its right to redeem the property, Generous Bank is not liable to pay capital gains tax on the foreclosure sale. As stated in the analogous case of Supreme Transliner, Inc., v. BPI Family Savings Bank, Inc. (G.R. No. 165617, February 25, 2011, 644 SCRA 59), Rev. Regs. No. 4-99 expressly provides that if a mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no sale or transfer of real property was realized. It is only in case of non-redemption by Hopeful Corporation that the obligation to pay capital gains tax arises, which shall be based on the bid price of the highest bidder. The tax will be imposed only upon the expiration of the one-year period of redemption. Furthermore, the obligation to pay the capital gains tax would primarily fall on the mortgagor, Hopeful Corporation, and not on Generous Bank. iii. Recognition of income Page 34 of 195 Law on Taxation Mr. A was preparing his income tax return and had some doubt on whether a commission he earned should be declared for the current year or for the succeeding year. He sought the opinion of his lawyer who advised him to report the commission in the succeeding year. He heeded his lawyer's advice and reported the commission in the succeeding year. The lawyer's advice turned out to be wrong; in Mr. A's petition against the BIR assessment, the court ruled against Mr. A. Is Mr. A guilty of fraud? (1%)(2013 Bar Question) (A) Mr. A is not guilty of fraud as he simply followed the advice of his lawyer. (B) Mr. A is guilty of fraud; he deliberately did not report the commission in the current year when he should have done so. (C) Mr. A's lawyer should pay the tax for giving the wrong advice. (D) Mr. A is guilty for failing to consult his accountant. SUGGESTED ANSWER: (A) Mr. A is not guilty of fraud as he simply followed the advice of his lawyer. In Santos v. People of the Philippines and BIR, the Court of Tax Appeals (CTA) acquitted Santos from the criminal case of tax evasion and ruled that failure to supply correct and accurate information must be fully established as a positive act or state of mind; it cannot be presumed nor attributed to mere inadvertent or negligent acts. Moreover, the CTA reiterated the doctrine in Yulivo Sons hardware v. Court of Tax Appeals (G.R. No. L- 13203), January 28, 1961, 1 SCRA 169) that mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. In the present case, Mr. A relied in good faith on the expertise of his lawyer in not declaring his income for that year. Therefore, he is not guilty of fraud. iv. Methods of accounting A corporation may change its taxable year to calendar or fiscal year in filing its annual income tax return, provided: (2011 Bar Question) (A) it seeks prior BIR approval of its proposed change in accounting period. (B) it simultaneously seeks BIR approval of its new accounting period. (C) it should change its accounting period two years prior to changing its taxable year. (D) its constitution and by-laws authorizes the change. SUGGESTED ANSWER: (A) it seeks prior BIR approval of its proposed change in accounting period. The appropriate method of accounting for a contractor on his long-term construction contract (i.e., it takes more than a year to finish) is: (2012 BAR) Page 35 of 195 Law on Taxation a) Cash method; b) Accrual method; c) Installment sale method; d) Percentage of completion method. SUGGESTED ANSWER: d) Percentage of completion method Section 127, NIRC. d. Tests in determining whether income is earned for tax purposes i. Realization test ii. Claim of right doctrine or doctrine of ownership, command, or control iii. Economic benefit test, doctrine of proprietary interest iv. Severance test v. All events test The "all events test" refers to: (2012 BAR) a) A person who uses the cash method where all sales have been fully paid by the buyers thereof; b) A person who uses the installment sales method, where the full amount of consideration is paid in full by the buyer thereof within the year of sale; c) A person who uses the accrual method, whereby an expense is deductible for the taxable year in which all the events had occurred which determined the fact of the liability and the amount thereof could be determined with reasonable accuracy; d) A person who uses the completed method, whereby the construction project has been completed during the year the contract was signed. SUGGESTED ANSWER: c) A person who uses the accrual method, whereby an expense is deductible for the taxable year in which all the events had occurred which determined the fact of the liability and the amount thereof could be determined with reasonable accuracy. The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; (2) the availability of the reasonable accurate determination of such income or liability. The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all- events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be Page 36 of 195 Law on Taxation unknown, but is not as much as unknowable, within the taxable year. “The amount of liability does not have to be determined exactly; it must be determined with reasonable accuracy.” (Commissioner of Internal Revenue vs. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007) YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to defend the corporation’s title over a property used in the business. For the legal services rendered in 2007, the law firm billed the corporation only in 2008. The corporation duly paid. YYY Corporation claimed this expense as a deduction from gross income in its 2008 return, because the exact amount of the expense was determined only in 2008. Is YYY’s claim of deduction proper? Reasons. (4%) SUGGESTED ANSWER: No. The expense is deductible in the year it complies with the all-events test. The test is considered met if the liability is fixed, and the amount of such liability is determined with reasonable accuracy. The liability to pay is already fixed in 2007 when the services were rendered, and the amount of such liability is determinable with reasonable accuracy in the same year. Hence the deduction should have been claimed in 2007 and not in 2008. (CIR v. Isabela Cultural Corporation, SIS SCRA 556 ). (BAR 2009) 9. Gross income a. Definition b. Concept of income from whatever source derived There is no taxable income until such income is recognized. Taxable income is recognized when the: (2011 Bar Question) (A) taxpayer fails to include the income in his income tax return. (B) income has been actually received in money or its equivalent. (C) income has been received, either actually or constructively. (D) transaction that is the source of the income is consummated. SUGGESTED ANSWER: (C) income has been received, either actually or constructively. In 2010, Juliet Ulbod earned P500,000.00 as income from her beauty parlor and received P250,000.00 as Christmas gift from her spinster aunt. She had no other receipts for the year. She spent P150,000.00 for the operation of her beauty parlor. For tax purposes, her gross income for 2010 is: (2011 Bar Question) (A) P750,000.00. Page 37 of 195 Law on Taxation (B) P500,000.00. (C) P350,000.00. (D) P600,000.00. SUGGESTED ANSWER: (B) P500,000.00. In 2010, Mr. Platon sent his sister Helen $1 ,000 via a telegraphic transfer through the Bank of PI. The bank's remittance clerk made a mistake and credited Helen with $1,000,000 which she promptly withdrew. The bank demanded the return of the mistakenly credited excess, but Helen refused. The BIR entered the picture and investigated Helen. Would the BIR be correct if it determines that Helen earned taxable income under these facts? (1%) (2013 Bar Question) (A) No, she had no income because she had no right to the mistakenly credited funds. (B) Yes, income is income regardless of the source. (C) No, it was not her fault that the funds in excess of $1,000 were credited to her. (D) No, the funds in excess of$1,000 were in effect donated to her. SUGGESTED ANSWER: (B) Yes, income is income regardless of the source. Section 32 of the NIRC defines gross income as all income derived from whatever source. Consequently, the flow of wealth, without any distinction as to the lawfulness of its source, is subject to income tax. In other words, the phrase “income from whatever source” discloses a legislative policy to include all income not expressly exempted within the class of taxable income under the law. c. Gross income vis-à-vis net income vis-à-vis taxable income d. Classification of income as to source i. Gross income and taxable income from sources within the Philippines ii. Gross income and taxable income from sources without the Philippines iii. Income partly within or partly without the Philippines e. Sources of income subject to tax i. Compensation income Mr. Gipit borrowed from Mr. Maunawain P100,000.00, payable in five (5) equal monthly installments. Before the first installment became due, Mr. Gipit rendered Page 38 of 195 Law on Taxation general cleaning services in the entire office building of Mr. Maunawain, and as compensation therefor, Mr. Maunawain cancelled the indebtedness of Mr. Gipit up to the amount of P75,000.00. Mr. Gipit claims that the cancellation of his indebtedness cannot be considered as gain on his part which must be subject to income tax, because according to him, he did not actually receive payment from Mr. Maunawain for the general cleaning services. Is Mr. Gipit correct? Explain. (2014 Bar Question) SUGGESTED ANSWER : No. Section 50 of Rev. Regs. No. 2, otherwise known as Income Tax Regulations, provides that if a debtor performs services for a creditor who cancels the debt in consideration for such services, the debtor realizes income to that amount as compensation for his services. In the given problem, the cancellation of Mr. Gipit’s indebtedness up to the amount of Php 75,000.00 gave rise to compensation income subject to income tax, since Mr. Maunawain condoned such amount as consideration for the general cleaning services rendered by Mr. Gipit. ii. Fringe benefits PRT Corp. purchased a residential house and lot with a swimming pool in an upscale subdivision and required the company president to stay there without paying rent; it reasoned out that the company president must maintain a certain image and be able to entertain guests at the house to promote the company's business. The company president declared that because they are childless, he and his wife could very well live in a smaller house. Was there a taxable fringe benefit? (1%) (2013 Bar Question) (A) There was no taxable fringe benefit since it was for the convenience of the employer and was necessary for its business. (B) There was a taxable fringe benefit since the stay at the house was for free. (C) There was a taxable fringe benefit because the house was very luxurious. (D) There was no taxable fringe benefit because the company president was only required to stay there and did not demand free housing. SUGGESTED ANSWER: (B) There was a taxable fringe benefit since the stay at the house was for free. First, the company president is not a rank-and-file employee. Thus, the housing benefit is subject to fringe benefits tax pursuant to Section 33 of the NIRC and Section 2.33 (A) of the RR No. 03- 98. Although the housing benefit to the President may be for the convenience of the employer (PRT Corp.) or necessary to its business, still, it also inured to the benefit of the President as his stay therein is for free. RR No. 03-98 also provides for the guidelines and valuation of fringe benefits for purposes of computing Page 39 of 195 Law on Taxation the portion which shall be subject to fringe benefits tax in cases where the fringe benefits entail joint benefits to the employer and employee. Thus, there was a taxable fringe benefit. iii. Professional income iv. Income from business v. Income from dealings in property Income from dealings in property (real, personal, or mixed) is the gain or loss derived: (2011 Bar Question) (A) only from the cash sales of property. (B) from cash and gratuitous receipts of property. (C) from sale and lease of property. (D) only from the sale of property. SUGGESTED ANSWER: (D) only from the sale of property. a. Types of properties Mr. Pedro Aguirre, a resident citizen, is working for a large real estate development company in the country and in 2010, he was promoted to Vice- President of the company. With more responsibilities comes higher pay. In 2011, he decided to buy a new car worth P2 Million and he traded-in his old car with a market value of P800,000.00 and paid the difference of P1.2 Million to the car company. The old car, which was bought three (3) years ago by the father of Mr. Pedro Aguirre at price of P700,000.00 was donated by him and registered in the name of his son. The corresponding donor’s tax thereon was duly paid by the father. (2012 BAR) a. How much is the cost basis of the old car to Mr. Aguirre? Explain your answer b. What is the nature of the old car – capital asset or ordinary asset? Explain your answer. c. Is Mr. Aguirre liable to pay income tax on the gain from the sale of his old car? Explain your answer. Suggested Answer: a. P700,000. The basis of the property in the hands of the donee is the carry-over basis (Sec. 40(B)(3), NIRC). b. The old car is a capital asset. It is property held by the taxpayer, but is not 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 Page 40 of 195 Law on Taxation  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; or real property used in trade or business of the taxpayer (Sec. 39, NIRC). c. YES. Capital gain is P100,000. The amount of the taxable gain is subject to the holding period of the asset (Sec. 39,NIRC). Income from dealings in property (real, personal, or mixed) is the gain or loss derived: (2011 Bar Question) (A) only from the cash sales of property. (B) from cash and gratuitous receipts of property. (C) from sale and lease of property. (D) only from the sale of property. SUGGESTED ANSWER: (D) only from the sale of property. 1. Ordinary assets 2. Capital assets b. Types of gains from dealings in property Income from dealings in property (real, personal, or mixed) is the gain or loss derived: (2011 Bar Question) (A) only from the cash sales of property. (B) from cash and gratuitous receipts of property. (C) from sale and lease of property. (D) only from the sale of property. SUGGESTED ANSWER: (D) only from the sale of property. 1. Ordinary income vis-à-vis capital gain An individual, who is a real estate dealer, sold a residential lot in Quezon City at a gain of P100,000.00 (selling price of P900,000.00 and cost is P800,00.00). The sale is subject to income tax as follows: (2012 BAR) a) 6% capital gains tax on the gain; b) 6% capital gains tax on the gross selling price of fair market value, whichever is higher; c) Ordinary income tax at the graduated rates of 5% to 32% of net taxable income; Page 41 of 195 Law on Taxation d) 30% income tax on net taxable income. SUGGESTED ANSWER: c) Ordinary income tax at the graduated rates of 5% to 32% of net taxable income Section 24, NIRC. 2. Actual gain vis-à-vis presumed gain 3. Long term capital gain vis-à-vis short-term capital gain 4. Net capital gain, net capital loss 5. Computation of the amount of gain or loss 6. Income tax treatment of capital loss a. Capital loss limitation rule (applicable to both corporations and individuals) Mirador, Inc., a domestic corporation, filed its Annual Income Tax Return for its taxable year 2008 on April 15, 2009. In the Return, it reflected an income tax overpayment of PI,000,000.00 and indicated its choice to carry-over the overpayment as an automatic tax credit against its income tax liabilities in subsequent years. On April 15,2010, it filed its Annual Income Tax Return for its taxable year 2009 reflecting a taxable loss and an income tax overpayment for the current year 2009 in the amount of P500,000.00 and its income tax overpayment for the prior year 2008 of PI ,000,000.00. In its 2009 Return, the corporation indicated its option to claim for refund the total income tax overpayment of P1,500,000.00 Choose which of the following statements is correct. A. Mirador, Inc. may claim as refund the total income tax overpayment of P1,500,000.00 reflected in its income tax return for its taxable year 2009; B. It may claim as refund the amount of P500,000.00 representing its income tax overpayment for its taxable year 2009; or C. No amount may be claimed as refund. Explain the basis of your answer. (5%) ANSWER: It may claim as refund the amount of P500,000 representing its income tax overpayment for its taxable year 2009. b. Net loss carry-over rule (applicable only to individuals) Page 42 of 195 Law on Taxation In March 2009, Tonette, who is fond of jewelries, bought a diamond ring for P750,000.00, a bracelet for P250,000.00, a necklace for P500,000.00, and a brooch for P500,000.00. Tonette derives income from the exercise of her profession as a licensed CPA. In October 2009, Tonette sold her diamond ring, bracelet, and necklace for only P1.25 million incurring a loss of P250,000.00. She used the P1.25 million to buy a solo diamond ring in November 2009 which she sold for P1.5 million in September 2010. Tonette had no other transaction in jewelry in 2010. Which among the