SUGGESTED ANSWERS TO THE 2017 BAR EXAMINATION QUESTIONS IN TAXATION

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SMZ, Inc. is a VAT-registered enterprise engaged in the general construction business. HP International contracts the services of SMZ Inc, to construct HP International’s factory building located in the Laguna TechnoPark, a special economic zone HP International is registered with the Philippine Economic Zone Authority (PEZA) as an ecozone export enterprise, and, as such, enjoys income tax holiday pursuant to the Special Economic Zone Act of 1995.

SMZ, Inc., files an application with the Bureau of Internal Revenue (BIR) for the VAT zero-rating of its sale of services to HP International. However, the BIR denies SMZ, Inc.’s application on the ground that HP International already enjoys income tax holiday: Is the BIR correct in denying SMZ, Inc.’s application? Explain your answer: (6%)

SUGGESTED ANSWER

No. All sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an ecozone enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter’s type or class of PEZA registration (Coral Bay Nickel Corporation v. CIR, G.R. No. 190506, June 13, 2016, citing Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G.R. No. 150154, August 9, 2005).

Moreover, under Section 108 (B)(3), of the 1997 NIRC as amended, services rendered to persons or entities whose exemption under special laws effectively subjects the supply of such services to zero percent (0%) rate are considered zero-rated. Considering the law doés not provide for any additional qualification or disqualification, the BIR cannot deny the application on the ground that HP International already enjoys income tax holiday.

An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to the requirements provided by law. To do so constitutes lawmaking, which is generally reserved for Congress (Soriano v. Secretary of Finance, et al, G.R. Nos. 184450, 184508, 184538, 185234, January 24, 2017).

ALTERNATIVE ANSWER

The BIR is wrong. Under Sec 108(B)(3) of the NIRC, the sale is effectively zero-rated and there is no need to file an application for zero-rating with the BIR The BIR in pointing out that HP International enjoys income tax holiday is of no moment, because a sale of services to an ecozone enterprise by a supplier from the customs territory is considered as an effectively zero-rated sale of service in view of the exemption enjoyed by the Peza enterprise from indirect taxes.

II.

Wreck Corporation is a domestic corporation engaged in the business of importing, refining and selling petroleum products. During the period from September 1, 2014 to December 31, 2014, Wreck Corporation imported 225 million liters of Jet A-1 aviation fuel and paid the excise taxes thereon. Seventy-five percent (75%) of the total volume of aviation fuel imported were actually sold to international carriers of Philippine and foreign registries for their use or consumption outside of the Philippines in the period from November 1, 2014, to December 31, 2014. Wreck Corporation did not pass on to the international carriers the excise taxes it paid on the importation of petroleum products.

On June 25, 2015, Wreck Corporation filed an administrative claim for refund or issuance of tax credit certificate amounting to the excise taxes it had paid on the importation of 225 million liters of Jet A-l aviation fuel.

If you were the Commissioner of Internal Revenue, will you grant Wreck Corporation’s administrative claim for refund or issuance of tax credit certificate? Explain your answer. (6%)

SUGGESTED ANSWER:

Yes, but only the excise tax which corresponds to the 75% of the total volume of aviation fuel imported that were actually sold to the inter national carriers. Wreck Corporation, as the statutory taxpayer who is directly liable to pay the excise tax on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum products sold to international carriers, the latter having been granted exemption from the payment of said excise tax under Sec. 135 (a) of the NIRC(CIR v. Pilipinas. Shell Petroleum Corporation, G.R. No. 188497, February 19, 2014).

III

Vanderful, Inc.’s income tax return for taxable year 2015 showed an overpayment due to excess creditable withholding taxes in the amount of P750,000. The company. opted to carry over the excess income tax credits: as tax credit against its quarterly income tax liabilities for the next succeeding years. For taxable year 2016, the company’s income tax return showed an overpayment due to excess creditable withholding taxes in the amount of PI,100,000, which included the carry-over from year 2015 in the amount of P750,000 because its operations resulted in a net loss hence, there was no application for any tax liability. This time, the company opted and marked the box “To be refunded” in respect of the total amount of P1,100,000.

Vanderful, Inc. now files in the BIR a claim for refund of unutilized overpayments of P1,100,000, Is the claim meritorious? (4%).

SUGGESTED ANSWER:

No, but only to the extent of the amount of P750,000.00 which was carried over from year 2015. Section 76 of the NIRC of 1997 clearly states: Once the option to carry-over and apply the excess quarterly income tax” against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. Section 76 expressly states that the option shall be considered irrevocable for that taxable period referring to the period comprising the succeeding taxable years. Section 76 further states that no application for cash refund or issuance of a tax credit certificate shall be allowed therefore referring to that taxable period..” comprising the succeeding taxable years (Asiaworld Properties Philippine Corporation v. CIR, G.R. No. 171766, July 29, 2010).

IV.

On the basis of a warrant of seizure and detention issued by the Collector of Customs for the purpose of enforcing the Tariff and Customs Code, assorted brands of liquor and cigarettes said to have been illegally imported into the Philippines were seized from a store operating in a Freeport zone. The store owner moved for the quasáhal of the warrant on the ground that the col-… lector of Customs had no jurisdiction to enforce it within the Freeport zone..

Should the motion to quash be granted (3%)

SUGGESTED ANSWER:

As regards the claims for VAT refund which are administrative in nature, all have been timely filed. The law requires that the administrative claim should be filed within two years from the end of the quarter when the sale was made (Sec. 112(A), NIRC); hence, the filing of the administrative claim for refund on March 30, 2016 covering the four quarters of 2014, complies with the period prescribed by law.

The same is not true, however, as to the judicial claims. Only the judicial claim filed on August 12, 2016 is timely filed. As provided by Section 112(C), 1997 NIRC, as amended, one of the conditions for a judicial claim of refund or credit under the VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Strict compliance with the 120+30 day periods is, thus, necessary for such claim to prosper (CIR V. San Roque Power Corporation, G.R. Nos. 187485, 196113 and 197156, October 8, 2013).

The Commissioner has been granted by law 120 days within which to decide the taxpayer’s claim. Then, if the Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day. period. Applying this to the present case, the 120+ day from the filing of the administrative claim fell on July 28, 2016. XL Co. may ile the judicial claim from July 29, 2016 to August 27, 2016; thus, only the judicial claim filed on August 12. 2016 has been timely filed.

VI.

Heeding the pronouncement of the President that the worsening traffic condition in the metropolis was a sign of economic progress, the Congress enacted Republic Act No. 10701, also known as An Act Imposing, a Transport Tax on the Purchase of Private Vehicles. Under RA 10701, buyers of private vehicles are required to pay a transport tax equivalent to 5% of the total purchase price per vehicle purchased. RA 10701 provides that the Land Transportation Office (LTO) shall not accept for registration any new vehicles without proof of payment of the 5% transport tax. RA 10701 further provide that existing owners of private vehicles shall be required to pay a tax equivalent to 5% of the current fair market : value of every vehicle registered with the LTO. However, RA 10701 exempts owners of public utility vehicles and the Government from the coverage of the 5% transport tax.

A group of private vehicle owners sue on the ground that the law is unconstitutional for contravening the Equal Protection Clause of the Constitution.

Rule on the constitutionality and validity of RA 10701. (5%).

SUGGESTED ANSWER

RA 10701 is valid and constitutional. A levy of tax is not unconstitutional because it is not intrinsically equal and uniform in its operation. The uniformity, rule does not prohibit classification for purposes of taxation (British American Tobacco v. Jose Isidro N. Camacho, G.R. No. 163583, August 20, 2008, 562 SCRA 511).

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated are to be treated alike both in privileges and liabilities. Unifor-. mity does not forfend classification as long as: (1) the standards that are used therefore are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class (Rufino R. Tan v. Ramon R. Del Rosario, Jr., G.R. Nos. 109289 and 109446, October 13, 1994, 237 SCRA 324, 331). All of the foregoing requirements of a valid classification having been net and those which are singled out are a.class. in themselves, there is no violation of the “Equal Protection Clause” of the Constitution.

VII.

Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file) of Sta. Portia Realty Corporation (SPRC). He invited the Regional Director of the Housing and Land Use Regulatory Board (HLURB) to lunch at the Sulo Hotel in Quezon City to discuss the approval of SPRC’s application for a development permit in connection with its subdivision development project in Pasig City, At breakfast the following day, Calvin met a prospective client interested to enter into a joint venture with SPRC. for the construction of a residential condominium unit in Cainta, Rizal.

Calvin incurred expenses for the lunch and breakfast meetings he had with the Regional Director of HLURB and the prospective client, respectively. The expenses were duly supported by official receipts issued in his name. At month’s end, he requested the reimbursement of his expenses, and SPRC granted his request.

(a) Can SPRC claim an allowable deduction for the expenses incurred by Calvin? Explain your answer. (2.5%)

SUGGESTED ANSWER

(a) SPRC cannot claim as a deduction, the amount spent for lunch in the meeting with the Regional Director of HLURB: While the expense is business connected, the same is not allowed as deduction because it was incurred as an indirect payment to a government official which, not only amounts to a violation of the Anti Graft and Corrupt Practices Act but also constitutes bribes, kickbacks and similar payments (See Şec: 34 (a) (C) NIRC).

With respect, however, to the amount spent for breakfast with a prospective client, the same is deductible from gross income of SPRC. The expense complies with the requirements for deductibility, namely: (a) the expense must be ordinary and necessary (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer, and (d) it must be supported by receipts, records or other pertinent papers (CIR v. General Foods (Phils.), Inc, GR No: 143672, April 4, 2003, 401 SCRA 545, 553).

Section 34 (A )(b) of the 1997 NIRC, as amended, does not require that the substantiation be in the form of official receipts or invoices issued in the name of the taxpayer claiming the expense. It must only be proven that there is a direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade business or profession of the taxpayer”.

(b) is the reimbursement received by Calvin from SPRC subject to tax? Explain your answer. (2.5%)

SUGGESTED ANSWER:

(b) No. Any amount paid as reimbursements for representation incurred by the employee in the performance of his duties is not compensation subject to withholding, if the following conditions are satisfied: (1) It is for ordinary and necessary representation expense paid or incurred by the employee in the pursuit of the trade, business or profession, and (ii) The employee is required to account/liquidate (for such expense in accordance with the specific requirements of substantiation pursuant to Seç, 34 of the 1997 NIRC, as amended. The amounts are actually spent by the employee for the benefit of his employer, so no income is considered to have flowed to the employee.

VIII

On April 30, 2015 Daryl resigned as the production manager of 52nd Avenue, a television studio owned by SSS Entertainment Corporation. 52nd Avenue issued to her a Certificate of Withholding Tax ori Compensation (BIR Form No. 2316), which showed that the tax withheld from her compensation was equal to her income tax due for the period from January 2015 to April 30, 2015.

A month after her resignation, Daryl put up her own studio and started producing short films. She was able to earn a meager income from her short films but did not keep a record of her production expenses.

Is Daryl qualified for substituted filing for taxable year 2015? Explain your answer. (3%)

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 of 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.

On January 27, 2017, Ramon, the comptroller of Vantage Point, Inc., executed a document entitled “Waiver of the Statute of Limitations” in connection with the BIR’s investigation of the tax liabilities of the company for the year 2012. However, the Board of Directors of Vantage Point, Inc., did not adopt a board resolution authorizing Ramon to execute the waiver.

On October 14, 2017, Vantage Point, Inc. received a preliminary assessment notice from the BIR indicating its deficiency withholding taxes. for the year 2012. Vantage Point, Inc., filed its protest. On October 30, 2017, the BIR issued a formal letter of demand and final assessment notice. Vantage Point, Inc., again filed a protest. The Commissioner of Internal Revenue denied the protests and directed the collection of the assessed deficiency taxes,

Accordingly, Vantage Point, Inc., filed a petition for review in the CTA to seek the cancellation and withdrawal of the assessment on the ground of prescription.

What.constitutes a valid waiver of the statute of limitations for the assessment and collection of taxes? Explain your answer.(3%)

SUGGESTED ANSWER

(a) Generally, a valid waiver of the statute of limitations for the assessment and collection of taxes must be executed by the taxpayer and accepted by the BIR prior to the expiration of the period which it seeks to extend. The same must also be executed by the taxpayer.or.. his duly authorized representative, or in the case of a corporation, it must be signed by any of its responsible officers (CIR V. Kudos Metal Corporation, G.R. No. 178087, May 5, 2010, 620 SCRA 232, 243, 244). Such requirements must be met considering that a waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed (Philippine journalists, Inc. x. CIR, G.R. No. 162852, December 16, 2004).

(b) Has the right of the Government to assess and collect deficiency taxes from Vantage Point, Inc. for the year 2012 prescribed? Explain your answer. (4%)

SUGGESTED ANSWER

It shall be tax-exempt. Section 30(B)(6)(b) of the 1997 NIRC, as amended, provides that any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall be exempt from taxation.

XII.

On September 17, 2015, Data Realty, Inc., a real-estate corporation duly organized and existing under Philippine law, sold to Jenny Vera a condominium unit at Freedom Residences in Malabon City with an area of 32.31 square meters for a contract price of P4,213,000. The condominium unit had a zonal value amounting to P2,877,000 and fair market value amounting to P550,000.

(a) is the transaction subject to value-added tax and documentary stamp tax? Explain your answer. (3%)

SUGGESTED ANSWER

(a) Yes. As to the VAT liability, sale of real properties held primarily for sale to customer or held for lease in the ordinary course of trade or business is subject to VAT (Section 106 (A) 1)(a), 1997 NIRC, as amended); further, the contract price, which is the highest compared to the zonal value and the fair market value, is beyond the transactional . threshold amount for residential dwellings thereby making the sale transaction VATable. As to the DST. liability, all deeds of sale and conveyances of real property are likewise subject to DST (Section 196, 1997 NIRC, as amended).

(b) Would your answer be the same if the property was sold by a bank in a foreclosure sale? Explain your answer. (3%)

SUGGESTED ANSWER

(b) No, the sale made by the bank is exempt from VAT. Banks are exempt from VAT because they are subject to percentage tax under Title V of the NIRC (Section 109 in relation to Section 121 of 1997 NIRC, as amended). The sale, however, will still be subject to DST because conveyances of real property are generally subject to DST (Section 196, NIRC).

XIII

BATAS Law is a general professional partnership operating in the City of Valenzuela. It regularly pays value-added tax on its services. All its lawyers have individually paid the required professional tax for the year 2017. However, as a condition for the renewal of its business permit for the year 2017, the City Treasurer of Valenzuela assessed BATAS Law for the payment of percentage business tax on its gross receipts for the year 2016 in accordance with the Revenue Tax Code of Valenzuela.

Is BATAS Law liable to pay the assessed percentage business tax? Explain your answer. (3%)

SUGGESTED ANSWER

No Section 133 (i) of the Local Government Code provides that the exercise of the taxing powers of local government units such as the City of Valenzuela shall not extend to the levy of percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided in the LGC; therefore, BATAS Law may not be assessed with and required to pay percentage business tax.

XIV.

Globesmart Services, Inc, received a final assessment notice with formal letter of demand from the BIR for deficiency income tax, value-added tax and withholding tax for the taxable year 2016 amounting to P48 million. Globesmart Services, Inc., filed a protest against the assessment, but the Commissioner of Internal Revenue denied the protest. Hence, Globesmart Services, Inc. filed a petition for review in the CTA with an urgent motion to suspend the collection of tax.

After hearing, the CTA Division issued a resolution granting the mo tion to suspend but required Globesmart Services, Inc., to post a surety bond equivalent to the deficiency assessment within 15 days from notice of the resolution. Globesmart Services, Inc, moved for the partial reconsideration of the resolution and for the reduction of the bond to an amount it could obtain.

The CTA division issued another resolution reducing the amount of the surety bond to P24 million. The latter amount was still more than the net worth of Globesmart Services, Inc., as reported in its audited financial statements.

May the collection of taxes be suspended? Explain your answer. (3%)

SUGGESTED ANSWER

(a) Yes. As provided by RA No. 1125, as amended by RA No. 9282, that when in the opinion of the Court the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer, the Court at any stage of the proceeding may suspend the collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.

(b) Is the CTA Division justified in requiring Globesmart Services, Inc., to post a surety bond as a condition for the suspension of the deficiency tax collection? Explain your answer. (3%)

SUGGESTED ANSWER

(b). No. The Supreme Court in the Tridharma Case cited the case of Pacquiao v. Court of Tax Appeals (G.R. No. 213394, April 6, 2016) where it ruled that the CTA should first conduct a preliminary hearing for the proper determination of the necessity of a surety bond or the reduction thereof. In the conduct of its preliminary hearing, the CTA must balance the scale between the inherent power of the State to tax and its right to prosecute perceived transgressors of the law, on one side, and the constitutional rights of petitioners to due process of law and the equal protection of the laws, on the other. In this case, the CTA failed to consider that the amount of the surety bond that it is asking Globesmart Services, Inc. to pay is more than its net worth. It is, thus, necessary for the CTA to first conduct a preliminary hearing to give the taxpayer an opportunity to prove its inability to come up with such amount.

XV.

Casimira died on June 19, 2017, after three weeks of confinement

due to an unsuccessful liver transplant. For her confinement, she had incurred substantial medical expenses that she financed through personal loans secured by mortgages on her real properties. Her heirs are still in the process of making an inventory of her assets that can be used to pay the estate taxes, if any, which are due on December 19, 2017.

Are the medical expenses, personal loans and mortgages incurred by Casimira deductible from her gross estate? Explain your answer.

SUGGESTED ANSWER

(a) Yes, subject to certain conditions set by the NIRC. As for the medical expenses, they must be incurred within one year from death, whether paid or unpaid, and the amount must not exceed P500,000. As for the personal loans, it is required that the loan document must be notarized and if incurred within three years from the date of death, the executor or administrator shall submit a statement showing the disposition of the proceeds of the loan. As to the mortgages, it is required that the fair. market value of Casimira’s interest in said property, undiminished by such mortgage or indebtedness, is included in the value of the gross estate. The claims for personal loans and mortgages must have been contracted bona fide and for an adequate consideration in money or money’s worth (Section 86, 1997 NIRC, as amended).

(b). May the heirs of Casimira file the estate tax return and pay the corresponding estate tax beyond December 19, 2017, without incurring interest and surcharge? Explain your answer. (3%)

SUGGESTED ANSWER

(b). The heirs may file the estate tax return beyond December 19, 2017, as long as they filed a request for a reasonable extension, not exceeding 30 days. Once the request for extension has been granted and the return filed within the extended period following the “pay-as-you file” procedure, only the interest on extended payment may be imposed but not the surcharge. Interest and surcharge, however, may be imposed upon failure of the heirs to file and pay the estate tax within the extended period granted by the CIR (Sections 248(A) and 249 (D), 1997 NIRC, as amended).

Section 91, on the other hand, allows for the extension of time to pay the estate tax due, for a period not exceeding five (5) years in case the estate is settled through the courts, or two (2) years in case the estate is settled extrajudicially, If an extension is granted, the interest on extended payment may be imposed. The Commissioner may require the executor,. or administrator, or beneficiary, as the case may be, to furnish a bond in an amount not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the pay. ment of the said tax in accordance with the terms of the extension.

XVI.

The BIR assessed the Babuyan Water District (BWD) with deficiency income taxes amounting to P8.5 million, inclusive of interest and surcharge. The BWD disputed the assessment, and argued that it was a wholly-owned government entity performing essential government functions. However, the BR denied the protest.

The BWD filed a petition for arbitration in the Office of the Secretary of Justice pursuant to Sections 66 to 71, Chapter 14, Book IV of the Administrative Code of 1987 to assail the denial of its protest, and to seek the proper interpretation of Section 32(B)(7)(b) of the Tax Code that excluded from gross income the income derived by the Government or its political subdivisions. The Secretary of Justice rendered a decision declaring the BWD exempt from the payment of income tax.

The Commissioner of Internal Revenue appealed to the CTA on the sole ground that the Secretary of Justice had no jurisdiction to review the assessment of the BIR.

is the appeal meritorious? Explain your answer. (4%)

SUGGESTED ANSWER

No. Section 7(a) of RA No. 1125, as amended by RA 9282 enu merates the CTA‘s exclusive appellate jurisdiction to review by appeal certain decisions or inaction but not that of a Secretary of Justice.

Moreover, despite the issue involves the CIR’s assessment, however, Section 7(a)(1) of the same law, specifically the phrase “other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue” must be read together with words preceding it, i.e., “decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, following the statutory construction principle of ejusdem generis (CIR V. CTA (Second Division) and Petron Corporation, GR No. 207843, July 15, 2015).

ALTERNATIVE ANSWER

Yes. GOCCs are taxable entities and they are not exempt from BIR assessment and collection, unless their charter or the law creating them provides otherwise. Hence, in case of tax dispute between a GOCC and the BIR, the controversy is cognizable and appealable to the CTA. The issue cannot be resolved by the DOJ.

PD 242 is a general law that deals with administrative settlement or adjudication of disputes, claims, and controversies between or among government offices, agencies and instrumentalities, including GOCCs; whereas, RA 1125 (the law creating CTA) is a special law. A special law. prevails over a general law. The fact that PD 242 is the more recent law is of no significance, CTA has jurisdiction when a GOCC is assessed taxes. Disputes, claims, and controversies falling under RA 1125, even though solely among government offices, agencies, and instrumentalities, including GOCCs, remain solely in the exclusive jurisdiction of the CTA.

[Note: (On recent jurisprudence not covered by the 2017 Bar Syllabus) The Supreme Court held in Commissioner of Internal Revenue v. Secretary of Ju tice and PAGCOR (G.R. No. 177387, November 9, 2016) that the Secretary of Justice does not have any jurisdiction to review any disputed assessments arising under the Tax Code. The Secretary of Justice should have desisted from dealing with the petition and referred the matter to the Court of Tax Appeals that has jurisdiction over appeals on the decisions of the BIR in tax assessment cases).

XVII

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, à 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%)

SUGGESTED ANSWER

(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 (CİR 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%)

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).

XVIII.

Distinguish outright smuggling from technical smuggling. (3%)

SUGGESTED ANSWER

(a) In outright smuggling (or unlawful importation), goods and articles of commerce are brought into the country without the required importation documents, or are disposed of in the local market Without having been cleared by the BOC or other authorized government agencies, to evade the payment of correct taxes, duties and other charges. (Bureau of Customs v. The Honorable Agnes VST Devanadera, er al, G.R.. No. 193253, September 8, 2015)

Sec, 102. (FI) CMTA: Outright Smuggling refers to an act of importing goods into the country without complete customs prescribed importation documents, or without being cleared by customs or other regulatory government agencies, for the purpose of evading payment of prescribed taxes, duties and other government charges.

On the other hand, in technical smuggling, the goods and articles are brought into the country through fraudulent, falsified or erroneous declarations, to substantially reduce, if not totally avoid, the payment of correct taxes, duties and other charges. Such goods and articles pass through the BOC, but the processing and clearing procedures are attended by fraudulent acts in order to evade the payment of correct taxes, du ties, and other charges (Bureau of Customs v. The Honorable Agnes VST Devanadera, et al, G.R. No. 193253, September 8, 2015).

Sec. 102. (pp) CMTA: Technical Smuggling refers to the act of importing goods into the country by means of fraudulent, falsified or erroneous declaration of the goods to its nature, kind, quality, quantity or weight, for the purpose of reducing or avoiding payment of prescribed taxes, duties, and other charges.m

(b) Distinguish compromise from abatement of taxes (3%)

SUGGESTED ANSWER:

(b) A compromise of tax is a remedy which is available when there is a reasonable doubt as to the validity of the claim against the taxpayer exists, or when the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

Abatement of tax, on the other hand, is available as a remedy when the tax or any portion thereof appears to be unjustly or excessively assessed, or when the administration and collection costs involved do not justify the collection of the amount due (Section 204, NIRC).

XIX.

CMI School, Inc., a non-stock, non-profit corporation, donated its three parcels of idle land situated in the Municipality of Cuyapo, Nueva Ecija to SLC University, another non-stock, non-profit corporation, in recognition of the latter’s contribution to and participation in the spiritual and educational development of the former.

(a) Is CMI School, Inc., liable for the payment of donor’s tax? Explain your answer. (2.5%)

SUGGESTED ANSWER

(a) No. Gifts made by a resident in favor of an educational corporation or institution shall be exempt from donor’s tax (Section 101(A)(3), 1997 NIRC, as amended). Considering that SLC University is a non-stock, non-profit corporation, and the property donated was made by a resident, then, such exemption under the law applies to the present cases.

(b) If SLC. University later sells the three parcels of idle land to Puregold Supermarket, Inc., a stock corporation, will SLC University be liable for capital gains tax? Explain your answer. (3%)

SUGGESTED ANSWER

(b) Yes. The gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets shall be subject to capital gains tax (Section 27(D)(5), 1997 NIRC, as amended). Likewise, Section 30 of the NIRC subjects to income tax (capital gains tax) all income from properties, real or personal, or from any activity conducted for profit, irrespective of the disposition of the income, by all tax exempt corporations.

(c) If SLC University donates the three parcels of idle land in favor of the Municipality of Cuyapo, Nueva Ecija, will SLC University be ii able for donor’s tax? Explain your answer. (25%)

SUGGESTED ANSWER

(C) No. Gifts made by a resident to any political subdivision of the National Government shall be exempt from donor’s tax (Section 101(A)2), 1997 NIRC, as amended).

PINAY JURIST

Bar Exam Reviewers and Case Digests

SUGGESTED ANSWERS TO THE 2017 BAR EXAMINATION QUESTIONS IN TAXATION

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