Wednesday, September 10, 2008

PRIMUS 2008 ONE-LINERS: TAXATION PART 2

“PRIMUS 2008 ONE-LINERS”

TAXATION

VER. 2008.09.10

copyrighted 2008

Prepared by the PRIMUS Board of Consultants

Prof. Abelardo T. Domondon

Principal Consultant

These Notes in the form of one or two sentences and questions and answers were specially prepared by a Board of Consultants specially commissioned by PRIMUS Information Center, Inc., for the use of candidates who are going to take the 2008 Bar Examination. They are not as comprehensive as the other PRIMUS publications such as the PRIMUS Bar Star Notes, or the PRIMUS Cut and Paste. They are intended to be read during the Pre-Week or before the start of the regular Bar review for any given Bar Examination year.

These Notes attempt to second guess the areas where questions may probably be sourced for the 2008 Bar Examination in Taxation. They include enumerations and distinctions, as well digests of some landmark cases, although they go beyond two sentences. They may also serve as “memory joggers” to help the candidate recall concepts. The reader is advised to concentrate on the “One-liners” that are in bold letters. Those that are not in bold are mere elucidations of concepts.

The PRIMUS 2008 ONE-LINERS” shall be revised regularly to consider latest law and jurisprudence to meet the requirements of future Bar Reviews such that the title shall change from year to year. For the 2009 Bar examination the title shall be “PRIMUS 2009 ONE-LINERS” which shall be released sometime in September, 2009. The reader is however advised to acquire and read the latest versions of the other PRIMUS publications such as the PRIMUS Bar Star Notes, or the PRIMUS Cut and Paste which contain more detailed information leading to a more comprehensive Bar review. Of course those who intend to take the 2009 Bar examination are encouraged to attend the PRIMUS 2009 Wrap-up Reviews

Although primarily for the use of Bar candidates who have attended the PRIMUS 2008 Wrap-up Reviews, the “On-Liners” may be availed of by other students who are interested in the subject. While available for the free use of all the contents of the PRIMUS 2008 ONE-LINERSare covered by copyright protection and should never be published (whether through printed media or through the internet) without written permission in writing from PRIMUS Information Center, Inc. Downloading and printing into hard copies is allowed only for private use and should not be distributed on a commercial basis.


TARIFF AND CUSTOMS CODE

1. Customs duties defined. Customs duties is the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001)

2. Safeguard measures are emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them.

The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing safeguard measures as provided under Rep. Act No. 8800 the Safeguard Measures Act (SMA). (Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004)

The DTI Secretary cannot impose the safeguard measures if the Tariff Commission does not favorably recommend its imposition.

3. What is mean by the term “entry” in Customs Law ?

SUGGESTED ANSWER: It has a triple meaning.

a. the documents filed at the Customs house;

b. the submission and acceptance of the documents; and

c. Customs declaration forms or customs entry forms required to be accomplished by passengers of incoming vessels or passenger planes as envisaged under Sec. 2505 of the TCCP (Failure to declare baggage). (Jardeleza v. People, G.R. No. 165265, February 6, 2006)

4. A flight stewardess arrived from Singapore. Upon her arrival she was asked whether she has anything to declare. She answered none, and she submitted her “Customs Baggage Declaration Form” which she accomplished and signed with nothing or written on the space for items to be declared. When her hanger bag was examined some pieces of jewelry were found concealed within the lining of said bag.

She was then convicted of violating of Sec. 3601 of the Tariff and Customs Code for unlawful importation which penalizes any person who shall fraudulently import or bring into the Philippines any article contrary to law.

She now appeals claiming that lower court erred n convicting her under Sec. 3601 when the facts alleged both in the information and those shown by the prosecution constitute the offense under Sec. 2505 “Failure to Declare Baggage,” of which she was acquitted. Is she correct ?

SUGGESTED ANSWER: No. Sec. 3601 does not define a crime. It merely provides, inter alia, the administrative remedies which can be resorted to by the Bureau of Customs when seizing dutiable articles found the baggage of any person arriving in the Philippines which is not included in the accomplished baggage declaration submitted to the customs authorities, and the administrative penalties that such person must pay for the release of such goods if not imported contrary to law.

Such administrative penalties are independent of the criminal liability for smuggling that may be imposed under Sec. 3601, and other provisions of the TCC which can only be determined after the appropriate criminal proceedings, prescinding from the outcome in any administrative case that may have been filed and disposed of by the customs authorities.

Indeed the second paragraph of Sec. 2505 provides that nothing shall prevent the bringing of a criminal action against the offender for smuggling under Section 3601. (Jardeleza v. People, G. R. No. 165265, February 6, 2006)

5. How is smuggling committed ?

SUGGESTED ANSWER: Smuggling is committed by any person who:

a. fraudulently imports or brings into the country any article contrary to law;

b. assists in so doing any article contrary to law; or

c. receives, conceals, buys, sells or in any manner facilitates the transportation, concealment or sale of such goods after importation, knowing the same to have been imported contrary to law. (Jardeleza v. People, G.R. No. 165265, February 6, 2006 citing Rodriguez v. Court of Appeals, G. R. No. 115218, September 18, 1995, 248 SCRA 288, 296)

6. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. RTCs are precluded from assuming cognizance over such matters even through petitions of certiorari, prohibition or mandamus. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)

What is the rationale for this doctrine ?

SUGGESTED ANSWER:

a. Regional Trial Courts have no jurisdiction to replevin a property which is subject to seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455)

b. The doctrine of exclusive customs jurisdiction over customs cases to the exclusion of the RTCs is anchored upon the policy of placing no unnecessary hindrance on the government’s drive, not only to prevent smuggling and other frauds upon Customs,

c. but more importantly, to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jao, et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43)

d. The issuance by regular courts of writs of preliminary injunction in seizure and forfeiture proceedings before the Bureau of Customs may arouse suspicion that the issuance or grant was for consideration other than the strict merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003])

e. Under the doctrine of primary jurisdiction, the Bureau of Customs has exclusive administrative jurisdiction to conduct searches, seizures and forfeitures of contraband without interference from the courts. It could conduct searches and seizures without need of a judicial warrant except if the search is to be conducted in a dwelling place.

Where an administrative office has obtained a technical expertise in a specific subject, even the courts must defer to this expertise.

7. “A” claiming to be the owner of a vessel which is the subject of customs warrant of seizure and detention sought the intercession of the RTC to restrain the Bureau of Customs from interfering with his property rights over the vessel. Would the suit prosper?

SUGGESTED ANSWER: No. His remedy was not with the RTC but with the CTA, as issues of ownership of goods in the custody of customs officials are within the power of the CTA to determine.

The Collector of Customs has exclusive jurisdiction over seizure and forfeiture proceedings and trial courts are precluded from assuming cognizance over such matters even through petitions for certiorari, prohibition or mandamus. (Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006)

8. The customs authorities do not have to prove to the satisfaction of the court that the articles on board a vessel were imported from abroad or are intended to be shipped abroad before they may exercise the power to effect customs searches, seizures, or arrests provided by law and continue with the administrative hearings. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)

9. Instances where there is no right of redemption of seized and forfeited articles:

a. There is fraud;

b. The importation is absolutely prohibited, or

c. The release of the property would be contrary to law. (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999)

10. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court of Tax Appeals, et al., 217 SCRA 298, the Supreme Court clarified that the fraud contemplated by law must be actual and not constructive. It must be intentional, consisting of deception, willfully and deliberately done or resorted to in order to induce another to give up some right.

11. Requisites for forfeiture of imported goods:

a. Wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper – all touching on the importation or exportation of merchandise.

b. the falsity of such declaration, affidavit, invoice, letter or paper; and

c. an intention on the part of the importer/consignee to evade the payment of the duties due. (Republic, etc., v. The Court of Appeals, et al., G.R. No. 139050, October 2, 2001)

12. On January 7, 1989, the vessel M/V ”Star Ace, ”coming from Singapore laden with cargo, entered the Port of San Fernando, La Union for needed repairs. When the Bureau of Customs later became suspicious that the vessel’s real purpose in docking was to smuggle cargo into the country, seizure proceedings were instituted and subsequently two Warrants of Seizure and Detention were issued for the vessel and its cargo.

Cesar does not own the vessel or any of its cargo but claimed a preferred maritime lien. Cesar then brought several cases in the RTC to enforce his lien. Would these suits prosper ?

SUGGESTED ANSWER: No. The Bureau of Customs having first obtained possession of the vessel and its goods has obtained jurisdiction to the exclusion of the trial courts.

When Cesar has impleaded the vessel as a defendant to enforce his alleged maritime lien, in the RTC, he brought an action in rem under the Code of Commerce under which the vessel may be attached and sold.

However, the basic operative fact is the actual or constructive possession of the res by the tribunal empowered by law to conduct the proceedings. This means that to acquire jurisdiction over the vessel, as a defendant, the trial court must have obtained either actual or constructive possession over it. Neither was accomplished by the RTC as the vessel was already in the possession of the Bureau of Customs. (Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006)

13. What is the concept of assessments under the Tariff and Customs Code ?

SUGGESTED ANSWER: Assessments inform taxpayers of their tax liabilities.

Under the TCCP, the assessment is in the form of a liquidation made on the face of the import entry return and approved by the Collector of Customs. (Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008)

14. What is meant by liquidation ?

SUGGESTED ANSWER: Liquidation is the final computation and ascertainment by the Collector of Customs of the duties due on imported merchandise based on official reports as to the quantity, character and value thereof, and the Collector of Customs' own finding as to the applicable rate of duty.

A liquidation is considered to have been made when the entry is officially stamped “liquidated.” (Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008)

15. When assessment or liquidation made by the Bureau of Customs attains finality and conclusiveness. An assessment or liquidation by the Bureau of Customs attains finality and conclusiveness one year from the date of the final payment of duties except when:

a. there was fraud;

b. there is a pending protest or

c. the liquidation of import entry was merely tentative. (Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008)

16. Instance when the Bureau of Customs would utilize its remedy of filing a civil suit for collection of taxes. Import duties constitute a personal debt of the importer that must be paid in full. The importer’s liability therefore constitutes a lien on the article which the government may choose to enforce while the imported articles are either in its custody or under its control.

When Bureau of Customs has released the imported goods, its lien over the imported goods was extinguished. Consequently, Bureau of Customs could only enforce the payment of import duties in full by filing a case for collection against importer. (Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008)

17. Despite the holding in Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008, the distribution of jurisdiction for collection cases involving tariff and customs duties is as follows:

a. Basic tax does not exceed P300,000.00 MTC if outside of Metro Manila; does not exceed P400,000.00 MTC if within Metro Manila;

b. Basic tax exceeds P300,000 but does not reach P1 million RTC if outside Metro Manila, exceeds P400,000.00 but does not reach P1 million RTC if within Metro Manila;

c. Basic tax is P1 million or over, Court of Tax Appeals, Division.

Pilipinas Shell ruled that jurisdiction vested upon the RTC because it was interpreting the CTA jurisdiction prior to the amendment of Rep. Act No. 1125.

18. Importation begins when the conveying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein. (Sec. 1202, TCCP) The jurisdiction of the Bureau of Customs to enforce the provisions of the TCCP including seizure and forfeiture also begins from the beginning of importation.

19. Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the agencies, or secured to be paid, at the port of entry and the legal permit for withdrawal shall have been granted.

In case the articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs. (Sec. 1202, TCCP) The Bureau of Customs loses jurisdiction to enforce the TCCP and to make seizures and forfeitures after importation is deemed terminated.

20. The flexible tariff clause is a provision in the Tariff and Customs Code, which implements the constitutionally delegated power to the President of the Philippines, in the interest of national economy, general welfare and/or national security upon recommendation of the NEDA (a) to increase, reduce or remove existing protective rates of import duty, provided that, the increase should not be higher than 100% ad valorem; (b) to establish import quota or to ban imports of any commodity, and (c) to impose additional duty on all imports not exceeding 10% ad valorem, among others.

21. Customs duties defined. Customs duties is the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001)

22. Special customs duties are additional import duties imposed on specific kinds of imported articles under certain conditions. The special customs duties under the Tariff and Customs Code (TCCP) are the anti-dumping duty, the countervailing duty, the discriminatory duty, and the marking duty, and under the Safeguard Measures Act (SMA) additional tariffs as safeguard measures.

23. The special customs duties are imposed for the protection of consumers and manufacturers, as well as Philippine products.

24. Dumping duty is an additional special duty amounting to the difference between the export price and the normal value of such product, commodity or article (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999.”) imposed on the importation of a product, commodity or article of commerce into the Philippines at less than its normal value when destined for domestic consumption in the exporting country which is causing or is threatening to cause material injury to a domestic industry, or materially retarding the establishment of a domestic industry producing the like product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]

25. The anti-dumping duty is imposed

a. Where a product, commodity or article of commerce is exported into the Philippines at a price less than its normal value when destined for domestic consumption in the exporting country,

b. and such exportation is causing or is threatening to cause material injury to a domestic industry, or materially retards the establishment of a domestic industry producing the like product. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]

26. Normal value for purposes of imposing the anti-dumping duty is the comparable price at the date of sale of like product, commodity, or article in the ordinary course of trade when destined for consumption in the country of export. [Sec. 301 (s) (3 ), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]

27. A dumped imported product is any product, commodity or article of commerce introduced into the Philippines at an export price less than its normal value in the ordinary course of trade, for the like product, commodity or article destined for consumption in the exporting country, which is causing or is threatening to cause material injury to a domestic industry, or materially retarding the establishment of a domestic industry producing the like product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]

28. The imposing authority for the anti-dumping duty is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]

29. Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”] Thus, the cabinet secretaries could not contravene the recommendation of the Tariff Commission. They could not impose the anti-dumping duty or any special customs duty without the favorable recommendation of the Tariff Commission.

30. In the determination of whether to impose the anti-dumping duty, the Tariff Commission, may consider among others, the effect of imposing an anti-dumping duty on the welfare of the consumers and/or the general public, and other related local industries. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)

31. The amount of anti-dumping duty that may be imposed is the difference between the export price and the normal value of such product, commodity or article. (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)

The anti-dumping duty shall be equal to the margin of dumping on such product, commodity or article thereafter imported to the Philippines under similar circumstances, in addition to ordinary duties, taxes and charges imposed by law on the imported product, commodity or article.

32. Countervailing duties are additional customs duties imposed on any product, commodity or article of commerce which is granted directly or indirectly by the government in the country of origin or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation of such product commodity or article, and the importation of such subsidized product, commodity, or article has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry. (Sec. 302, TCCP as amended by Section 1, R.A. No. 8751)

33. The imposing authority for the countervailing duties is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission.

Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)

34. The countervailing duty is equivalent to the value of the specific subsidy.

35. Marking duties are the additional customs duties imposed on foreign articles (or its containers if the article itself cannot be marked), not marked in any official language in the Philippines, in a conspicuous place as legibly, indelibly and permanently in such manner as to indicate to an ultimate purchaser in the Philippines the name of the country of origin.

36. The Commissioner of Customs imposes the marking duty.

37. The marking duty is equivalent to five percent (5%) ad valorem.

38. A discriminatory duty is a new and additional customs duty imposed upon articles wholly or in part the growth or product of, or imported in a vessel, of any foreign country which imposes, directly or indirectly, upon the disposition or transportation in transit through or reexportation from such country of any article wholly or in part the growth or product of the Philippines, any unreasonable charge, exaction, regulation or limitation which is not equally enforced upon like articles of every foreign country, or discriminates against the commerce of the Philippines, directly or indirectly, by law or administrative regulation or practice, by or in respect to any customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction or prohibition, in such manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country.

39. The President of the Philippines imposes the discriminatory duties.

40. Safeguard measures are emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them.

The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing safeguard measures as provided under Rep. Act No. 8800 the Safeguard Measures Act (SMA). (Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004)

The DTI Secretary cannot impose the safeguard measures if the Tariff Commission does not favorably recommend its imposition.

41. Imposing authority for safeguard measures. The imposing authority for the countervailing duties is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission.

42. Safeguards measures that may be imposed. Additional tariffs, import quotas or banning of imports.

43. Payment under protest required where additional duties, taxes, fees or other charges are imposed by the Collector otherwise taxpayer could not obtain refund. When a ruling or decision of the collector is made whereby liability for duties, taxes, fees, or other charges are determined, except the fixing of fines in seizure cases, the party adversely affected may protest such ruling or decision

a. by presenting to the Collector at the time when payment is made, or within fifteen (15) days thereafter,

b. a written protest setting forth his objection to the ruling or decision in question, together with his reasons therefor. No protest shall be considered unless payment of the amount due after final liquidation has first been made and the corresponding docket fee. (Sec. 2308, TCC numbering and arrangement supplied)

44. Protest Exclusive Remedy in Protestable Cases. In all cases subject to protest, the interested party who desires to have the action of the collector reviewed, shall make a protest, otherwise the action of the collector shall be final and conclusive against him. (Sec. 2309, TCC)

45. The basis of dutiable value of merchandise that is subject to ad valorem customs duties the transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding certain cost elements to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, and may include the following:

a. Cost of containers and packing,

b. Insurance, and

c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No. 9135)

46. The above transaction value is the primary method of determining dutiable value. If the transaction value of the imported article could not be determined using the above, the following alternative methods should be used one after the other:

a. Transaction value of identical goods

b. Transaction value of similar goods

c. Deductive method

d. Computed method

e. Fallback method

47. There is a mistaken belief that claims for refund are governed by the rule on quasi-contract of solutio indebeti which prescribes in six (6) years under Article 1145 of the Civil Code.

In order for the rule on solutio indebeti to apply it is an essential condition that the petitioner must first show that its payment of the customs duties was in excess of what was required by the law at the time the subject 16 importations of milk and milk products were made. Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in favor of the Collector of Customs. (Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001)

48. There is no automatic grant of refund. In determining whether Nestle is entitled to refund of alleged overpayment of custom duties, it is necessary to determine exactly how much the Government is entitled to collect as customs duties. Until there is such a determination by the Collector and affirmed or rejected by the Commissioner, then the Court of Tax Appeals does not have jurisdiction. The CTA’s jurisdiction under the Tariff and Customs Code is not concurrent with that of the Commissioner of Customs due to the absence of any certification from the Collector of Customs of Manila that such import duties should be refunded. Consequently, the finding by the CTA in another case of overpayment of internal revenue taxes is not necessarily a finding that there was overpayment of customs duties. (Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001)

49. All claims for refund of duties shall be made in writing and forwarded to the Collector of Customs to whom such duties are paid, who upon receipt of such claim, shall verify the same by the records of his Office, and if found to be correct and in accordance with law, shall certify the same to the Commissioner of Customs with his recommendation together with all necessary papers and documents. Upon receipt by the Commissioner of such certified claim he shall cause the same to be paid if found correct. (Sec. 1708, TCC)

50. Under the doctrine of primary jurisdiction, the Bureau of Customs has exclusive administrative jurisdiction to conduct searches, seizures and forfeitures of contraband without interference from the courts. It could conduct searches and seizures without need of a judicial warrant except if the search is to be conducted in a dwelling place.

51. The doctrine of exclusive customs jurisdiction over customs cases to the exclusion of the RTCs is anchored upon the policy of placing no unnecessary hindrance on the government’s drive, not only to prevent smuggling and other frauds upon Customs, but more importantly, to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jao, et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43)

52. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. RTCs are precluded from assuming cognizance over such matters even through petitions of certiorari, prohibition or mandamus. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)

53. Regional Trial Courts have no jurisdiction to replevin a property which is subject to seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455)

54. The customs authorities do not have to prove to the satisfaction of the court that the articles on board a vessel were imported from abroad or are intended to be shipped abroad before they may exercise the power to effect customs searches, seizures, or arrests provided by law and continue with the administrative hearings. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)

55. The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as by enforcing the tax lien on the imported article when the imported articles could be found and be subject to seizure and forfeiture.

56. The Tariff and Customs Code allows the Bureau of Customs to resort to the judicial remedy of filing an action in court when the imported articles could not anymore be found.

57. Instances where there is no right of redemption of seized and forfeited articles:

a. There is fraud;

b. The importation is absolutely prohibited, or

c. The release of the property would be contrary to law. (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999)

58. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298, the Supreme Court clarified that the fraud contemplated by law must be actual and not constructive. It must be intentional, consisting of deception, willfully and deliberately done or resorted to in order to induce another to give up some right.

59. Fraud must be proved to justify forfeiture. It must be actual, amounting to intentional wrong-doing with the clear purpose of avoiding the tax. Forfeiture is not favored in law nor in equity. Mere negligence is not equivalent to the fraud contemplated by law. An honest mistake, will not deprive the government of its right to collect the proper tax. (Republic, etc., v. The Court of Appeals, et al., G.R. No. 139050, October 2, 2001)

60. Requisites for forfeiture of imported goods:

a. Wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper – all touching on the importation or exportation of merchandise.

b. the falsity of such declaration, affidavit, invoice, letter or paper; and

c. an intention on the part of the importer/consignee to evade the payment of the duties due. (Republic, etc., v. The Court of Appeals, et al., G.R. No. 139050, October 2, 2001)

61. Forfeiture of seized goods in the Bureau of Customs is in the nature of a proceeding in rem, i.e. directed against the res or imported goods and entails a determination of the legality of their importation. In this proceeding, it is in legal contemplation the property itself which commits the violation and is treated as the offender, without reference whatsoever to the character or conduct of the owner.

The issue is limited to whether the imported goods should be forfeited and disposed of in accordance with law for violation of the Tariff and Customs Code. .(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999)

62. The one-year prescriptive period for forfeiture proceedings applies only in the absence of fraud. (Commissioner of Customs v. Court of Tax Appeals, et al., G.R. No. 132929, March 27, 2000)

63. The posting of customs guards at the importer’s warehouse where the imported steel billets were transferred under guard from the customs zone is an indication that the goods were not yet released by the Bureau of Customs to the importer and that importation has not yet been terminated.

However, when the Bureau of Customs allowed the processing of the import entry, accepted the payment and issued an order of release such order is sufficient legal permit for withdrawal and importation is then deemed terminated. The goods could not anymore be seized and forfeited because importation has been validly terminated. (Sandoval-Gutierrez J. Commissioner of Customs v. Milwaukee Industrial Corporation, G. R. No. 135253, December 9, 2004)

64. The Collector of Customs upon probable cause that the articles are imported or exported, or are attempted to be imported or exported, in violation of the tariff and customs laws shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93)

If the search and seizure is to be conducted in a dwelling place, then a search warrant should be issued by the regular courts not the Bureau of Customs.

There may be instances where no warrants issued by the Bureau of Customs or the regular courts is required, as in search and seizures of motor vehicles and vessels.

65. Smuggled goods seized by virtue of a court warrant should be surrendered to the court that issued the warrant and not to the Bureau of Customs because the goods are in custodia legis.

REPUBLIC ACT NO. 1125, CREATING THE COURT OF TAX APPEALS INCLUDING JURISDICTION OF THE CTA, AS AMENDED

1. Why was the Court of Tax Appeals created ?

SUGGESTED ANSWER:

a. To prevent delay in the disposition of tax cases by the then Courts of First Instance (now RTCs), in view of the backlog of civil, criminal, and cadastral cases accumulating in the dockets of such courts; and

b. To have a body with special knowledge which ordinary Judges of the then Courts of First Instance (now RTCs), are not likely to possess, thus providing for an adequate remedy for a speedy determination of tax cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209; Lacsamana, et al., etc., v. CTA, et al., 102 Phil. 931)

2. CTA specialized court. By the very nature of its functions, the CTA is a highly specialized court specifically created for the purpose of reviewing tax and customs cases. it is dedicated exclusively to the study and consideration of revenue-related problems and has necessarily developed an expertise on the subject. (J. Panganiban in Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005, citing various cases in his separate opinion to the decision on the motion for reconsideration)

3. Court of Tax Appeals’ finding of fact binds the Supreme Court. It is doctrinal that the factual findings of the Court of Tax Appeals, when supported by substantial evidence, will not be disturbed on appeal, unless it is shown that it committed gross error in the appreciation of facts. (Commissioner of Internal Revenue v. Manila Electric Company, G. R. No. 121666, October 10, 2007 citing Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 124043, October 14, 1998, 298 SCRA 83, 91 citing Commissioner of Internal Revenue v. Mitsubishi Metal Corp., G.R. Nos. 54909 and 80041, January 22, 1990, 181 SCRA 214, 220; Philippine Refining Company v. Court Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 124043, October 14, 1998, 298 SCRA 83, 91 citing Commissioner of Internal Revenue v. Mitsubishi Metal Corp., G.R. Nos. 54909 and 80041, January 22, 1990, 181 SCRA 214, 220; Philippine Refining Company v. Court of Appeals, G.R. No. 118794, May 8, 1996, 256 SCRA 667, 676)

Hence, as a matter of practice and principle, the Supreme Court will not set aside the conclusion reached by the Court of Tax Appeals, especially if affirmed by the Court of Appeals as in the present case. For by the nature of its functions, the tax court dedicates itself to the study and consideration of tax problems and necessarily develops expertise thereon, unless there has been an abuse or improvident exercise of authority on its part. (Ibid. citing Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue, G.R. No. 133834, August 28, 2006, 499 SCRA 664, 669; Commissioner of Internal Revenue v. General Foods (Phils.) Inc., G.R. No. 143672, April 24, 2003, 401 SCRA 545, 553.

4. Court of Tax Appeals is not governed strictly by technical rules of evidence. (Sec. 8, Rep. Act No. 1125) While this may be so rules of procedure are not ends in themselves but are primarily intended as tools in the administration of justice, the presentation of the purchase receipts and/or invoices is not mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of the taxpayer’s claims. (Commissioner of Internal v. Manila Mining Corporation, G. R. No. 153204, August 31, 2005)

Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it are litigated de novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as the rules on documentary evidence require that these documents must be formally offered before the CTA.

While the CTA is not governed strictly by technical rules of evidence, as rules of procedure are not ends in themselves and are primarily intended as tools in the administration of justice, the presentation of the BIR's evidence is not a mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's claims. (Dizon, etc., v. Court of Tax Appeals, et al., G.R. No. 140944, April 30, 2008)

5. The legal remedies under the NIRC of 1997 and other laws available to an aggrieved taxpayer may be classified into the tax remedies with respect to:

a. assessment;

b. collection, and

c. refund of internal revenue taxes.

The remedies may also be classified into the administrative or the judicial remedies.

6. The legal remedies under the NIRC of 1997 available to an aggrieved taxpayer at the administrative level with respect to assessment of internal revenue taxes are the following:

a. Upon receipt of a pre-assessment notice, the taxpayer shall respond to the same within fifteen (15) days from receipt which is the period provided for by implementing rules and regulations. [3rd par., Sec. 228 (e), NIRC of 1997]

b. Upon the issuance of an assessment notice, the taxpayer shall protest administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations.

c. Within sixty (60) days from the filing of the protest, all relevant supporting documents shall be submitted; otherwise the assessment shall become final. (4th par., Ibid.)

7. The legal remedies under the NIRC of 1997 available to an aggrieved taxpayer at the judicial level with respect to assessment of internal revenue taxes:

a. If the protest is denied in whole or in part, or

b. is not acted upon within one hundred eighty (180) days from submission of documents,

c. the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180) – day period; otherwise, the decision shall become final, executory and demandable. [last par., Sec. 228 (e), NIRC of 1997]

d. On appeal, the taxpayer should apply for the issuance of a writ of preliminary injunction to enjoin the BIR from collecting the tax subject of the appeal.

e. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the government may be the subject of a motion for reconsideration or new trial, a denial of which is appealable to the Court of Tax Appeals en banc by means of a petition for review. .

f. A decision of the Court of Tax Appeals en banc adverse to the taxpayer or the government may be appealed to the Supreme Court through a petition for review on certiorari filed with fifteen (15) days from notice, and extendible for justifiable reasons for thirty (30) days only.

8. The legal remedy under the NIRC of 1997 available to an aggrieved taxpayer at the administrative level with respect to refund or recovery of tax erroneously or illegally collected, is to file a claim for refund or credit with the Commissioner of Internal Revenue. (1st par., Sec. 229, NIRC of 1997)

9. The legal remedy under the NIRC of 1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected, is the filing of a suit or proceeding with the Court of Tax Appeals

a. before the expiration of two (2) years from the date of payment of the tax regardless of any supervening cause that may arise after payment (2nd par., Sec. 229, NIRC of 1997;), or

b. within thirty (30) days from receipt of the denial by the Commissioner of the application for refund or credit. (Sec. 11, R.A. No. 1125)

10. The two (2) year period and the thirty (30) day period should be applied on a whichever comes first basis. Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year period is about to lapse but there is no decision yet by the Commissioner which would trigger the 30-day period, the taxpayer should file an appeal, despite the absence of a decision. (Commissioners, etc. v. Court of Tax Appeals, et al., G.R.No. 82618, March 16, 1989, unrep.)

11. Where the taxpayer is a corporation the two year prescriptive period from “date of payment” for refund of income taxes should be the date when the corporation filed its final adjustment return not on the date when the taxes were paid on a quarterly basis. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999)

12. Generally speaking it is the Final Adjustment Return, in which amounts of the gross receipts and deductions have been audited and adjusted, which is reflective of the results of the operations of a business enterprise. It is only when the return, covering the whole year, is filed that the taxpayer will be able to ascertain whether a tax is still due or refund can be claimed based on the adjusted and audited figures. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001)

13. Outline of tax remedies of a taxpayer and the government relative to ASSESSMENT of internal revenue taxes.

a. The taxpayer files his tax return.

b. A Letter of Authority is issued authorizing BIR examiner to audit or examine the tax return and determines whether the full and complete taxes have been paid.

c. If the examiner is satisfied that the tax return is truly reflective of the taxable transaction and all taxes have been paid, the process ends. However, if the examiner is not satisfied that the tax return is truly reflective of the taxable transaction and that the taxes have not been fully paid, a Notice of Informal Conference is issued inviting the taxpayer to explain why he should not be subject to additional taxes.

d. If the taxpayer attends the informal conference and the examiner is satisfied with the explanation of the taxpayer, the process is again ended.

If the taxpayer ignores the invitation to the informal conference, or if the examiner is not satisfied with taxpayer’s explanation,, and he believes that proper taxes should be assessed, the Commissioner of Internal Revenue or his duly authorized representative shall then notify the taxpayer of the findings in the form of a pre-assessment notice. The pre-assessment notice requires the taxpayer to explain within fifteen (15) days from receipt why no notice of assessment and letter of demand for additional taxes should be directed to him.

e. If the Commissioner is satisfied with the explanation of the taxpayer, then the process is again ended.

If the taxpayer ignores the pre-assessment notice by not responding or his explanations are not accepted by the Commissioner, then a notice of assessment and a letter of demand is issued.

The notice of assessment must be issued by the Commissioner to the taxpayer within a period of three (3) years from the time the tax return was filed or should have been filed whichever is the later of the two events. Where the taxpayer did not file a tax return or where the tax return filed is false or fraudulent, then the Commissioner has a period of ten (10) years from discovery of the failure to file a tax return or from discovery of the fraud within which to issue an assessment notice. The running of the above prescriptive periods may however be suspended under certain instances.

The notice of assessment must be issued within the prescriptive period and must contain the facts, law and jurisprudence relied upon by the Commissioner. Otherwise it would not be valid.

f. The taxpayer should then file an administrative protest by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment notice.

The taxpayer could not immediately interpose an appeal to the Court of Tax Appeals because there is no decision yet of the Commissioner that could be the subject of a review.

To be valid the administrative protest must be filed within the prescriptive period, must show the error of the Bureau of Internal Revenue and the correct computations supported by a statement of facts, and the law and jurisprudence relied upon by the taxpayer. There is no need to pay under protest. If the protest was not seasonably filed the assessment becomes final and collectible and the Bureau of Internal Revenue could use its administrative and judicial remedies in collecting the tax.

g. Within sixty (60) days from filing of the protest, all relevant supporting documents shall be submitted, otherwise the assessment shall become final and collectible and the BIR could use its administrative and judicial remedies to collect the tax.

Once an assessment has become final and collectible, not even the BIR Commissioner could change the same. Thus, the taxpayer could not pay the tax, then apply for a refund, and if denied appeal the same to the Court of Tax Appeals.

h. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from the submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the adverse decision, or from the lapse of the one hundred eighty (180-) day period, with an application for the issuance of a writ of preliminary injunction to enjoin the BIR from collecting the tax subject of the appeal.

If the taxpayer fails to so appeal, the denial of the Commissioner or the inaction of the Commissioner would result to the notice of assessment becoming final and collectible and the BIR could then utilize its administrative and judicial remedies to collect the tax.

i. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the government may be the subject of a motion for reconsideration or new trial, a denial of which is appealable to the Court of Tax Appeals en banc by means of a petition for review. .

The Court of Tax Appeals, has a period of twelve (12) months from submission of the case for decision within which to decide.

j. If the decision of the Court of Tax Appeals en banc affirms the denial of the protest by the Commissioner or the assessment in case of failure by the Commissioner to decide the taxpayer must file a petition for review on certiorari with the Supreme Court within fifteen (15) days from notice of the judgment on questions of law. An extension of thirty (30) days may for justifiable reasons be granted. If the taxpayer does not so appeal, the decision of the Court of Tax Appeals would become final and this has the effect of making the assessment also final and collectible. The BIR could then use its administrative and judicial remedies to collect the tax.

14. The jurisdiction of the Court of Tax Appeals:

“a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties, in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue’; (DIVISION)

2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds or internal revenue taxes, fees or other charges, penalties in relation thereto, or other matter arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; (The inaction on refunds in two years from the time tax was paid. Thus, if the prescriptive period of two years is about to expire, the taxpayer should interpose a petition for review with the CTA – DIVISION)

3. Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction; (If original DIVISION; if appellate EN BANC)

4. Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; (DIVISION)

5. Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals; (EN BANC)

6. Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the Tariff and Customs Code; (This has reference to forfeiture cases where the decision is to release the seized articles – DIVISION)

7. Decisions of the Secretary of Trade and Industry, in case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties. (DIVISION)

b. Jurisdiction over cases involving criminal offenses as herein provided:

1. Exclusive original jurisdiction over all criminal cases arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive of charges and penalties claimed, is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular Courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the civil action will be recognized.

2. Exclusive appellate jurisdiction in criminal offenses:

a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their respective territorial jurisdiction.

b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction.

c. Jurisdiction over tax collection cases:

1. Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties: Provided, however, That collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000) shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court.

2. Exclusive appellate jurisdiction in tax collection cases:

a. Over appeals from judgments, resolutions, or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction.

b. Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.” (Sec. 7, R. A. No. 1125, as amended by R. A. No. 9282, emphasis and words in parentheses supplied)

15. The following are the acts of BIR Commissioner considered as denial of a protest which serve as basis for appeal to the Court of Tax Appeals:

a. Filing by the BIR of a civil suit for collection of the deficiency tax is considered a denial of the request for reconsideration. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)

b. An indication to the taxpayer by the Commissioner “in clear and unequivocal language” of his final denial not the issuance of the warrant of distraint and levy. What is the subject of the appeal is the final decision not the warrant of distraint. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)

c. A BIR demand letter sent to the taxpayer after his protest of the assessment notice is considered as the final decision of the Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)

d. A letter of the BIR Commissioner reiterating to a taxpayer his previous demand to pay an assessment is considered a denial of the request for reconsideration or protest and is appealable to the Court of Tax Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204)

e. Final notice before seizure considered as commissioner’s decision of taxpayer’s request for reconsideration who received no other response. Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001 held that not only is the Notice the only response received: its content and tenor supports the theory that it was the CIR’s final act regarding the request for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that the taxpayer was being given “this LAST OPPORTUNITY” to pay; otherwise, its properties would be subjected to distraint and levy.

16. The taxpayer seasonably protested the assessment issued by the Commissioner of Internal Revenue. During the pendency of the protest the CIR issued a warrant of distraint and levy to collect the taxes subject of the protest.

As counsel what advice shall you give the taxpayer. Explain briefly your answer.

ANSWER: The taxpayer should appeal, by way of a petition for review, to the Court of Tax Appeals not on the ground of the denial of the protest but on other matter arising under the provisions of the National Internal Revenue Code. The actual issuance of a warrant of distraint and levy in certain cases cannot be considered a final decision on a disputed assessment.

To be a valid decision on a disputed assessment, the decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, in which case the same shall not be considered a decision on the disputed assessment; and (b) that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99) These conditions are not complied with by the mere issuance of a warrant of distraint and levy. (Commissioner of Internal Revenue v. Union Shipping Corp., 185 SCRA 547)

Furthermore, a motion for the suspension of the collection of the tax may be filed together with the petition for review (Sec. 3, Rule 10, RRCTA effective December 15, 2005) because the collection of the tax may jeopardize the interest of the taxpayer.

17. As a general rule, there must always be a decision of the Commissioner of Internal Revenue or Commissioner of Customs before the Court of Tax Appeals, would have jurisdiction. If there is no such decision, the would be dismissed for lack of jurisdiction unless the case falls under any of the following exceptions.

18. Instances where the Court of Tax Appeals would have jurisdiction even if there is no decision yet by the Commissioner of Internal Revenue:

a. Where the Commissioner has not acted on the disputed assessment after a period of 180 days from submission of complete supporting documents, the taxpayer has a period of 30 days from the expiration of the 180 day period within which to appeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001)

b. Where the Commissioner has not acted on an application for refund or credit and the two year period from the time of payment is about to expire, the taxpayer has to file his appeal with the Court of Tax Appeals before the expiration of two years from the time the tax was paid.

It is disheartening enough to a taxpayer to be kept waiting for an indefinite period for the ruling,. It would make matters more exasperating for the taxpayer if the doors of justice would be closed for such a relief until after the Commissioner, would have, at his personal convenience, given his go signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.)

19. What is the legal remedy under the NIRC of 1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected ?

SUGGESTED ANSWER. The legal remedy under the NIRC of 1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected, is the filing of a suit or proceeding with the Court of Tax Appeals

a. before the expiration of two (2) years from the date of payment of the tax regardless of any supervening cause that may arise after payment (2nd par., Sec. 229, NIRC of 1997), or

b. within thirty (30) days from receipt of the denial by the Commissioner of the application for refund or credit. (Sec. 11, R.A. No. 1125)

20. The two (2) year period and the thirty (30) day period should be applied on a whichever comes first basis. Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year period is about to lapse but there is no decision yet by the Commissioner which would trigger the 30-day period, the taxpayer should file an appeal, despite the absence of a decision. (Commissioners, etc. v. Court of Tax Appeals, et al., G. R. No. 82618, March 16, 1989, unrep.)

21. Where the taxpayer is a corporation the two year prescriptive period from “date of payment” for refund of income taxes should be the date when the corporation filed its final adjustment return not on the date when the taxes were paid on a quarterly basis. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999)

Generally speaking it is the Final Adjustment Return, in which amounts of the gross receipts and deductions have been audited and adjusted, which is reflective of the results of the operations of a business enterprise. It is only when the return, covering the whole year, is filed that the taxpayer will be able to ascertain whether a tax is still due or refund can be claimed based on the adjusted and audited figures. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001)

22. What is the burden of taxpayers seeking tax refunds or credits ?

SUGGESTED ANSWER: It has always been the rule that those seeking tax refunds or credits bear the burden of proving the factual basis of their claims and of showing, by words too plain to be mistaken, that the legislature intended to entitle them to such claims. (Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G. R. No. 145526, March 16, 2007, See Commissioner of Internal Revenue v. Seagate Technology (Philippines) G. R. No. 153866, 11 February 2005, 451 SCRA 132)

23. What is the nature of proceedings before the Court of Tax Appeals ?

SUGGESTED ANSWER:

First, a judicial claim for refund or tax credit in the CTA is by no means an original action, but rather an appeal by way of petition for review of a previous, unsuccessful administrative claim.

Therefore, as in every appeal or petition for review, a petitioner has to convince the appellate court that the quasi-judicial agency a quo did not have any reason to deny its claims.

Second, cases filed in the CTA are litigated de novo. Thus, a petitioner should prove every minute aspect of its case by presenting, formally offering and submitting its evidence to the CTA.

Since it is crucial for a petitioner in a judicial claim for refund or tax credit to show that its administrative claim should have been granted in the first place, part of the evidence to be submitted to the CTA must necessarily include whatever is required for the successful prosecution of an administrative claim. (Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G. R. No. 145526, March 116, 2007)

24. Applicability of Proton Pilipinas Corporation vs. Republic, etc., G. R. No. 165027, October 16, 2006. The case was decided on factual antecedents before R. A. No. 9282 which grants criminal jurisdiction to the Court of Tax Appeals if the value of the tax is P1 million or more.

Interpreting the provisions of Republic Act No. 8249, which provides that the civil action for recovery of civil liability should be jointly determined in the criminal proceeding by the Sandiganbayan or appropriate courts, the prohibition of reservation of the criminal aspect, the Supreme Court said that tax collection cases may be tried separately, and not before the Sandiganbayan in Rep. Act No. 3019 cases. This is so because, Rep. Act No. 3019 is silent on the definition of civil liability and the application of Art. 104 of the Revised Penal Code does not cover taxes. Consequently, the Supreme Court ruled that on the tax collection case the RTC would have jurisdiction.

Interpretation by the author in the light of Rep. Act. 9282. If it is a criminal case cognizable by the Sandiganbayan, then this court retains jurisdiction, with the civil jurisdiction being cognizable by the CTA or the lower courts depending on the amount.

If the issue is a purely tax case, even if it involves cases cognizable by the Sandiganbayan, then jurisdiction vests upon the CTA or the lower courts depending on the amount of the tax.

25. On January 24, 1995, the then Secretary of Finance, through the recommendation of the then Commissioner of Internal Revenue issued Revenue Regulations [Rev. Reg.] No. 1-95, providing the “Rules and Regulations to Implement the Tax Incentives Provisions Under Paragraphs (b) and (c) of Section 12, [R.A.] No. 7227, [o]therwise known as the Bases Conversion and Development Act of 1992.” Subsequently, Rev. Reg. No. 12-97 was issued providing for the “Regulations Implementing Sections 12(c) and 15 of [R.A.] No. 7227 and Sections 24(b) and (c) of [R.A.] No. 7916 Allocating Two Percent (2%) of the Gross Income Earned by All Businesses and Enterprises Within the Subic, Clark, John Hay, Poro Point Special Economic Zones and other Special Economic Zones under PEZA.” On September 27, 1999, Rev. Reg. No. 16-99 was issued “Amending [RR] No. 1-95, as amended, and other related Rules and Regulations to Implement the Provisions of paragraphs (b) and (c) of Section 12 of [R.A.] No. 7227, otherwise known as the ‘Bases Conversion and Development Act of 1992’ Relative to the Tax Incentives Granted to Enterprises Registered in the Subic Special Economic and Freeport Zone.”

On June 3, 2003, the Commissioner of Internal Revenue issued Revenue Memorandum Circular (RMC) No. 31-2003 setting the “Uniform Guidelines on the Taxation of Imported Motor Vehicles through the Subic Free Port Zone and Other Freeport Zones that are Sold at Public Auction,” which provided for the tax treatments on the transactions involved in the importation of motor vehicles through the SSEFZ and other legislated Freeport zones and subsequent sale thereof through public auction. This was later amended by RMC No. 32-2003.

Asia International Auctioneers and others filed a complaint before the RTC of Olongapo City, to declare Void, Ultra Vires, and Unconstitutional [RMC] No. 31-2003 dated June 3, 2003 and [RMC] No. 32-2003 dated June 5, 2003, Rev. Reg. Nos. 1-95, 12-97 and 16-99 dated January 24, 1995, August 7, 1997 and September 27, 1999, respectively,

They contended that jurisdiction over the case at bar properly pertains to the regular courts as this is “an action to declare as unconstitutional, void and against the provisions of [R.A. No.] 7227” the RMCs issued by the CIR. They do “do not challenge the rate, structure or figures of the imposed taxes, rather they challenge the authority of the respondent Commissioner to impose and collect the said taxes.” They also claim that the challenge on the authority of the CIR to issue the RMCs does not fall within the jurisdiction of the Court of Tax Appeals (CTA).

Does the RTC have jurisdiction ?

SUGGESTED ANSWER: No. It is the Court of Tax Appeals that has exclusive jurisdiction.

In the case at bar, the assailed revenue regulations and revenue memorandum circulars are actually rulings or opinions of the CIR on the tax treatment of motor vehicles sold at public auction within the SSEZ to implement Section 12 of R.A. No. 7227 which provides that “exportation or removal of goods from the territory of the [SSEZ] to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.” They were issued pursuant to the power of the CIR under Section 4 of the National Internal Revenue Code, viz:

Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.-- The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. (as amended by the NIRC of 1997, emphases supplied, Asia International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R. No. 103445, December 18, 2007)

26. What is the characteristic of a BIR denial of a protest such as would enable the taxpayer to appeal the same to the Court of Tax Appeals ?

SUGGESTED ANSWER: The Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment.

On the basis of his statement indubitably showing that the Commissioner’s communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. (Commissioner of Internal Revenue v. Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007 citing Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue, G. R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523)

27. Reasons for the rule requiring CIR’s unequivocal language on his action on the protest.

a. It would obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment – and, consequently, the collection of the amount demanded as taxes – by repeated requests for recomputation and reconsideration.

b. On the part of the Commissioner of Internal Revenue, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and define decision thereon in the first instance.

c. This would also deter the Commissioner of Internal Revenue from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court.

d. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action. (Commissioner of Internal Revenue v. Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007 citing Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue, G. R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523)

28. Cite acts of BIR Commissioner that may be considered as denial of a protest which serve as basis for appeal to the Court of Tax Appeals.

SUGGESTED ANSWER:

a. Filing by the BIR of a civil suit for collection of the deficiency tax is considered a denial of the request for reconsideration. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)

b. An indication to the taxpayer by the Commissioner “in clear and unequivocal language” of his final denial not the issuance of the warrant of distraint and levy. What is the subject of the appeal is the final decision not the warrant of distraint. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)

c. A BIR demand letter sent to the taxpayer after his protest of the assessment notice is considered as the final decision of the Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)

d. A letter of the BIR Commissioner reiterating to a taxpayer his previous demand to pay an assessment is considered a denial of the request for reconsideration or protest and is appealable to the Court of Tax Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204)

e. Final notice before seizure considered as commissioner’s decision of taxpayer’s request for reconsideration who received no other response. Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001 held that not only is the Notice the only response received: its content and tenor supports the theory that it was the CIR’s final act regarding the request for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that the taxpayer was being given “this LAST OPPORTUNITY” to pay; otherwise, its properties would be subjected to distraint and levy.

29. The taxpayer seasonably protested the assessment issued by the Commissioner of Internal Revenue. During the pendency of the protest the CIR issued a warrant of distraint and levy to collect the taxes subject of the protest.

As counsel what advice shall you give the taxpayer. Explain briefly your answer.

SUGGESTED ANSWER: The taxpayer should appeal, by way of a petition for review, to the Court of Tax Appeals not on the ground of the denial of the protest but on other matter arising under the provisions of the National Internal Revenue Code. The actual issuance of a warrant of distraint and levy in certain cases cannot be considered a final decision on a disputed assessment.

To be a valid decision on a disputed assessment, the decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, in which case the same shall not be considered a decision on the disputed assessment; and (b) that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99) These conditions are not complied with by the mere issuance of a warrant of distraint and levy. (Commissioner of Internal Revenue v. Union Shipping Corp., 185 SCRA 547)

Furthermore, a motion for the suspension of the collection of the tax may be filed together with the petition for review (Sec. 3, Rule 10, RRCTA effective December 15, 2005) because the collection of the tax may jeopardize the interest of the taxpayer.

30. Instances where the Court of Tax Appeals would have jurisdiction even if there is no decision yet by the Commissioner of Internal Revenue:

a. Where the Commissioner has not acted on the disputed assessment after a period of 180 days from submission of complete supporting documents, the taxpayer has a period of 30 days from the expiration of the 180 day period within which to appeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001)

b. Where the Commissioner has not acted on an application for refund or credit and the two year period from the time of payment is about to expire, the taxpayer has to file his appeal with the Court of Tax Appeals before the expiration of two years from the time the tax was paid.

It is disheartening enough to a taxpayer to be kept waiting for an indefinite period for the ruling,. It would make matters more exasperating for the taxpayer if the doors of justice would be closed for such a relief until after the Commissioner, would have, at his personal convenience, given his go signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.)

31. As a general rule, “No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge.” (Sec. 218, NIRC)

“No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, 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 said 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.” (Sec. 11, Rep. Act No. 1125, as amended by Sec.9, Rep. Act No. 9282 )

The Supreme Court may enjoin the collection of taxes under its general judicial power but it should be apparent that the source of the power is not statutory but constitutional.

The Supreme Court did not grant the provisional remedy prayed for in Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004 for it would be tantamount to enjoining the collection of taxes, a peremptory judicial act which is traditionally frowned upon unless there is a clear statutory basis for it. Evident is the clear legislative intent that the imposition of safeguard measures, despite the availability of judicial review, should not be enjoined notwithstanding any timely appeal of the imposition. This so because the Safeguard Measures Act states that the filing of a petition for review before the CTA does not stop, suspend, or otherwise toll the imposition or collection of the appropriate tariff duties or the adoption of other appropriate safeguard measures.

32. General rule: “The rule is that in the absence of accounting records of a taxpayer, his tax liability may be determined by estimation. The petitioner (Commissioner of Internal Revenue) is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005 citing United States v. Johnson, 319 U.S. 1233 (1943)] “However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc., citing United States v. Rindskopf, 105 U.S.418 (1881)]

33. Meaning of "best evidence obtainable" under Sec. 6 (B), NIRC of 1997. This means that the original documents must be produced. If it could not be produced, secondary evidence must be adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA - G.R. SP No. 47172, September 30, 1998)

34. Sec. 6 (B) of the NIRC of 1997 allows the BIR to make or amend a tax return from his own knowledge or obtained through testimony or otherwise. Thus, the Commissioner of Internal Revenue investigates ”any circumstance which led him to believe that the taxpayer had taxable income larger than that reported. Necessarily, this inquiry would have to be outside of the books because they supported the return as filed. He may take the sworn testimony of the taxpayer, he may take the testimony of third parties; he may examine and subpoena, if necessary, traders’ and brokers’ accounts and books and the taxpayer’s books of accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any particular proof that is available in the circumstances of the particular situation. [Commissioner of Internal Revenue v. Hantex Trading Co., Inc. citing Campbell, Jr., v. Guetersloh, 287 F.2d 878 (1961)]

Citing its ruling in a previous case, a “U.S. appellate court declared that where the records of the taxpayer are manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during the years in question. (Ibid., in turn citing Kenney v. Commissioner, 111 F.2d 374)

35. The following are the general methods developed by the Bureau of Internal Revenue for reconstructing a taxpayer’s income where the records do not show the true income or where no return was filed or what was filed was a false and fraudulent return

(a) Percentage method;

(b) Net worth method.;

(c) Bank deposit method;

(d) Cash expenditure method;

(e) Unit and value method;

(f) Third party information or access to records method;

(g) Surveillance and assessment method. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)

36. Under the percentage method, the computed amount of revenues based on the percentage computation is compared to the amount of revenues reflected on the return. The percentages used may be obtained from the taxpayer, industry publication, prior year’s audit results, or third parties. The comparison will provide an indication on the possibility of revenue being understated.

Among the significant ratios and trends to be analyzed are the percentage mark-up, gross profits ratio or gross margin percentage, profit margin, total assets turnover, and inventory turnover. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)

37. The net worth method is a method of reconstructing income which is based on the theory that if the taxpayer’s net worth has increased in a given year in an amount larger than his reported income, he has understated his income for that year. The net worth on a fixed starting date is compared with the net worth on a fixed ending date. Any increase in net worth is presumed to be income not declared for tax purposes. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)

38. The difficulty of establishing the opening net worth of a tax payer has led to the “Cohan Rule” which is the use of estimates or approximations of the amount of cash and other asserts where the taxpayer lacks adequate records. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)

39. Under the bank deposit method, the bank records of the taxpayer are analyzed and the BIR estimates income on the basis of the total bank deposits after eliminating non-income items. This method stands on the premise that deposits represent taxable income unless otherwise explained as being non-taxable items. This method may be used only where the BIR has been legally allowed access to the taxpayer’s bank records. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)

40. The cash expenditure method assumes that the excess of a taxpayer’s expenditures during the tax period over his reported income for that period is taxable to the extent not disproved otherwise. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)

41. Under the unit and value method, the determination or verification of gross receipts may be computed by applying price and profit figures to the known ascertainable quality of business of the taxpayer. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)

For example, in order to determine the gross receipts of a pizza parlor, multiply the pounds of flour used by the number of pizzas per pound which in turn would then be multiplied by the average price per pizza.

42. Third party information or access to records method. The BIR may require third parties, public or private to supply information to the BIR, and thus, “obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities including the Bangko Sentral ng Pilipinas and government-owned or –controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names , addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters or multinational companies, joint accounts, associations, joint ventures or consortia and registered partnerships, and their members; xxx” [Sec. 5 (B), NIRC of 1997)

43. A pre-assessment notice is a letter sent by the Bureau of Internal Revenue to a taxpayer asking him to explain within a period of fifteen (15) days from receipt why he should not be the subject of an assessment notice. It is part of the due process rights of a taxpayer.

As a general rule, the BIR could not issue an assessment notice without first issuing a pre-assessment notice because it is part of the due process rights of a taxpayer to be given notice in the form of a pre-assessment notice, and for him to explain why he should not be the subject of an assessment notice.

44. Instances where a pre-assessment notice is not required before a notice of assessment is sent to the taxpayer.

a. When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or

b. When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

c. When a taxpayer opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding table year; or

d. When the excess tax due on excisable articles has not been paid; or

e. When an article locally purchased or imported by an exempt person, such as, but not limited to vehicles, capital equipment, machineries and spare parts, has been sold, trade or transferred to non-exempt persons. (Sec. 228, NIRC of 1997)

45. The word assessment when used in connection with taxation, may have more than one meaning. More commonly the word “assessment” means the official valuation of a taxpayer’s property for purpose of taxation. The above definition of assessment finds application under tariff and customs taxation as well as local government taxation.

For real property taxation, there may be a special meaning to the burdens that are imposed upon real properties that have been benefited by a public works expenditure of a local government. It is sometimes called a special assessment or a special levy. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)

For internal revenue taxation assessment as laying a tax. The ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is to pay. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)

46. An assessment is a notice duly sent to the taxpayer which is deemed made only when the BIR releases, mails or sends such notice to the taxpayer. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)

47. What is a self-assessed tax ?

SUGGESTED ANSWER: A tax that the taxpayer himself assesses or computes and pays to the taxing authority. It is a tax that self-assessed by the taxpayer without the intervention of an assessment by the tax authority to create the tax liability.

The Tax Code follows the pay-as-you-file system of taxation under which the taxpayer computes his own tax liability, prepares the return, and pays the tax as he files the return. The pay-as-you-file system is a self-assessing tax return.

Internal revenue taxes are self-assessing. [Dissent of J. Carpio in Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April 26, 2005 and companion case citing Tupaz v. Ulep, 316 SCRA 118 (1999) in turn citing Vitug and Acosta, Tax Law and Jurisprudence, 1st edition, 1997, p. 267]

A clear example of a self-assessed tax is the annual income tax, which the taxpayer himself computes and pays without the intervention of any assessment by the BIR. The annual income tax becomes due and payable without need of any prior assessment by the BIR. The BIR may or may not investigate or audit the annual income tax return filed by the taxpayer. The taxpayer’s liability for the income tax does not depend on whether or not the BIR conducts such subsequent investigation or audit.

However, if the taxing authority is first required to investigate, and after such investigation to issue the tax assessment that creates the tax liability, then the tax is no longer self-assessed. (Dissent of J. Carpio in Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April 26, 2005 and companion case)

48. On October 28, 1988 taxpayer bank received a notice of assessment from the BIR informing it that deficiency taxes are due from the said taxpayer bank without any findings of law or fact but supported only with a computation. On December 10, 1988, the taxpayer bank counsel filed a letter that “as soon as this is explained and clarified in a proper notice of assessment, we shall inform you of the taxpayer’s decision on whether to pay or protest the assessment.” The taxpayer bank insists that the assessment was not valid. Of course, BIR took the opposite view contending further that there was no seasonable protest, hence the tax is sue and collectible. Who is correct ?

SUGGESTED ANSWER: The BIR is correct. Under the old law Sec. 270, it is enough merely that the BIR Commissioner shall “notify the taxpayer of his findings

The taxpayer bank counsel’s December 10, 1988 letter is not a seasonable protest because it was filed thirty (30) days after receipt of the assessment on October 28, 1988. (Commissioner of Internal Revenue v. Bank of Philippine Islands, G. R. No. 134062, April 17, 2007)

49. What are the prescriptive periods for making assessments of internal revenue taxes ?

SUGGESTED ANSWER:

a. Three (3) years from the last day within which to file a return or when the return was actually filed, whichever is later (Sec. 203, NIRC of 1997). The CIR has three (3) years from the date of actual filing of the tax return to assess a national internal revenue tax or to commence court proceedings for the collection thereof without an assessment. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]

b. ten years from discovery of the failure to file the tax return or discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of 1997) ; or

c. within the period agreed upon between the government and the taxpayer where there is a waiver of the prescriptive period for assessment (Sec. 222 (b), NIRC of 1997).

50. Purpose of period of limitations in taxation. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. [Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc., (now Sime Darby International Tire Co., Inc.), et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546; Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004;], as well as their assessments.

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law. [Republic of the Philippines v. Ablaza, 108 Phil. 1105, 1108, cited in Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]

51. Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will not longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 with note to see Republic v. Ablaza, 108 Phil. 1105. 1108)

Laws on prescription should be liberally construed in favor of the taxpayer. Reason: for the purpose of safeguarding taxpayers from an unreasonable examination, investigation or assessment, our tax laws provide a statute of limitation on the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection, As a corollary, the exceptions to the law on prescription should perforce be strictly construed. [Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 citing Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby International Tire Co., Inc.),., et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546]

The prescriptive period was precisely intended to give the taxpayers peace of mind. (Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., et al., G.R. No. 104171, February 24, 1999)

52. During Juliana’s lifetime, her business affairs were managed by the Philippine Trust Company (Philtrust). She died on April 3, 2001.Two days after her death, Philtrust, through its Trust Officer, filed her Income Tax Return for 2000, without indicating that Juliana died.

On May 22, 2001, Philtrust filed a verified petition with the RTC for appointment as Special Administrator. This was denied by the court who appointed one of the heirs as Special Administrator. Philtrust’s motion for reconsideration was denied.

After an investigation by the BIR of the decedent’s income tax liability, it sent, on November 18, 2003, a demand letter and a Notice of Assessment to Juliana c/o Philtrust at the latter’s address which was stated in the 1998 Income Tax Return. No response was made neither was the BIR advised that Juliana already died.

On June 18, 2005, the BIR Commissioner issued warrants of distraint and levy to enforce collection of the deficiency income tax liability which was served on Juliana’s heir. On November 22, 2005, the BIR filed with the estate court a motion for allowance of claim. The heir claimed that there was no proper service of the notice of assessment and that the filing of the motion was time-barred. On the other hand the BIR made the submission that both the issuance of the assessment notice and the motion were all properly made on Philtrust. Furthermore the lapse of the 30-day period within which to protest made the assessment final, executory and uncontestable and not time barred.

Rule on the conflicting claims of the parties.

SUGGESTED ANSWER: I would rule in favor of the heir.

There was no proper service of the notice of assessment because the death of Juliana automatically severed the legal relationship of principal and agent between her and Philtrust. The severed relationship could not be revived on the mere fact that Philtrust filed her Tax Return two days after her death.

Philtrust’s failure to file a notice of death subjects it to penal sanctions which do not include the indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the notice requirement for such assessments. (Estate of the late Juliana Diez Vda. de Gabriel v. Commissioner of Internal Revenue, G.R. No. 155541, January 27, 2004)

53. What is the presumption that flows from a taxpayer’s failure to protest an assessment ?

SUGGESTED ANSWER: “Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.” (Commissioner of Internal Revenue v. Bank of Philippine Islands., G, R. No. 134062, April 17, 2007 citing Sy Po v. Court of Appeals, G. R. No. L-81446, 18 August 1988, 164 SCRA 524, 530, citations omitted)

54. What are the reasons for presumption of correctness of assessments ?

SUGGESTED ANSWER:

a. Lifeblood theory

b. Presumption of regularity (Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005) in the performance of public functions. (Commissioner of Internal Revenue v. Tuazon, Inc., 173 SCRA 397)

c. The likelihood that the taxpayer will have access to the relevant information [Commissioner of Internal Revenue, supra citing United States v. Rexach, 482 F.2d 10 (1973). The certiorari was denied by the United States Supreme Court on November 19, 1973)

d. The desirability of bolstering the record-keeping requirements of the NIRC. (Ibid.)

55. Give instances where prima facie correctness of a tax assessment does not apply.

SUGGESTED ANSWER: The “prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a “naked assessment” i.e., without any foundation character, the determination of the tax due is without rational basis.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005 citing United States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In such a situation, “the determination of the Commissioner contained in a deficiency notice disappears.” [Commissioner of Internal Revenue, supra citing a U.S. Court of Appeals ruling, in Clark and Clark v. Commissioner of Internal Revenue, 266 F. 2d 698 (1959)] “Hence, the determination by the CTA must rest on all the evidence introduced and its ultimate determination must find support in credible evidence.” [Commissioner of Internal Revenue, supra]

56. What are the instances that suspends the running of the prescriptive periods (Statute of Limitations) within which to make an assessment and the beginning of distraint or levy or of a proceeding in court for the collection, in respect of any tax deficiencies?

SUGGESTED ANSWER:

a. When the Commissioner is prohibited from making the assessment, or beginning distraint, or levy or proceeding in court and for sixty (60) days thereafter;

b. When the taxpayer requests for and is granted a reinvestigation by the commissioner;

c. When the taxpayer could not be located in the address given by him in the return filed upon which the tax is being assessed or collected;

d. When the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and

e. When the taxpayer is out of the Philippines.

:

57. The signatures of both the Commissioner and the taxpayer, are required for a waiver of the prescriptive period, thus a unilateral waiver on the part of the taxpayer does not suspend the prescriptive period. [Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case)]

58. The act of requesting a reinvestigation alone does not suspend the running of the prescriptive period. The request for reinvestigation must be granted by the CIR. The Supreme Court declared that the burden of proof that the request for reinvestigation had been actually granted shall be on the Commissioner of Internal Revenue. Such grant may be expressed in its communications with the taxpayer or implied from the action of the Commissioner or his authorized representative in response to the request for reinvestigation. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]

59. Philippine Journalists, Inc. (PJI) filed its Annual Income Tax Return for the calendar year ended December 31, 1994 which showed a net income of P30 million and the tax due as P10 million. An examination of PJI’s books of account and other accounting records for the period January 1, 1994 to December 31, 1994 showed deficiency VAT, Income Tax and Withholding Tax in the total amount of P1`27 million. During the September 22, 1997 informal conference with the Revenue District Officer, PJI’s Comptroller executed a waiver of statute of limitations provided for under sections 223 and 224 of the NIRC. On October 5, 1998, the BIR issued a Pre-Assessment Notice which was followed by Assessment/Demand No.33-1-000757-94 stating a total deficiency taxes in the amount of P111 million for income tax, VAT and expanded withholding taxes, inclusive of interest and compromise penalty.

On March 16, 1999, the BIR sent to PJI a Preliminary Collection Letter to pay the assessment within 10 days from receipt. On November 10,1999, a Final Notice Before Seizure was issued giving PJI 10 days from receipt within which to pay. PJI received the final notice on November 24, 1999 and on November 26, 1999 PJI asked that it be clarified on how the tax liability of P111 million was arrived at and requested for an extension of 30 days from receipt of the clarification within which to reply. PJI, through a follow-up letter, asserted it never received Assessment/Demand No. 33-1-000757-94. On March 28, 2000 PJI received a Warrant of Distraint and/or Levy. PJI then appealed to the CTA.

The following issues are for resolution in the appeal:

a. Does the CTA have jurisdiction over the appeal ?

b. Was the Waiver of the Statute of Limitations valid ?

c. Were the Assessment/Demand and the Warrant of Distraint and/or Levy valid ?

Will the appeal prosper? Explain briefly your answer.

SUGGESTED ANSWER: Yes, it will prosper.

a. The CTA has jurisdiction to determine if the warrant of distraint and levy issued by the BIR is valid and to rule if the Waiver of the Statute of Limitations was validly effected. This is so because the CTA has exclusive appellate jurisdiction to review by appeal decisions of the Commissioner of Internal Revenue in cases involving “other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue.” [Sec. 7 (a) (1). R. A. No. 1125, as amended by R. A. No. 9282) Thus it was previously ruled that the CTA had jurisdiction to act on a petition to invalidate and annul the distraint orders of the Commissioner. [Ynares-Santiago, J. Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 citing Panrtoja v. David, 111 Phil. 197; 1 SCRA 608 (1961)] Likewise upheld by the Supreme Court was the decision of the CTA declaring several waivers executed by the taxpayer as null and void, thus invalidating the assessments issued by the BIR. (Ibid., citing Commissioner of Internal Revenue v. Court of Appeals, G. R. No. 115712, 25 February 1999, 303 SCRA 614)

b. The Waiver of the Statute of Limitations is not valid because it did not specify a definite agreed date between the BIR and PJI, within which the former may assess and collect revenue taxes. Furthermore, the waiver is also defective from the government side because it was signed only by a revenue district officer, and not the Commissioner, as so required. Finally, PJI was not furnished a copy of the waiver.

c. The waiver document is incomplete and defective and thus the three-year prescriptive period within which to assess was not tolled or extended and continued to run until April 17, 1998. Consequently, Assessment/Demand No. 33-1-000757-94 issued on December 9, 1998 was invalid because it was issued beyond the three (3) year period. In the same manner, the Warrant of Distraint and/or Levy which PJI received on March 28, 2000 is also null and void for having been issued pursuant to an invalid assessment. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004)

60. What are the two ways of protesting an assessment notice for an internal revenue tax ? Alternatively, what are the two types of protests ? Explain briefly.

SUGGESTED ANSWER:

a. Request for reconsideration which refers to a plea for re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both.

b. Request for reinvestigation which refers to a plea for re-evaluation of an assessment on the basis of newly-discovered evidence or additional evidence that a taxpayer intends to present in the investigation. It may also involve a question of fact or law or both. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Rev. Regs. No. 12-85)

61. What is that type of protest that suspends the running of the statute of limitations for the beginning of distraint or levy or a proceeding in court for collection ? Why ?

SUGGESTED ANSWER: It is that type of protest “when the taxpayer requests for a reinvestigation which is granted by the Commissioner” (Sec. 223, NIRC of 1997), that suspends the running of the statute of limitations for collection of the tax. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Sec. 271, now Sec. 223, NIRC of 1997) When a taxpayer demands a reinvestigation, the time employed in reinvestigation should be deducted from the total period of limitation. [Commissioner of Internal Revenue, supra citing Republic v. Lopez, 117 Phil. 575, 578; 7 SCRA 566, 568-569 (1963)]

Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Bank of Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231)

62. A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028, Civil Code)

A compromise penalty could not be imposed by the BIR, if the taxpayer did not agree. A compromise being, by its nature, mutual in essence requires agreement. The payment made under protest could only signify that there was no agreement that had effectively been reached between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485, September 10, 2001)

63. A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028, Civil Code)

64. A compromise penalty could not be imposed by the BIR, if the taxpayer did not agree. A compromise being, by its nature, mutual in essence requires agreement. The payment made under protest could only signify that there was no agreement that had effectively been reached between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485, September 10, 2001)

65. The following cases may, upon taxpayer’s compliance with the basis for compromise, be the subject matter of compromise settlement:

a. Delinquent accounts;

b. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office;

c. Civil tax cases being disputed before the courts;

d. Collection cases filed in courts;

e. Criminal violations, other than those already filed in court, or those involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002)

66. Tax cases which could not be the subject of compromise:

a. Withholding tax cases unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligation to withhold.;

b. Criminal tax fraud cases, confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative;

c. Criminal violations already filed in court;

d. Delinquent accounts with duly approved schedule of installment payments;

e. Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis;

f. Cases which become final and executory after final judgment of a court where compromise is requested on the ground of doubtful validity of the assessment; and

g. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002)

67. The Commissioner may compromise the payment of any internal revenue tax when:

a. A reasonable doubt as to the validity of the claim against the taxpayer exists provided that the minimum compromise entered into is equivalent to forty percent (40%) of the basic tax; or

b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax provided that the minimum compromise entered into is equivalent to ten percent (10%) of the basic assessed tax

In the above instances the Commissioner is allowed to enter into a compromise only if the basic tax involved does not exceed One million pesos (P1,000,000.00), and the settlement offered is not less than the prescribed percentages. [Sec. 204 (A), NIRC of 1997]

In instances where the Commissioner is not authorized, the compromise shall be subject to the approval of the Evaluation Board composed of the Commissioner and the four (4) Deputy Commissioners.

68. The Commissioner of Internal Revenue is authorized to abate or cancel a tax liability, when:

a. The tax or any portion thereof appears to be unjustly or excessively assessed; or

b. The administration and collection costs involved do not justify the collection of the amount due. [Sec. 204 (B), NIRC of 1997]

69. The offer to compromise a delinquent account or disputed assessment on the ground of reasonable doubt as to the validity of the assessment may be accepted when it is shown that:

a. The delinquent account or disputed assessment is one resulting from a jeopardy assessment. or

b. The assessment seems to be arbitrary in nature, appearing to be based on presumptions and there is reason to believe that it is lacking in legal and/or factual basis; or

c. The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice of assessment and there is reason to believe that the assessment is lacking in legal and/or factual basis; or

d. The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that the assessment is lacking in legal and/or factual basis; or

e. The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that the assessment is lacking in legal and/or factual basis; or

f. The assessments were issued on or after January 1, 1998, where the demand notice allegedly failed to comply with the formalities under Sec. 228 of the National Internal Revenue Code of 1997; or

g. Assessments made based on the “Best Evidence Obtainable Rule” and there is reason to believe that the same can be disputed by sufficient and competent evidence; or

h. The assessment was issued within the prescriptive period for assessment as extended by the taxpayer’s execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic. (Sec. 3, 1, Rev. Regs. No. 30-3002)

70. The offer to compromise based on financial incapacity may be accepted upon showing that:

a. The corporation ceased operation or is already dissolved Provided, that tax liabilities corresponding to the Subscription Receivable or Assets distributed/distributable to the stockholders representing return of capital at the time of cessation of operation or dissolution of business shall not be considered for compromise; or

b. The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%, provided that amounts payable to due to stockholders other than business-related transactions which are properly ineludible in the regular “accounts payable” are by fiction of law considered as part of capital and not liability, and provided further that the taxpayer has no sufficient liquid asset to satisfy the tax liability; or

c. The taxpayer is suffering from a networth deficit (total liabilities exceed total assets) computed by deducting total liabilities (net of deferred credits and amounts payable to stockholders/owners reflected as liabilities, except business-related transactions) from total assets (net of prepaid expenses, deferred charges, pre-operating expenses, as well as appraisal increases in fixed assets) taken from the latest audited financial statements, provided that in the case of an individual taxpayer, he has no other leviable properties under the law other than his family home; or

d. The taxpayer is a compensation income earner with no other source of income and the family’s gross monthly compensation income does not exceed, if single, P10,500 or less, or if married, whose salary together with his spouse is P21,000 per month, or less, and it appears that the taxpayer possesses no other leviable/distrainable assets other than his family home; or

e. The taxpayer has been declared by any competent tribunal/ authority/body/government agency as bankrupt or insolvent. (Sec. 3. 2, Rev. in relation to Sec.4.1.1 both of Regs. No. 30-3002)

71. What is the prescriptive period for collecting internal revenue taxes ?

SUGGESTED ANSWER: There are four (4) prescriptive periods for the collection of an internal revenue tax:

a. Collection upon a false or fraudulent return or no return without assessment. In case of a false or fraudulent return with the intent to evade tax or of failure to file a return, “a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission.” [Sec. 222 (a), NIRC of 1997)

b. Collection upon a false or fraudulent return or no return with assessment. Any internal revenue tax which has been assessed (because the return is false or fraudulent with intent to evade tax or of failure to fail a return), within a period of ten (10) years from discovery of the falsity, fraud or omission “may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax.” [Sec. 222 (c), in relation to Sec. 222 (a) NIRC of 1997, emphasis supplied)

c. Collection upon an extended assessment. Where a tax has been assessed with the period agreed upon between the Commissioner and the taxpayer in writing (which should initially be within three (3) years from the time the return was filed or should have been filed), or any extensions before the expiration of the period agreed upon, the tax “may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon.” [Sec. 222 (d), in relation to Secs. 222 (b) and 203, NIRC of 1997, emphasis supplied)

d. Collection upon a return that is not false or fraudulent, or where the assessment is not an extended assessment. “Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period; Provided, That in case where a return is filed beyond the period prescribed by law, the three (3) year period shall be computed from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered filed on such last day.” (Sec. 203, NIRC of 1997, emphasis supplied)

When the BIR validly issues an assessment within the three (3)-year period, it has another three (3) years within which to collect the tax due by distraint, levy, or court proceeding. The assessment of the tax is deemed made and the three (3)-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent to the taxpayer. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008 citing BPI v. Commissioner of Internal Revenue, G.R. No. 139736, 17 October 2005, 473 SCRA 205, 222-223)

72. What is solutio indebeti as applied to tax cases ?

SUGGESTED ANSWER: This is erroneous payment of taxes and occurs when the taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an existing exemption in his favor at the time the payment was made. Such payment is held to be not voluntary and therefore, can be recovered or refunded. (Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, G. R. No. 147295, February 16, 2007)

73. What are the reasons for requiring the filing of an administrative application for refund or credit with the Bureau of Internal Revenue before a case may be filed with the Court of Tax Appeals ?

SUGGESTED ANSWER: The filing of an administrative claim for refund with the BIR, before filing a case with the Court of Tax Appeals, is necessary for the following reasons:

a. To afford the Commissioner an opportunity to correct his errors or that of subordinate officers. (Gonzales v. Court of Tax Appeals, et al., 14 SCRA 79)

b. To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue available for expenditures. (Bermejo v. Collector, G.R. No. L-3028, July 28, 1950)

74. As a general rule the filing of an application for refund or credit with the Bureau of Internal Revenue is an administrative precondition before a suit may be filed with the Court of Tax Appeals. Is there any exception ?

SUGGESTED ANSWER: Yes. The failure to first file a written claim for refund or credit is not fatal to a petition for review involving a disputed assessment where an assessment was disputed but the protest was denied by the Bureau of Internal Revenue.

To hold that the taxpayer has now lost the right to appeal from the ruling on the disputed assessment and require him to file a claim for a refund of the taxes paid as a condition precedent to his right to appeal, would in effect require of him to go through a useless and needless ceremony that would only delay the disposition of the case, for the Commissioner would certainly disallow the claim for refund in the same way as he disallowed the protest against the assessment. The law, should not be interpreted as to result in absurdities. (vda. de San Agustin., etc., v. Commissioner of Internal Revenue, G.R. No. 138485, September 10, 2001 citing Roman Catholic Archbishop of Cebu v. Collector of Internal Revenue, 4 SCRA 279)

75. What is the nature of the taxpayer’s remedy of either to ask for a refund of excess tax payments or to apply the same in payment of succeeding taxable periods’ taxes ?

ANSWER: Sec. 69 of the 1977 NIRC (now Sec. 76 of the NIRC of 1997) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative and the choice of one precludes the other. Since the Bank has chosen the tax credit approach it cannot anymore avail of the tax refund. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999)

76. What is the “irrevocability rule” in claims for refund and what is the rationale behind this ? SUGGESTED ANSWER: A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period.

In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention either to carry over the excess credit or to claim a refund. To facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other. [Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916 (1999)]

This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the Tax Code. The phrase “such option shall be considered irrevocable for that taxable period” means that the option to carry over the excess tax credits of a particular taxable year can no longer be revoked.

The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic credit against taxes for the taxable quarters of the succeeding years for which no tax credit certificate has been issued and (2) as a tax credit either for which a tax credit certificate will be issued or which will be claimed for cash refund. (Systra Philippines, Inc., supra citing De Leon, Hector, The National Internal Revenue Code, Seventh Edition, 2000, p. 430)

77. In the year 2000 Systra derived excess tax credits and exercised the option to carry them over as tax credits for the next taxable year. However, the tax due for the next taxable year is lower than excess tax credits. It now applies for a refund of the unapplied tax credits. May its refund be granted ? If the refund is denied, does Systra lose the unapplied tax credits ? Explain briefly your answer.

SUGGESTED ANSWER: Systra’s claim for refund should be denied. Once the carry over option was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax credits were actually or fully utilized Under Section 76 of the Tax Code, a claim for refund of such excess credits can no longer be made. The excess credits will only be applied “against income tax due for the taxable quarters of the succeeding taxable years.”

Despite the denial of its claim for refund, Systra does not lose the unapplied tax credits. The amount will not be forfeited in favor of the government but will remain in the taxpayer’s account. Petitioner may claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until fully utilized. (Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing Philam Asset Management, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, 14 December 2005, 477 SCRA 761)

Supposing in the above problem that Systra permanent ceased operations, what happens to the unapplied credits ?

SUGGESTED ANSWER: Where, the corporation permanently ceases its operations before full utilization of the tax credits it opted to carry over, it may then be allowed to claim the refund of the remaining tax credits. In such a case, the remaining tax credits can no longer be carried over and the irrevocability rule ceases to apply. Cessante ratione legis, cessat ipse lex. (Footnote no. 23, Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007)

78. Is it fatal to a claim for refund the failure of a taxpayer to indicate in its tax return the option whether to request a refund or claim the excess withholding tax as tax credit for the succeeding taxable year ?

SUGGESTED ANSWER: No. The option of requesting a tax refund or claiming a tax credit is in the alternative.

A corporation must signify its intention – whether to request a tax refund or claim a tax credit – by marking the corresponding option box provided in the FAR. While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement is only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure to signify one’s intention in the FAR does not mean outright barring of a valid request for a refund, should one still choose this option later on. A tax credit should be construed merely as an alternative remedy to a tax refund, subject to prior verification and approval by the BIR..

The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration, particularly the self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or preference and thus demonstrates clear diligence. Conversely, a taxpayer that makes no choice expresses uncertainty or lack of preference and hence shows simple negligence or plain oversight. (Commissioner of Internal Revenue v. PERF Realty Corporation, G.R. No. 163345, July 4, 2008, citing Philam Asset Management, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 156637 & 162004, December 14, 2005, 477 SCRA 761)

79. Tax credit, defined. A tax credit is not specifically defined in our Tax Code, but Art. 21 of EO 226 defines a tax credit as “any of the credits against taxes and/or duties equal to those actually paid or would have been paid to evidence which a tax credit certificate shall be issued by the Secretary of Finance or his representative, or the Board (of Investments), if so delegated by the Secretary of Finance.” Tax credits were granted under EO 226 as incentives to encourage investments in certain businesses. A tax credit generally refers to an amount that may be “subtracted directly from one’s total tax liability.” [Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue, G. R. No. 172598, December 21, 2007 citing Garner, ed., Black’s Law Dictionary 1501 (8th ed., 1999)]

It is therefore an “allowance against the tax itself” [Pilipinas Shell, supra citing Smith, West’s Tax Law Dictionary 177-178 (1993).] or “a deduction from what is owed” [Ibid., citing Oran and Tosti, Oran’s Dictionary of the Law 124 (3rd ed., 2000)], by a taxpayer to the government. In RR 5-2000, “Prescribing the Regulations Governing the Manner of the Issuance of Tax Credit Certificates, and the Conditions for their Use, Revalidation and Transfer,” issued by then Secretary of Finance Jose T. Pardo on July 19, 2000. a tax credit is defined as “the amount due to a taxpayer resulting from an overpayment of a tax liability or erroneous payment of a tax due.” (Id., Section 1.A)

Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability, an allowance against the tax itself, or a deduction from what is owned.

A tax credit reduces the tax due, including –whenever applicable – the income tax that is determined after applying the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

80. Tax credit certificate (TCC), defined, and its nature. A certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a tax credit, the money value of which may be used in payment or in satisfaction of any of his internal revenue tax liability (except those excluded), or may be converted as a cash refund, or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by the provisions of these Regulations. (Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue, G. R. No. 172598, December 21, 2007 citing RR 5-2000, “Prescribing the Regulations Governing the Manner of the Issuance of Tax Credit Certificates, and the Conditions for their Use, Revalidation and Transfer,” issued by then Secretary of Finance Jose T. Pardo on July 19, 2000, Sec. I, B)

It is clear that a TCC is an undertaking by the government through the BIR or DOF, acknowledging that a taxpayer is entitled to a certain amount of tax credit from either an overpayment of income taxes, a direct benefit granted by law or other sources and instances granted by law such as on specific unused input taxes and excise taxes on certain goods. As such, tax credit is transferable in accordance with pertinent laws, rules, and regulations.

Therefore, the TCCs are immediately valid and effective after their issuance. (Pilipinas Shell Petroleum Corporation, supra)

81. Discuss the difference between tax refund and tax credit.

SUGGESTED ANSWER: There are unmistakable formal and practical differences between the two modes. Formally, a tax refund requires a physical return of the sum erroneously paid by the taxpayer, while a tax credit involves the application of the reimbursable amount against any sum that may be due and collectible from the taxpayer.

On the practical side, the taxpayer to whom the tax is refunded would have the option, among others, to invest for profit the returned sum, an option not proximately available if the taxpayer chooses instead to receive a tax credit. (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004)

82. In early April 1999 XYZ Bank advanced the amount of P180 million to the BIR its income tax payment for the bank’s 1999 operations in response for the government’s call to generate more revenues for national development. In separate letters dated April 19 and 29, 1999 and May 14, 1999 XYZ requested for the issuance of a Tax Credit Certificate (TCC) to be utilized against future tax obligations of the bank.

By the end of 1999, a credit balance in the amount of P73 million remain which was carried over for the years 2000 to 2004 but was not availed of because XYZ incurred losses during the period. On July 28, 2005 PNB reiterated its request for the issuance of a TCC for the P73 million balance. The BIR rejected the request on the ground of among others prescription having been applied for beyond the two-year reglementary period for filing claims for refund as set forth in Sec. 229 of the NIRC of 1997.

Has the claim prescribed ? Explain briefly your answer.

SUGGESTED ANSWER: The claim has not prescribed. Sec. 229 of the Tax Code, as couched, particularly its statute of limitations component, is in context intended to apply to suits for any national internal revenue tax “alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have excessively or in any manner wrongfully collected.”

Analyzing the underlying reason behind the advance payment (to help the government) made by XYZ it would be improper to treat the same as erroneous, wrongful or illegal payment of tax within the meaning of Sec. 229 of the NIRC of 1997.

An availment of tax credit due for reasons other than the erroneous or wrongful collection of taxes may have a different prescriptive period. (Commissioner of Internal Revenue v. Philippine National Bank, G.R. No. 161997, October 25, 2005 citing Commissioner of Internal Revenue v. The Philippine Life Insurance Co., et al. G.R. No. 105208, May 29, 1995) Absent any specific provision in the Tax Code or special laws, that period would be ten (10) years under Article 1144 of the Civil Code. (Commissioner of Internal Revenue v. Philippine National Bank, supra)

83. ABC Bank filed with the BIR an application for a tax credit/refund for alleged excess payments of its gross receipts tax (GRT) for the 3rd and 4th quarters of 2003 and the entire 2004 amounting to P14 million. Since no action was taken by the Commissioner on its claim, ABC filed a case with the CTA on October 18, 2005 to comply with the two-year reglementary period and avoid the prescription of its action. Only July 30, 2007, the CTA rendered a decision denying the claim for ABC’s failure to file its formal offer of evidence in the CTA.

ABC Bank now seeks refuge in Onate v. Court of Appeals, 320 Phil. 344; 250 SCRA 283 (1995) where the Supreme Court allowed evidence, not formally offered, to be considered on condition that: (1) evidence must have been identified by testimony duly recorded and (2) it must have been incorporated in the records of the case.

Is ABC correct ?

SUGGESTED ANSWER: No. A tax refund s in the nature of a tax exemption which must be construed strictissimi juris against the taxpayer. The taxpayer must present convincing evidence to substantiate a claim for refund. Without any documentary evidenced on record, ABC failed to discharge the burden of proving its right to a tax credit/tax refund. (Far East Bank & Trust Company v. Commissioner of Internal Revenue, G. R. No. 149589, September 15, 2006)

84. A simultaneous filing of the application with the BIR for refund/credit and the institution of the court suit with the CTA is allowed. There is no need to wait for a BIR denial. REASONS:

a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of 1997);

b. The doctrine that delay of the Commissioner in rendering decision does not extend the peremptory period fixed by the statute;

c. The law fixed the same period two years for filing a claim for refund with the Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and for filing suit in court under Sec. 230, NIRC (now Sec. 229, NIRC of 1997), unlike in protests of assessments under Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the period (thirty days from receipt of decision) for appealing to the court, thus clearly implying that the prior decision of the Commissioner is necessary to take cognizance of the case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151)

85. The grant of a refund is founded on the assumption that the tax return is valid, i.e. that the facts stated therein are true and correct. (Commissioner of Internal Revenue v. Court of Tax Appeals, G. R. No. 106611, July 21, 1994, 234 SCRA 348) Without the tax return it would be virtually impossible to determine whether the proper taxes have been assessed and paid. After all, it is axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004)

However, in BPI-Family Savings Bank v. Court of Appeals, 386 Phil. 719; 326 SCRA 641 (2000), refund was granted, despite the failure to present the tax return, because other evidence was presented to prove that the overpaid taxes were not applied. (Ibid.)

86. What are the three (3) conditions for the grant of a claim for refund of creditable withholding tax ?

SUGGESTED ANSWER:

a. The claim is filed with the Commissioner of Internal Revenue within the two-year period from the date of the payment of the tax.

b. It is shown on the return of the recipient that the income payment received was declared as part of the gross income; and

c. The fact of withholding is established by a copy of a statement duly issued by the payee showing the amount paid and the amount of tax withheld therefrom. (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007)

87. What should be established by a taxpayer for the grant of a tax refund ? Why ?

SUGGESTED ANSWER: A taxpayer needs to establish not only that the refund is justified under the law, but also the correct amount that should be refunded.

If the latter requisite cannot be ascertained with particularity, there is cause to deny the refund, or allow it only to the extent of the sum that is actually proven as due.

Tax refunds partake of the nature of tax exemptions and are thus construed strictissimi juris against the person claiming the exemption. The burden in proving the claim for refund necessarily falls on the taxpayer. (Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, 2006)

88. What are the requisites for the refund of illegally deducted taxes from the income of an employees’ trust fund ?

SUGGESTED ANSWER: What has to be established, as a matter of evidence, is that the amount sought to be refunded to the bank-trustee corresponds to the tax withheld on the interest income earned from the exempt employees’ trust. The need to be determinate is important, specially if the bank trustee, in the ordinary course of its banking business, earns interest income not only from its investments of employees’ trusts, but on a whole range of accounts which do not enjoy the same broad exemption as employees’ trusts. (Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, 2006)

89. A bank-trustee of employee trusts filed an application for the refund of taxes withheld on the interest incomes of the investments made of the funds of the employees’ trusts. Instead of presenting separate accounts for interest incomes made of these investments, the bank-trustee instead presented witness to establish that it would next to impossible to single out the specific transactions involving the employees’ trust funds from the totality of all interest income from its total investments. On the above basis will the application for refund prosper ?

SUGGESTED ANSWER: No. The application for refund will not prosper.

The bank-trustee needs to establish not only that the refund is justified under the law (which is so because incomes of employees’ trusts are tax exempt), but also the correct amount that should be refunded.

Tax refunds partake of the nature of tax exemptions and are thus construed strictissimi juris against the person or entity claiming the exemption. The burden in proving the amount to be refunded necessarily falls on the bank-trustee, and there is an apparent failure to do so.

A necessary consequence of the special exemption enjoyed alone by employees’ trusts would be a necessary segregation in the accounting of such income, interest or otherwise, earned from those trusts from that earned by the other clients of the bank-trustee. (Far East Bank and Trust Company, etc., v. Commissioner, etc., et al., G.R. No. 138919, May 2, 2006) The amounts that are the exempt earnings of the employee’s trust has not been shown as they have been commingled with the interest income of the other clients of the bank-trustee.

90. CTA Circular No. 1-95 clearly requires that photocopies of the receipts or invoices must be pre-marked and submitted to the CTA to verify the correctness of the summary listing and the CPA certification. CTA Circular No. 1-95, issued on 25 January 1995, reads:

“1. The party who desires to introduce as evidence such voluminous documents must present: (a) Summary containing the total amount/s of the tax account or tax paid for the period involved and a chronological or numerical list of the numbers, dates and amounts covered by the invoices or receipts; and (b) a Certification of an independent Certified Public Accountant attesting to the correctness of the contents of the summary after making an examination and evaluation of the voluminous receipts and invoices. Such summary and certification must properly be identified by a competent witness from the accounting firm.

2. The method of individual presentation of each and every receipt or invoice or other documents for marking, identification and comparison with the originals thereof need not be done before the Court or the Commissioner anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices and other documents covering the said accounts or payments must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party whenever he/she desires to check and verify the correctness of the summary and CPA certification. However, the originals of the said receipts, invoices or documents should be ready for verification and comparison in case doubt on the authenticity of the particular documents presented is raised during the hearing of the case.” (Emphasis supplied)

91. Manila Electric Company a grantee of a legislative franchise under Act No. 484, as amended by Republic Act No. 4159 and Presidential Decree No. 551, had been paying a 2% franchise tax based on its gross receipts, in lieu of all other taxes and assessments of whatever nature. Upon the effectivity of Executive Order No. 72 on February 10, 1987, however, respondent became subject to the payment of regular corporate income tax.

For the last quarter ending December 31, 1987, respondent filed on April 15, 1988 its tentative income tax reflecting a refundable amount of P101,897,741, but only P77,931,812 was applied as tax credit for the succeeding taxable year 1988.

Acting on a yearly routinary Letter of Authority No. 0018064 NA dated June 27, 1988 issued by petitioner, directing the investigation of tax liabilities of respondent for taxable year 1987, an investigation was conducted by Revenue Officer Frederick Capitan which showed that respondent was liable for “1. deficiency income tax in the amount of P2,340,902.52; and 2. deficiency franchise tax in the amount of P2,838,335.84.”

On April 17, 1989, respondent filed an amended final corporate Income Tax Return ending December 31, 1988 reflecting a refundable amount of P107,649,729.

Respondent thus filed on March 30, 1990 a letter-claim for refund or credit in the amount of P107,649,729 representing overpaid income taxes for the years 1987 and 1988.

Petitioner not having acted on its request, respondent filed on April 6, 1990 a judicial claim for refund or credit with the Court of Tax Appeals.

It is gathered that respondent paid the deficiency franchise tax in the amount of P2,838,335.84. It protested the payment of the alleged deficiency income tax and claimed as an alternative remedy the deduction thereof from its claim for refund or credit.

The Court of Tax Appeals granted the P107,649,729 claim for refund, or in the alternative for the BIR to issue a tax credit. Is the Court of Tax Appeals correct ?

SUGGESTED ANSWER: Yes. Section 69 of the National Internal Revenue Code of 1986, now Sec. 76 provides, if the sum of the quarterly tax payments made during a taxable year is not equal to the total tax due on the entire taxable income of that year as shown in its final adjustment return, the corporation has the option to either: (a) pay the excess tax still due, or (b) be refunded the excess amount paid. The returns submitted are “merely pre-audited which consist mainly of checking mathematical accuracy of the figures in the return.” After such checking, the purpose of which being to “insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes,” (Revenue Memorandum Order No. 32-76 dated June 11, 1976) the refund or tax credit is granted. (Commissioner of Internal Revenue v. Manila Electric Company, G. R. No. 121666, October 10, 2007)

LOCAL GOVERNMENT CODE ON TAXATION

LOCAL TAXATION

1. The Local Government Code prohibits local government units from collecting excise taxes on articles enumerated under the NIRC, and taxes, fees or charges on petroleum products. (Sec. 133 [h], Local Government Code in relation to the Tax Code).

2. Petron maintains a depot or bulk plant at the Navotas Fishport Complex in Navotas. Through that depot, it has engaged in the selling of diesel fuels to vessels used in commercial fishing in and around Manila Bay. On 1 March 2002, Petron received a letter from the office of Navotas Mayor, Toby Tiangco, wherein the corporation was assessed taxes “relative to the figures covering sale of diesel declared by your Navotas Terminal from 1997 to 2001.” The stated total amount due was P6,259,087.62, a figure derived from the gross sales of the depot during the years in question. The computation sheets that were attached to the letter made reference to Ordinance 92-03, or the New Navotas Revenue Code (Navotas Revenue Code).

Is a local government unit, like Navotas, empowered under the Local Government Code (the LGC) to impose business taxes on persons or entities engaged in the sale of petroleum products ?

SUGGESTED ANSWER: No. While the Local Government Code does not generally bar the imposition of business taxes on articles burdened by excise taxes under the NIRC, it specifically prohibits local government units from extending the levy of any kind of “taxes, fees or charges on petroleum products.” The plain letter of the law is an explicit disinclination on the part of the legislature to impart that particular taxing power to local government units.

The Supreme Court defers to the other branches of government in the formulation of oil policy, but when the choices are made through legislation, the Court expects that the choices are deliberate, considering that the stakes are virtually all-in. Navotas may be bolstered by the constitutional and statutory policy favoring local fiscal autonomy, but it would be utter indolence to reflexively affirm such policy when the inevitable effect is an increase in oil prices. Any prudent adjudication should fully ascertain the mandate of local government units to impose taxes on petroleum products, and such mandate should be cast in so specific terms as to leave no dispute as to the legislative intendment to extend such power in the name of local autonomy. (Petron Corporation v. Tiangco, et al., G. R. No. 158881, April 16, 2008)

3. The primary reason for the withdrawal of tax exemption privileges granted to government owned and controlled corporations and all other units of government was that such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due them. (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)

4. National Power Corporation (NPC) is of the insistence that it is not subject to the payment of franchises taxes imposed by the Province of Isabela because all of its shares are owned by the Republic of the Philippines. It is thus, an instrumentality of the National Government which is exempt from local taxation. As such it is not a private corporation engaged in “business enjoying franchise”

Is such contention meritorious ?

SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect a local franchise tax because the Local Government Code has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them.

5. X City issued a notice of assessment against ABC Condominium Corporation for unpaid business taxes. The Condominium Corporation is a duly constituted condominium corporation in accordance with the Condominium Act which owns and holds title to the common and limited common areas of the condominium. Its membership comprises the unit owners and is authorized under its By-Laws to collect regular assessments from its members for operating expenses, capital expenditures on the common areas and other special assessments as provided for in the Master Deed with ?Declaration of Restrictions of the Condominium.

ABC Condominium Corporation insists that the X City Revenue Code and the Local Government Code do not contain provisions upon which the assessment could be based. Resolve the controversy.

SUGGESTED ANSWER: ABC is correct. Condominium corporations are generally exempt from local business taxation under the Local Government Code, irrespective of any local ordinance that seeks to declare otherwise.

X City, is authorized under the Local Government Code, to impose a tax on business, which is defined under the Code as ”trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.” By its very nature a condominium corporation is not engaged in business, and any profit that it derives is merely incidental, hence it may not be subject to business taxes. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005)

6. On 17 August 2000, City of Manila, Tax Ordinance No. 7988 was declared null and void and of no effect by the Secretary of Justice. For failure of the City to move for reconsideration the decision lapsed into finality. On 22 February 2001, the City enacted Tax Ordinance No. 8011 which amended certain provisions of Tax Ordinance No. 7988. May Tax Ordinance No. 8011 be enforced ?

SUGGESTED ANSWER: No. If an order or law such as Tax Ordinance No. 7988 is invalid, then it does not legally exist, there should be no occasion or need to amend it. [Coca-Cola Bottlers Philippines, Inc. v. City of Manila, et al., G. R. No. 156252, June 27, 2006 citing People v. Lim, 108 Phil. 1091 (1960)], hence Tax Ordinance No. 8011 is also invalid and cannot be enforced.

7. Professional tax may be imposed by a province or city but not by a municipality or barangay.

a. Transaction taxed: Exercise or practice of profession requiring government licensure examination.

b. Tax rate: Not be exceed P300.00.

c. Tax base: Reasonable classification by the sanggunian.

d. Exception: Payment to one province or city no longer subject to any other national or local tax, license or fee for the practice of such profession in any part of the Philippine professionals exclusively employed in the government.

e. Date of payment: or on before January 31 or engaging in the profession.

f. Place of payment: Province or city where the professional practices his profession or where he maintains his principal office in case he practices his profession in several places.

8. Requirements: Any individual or corporation employing a person subject to professional tax shall require payment by that person of the tax on his profession before employment and annually thereafter.

Any person subject to the professional tax shall write in deeds, receipts, prescriptions, reports, books of account, plans and designs, surveys and maps, as the case may be, the number of the official receipt issued to him.

f. Exemption: Professionals exclusively employed in the government shall be exempt from payment. (Sec. 139, LGC)

9. Professionals who are subject to professional tax, defined. The professionals subject to the professional tax are only those who have passed the bar examinations, or any board or other examinations conducted by the Professional Regulation Commission (PRC). for example, a lawyer who is also a Certified Public Accountant (CPA) must pay the professional tax imposed on lawyers and that fixed for CPAs, if he is to practice both professions. [Sec. 238 (f), Rule XXX, Rules and Regulations Implementing the Local Government Code of 1991]

10. Overview of the power of a local government unit to impose business taxes. The power of local government units to impose taxes within its territorial jurisdiction derives from the Constitution itself, which recognizes the power of these units “to create its own sources of revenue and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide consistent with the basic policy of local autonomy. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005 citing Sec. 5, Article X, Constitution)

These guidelines and limitations as provided by Congress are in main contained in the Local Government Code of 1991 which provides for comprehensive instances when and how local government units may impose taxes. The significant limitations are enumerated primarily in Section 133 of the Code, which includes among others, a prohibition on the imposition of income taxes except when levied on banks and other financial institutions.

The most well-known mode of local government taxation is perhaps the real property tax. The Code specifically enumerates several types of business on which municipalities and cities may impose taxes. Moreover, the local sanggunian is also authorized to impose taxes on any other businesses not otherwise specified under the Code which the sanggunian concerned may deem proper to tax. (Ibid.)

11. X City issued a notice of assessment against ABC Condominium Corporation for unpaid business taxes. The Condominium Corporation is a duly constituted condominium corporation in accordance with the Condominium Act which owns and holds title to the common and limited common areas of the condominium. Its membership comprises the unit owners and is authorized under its By-Laws to collect regular assessments from its members for operating expenses, capital expenditures on the common areas and other special assessments as provided for in the Master Deed with ?Declaration of Restrictions of the Condominium.

ABC Condominium Corporation insists that the X City Revenue Code and the Local Government Code do not contain provisions upon which the assessment could be based. Resolve the controversy.

ANSWER: ABC is correct. Condominium corporations are generally exempt from local business taxation under the Local Government Code, irrespective of any local ordinance that seeks to declare otherwise.

X City, is authorized under the Local Government Code, to impose a tax on business, which is defined under the Code as ”trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.” By its very nature a condominium corporation is not engaged in business, and any profit that it derives is merely incidental, hence it may not be subject to business taxes. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005)

12. Situs of municipal taxation where there is no branch, sales office or warehouse. For purposes of collecting business taxes, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor, distilled spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers, contractors, banks and other financial institutions, and other business shall report In cases where there is no such branch, sales office, or warehouse in the locality where the sale is made, the sale shall be recorded in the principal office along with the sales made by said principal office and the tax shall accrue to the city or municipality where said principal office is located. [Sec. 150 (a), LGC; Art. 243 (b) (2),Rules and Regulations Implementing the Local Government Code of 1991]

13. Situs of municipal taxation where there is a factory, project office, plant or plantation in pursuit of business. The following sales allocation shall apply to manufacturers, assemblers, contractors, producers, and exporters with a factory, project office, plant or plantation in pursuit of a business,

a. thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located, and

b. seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant or plantation is located.

LGUs where only experimental farms are located shall not be entitled to the above sales allocation. [Sec. 150 (a), LGC; Art. 243 (b) (3),Rules and Regulations Implementing the Local Government Code of 1991, numbering and arrangement supplied]

On-site sales of commercial quantity made by experimental farms shall be similarly imposed the corresponding tax and allocated as shown above. [2nd par., Art. 243 (a) (5), Ibid.]

14. Situs of municipal taxation where the sales are made by route trucks, vans, or vehicles.

a. For route sales made in a locality where a manufacturer, producer, wholesaler, retailer or dealer has a branch or sales office or warehouse, the sales are recorded in the branch, sales office or warehouse and the tax due thereon is paid to the LGU where such branch, sales office or warehouse is located. [Art. 243 (d) (1), Rules and Regulations Implementing the Local Government Code of 1991]

b. For route sales made in a locality where a manufacturer, producer, wholesaler, retailer or dealer has no branch, sales office or warehouse, the sales are recorded in the branch, sales office or warehouse from where the route trucks withdraw their products for sale, and the tax due on such sale is paid to the LGU where such branch, sales office or warehouse is located. [Art. 243 (d) (2), Ibid.]

c. The LGUs where the route trucks, mentioned above, deliver merchandise cannot impose any tax on said trucks except the annual fixed tax authorized to be imposed by the province or city on every delivery truck or van or any motor vehicle used by manufacturers, producers, wholesalers, dealers, or retailers in the delivery and distribution of distilled spirits, fermented liquors, softdrinks, cigars and cigarettes, and other products as may be determined by the sangguniang panlalawigan, or panlungsod. [Art. 243 (d) (3), Ibid.]

d. In addition to the annual fixed tax, cities may also collect from the same manufacturers, producers, wholesalers, retailers, and dealers using route trucks a mayor’s permit fee which shall be imposed in a local tax ordinance. [Art. 243 (d) (4), Ibid.]

15. Illustrations of situs of taxation.

a. MI is a corporation engaged in the trading of books. It holds office in Pasig City, where all transactions are made including the issuance of sales invoices. However, it also maintains a warehouse in Mandaluyong City which serves as its storage area and no transactions are made therein.

MI should be assessed at the gross sales or receipts of the preceding year by Pasig City. Likewise, it may also collect the mayor’s permit and other regulatory fees.

Mandaluyong City where the warehouse is located but where no transactions are made, may only collect the Mayor’s permit fee and other regulatory fees provided for under its existing local tax ordinances. (DOF March 29, 1993 letter to Megastrat, Inc.)

b. MC is a subsidiary of SMC. It is a manufacturer with a principal office in Pasig City maintained for management and administrative purposes. It has a factory and sales office in Quezon City, where said route trucks withdraw their products for delivery to the customers in Pasig City.

MC should pay business taxes to Quezon City and not to Pasig City. However, Pasig may levy and collect the annual fixed tax for every delivery truck or van of MC delivering goods within Pasig. The IRR of the LGC of 1991 provides in Article 243 (2), “For route sales made in a locality where a manufacturer, producer, wholesaler, retailer or dealer has no branch, sales office or warehouse, the sales are recorded in the branch, sales office or warehouse from where the route trucks withdraw their products for sale, and the tax due on such sales is paid to the LGU where such branch, sales office or warehouse is located.” (DOF February 26, 1993 letter to San Miguel Corporation)

c. The place of delivery of the subject of the contract, and not the place where the contract was perfected determines the situs of taxation. (Shell Co., Inc. v. Municipality of Sipocot, Camarines Sur, 105 Phil. 1263) This is the place where the sale was consummated through delivery.

d. Matches purchased by customers outside of Cebu City but booked, paid for and delivered to carriers in Cebu City are taxable by Cebu City. Delivery to the carrier is delivery to the buyer. (Philippine Match Co., Ltd. v. City of Cebu, et al., L-30745, January 18, 1978]

16. What is the jurisdiction of the Secretary of Justice regarding issues of validity of tax ordinances ?

SUGGESTED ANSWER: Secretary of Justice can take cognizance of a case involving the constitutionality or legality of tax ordinances where there are factual issues involved. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999)

Taxpayer files appeal to the Secretary of Justice, within 30 days from effectivity thereof. In case the Secretary decides the appeal, a period also of 30 days is allowed for an aggrieved party to go to court. But if the Secretary does not act thereon, after the lapse of 60 days, a party could already seek relief in court within 30 days from the lapse of the 60 day period.

These three separate periods are clearly given for compliance as a prerequisite before seeking redress in a competent court. Such statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge of judicial functions. For this reason the courts construe these provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233, December 10, 1999)

17. Public hearings are mandatory prior to approval of tax ordinance, but this still requires the taxpayer to adduce evidence to show that no public hearings ever took place. (Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233, December 10, 1999) Public hearings are required to be conducted prior to the enactment of an ordinance imposing real property taxes. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999)

18. When is payment under protest not required when impugning the validity of a tax ordinance ? Explain.

SUGGESTED ANSWER: If the ground for the protest is validity of the real property tax ordinance and not the unreasonableness of the amount collected the tax must be paid under protest, and the issue of legality may be raised to the proper courts on certiorari without need of exhausting administrative remedies.

19. When is payment under protest required when impugning the validity of a tax ordinance ? If the ground for the protest is unreasonableness of the amounts collected there is need to pay under protest and administrative remedies must be resorted to before recourse to the proper courts.

REAL PROPERTY TAXATION

GENERAL CONCEPTS

1. What are the fundamental principles of real property taxation ?

SUGGESTED ANSWER: The fundamental principles of real property taxation are:

a. Appraisal at current and fair market value;

b. Classification for assessment on the basis of actual use;

c. Assessment on the basis of uniform classification;

d. Appraisal, assessment, levy and collection shall not be let to a private person;

e. Appraisal and assessment shall be equitable.

2. Basis for appraisal. Real properties shall be appraised at the current and fair market value prevailing in the locality where the property is situated and classified for assessment purposes on the basis of its actual use. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005)

KINDS OF REAL PROPERTY TAXES

THEIR LEVY AND IMPOSITION

1. The real property taxes that may be collected by provinces, cities and municipalities within the Metro Manila area are the

a. basic real property tax,

b. the special education fund, and

c. the ad valorem tax on idle lands.

Unlike the special levy, the levy and collection of real property taxes are limited only to the above local government units.

2. A special levy or special assessment is an imposition by a province, a city, a municipality within the Metropolitan Manila Area, a municipality or a barangay upon real property specially benefited by a public works expenditure of the LGU to recover not more than 60% of such expenditures.

3. What are the steps to be followed for the mandatory conduct of General Revision of Real Property Assessments ?

SUGGESTED ANSWER:

a. Preparation of Schedule of Fair Market Values;

b . Enactment of Ordinances:

1) Levying an annual “ad valorem tax on real property and an additional tax accruing to the Special Education Fund;

2) Fixing the assessment levels to be applied to the market values of real properties;

3) Providing the necessary appropriations to defray expenses incident to general revision of real property assessments,; and

4) Adopting the Schedule of Fair Market Values prepared by the assessors. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999)

4. What is the fair market value of properties ?

SUGGESTED ANSWER: Fair market value is the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy, taking into consideration all uses to which the property is adopted and might in reason be applied.

The criterion established by the statute contemplates a hypothetical sale. Hence, the buyers need not be actual and existing purchasers. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 citing Army and Navy Club, Manila v. Trinidad, 44 Phil. 383 )

5. Factors to be considered in fixing values of real property. In fixing the value of real property, assessors have to consider all the circumstances and elements of value and must exercise prudent discretion in reaching conclusions. [Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 citing Reyes v. Almanzor, 196 SCRA 322, 327 (1991)])

6 Procedure for the preparation of fair market values.

1) The city or municipal assessor shall prepare a schedule of fair market values for the different classes of real property situated in their respective Local Government Units for the enactment of an ordinance by the sanggunian concerned; and

2). The schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality concerned or the posting in the provincial capitol or other places as required by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999)

7. Publication requirement. Proposed fair market values of real property in a local government unit as well as the ordinance containing the schedule must be published in full for three (3) consecutive days in a newspaper of local circulation, where available, within ten (10) days of its approval, and posted in at lease two (2) prominent places in the provincial capitol, city, municipal or barangay hall for a minimum of three (3) consecutive weeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999)

8. Quezon City passed an ordinance whereby the “parcels of land sold, ceded. Transferred and conveyed for remuneratory consideration after the effectivity of this revision shall be subject to real estate tax based on the actual amount reflected in the deed of conveyance or the current approved zonal valuation of the Bureau of Internal Revenue prevailing at the time of sale, cession, transfer and conveyance, whichever is higher, as evidenced by the certificate of payment of the capital gains tax issued therefore.”

Is the proviso for the basis in determining the value for real property tax purposes valid ?

SUGGESTED ANSWER: No. The proviso being contrary to public policy and for restraining trade is not valid for the following reasons:

a. It mandates an exclusive rule in determining the fair market value and departs from the established procedures such as the sales analysis approach, the income capitalization approach and the reproduction approach provided under the rules implementing the statute. It unduly interferes with the duties statutorily placed upon the local assessor by completely dispensing with his analysis and discretion which the Local Government Code and the regulations require to be exercised. An ordinance that contravenes any statute is ultra vires and void.

b. The “consideration approach” in the ordinance is illegal since “the appraisal, assessment, levy and collection of real property tax shall not be let to any private person”, it will also completely destroy the fundamental principle in real property taxation – that 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. Allowing the parties to a private sale to dictate the fair market value of the property will dispense with the distinctions of actual use stated in the Local Government Code and in the regulations.

c. The invalidity is not cured by the prhase “whichever is higher” because an integral part of that system still permits valuing real property in disregard of its “actual use.”

d. The ordinance would result to real property assessments more than once every three (3) years and that is not the congressional intent as shown in the provisions of the Local Government Code and the regulations. Consequently, the real property tax burden should not be interpreted to include those beyond what the Code or the regulations expressly clearly state.

e. The proviso would provide a chilling effect on real property owners or administrators to enter freely into contracts reflecting the increasing value of real properties in accordance with prevailing market conditions.

While the Local Government Code provides that the assessment of real property shall not be increased once every three (3) years, the questioned proviso subjects the property to a higher assessment every time a sales transaction is made. Real property owners would therefore postpone sales until after the lapse of the three (3) year period, or if they do so within the said period they shall be compelled to dispose of the property at a price not exceeding the last prior conveyance in order to avoid a higher tax assessment.

In the above two scenarios real property owners are effectively prevented from obtaining the best price possible for their properties and unduly hampers the equitable distribution of wealth. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005)

9. What is the nature of a tax declaration ?

SUGGESTED ANSWER: As a rule, tax declarations or realty tax payments of property are not conclusive evidence of ownership, nevertheless, they are good indicia of possession in the concept of owner, for no one in his right mind would be paying taxes for a property that is not in his actual or constructive possession. They constitute at least proof that the holder has a claim of title over the property.

The voluntary declaration of a piece of property for taxation purposes manifests not only one’s sincere and honest desire to obtain title to the property and announces his adverse claim against the State and all other interested parties, but also the intention to contribute needed revenues to the government. Such an act strengthens one’s bona fide claim of acquisition of ownership. (Buenaventura, et al., v. Republic, G. R. No. 166865, March 2, 2007 citing Heirs of Simplicio Santiago v. Heirs of Mariano E. Santiago, G. R. No. 151440, 17 June 2003, 404 SCRA 193, 199 – 200)

10. Give examples of personal property under the civil law that may be considered as real property for purposes of taxes.

SUGGESTED ANSWER: Personal property under the civil law may be considered as real property for purposes of taxes where the property is essential to the conduct of the business.

a. Underground tanks are essential to the conduct of the business of a gasoline station without which it would not be operational. (Caltex Phils., Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA 296)

b. Light Rail Transit (LRT) improvements such as buildings, carriageways, passenger terminals stations, and similar structures do not form part of the public roads since the former are constructed over the latter in such a way that the flow of vehicular traffic would not be impaired. The carriageways and terminals serve a function different from the public roads. Furthermore, they are not open to use by the general public hence not exempt from real property taxes. Even granting that the national government owns the carriageways and terminal stations, the property is not exempt because their beneficial use has been granted to LRTA a taxable entity. (Light Rail Transit Authority v. Central Board of Assessment Appeals, et al., G. R. No. 127316, October 12, 2000)

c. The Supreme Court of New York in Consolidated Edison Company of New York, Inc., et al., v. The City of New York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, held that barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were subject to real property taxes.

Moreover, Article 415(9) of the Civil Code provides that “[d]ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast” are considered immovable property by destination being intended by the owner for an industry or work which may be carried on in a building or on a piece of land and which tend directly to meet the needs of said industry or work.

11. Association of Benevola de Cebu, Inc. is a non-stock, non-profit organization organized under the laws of the Republic of the Philippines and is the owner of Chong Hua Hospital (CHH) in Cebu City. In the late 1990’s, it constructed the CHH Medical Arts Center (CHHMAC). It is the contention of the City Assessor that the medical arts center is commercial in nature because CHH is charging rental from the doctors that use the facility and is located 100 meters away from the main building. In turn these doctors also charge fees for the service they render to their patients. Is the CHHMAC built by CHH to house its doctors a separate commercial establishment with an assessment rate of 35% on the building or an appurtenant to the hospital, treated as a special real property entitled to a 10% assessment currently imposed for CHH and its other separate buildings—the CHH’s Dietary and Records Departments for purposes of realty tax ? SUGGESTED ANSWER: CHHMAC is subject to the 10% assessment and not the 35% rate. The doctors and medical specialists holding clinics in CHHMAC are those duly accredited by CHH, that is, they are consultants of the hospital and the ones who can treat CHH’s patients confined in it. Thus, CHHMAC should not be categorized as “commercial” since a tertiary hospital like CHH is required by law to have a pool of physicians who comprises the required medical departments in various medical fields.

It would have been different if CHHMAC was also open for non-accredited physicians, that is, any medical practitioner, for then CHHMAC would be running a commercial building for lease only to doctors which would indeed subject the CHHMAC to the commercial level of 35% assessment.

CHHMAC, being hundred meters away from the CHH main building, does not denigrate from its being an integral part of the latter.

The Herrera ruling on what constitutes property exempt from taxation is indeed applicable in the instant case, thus:

Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is “not limited to property actually indispensable” therefore (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are “incidental to and reasonably necessary for” the accomplishment of said purposes, such as, in the case of hospitals, “a school for training nurses, a nurses’ home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns and residents” (84 C.J.S., 621), such as “athletic fields,” including “a farm used for the inmates of the institution” (Cooley on Taxation, Vol. 2, p. 1430).

CHHMAC’s charge of rentals for the offices and clinics its accredited physicians occupy cannot be equated to a commercial venture, which is mainly for profit.

First, CHHMAC is only for its consultants or accredited doctors and medical specialists. Second, the charging of rentals is a practical necessity: (1) to recoup the investment cost of the building, (2) to cover the rentals for the lot CHHMAC is built on, and (3) to maintain the CHHMAC building and its facilities. Third, as correctly pointed out by respondent, it pays the proper taxes for its rental income. And, fourth, if there is indeed any net income from the lease income of CHHMAC, such does not inure to any private or individual person as it will be used for respondent’s other charitable projects. (City Assessor of Cebu v. Association of Benevola de Cebu, Inc.., G. R. No. 152904, June 8, 2007)

TAX REMEDIES: REAL PROPERTY TAXATION

1. The concurrent and simultaneous remedies afforded local government units in enforcing collection of real property taxes:

a. Distraint of personal property;

b. Sale of delinquent real property, and

c. Collection of real property tax through ordinary court action.

2. Procedure for refund of real property taxes based on unreasonableness or excessiveness of amounts collected.

a. Payment under protest at the time of payment or within thirty (30) days thereafter, protest being lodged to the provincial, city or in the case of a municipality within the Metro Manila Area the municipal treasurer.

b. The treasurer has a period of sixty (60) days from receipt of the protest within to decide.

c. Within thirty (30) days from receipt of treasurer’s decision or if the treasurer does not decide, within thirty (30) days from the expiration of the sixty (60) period for the treasurer to decide, the taxpayer should file an appeal with the Local Board of Assessment Appeals.

d. The Local Board of Assessment Appeals has 120 days from receipt of the appeal within which to decide.

e. The adverse decision of the Local Board of Assessment Appeals should be appealed within thirty (30) days from receipt to the Central Board of Assessment Appeals.

f. The adverse decision of the Central Board of Assessment Appeals shall be appealed to the Court of Tax Appeals (En Banc) by means of a petition for review within thirty (30) days from receipt of the adverse decision.

g. The decision of the CTA may be the subject of a motion for reconsideration or new trial after which an appeal may be interposed by means of a petition for review on certiorari directed to the Supreme Court on pure questions of law within a period of fifteen (15) days from receipt extendible for a period of thirty (30) days.

3. What is the rationale for the restriction upon the requirement for payment under protest of real property taxes ?

SUGGESTED ANSWER: The restriction upon the power of courts to impeach tax assessment without a prior payment, under protest, of the taxes assessed is consistent with the doctrine that taxes are the lifeblood of the nation, and as such their collection cannot be curtailed by injunction or any like action; otherwise, the state or, in this case, the local government unit, shall be crippled in dispensing the needed services to the people, and its machinery gravely disabled. (Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001)

Thus, the trial court has no jurisdiction to entertain a petition for prohibition absent payment under protest of the tax assessed. (Ibid.)

4. Unpaid real property taxes are considered as liens upon the property form which they were due. May such property be proceeded against if it is already owned by one other than the one who used it at the time the real property taxes were due ? Explain your answer briefly.

SUGGESTED ANSWER: No. While unpaid realty taxes attach to the property and is chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner, to impose the real property tax on the subsequent owner which was neither the owner not the beneficial user of the property during the designated periods would not only be contrary to law but also unjust.

Consequently, MERALCO the former owner/user of the property was required to pay the tax instead of the new owner NAPOCOR. (Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001)

5. May personal property be distrained in order to enforce real property tax delinquencies ? Explain briefly.

SUGGESTED ANSWER: Yes. The LGU could also avail of the remedy of distraint and levy of personal property subjecting any personal property of the taxpayer to execution. Thus, the issuance of the warrants of garnishment over MERALCO’s bank deposits was not improper or irregular. (Manila Electric Company v. Barlis, et al., G.R. No. 114231, May 18, 2001)

NOTE: The above May 18, 2001 decision was set aside by the Supreme Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004. The author submits that the above ruling in the May 18, 2001 decision is still valid, not on the basis of the May 18, 2001 decision, in the light of pronouncements of the Supreme Court in other cases. Thus, do not cite the doctrine as emanating from the May 18, 2001 decision.

6. What is the nature of the publication requirement for delinquency sales of real property ? What is the reason behind this nature ?

SUGGESTED ANSWER: Notice and publication, as well as the legal requirements for a tax delinquency sale, are mandatory, and the failure to comply therewith can invalidate the sale. The prescribed notices must be sent to comply with the requirements of due process. (De Knecht, et al,. v. Court of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)

The reason behind the notice requirement is that tax sales are administrative proceedings which are in personam in nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169 SCRA 314)

7. FELS Energy, Inc., had a contract to supply NPC with the electricity generated by FELS’ power barges. The contract also stated that NPC shall be responsible for all real estate taxes and assessments. FELS then received an assessment of real property taxes on its power barges from the Provincial Assessor of Batangas. If filed a motion for reconsideration with the Provincial Assessor.

a. Upon denial, FELS elevated the matter to the Local Board of Assessment Appeals (LBAA), where it raised the following issues:

1) Since NPC is tax-exempt then FEL’s should also be tax-exempt because of its contract with NPC.

2) The power barges are not real property subject to real property taxes.

b. Upon the other hand the Local Treasurer insists that the assessment has attained a state of finality hence the appeal to the LBAA should be dismissed.

Rule on the conflicting contentions.

SUGGESTED ANSWER:

a. All the contentions of FELS are without merit:

1) NPC is not the owner of the power barges nor the operator of the power barges. The tax exemption privilege granted to NPC cannot be extended to FELS. the covenant is between NPC and FELs and does not bind a third person not privy to the contract such as the Province of Batangas.

2) The Supreme Court of New York in Consolidated Edison Company of New York, Inc., et al., v. The City of New York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, held that barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were subject to real property taxes.

Moreover, Article 415(9) of the Civil Code provides that “[d]ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast” are considered immovable property by destination being intended by the owner for an industry or work which may be carried on in a building or on a piece of land and which tend directly to meet the needs of said industry or work.

b. The Treasurer is correct. The procedure do not allow a motion for reconsideration to be filed with the Provincial Assessor.

To allow the procedure would indeed invite corruption in the system of appraisal and assessment. it conveniently courts a graft-prone situation where values of real property may be initially set unreasonably high, and then subsequently reduced upon the request of a property owner. In the latter instance, allusions of possible cover, illicit trade-off cannot be avoided, and in fact can conveniently take place. Such occasion for mischief must be prevented and excised from our system. (FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, citing Callanta v. Office of the Ombudsman. G. R. Nos. 115253-74, January 30, 1998, 285 SCRA 648)

8. A notice of assessment issued by a local assessor is not the subject of a motion for reconsideration that must be appealed to the LBAA. The last action of the local assessor on a particular assessment shall be the notice of assessment. It is this last action which gives the owner of the property the right to appeal to the LBAA. The procedure does not permit the property owner the remedy of filing a motion for reconsideration before the local assessor, (FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, citing Callanta v. Office of the Ombudsman. G. R. Nos. 115253-74, January 30, 1998, 285 SCRA 648)

9. A City Ordinance adopting a method of assessment was nullified by the Supreme Court. A taxpayer who has paid his real property taxes on the basis of the nullified ordinance now posits that the return of the real property tax erroneously collected and paid is a necessary consequence of the Supreme Court’s nullification of the ordinance and there is no need to claim for a refund. Is this correct ?

SUGGESTED ANSWER: No. The entitlement to a tax refund does not necessarily call for the automatic payment of the sum claimed. The amount of the claim being a factual matter, it must still be proven in the normal course and in accordance with the administrative procedure for obtaining a refund of real property taxes, as provided under the Local Government Code. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, September 15, 2006)

10. Procedure for refund of real property taxes based on validity of the tax measure or solutio indebeti.

a. Payment under protest not required, claim must be directed to the local treasurer, who must decide within sixty (60) days from receipt.

b. The denial by the local treasurer of the protest would fall within the Regional Trial Court’s original jurisdiction, the review being the initial judicial cognizance of the matter. Despite the language of Section 195 of the Local Government Code which states that the remedy of the taxpayer whose protest is denied by the local treasurer is “to appeal with the court of competent jurisdiction,” labeling the said review as an exercise of appellate jurisdiction is inappropriate since the denial of the protest is not the judgment or order of a lower court, but of a local government official. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005)

c. The decision of the Regional Trial Court should be appealed by means of a petition for review directed to the Court of Tax Appeals (Division).

d. The decision of the Court of Tax Appeals (Division) may be the subject of a review by the Court of Tax Appeals (en banc).

e. The decision of the Court of Tax Appeals (en banc) may be the subject of a petition for review on certiorari on pure questions of law directed to the Supreme Court.

STATUTORY TAX EXEMPTIONS

11. Are port and other facilities owned by the Philippine Ports Authority exempt from real property taxes ?

SUGGESTED ANSWER: No. The fact that the port and its facilities and appurtenances, owned by the Philippine Ports Authority (PPA), are accessible to the general public does not exempt it from the payment of real property taxes. These are patrimonial properties of PPA, not for public use, and that the operation of the port and its facilities and the administration of its buildings are in the nature of ordinary business. PPA is a profit earning corporation, hence its patrimonial properties are subject to tax. [Philippine Ports Authority v. City of Iloilo, et al., G. R. No. 143214, November 11, 2004 citing Light Rail Transit Authority v. Central Board of Assessment Appeals, 342 SCRA 692 (2000)]

12. Warehouses located in ports are property subject to real property taxes. Ports constructed by the State are properties of the public dominion under Art. 420 of the Civil Code which enumerates these as properties intended for public use.

Be that as it may, a warehouse, which, although located within the port is distinct from the port itself. Thus, it is subject to tax. The warehouse, in the case at bar, may not be held as part of the port, considering its separable nature as an improvement upon the port, and the fact that it is not open for use by everyone and freely accessible to the public.

In the same way that the Supreme Court once ruled, that the exemption of public property from taxation does not extend to improvements made thereon by homesteaders or occupants at their own expense, it likewise upheld the taxability of the warehouse, in the case at bar, it being a mere improvement built on an alleged property of public domain. (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003) This is still good doctrine.

13. The Manila International Airport Authority (MIAA) was subject to real property taxes by the municipality of Paranaque on its airport lands, and buildings on the ground that the Local Government Code has withdrawn exemptions previously enjoyed by government-owned and controlled corporations. MIAA contends otherwise as it claims it is not a government owned or controlled corporation. Who is correct.

SUGGESTED ANSWER: MIAA is correct because it is not a government owned or controlled corporation but an instrumentality of the government that is exempt from taxation.

It is not a stock corporation because its capital is not divided into shares, neither is it a non-stock corporation because there are no members. It is instead an instrumentality of the government upon which the local governments are not allowed to levy taxes, fees or other charges.

An 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. This term includes regulatory agencies chartered institutions and government-owned or controlled corporations.” [Sec. 2 (10), Introductory Provisions, Administrative Code of 1987] It is an instrumentality exercising not only governmental but also corporate powers. It exercises governmental powers of eminent domain, police power authority, and levying of fees and charges.

Finally, the airport lands and buildings are property owned by the government that are devoted to public use and are properties of the public domain. (Manila International Airport Authority v. Court of Appeals, et al., G. R. No. 155650, July 20, 2006)

14. The primary reason for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government was that such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in their requirements of development, fiscal or otherwise, by paying the taxes and other charges due from them. (Philippine Ports Authority v. City of Iloilo, G.R. No. 109791, July 14, 2004 citing Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667)

15. Two (2) parcels of land previously owned by GSIS and sold to private parties were bought at public auction by a private individual to satisfy real property tax delinquencies. Since the original owner’s duplicate TCT could not be found, the buyer sought the registration of the land in her name. The court ordered the cancellation of GSIS’ title and the issuance of a new title in the buyer’s name.

GSIS now annulment of the decision claiming that it is exempt from payment of real property taxes in accordance with its charter R. A. No. 8291 which provides among others that, “Accordingly, notwithstanding any laws to the contrary, the GSIS, its assets, revenues, including all accruals thereto, and benefits paid shall be exempt from all taxes, assessment fees, charges or duties of all kinds.” (Sec. 39) It is the claim of GSIS that the above provisions of R.A. No. 8291, a later law, abrogated the provisions of R.A. No. 7160.

Is the contention of GSIS tenable?

SUGGESTED ANSWER: No. Even if the charter of GSIS generally exempts it from tax liabilities, the prescription is not so encompassing as to make the tax exemption applicable to the properties in dispute. The properties were already transferred and the alienation of the properties sold by GSIS was the proximate cause and necessary consequence of the delinquent taxes due. (Government Service Insurance System v. City Assessor of Iloilo City, et al., G.R. No. 147192, June 27, 2006 citing City of Baguio v. Busuego, No. L-29772, 18 September 1980, 100 SCRA 116)

The allegation of the repeal of R.A. No. 7160 by R.A. 8291, is not convincing. Repeal cannot be assumed; the intention to revoke must be clear and manifest. To bring about an implied repeal, the two laws must be clearly repugnant in away that the later law R.A. 8291 could not exist without nullifying the earlier law, R. A. No. 7160. (Government Service Insurance System, supra)

Sec. 39 of R.A. No. 8291 should be read consistently with its avowed purpose – the maintenance of its actuarial solvency to finance the retirement, disability and life insurance benefits of its members. The tax-exempt properties and assets of GSIS referred to those that remained at its disposal and use, either for investment or for income generating purposes. Properties whose actual and beneficial use had been transferred to private taxable persons, for consideration or otherwise, are excluded and are thus taxable. . (Ibid, citing Rubia v. Government Service Insurance System, G.R. No. 151439, 21 June 2004, 432 SCRA529))

16. A telecommunications company was granted by Congress on July 20, 1992, after the effectivity of the Local Government Code on January 1, 1992, a legislative franchise with tax exemption privileges which partly reads, “The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay.” This provision existed in the company’s franchise prior to the effectivity of the Local Government Code. A City then enacted an ordinance in 1993 imposing a real property on all real properties located within the city limits, and withdrawing all tax exemptions previously granted. Among properties covered are those owned by the company from which the City is now collecting P43 million. The properties of the company were then scheduled by the City for sale at public auction.

The company then filed a petition for the issuance of a writ of prohibition claiming exemption under its legislative franchise. The City defended its position raising the following:

a. There was no exhaustion of administrative remedies because the matter should have first been filed before the Local Board of Assessment Appeals;

b. The company’s properties are exempt from tax under its franchise.

Resolve the issues raised.

SUGGESTED ANSWERS:

a. There is no need to exhaust administrative remedies as the appeal to the LBAA is not a speedy and adequate remedy within the law. This is so because the properties are already scheduled for auction sale.

Furthermore one of the recognized exceptions to the rule on exhaustion is that if the issue is purely legal in character which is so in this case.

b. The properties are exempt from taxation. The grant of taxing powers to local governments under the Constitution and the Local Government Code does not affect the power of Congress to grant tax exemptions.

The term “exclusive of this franchise” is interpreted to mean properties actually, directly and exclusively used in the radio or telecommunications business. The subsequent piece of legislation which reiterated the phrase “exclusive of this franchise” found in the previous tax exemption grant to the company is an express and real intention on the part of Congress to once against remove from the LGC’s delegated taxing power, all of the company’s properties that are actually, directly and exclusively used in the pursuit of its franchise. (The City Government of Quezon City, et al., v. Bayan Telecommunications, Inc., G. R. No. 162015, March 6, 2006)

ADVANCE CONGRATULATIONS AND SEE YOU IN COURT


3 comments:

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2010 BAR REVIEW METHODS, INTENSIVE REVIEW AND WORKSHOP

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