Prof. Domondon 2010 Taxation Review 2

            âââ41.              A foreign Consortium composed of BWSC-Denmark, Mitsui Engineering and Shipbuilding Ltd., and Mitsui and Co., Ltd., which entered into a contract with NAPOCOR for the operation and maintenance of two power barges appointed BWSC-Denmark as its coordination manager.  BWSCMI was established as the subcontractor to perform the actual work in the Philippines.  The Consortium paid BWSCMI in acceptable foreign exchange and accounted for in accordance with the rules and regulations of the BSP.

            Through a February 14, 1995 ruling the BIR declared that BWSCMI may choose to register as a VAT persons subject to VAT at zero rate.  For 1996, it filed the proper VAT returns showing zero rating.  On December 29, 1997, believing that it is covered by Rev. Regs. 5-96, dated February  20, 1996, BWSCMI paid 10% output VAT for the period April-December 1996, through the Voluntary Assessment Program (VAP).

            On January 7, 1999, BWSCMI was able to obtain a Ruling from the BIR reconfirming that it is subject to VAT at zero-rating.  On this basis, BWSCMI applied for a refund of the output VAT it paid.

            a.         Is BWSCMI subject to the 10% VAT or is it zero rated ?

          SUGGESTED ANSWER:  Yes.  BWSCMI is not zero rated and is subject to the 10% VAT.  It is rendering service for the Consortium which is not doing business in the Philippines.  Zero-rating finds application only where the recipient of the services are other persons doing business outside of the Philippines.  BWSCMI provides services to the Consortium which by virtue of its contract with NAPOCOR is doing business within the Philippines.  (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007)

            b.         Could it obtain a refund of the VAT it paid through the VAP ?  Explain.

          SUGGESTED ANSWER:  Yes. BWSCMI is entitled to refund of the 10% output VAT it paid the based on the non-retroactivity of the prejudicial revocation of the BIR Rulings which held that it’s services  are subject to 0% VAT and which BWSCMI invoked in applying for refund of the output VAT. (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., supra)

            NOTES AND COMMENTS:

          a.            Do not confuse the BWSCMI case with the American Express case.  American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance  with BSP rules and regulations.   (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007)

âââ42.            What are VAT-Exempt transactions ? SUGGESTED ANSWER:  The sale of goods or properties and/or services and the use or lease of properties that is

         b.            not subject to VAT (output tax) and

         c. the  seller  is  not  allowed any tax credit on VAT (input tax) purchases.

            The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT.  [Rev. Regs. No. 16-2005, Sec. 4.109-1 (A), arrangement and numbering supplied]

            âââ43.            VAT-exempt transactions distinguished from VAT-exempt entities.                                                                                                   a.         An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status – VAT-exempt or not – of the party to the transaction.                                           An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT.  [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R. No. 150154, August 9, 2005]

            b.         An exempt transaction shall not be the subject of any billing for output VAT but it shall not also be allowed any input tax credits WHILE an exempt party being zero-rated is allowed to claim input tax credits.

                         44.      Transactions are exempt from VAT. (Subject to the election by a VAT-registered person not to be subject to the value-added tax), the following shall be exempt from VAT:

                        (A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor.

                        Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits.  Poultry shall include fowls, ducks, geese and turkey,  Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets.

                        Marine food products shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams.

                        Meat, fruit, fish, vegetables and other agricultural and marine food  Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping, including those using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods.  Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state.

                        Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of 99.5o and above are presumed to be refined sugar.

                        Cane sugar produced from the following shall be presumed, for internal revenue purposes, to be refined sugar:

(1)           product of a refining process,

(2)           products of a sugar refinery, or

               (3)          product of a production line of a sugar mill accredited by the BIR to be producing sugar with polarimeter reading of 99.5o and above, and for which the quedanissued therefor, and verified by the Sugar Regulatory Administration, identifies the same to be of a polarimeter reading of 99.5o and above.

            Bagasse is not included in the exemption provided for under this section.

            (B)        Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets);

            “Specialty feeds” refers to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets.

            (C)        Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines:  Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines;

            (D)       Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner of Internal Revenue, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide;

            (E) Services subject to percentage tax under Title V of the Tax Code, as enumerated below:

                        (1)        Sale or lease of goods or properties or the performance of services of non-VAT-registered persons, other than the transactions mentioned in paragraphs (A) to (U) of Sec. 109 (1) of the Tax Code, the annual sales and/or receipts of which does not exceed the amount of One  Million Five Hundred thousand Pesos (P1,500,000.00), Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO).  (Sec. 116, Tax Code)

                        (2)        Services rendered by domestic common carriers by land for the transport of passengers and keepers of garages.  (Sec. 117)

                        (3)        Services rendered by international air/shipping carriers.  (Sec. 118)

                        (4)        Service rendered by franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00) and by franchises of gas and water utilities.  (Sec. 119)

                        (5)        Service rendered for overseas dispatch message or conversation originating from the Philippines.  (Sc. 120)

                        (6)        Services rendered by any person, company or corporation (except purely cooperative companies or associations ) doing life insurance business of any sort in the Philippines.  (Sec. 123)

                        (7)        Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies.  (Sec. 124)

                        (8)        Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions professional basketball games, jai-Alai and race tracks.  (Sec. 125). and

                        (9)        Receipts on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering.  (Sec. 127)

            (F)        Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;

            “Agricultural contract growers” refers to those persons producing for others poultry, livestock or other agricultural and marine food products in their original state.

            (G)       Medical, dental, hospital and veterinary services except those rendered by professionals;

            Laboratory services are exempted.  If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT.

            (H)        Educational services rendered by private educational institutions, duly accredited by the Department of Education (DEPED), the Commission on Higher Education (CHED), the Technical Education And Skills Development Authority (TESDA) and those rendered by government educational institutions;

            “Educational services” shall refer to academic, technical or vocational education provided by private educational institutions duly accredited by the DepED, the CHED and TESDA and those rendered by government educational institutions and it does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or the TESDA.

            (I)        Services rendered by individuals pursuant to an employer-employee relationship;

            (J)        Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;

            (K)        Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529 – Petroleum Exploration Concessionaires under the Petroleum Act of 1949; and;

            (L)        Sales by agricultural cooperatives duly registered with the Cooperative Development Authority (CDA)  to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce;

            (M)       Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the Cooperative Development Authority;

            (N)        Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority:  Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;

            Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT.

            (O)       Export sales by persons who are not VAT-registered;

            (P)        Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, such as RA No. 7835 and RA No. 8765, residential lot valued at One million five hundred thousand pesos (P 1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P 2,500,000) and below:  Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO);

            (Q)       Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P 10,000) Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO);

            (R)        Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;

            (S)        Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations;  Provided, that the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of one hundred fifty (150) tons and above, including engine and spare parts of said vessels; Provided, further, that the vessels be imported shall comply with the age limit requirement, at the time of acquisition counted from the date of the vessel’s original commissioning, as follows:  (i)  for passenger and/or cargo vessels, the age limit is fifteen years (15) years old,  (ii)  for tankers, the age limit is ten (10) years old, and (iii)  For high-speed passenger cars, the age limit is five (5) years old, Provided, finally, that exemption shall be subject to the provisions of section 4 of Republic Act No. 9295, otherwise known as “The Domestic Shipping Development Act of 2004.”

            (T)        Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; Provided, that the said fuel,  goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines; provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 10% VAT (now 12%);

            (U) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; and

            âââ (V)           Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000):  Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO).

            For purposes of the threshold of P1,500,000.00, the husband and wife shall be cnsidered separate taxpayers.  However, the aggregation rule for each taxpayer shall apply.  For instance, if a profesional, aside from the practice ofhis profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded.  Thus, the VAT-exempt sales shall to be icluded in determining the threshold. [NIRC of 1997, Sec. 109 (1), as amended by R. A. No. 9337; words in italics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses supplied]

            âââ45.            Tax to be paid by persons exempt from VAT.

            a.         Any person, whose sales or receipts are exempt under Sec. 109 (1) (V) of the Tax Code,

            (V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000):  Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO), from the payment of VAT and

            b.         who is not a VAT-registered person

            c.          shall pay a tax equivalent to three percent (3%) of his gross monthly sales or receipts;

            Provided, that cooperatives shall be exempt from the three (3%) gross receipts tax herein imposed.   (Rev. Regs. No. 16-2005, Sec. 4.116-1, arrangement, numbering and words in italics supplied)

RETURNS AND    WITHHOLDING

          1.            Income tax returns being public documents, until controverted by competent evidence, are competent evidence, are prima facie correct with respect to the entries therein.  (Ropali Trading v. NLRC, et al., 296 SCRA 309, 317)

          2.            Individuals required to file an income tax return.

          a.            Every Filipino citizen residing in the Philippines;

          b.            Every Filipino citizen residing outside the Philippines on his income from sources within the Philippines;

          c.            Every alien residing in the Philippines on income derived from sources within the Philippines; and

          d.            Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.  [Sec. 51 (A) (1), NIRC of 1997]

          3.            Married individuals who are earning purely compensation income allowed to file separate returns.

          4.            Married individuals, whether citizens, resident or non-resident aliens, who do not derive income purely from compensation shall file a consolidated return for the taxable year to include the income of both spouses,  but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau  for purposes of verification.” [Section 51 (D) of the NIRC of 1997]

          5.            Computation of income tax for married individuals whether citizens, resident or non-resident aliens, who do not derive income purely from compensation required file a consolidated return for the taxable year but could not do so.  For married individuals, the husband and wife, subject to no. 2, supra,, shall compute separately their individual income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.  [2^nd to the last par., Sec. 24 (A) (2), NIRC of 1997 as amended by Rep. Act No. 9504]

          6.            Individuals who are not required to file an income tax return.

          a.            An individual whose gross income does not exceed his total personal and additional exemptions for dependents, Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippines shall file an income tax return regardless of the amount of gross income [Sec. 51 (A) (2), NIRC of 1997]

          b.            An individual with respect to pure compensation income, derived from such sources within the Philippines, the income tax on which has been correctly withheld: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return [Sec. 51 (A) (2), NIRC of 1997, as amended by Rep. Act No. 9504, paraphrasing supplied]

          c.            An individual whose sole income has been subject to final withholding tax;

          d.            A minimum wage earner (is a worker in the private sector paid the statutory minimum wage, or is an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned), an individual who is exempt from income tax pursuant to the provisions of the Tax Code and other laws, general or special.  [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as amended by Rep. Act. 9504]

          7.            Minimum wage earners are exempt from income taxation.  That minimum wage earners  (is a worker in the private sector paid the statutory minimum wage, or is an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned) shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.  [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as amended by Rep. Act. 9504]

         

          8.            An individual who is not required to file an income tax return may nevertheless be required to file an information return.  [Sec. 51 (A) (3), NIRC of 1997]

          9.            A corporation files its income tax return and pays its income tax four (4) times during a single taxable year.  Quarterly returns are required to be filed for the first three quarters, then a final adjustment return is filed covering the total taxable income for the whole taxable year, be it  calendar or fiscal.

          10.          An individual earning from the practice of his profession or who engages in trade or business files his income tax return and pays his income tax four (4) times during a single taxable year.  Quarterly returns are required to be filed for the first three quarters, then an annual income tax return is filed covering the total taxable income for the whole of the previous calendar year.

           11.         The purpose of the above four (4) times a year requirement is to make available sufficient funds to meet the budgetary requirements, on a quarterly basis thereby increasing government liquidity.  It also eases hardships on the part of individuals who are required to make this four time return. Thus, the taxpayer does not have to raise large sums of money in order to pay the tax.

          12.          An individual earning purely compensation income files only one annual income tax return  covering the total taxable compensation income for the whole of the previous calendar year.

          13.          Under the withholding tax system, taxes imposed or prescribed by the NIRC of 1997 are to be deducted and withheld by the payors from payments made to payees for the former to pay directly to the Bureau of Internal Revenue.  It is also known as collection of the tax at source.

          14.          A withholding agent is explicitly made personally liable under the Tax Code for the payment of the tax required to be withheld, in order to compel the withholding agent to withhold the tax under any and all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction.   (Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12, 1999)  The system facilitates tax collection and reduces tax evasion.

          15.          The two (2) types of withholding at source are the 1) final withholding tax; and  2)  creditable withholding tax.

          16.  Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income due from the payee on the said income.  [1^st sentence, 1^st par., Sec. 2.57  (A), Rev. Regs. No. 2-98]

          The liability for payment of the tax rests primarily on the payor or the withholding agent..  Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor withholding agent.  The payee is not required to file an income tax return for the particular income.

          17.          Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due  from the payee on the said income.  The income recipient is still required to file an income tax return and/or pay the difference between the tax withheld and the tax due on the income.  [1^st and 2^nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]

          18.          The two kinds of creditable withholding taxes are (a)  taxes withheld on income payments covered by the expanded withholding tax; and (b)  taxes withheld on compensation income.

         

          19.          Payments to the following are exempt from the requirement of withholding or when no withholding taxes required:           

          a.            National Government and its instrumentalities including provincial, city, or municipal governments;

          b.            Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following:

   1)  Sales of real property by a corporation which is registered with and certified by the HLURB or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed P180,000.00 in Metro Manila and other  highly urbanized areas and P150,000.00 in other areas or such adjusted amount of selling price for socialized housing as may later be determined and adopted by the HLURB;

   2)  Corporations registered with the Board of Investments and enjoying exemptions from income under the Omnibus Investment Code of 1997;

   3)         Corporations exempt from income tax under  Sec. 30, of the Tax Code, like the SSS, GSIS, the PCSO, etc.  However, income payments arising from any activity which is conducted for profit or income derived from real or personal property shall be subject to a withholding tax.  (Sec. 57.5, Rev. Regs. No. 2-98)

          20.          For tax amnesty purposes, the withholding agent is not a taxpayer.  He is made to pay the tax where he fails to withhold as a penalty and not because the tax is due from him.  (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999, the Anscor case)

PENALTIES, INTERESTS AND SURCHARGES

          1.            Surtaxes or surcharges, also known as the civil penalties, are the amounts imposed in addition to the tax required.

          They are in the nature of penalties and shall be collected at the same time, in the same manner, and as part of the tax.  [Sec.248 (A), NIRC of 1997]

          2.            What are the two (2) kinds of civil penalties ?

          SUGGESTED ANSWER:

          a.            the 25% surcharge for late filing or late payment [Sec. 248 (A), NIRC of 1997] (also known as the delinquency surcharge), and

          b.            the 50% willful neglect or fraud surcharge.  [Sec. 248 (B), Ibid.]

          3.            Define deficiency income tax.

          SUGGESTED ANSWER:  Deficiency income tax is the amount by which the tax imposed under the NIRC of 1997 exceeds the amount shown as the tax due by the taxpayer upon his return.  [Sec. 56 (B) (1), NIRC of 1997]

          4.            Deficiency interest, defined.   The interest assessed and collected on any unpaid amount of tax at the rate of 20% per annum or such higher rate as may be prescribed by regulations, from the date prescribed for payment until the amount is fully paid.  [Sec. 249 (A) (B), NIRC of 1997]

          5.            Delinquency interest, defined.   The interest assessed and collected on the unpaid amount until fully paid where there is failure on the part of the taxpayer to pay the amount die on any return required to be filed; or the amount of the tax due for which no return is required; or a deficiency tax, or any surcharge or interest thereon, on the date appearing in the notice and demand by the Commissioner of Internal Revenue.  [Sec.249 (c), NIRC of 1997]

          6.            After resolving the issues the BIR Commissioner reduced the assessment.  Was it proper to impose delinquency interest despite the reduction of the assessment ?  Why ?

          SUGGESTED ANSWER:  Yes.  The intention of the law is to discourage delay in the payment of taxes due to the State and in this sense the surcharge and interest charged are not penal but compensatory in nature – they are compensation to the State for the delay in payment, or for the concomitant tuse of the funds by the taxpayer beyond the date he is supposed to have paid them to the State.  (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006)

          7.            Compromise penalty is the amount agreed upon between the taxpayer and the Government to be paid as a penalty in cases of a compromise.

          8.            As a result of divergent rulings on whether it is subject to tax or not, the taxpayer was not able to pay his taxes on time.  Imposed surcharges and interests for such delay, the taxpayer not invokes good faith with the BIR countering by saying that good faith is not a valid defense for violation of a special law.  Furthermore, the BIR further raises the defense that the government is not bound by the errors of its agents.  Who is correct ?

          SUGGESTED ANSWER:  The taxpayer is correct. The settled rule is that good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax, are sufficient justification to delete the imposition of surcharges.  (Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G. R. No. 166786, September 11, 2006)

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

COURT OF TAX APPEALS, IN GENERAL

         

            â 1.      Discuss the role of the judiciary in taxation.  SUGGESTED ANSWER: The role of the judiciary is to be the sympathetic or vigilant court which would check injustices or abuses of the legislative and administrative agents of the State in their exercise of the power of taxation.

          â 2.  What is the nature and composition of the Court of Tax Appeals ?                                                                                   SUGGESTED ANSWER:  The Court of Tax Appeals is the special tax court created under Republic Act No. 1125, as amended, and is  composed of a Presiding Justice and eight (8) Associate Justices, organized into three (3) divisions.

          â 3.         What are the purposes for the creation of the Court of Tax Appeals ?                                                                      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)

          âââ 4.   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)

          The petition for review to be filed with the CTA en banc  as the mode for appealing a decision, resolution, or order of the CTA Division, under Section 18 of Republic Act No. 1125, as amended, is not a totally new remedy, unique to the CTA, with a special application or use therein.  To the contrary, the CTA merely adopts the procedure for petitions for review and appeals long established and practiced in other Philippine courts.  Accordingly, doctrines, principles, rules, and precedents laid down in jurisprudence by this Court as regards petitions for review and appeals in courts of general jurisdiction should likewise bind the CTA, and it cannot depart therefrom.  (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

           

          ââ 5.      It is the Regional Trial Court that has jurisdiction to rule upon the constitutionality of a tax law or a regulation issued by the taxing authorities.    Where what is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the administrative agency in the performance of its quasi-legislative function, the regular courts have jurisdiction to pass upon the same.  The determination of whether a specific rule or set of rules issued by an administrative agency contravenes the law or the constitution is within the jurisdiction of the regular courts. 

Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts.  This is within the scope of judicial power, which includes the authority of the courts to determine in an appropriate action the validity of the acts of the political departments.  Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.  (British American Tobacco v. Camacho et al., G. R. No. 163583, August 20, 2008 with an intervenor)

          NOTES AND COMMENTS:  The above doctrine supersedes Asia International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R. No. 103445, December 18, 2007 which ruled that it is the Court of Tax Appeals that has jurisdiction relative to matters involving the constitutionality of regulations issued by the BIR.  The reason was that this falls under the concept of decisions of the BIR Commissioner on “other matter” arising under the provisions of laws administered by the Commission.  Issuance of revenue regulations are authorized under the NIRC.

          British American Tobacco reversed Asia International Auctioneers upon the concept of the judiciary’s “expanded power.”

          6.            Instances where the Court of Tax Appeals would have jurisdiction even if there is no decision of the Commissioner of Customs:

          a.            Decisions of the Secretary of Trade and Industry or the Secretary of Agriculture in anti-dumping and countervailing duty cases are appealable to the Court of Tax Appeals within thirty (30) days from receipt of such decisions.

b.  In case of automatic review by the Secretary of Finance in seizure or forfeiture cases where the value of the importation exceeds P5 million or where the decision of the Collector of Customs which fully or partially releases the shipment seized is affirmed by the Commissioner of Customs.

          c.  In case of automatic review by the Secretary of Finance of a decision of a Collector of Customs acting favorably upon a customs protest.

ASSESSMENT OF INTERNAL REVENUE TAXES

         

          ââ 1.  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.

          2.            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. (Ibid.)

          3.            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)

          4.            Self-assessed tax, defined.  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)

          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.  (Ibid.) 

  ââ 5.   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. G. R. No. 136975, March 31, 2005)

          6.   General rule:  When the Commissioner of Internal Revenue may rely on estimates.  “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)

“However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously.”  (Ibid.)

  7.            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)

          â 8.  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)

          ââ 9.  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)

          10.          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.

          ââ 11.  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)

         

          âââ 12.   Prescriptive periods for making assessments of internal revenue taxes.   

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).

            13.       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.  [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008] 

            This mandate governs the question of prescription of the government’s right to assess internal revenue taxes primarily to safeguard the interests of taxpayers from unreasonable investigation.  Accordingly, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time.  (Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 225)

14.            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)

          15.          A “jeopardy assessment” is a delinquency tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return.  [Sec. 3.1 (a), Rev. Regs. No. 6-2000)

          Jeopardy assessment is an indication of the doubtful validity of the assessment, hence it may be subject to a compromise.  [Sec. 3.1 (a), Rev. Regs. No. 6-2000]

         

ââ16.  Requisites for Formal Letter of Demand and Assessment Notice.  The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative.  The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void.  The same shall be sent to the taxpayer only by registered mail or by personal delivery.

            ââ 17.  What are the requirements for the validity of a formal letter of demand and assessment notice ?

             SUGGESTED ANSWER:

a.  There must have been previously issued a pre-assessment notice until excepted;

b.  It must have been issued prior to the prescriptive period; and

c.  The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void.  (Sec. 3.1.4, Rev. Regs. No. 12-99)

 

          18.          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.)

          â 19.  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]

           ââ 20.  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.

          NOTES AND COMMENTS:

          The holding in Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case) that the waiver of the period for assessment must be in writing and have the written consent of the BIR Commissioner is still doctrinal because of the  provisions of Sec. 223, NIRC of 1997 which provides for the suspension of the prescriptive period:

ââ 21. Under RMO No. 20-90, which implements Sections 203 and 222 (b), the following procedures should be followed for a valid waiver of the prescriptive period for an assessment:                                                                                                                        a.         The waiver must be in the proper form;                                                   b.              The waiver shall be signed by the taxpayer himself or his duly authorized representative.  In the case of a corporation, the waiver must be signed by any of its responsible officials.                                              Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to the waiver.  The date of such acceptance by the Bureau should be indicated.  Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.                                c.          The following revenue officials are authorized to sign the waiver.                                                                                                                                        A.         In the National Office                                                                                          x x x x                                                                                                              3.              Commissioner                                                                                                 For tax cases involving more than P1M                              B.         In the Regional Offices                                                                                        1.         The  Revenue District Officer with respect to tax                       cases still pending investigation and the period to assess is                        about to prescribe regardless of amount.                                                              x x x x                                                                                      d.         The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver.  The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy.                                                                                       d.         The foregoing procedures shall be strictly followed.  Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with.  (Renumbering and emphasis supplied.)

            If the above are not followed there is no valid waiver and prescription would run.   (Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 228-229)

            ââ 22. The procedures in RMO No. 20-90 are NOT merely directory and that the execution of a waiver is a renunciation of  a taxpayer’s  right to invoke prescription.  RMO No. 20-90 must be strictly followed.  A waiver of the statute of limitations under the NIRC, to a certain extent being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed.  The waiver of the statute of limitations does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally, particularly where the language of the document is equivocal. 

            Thus a  waiver becomes unlimited in time, and invalid,  because it did not specify a definite date, agreed upon between the BIR and the taxpayer, within which the former may assess and collect taxes.  It also would have no binding effect on the taxpayer if there was no consent by the Commissioner.  On this basis, no implied consent can be presumed, nor can it be contended that the concurrence to such waiver is a mere formality. (Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 229 in turn citing Id. at 229, citing Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 115712, February 25, 1999, 303 SCRA 614, 620-622.)

          ââ 23.  BIR cannot rely on its invocation of the rule that the government cannot be estopped by the mistakes of its revenue officers in the enforcement of RMO No. 20-90 because the law on prescription 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 recommended the approval of the law.  To the Government, its tax officers are obliged to act promptly in the making of assessment so that taxpayers, after the lapse of the period of prescription, would have a feeling of security against unscrupulous tax agents who will always try to find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of a possible opportunity to harass even law-abiding businessmen.  Without such legal defense, taxpayers would be open season to harassment by unscrupulous tax agents. [Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Republic of the Phils. v. Ablaza, 108 Phil. 1105, 1108 (1960)]

          ââ 24.    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)]

          47.          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] 

PROTESTING INTERNAL REVENUE TAX ASSESSMENTS

1.   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)

          ââ 2.      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)

          ââ 3.      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)

          ââ 4.      What are the requirements for the validity of a taxpayer’s protest ?

          SUGGESTED ANSWER:

          a.            It must be filed within the reglementary period of thirty (30) days from receipt of the notice of assessment.

          b.            The taxpayer must not only show the errors of the Bureau of Internal Revenue but also the correct computation through

   1)         A statement of the facts, the applicable law, rules and regulations, or jurisprudence on which the taxpayer’s  protest is based, 

   2)         If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of the several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto.  (Sec. 3.1.5, Rev. Regs. 12-99)

          c.            Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting documents.  [4^th par., Sec. 228 (e), NIRC of 1997]

            ââ 5. “Relevant supporting documents,” defined.  The term “relevant supporting documents” should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents.

      The BIR cannot demand what type of supporting documents should be submitted.  Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit.  (Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc., G. R. 172045-46, June 16, 2009)

JUDICIAL REMEDIES INVOLVING PROTESTED ASSESSMENTS

          âââ 1.   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.

          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. (Ibid.)

          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. 

          2.   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. 

          3.            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 petition would be dismissed for lack of jurisdiction unless the case falls under any of the following exceptions.

          4.             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.)

          ââ5.       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.  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)

           

COLLECTION OF INTERNAL REVENUE TAXES

          1.            General rule:  Collection of taxes is imprescriptible.  While this may be so, statutes may provide for periods of prescription,

          2.            Why is the collection of taxes imprescriptible ?

          SUGGESTED ANSWER:

          a.            As a general rule, revenue laws are not intended to be liberally construed, and exemptions are not given retroactive application,  considering that taxes are the lifeblood of the government and in Holmes’ memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented.  (Commissioner of Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007)   However, statutes may provide for prescriptive periods for the collection of particular kinds of taxes.

          b.            Tax laws, unlike remedial laws, are not to be applied retroactively.  Revenue laws are substantive laws and their application must not be equated with remedial laws.  (Acosta, supra)

          3.            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]

          NOTES AND COMMENTS:

          a.            Both the former Sec. 269, NIRC of 1977 and Sec.222 of  NIRC of 1997 do not refer to a “regular return.”  It is clear that in enacting Sec. 222, entitled “Exceptions as to the period of limitation of assessment and collection of taxes,”  the NIRC of 1997 has eliminated sub-paragraph c of the former Sec. 269 of the NIRC, also entitled “Exceptions as to the period of limitation of assessment and collection of taxes.”  Said Sec. 269 (c), reads “Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.”

           A perusal of Sec. 222 of the NIRC is clear that it covers only three scenarios only.  1)  No assessment was made upon a false or fraudulent return or omission to file a return;  2)  an assessment was made upon a false or fraudulent return or omission to file a return; and 3)  an extended assessment issued within a period agreed upon by the  Commissioner and the taxpayer.  The same scenarios are those  referred to in the former Sec. 269 which provided for a prescriptive period for collection of three (3) years.

          It is clear therefore that neither  Sec. 222 nor the former Sec. 269  provide for an instance where the assessment was made upon a “regular return” or one that is not false or fraudulent, or that there was an agreement to extend the period for assessment.

          Resort should therefore be made to the three (3) year period referred to in Sec. 203 of the NIRC of 1997 which reads,  “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 x x x “ (paraphrasing and emphasis supplied)

         

          ââ 4.  What is a compromise ?

          SUGGESTED ANSWER:  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)

          ââ5.   What tax  cases may be the subject of a compromise ?

 SUGGESTED ANSWER:  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)

         

ââ6.  What tax cases could not be the subject of compromise ?

SUGGESTED ANSWER:

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)

ââ7.  When may the Commissioner of Internal Revenue compromise the payment of any internal revenue tax ?  Alternatively, what are the grounds for a compromise, and what are the amounts for which a compromise may be entered into ?

SUGGESTED ANSWER:

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.

          ââ8.  When is the Commissioner of Internal Revenue  authorized to abate or cancel a tax liability ?:

          SUGGESTED ANSWER:

          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]

          9.            The collection of a tax may not be suspended.  Only the Court of Tax Appeals may issue an order suspending the collection of a tax.

          ââ10.  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.

          ââ 11.    What is the procedure for suspension of collection of taxes ?

          SUGGESTED ANSWER:  Where the collection of the amount of the taxpayer’s liability, sought by means of a demand for payment, by levy, distraint or sale of property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardize the interest of the government or the taxpayer, an interested party may file a motion for the suspension of the collection of the  tax liability (Sec. 1, Rule 10, RRCTA effective December 15, 2005) with the Court of Tax Appeals. 

          The motion for suspension of the collection of the tax may be filed together with the petition for review or with the answer, or in a separate motion filed by the interested party at any stage of the proceedings.  (Sec. 3, Rule 10, RRCTA effective December 15, 2005)

REFUND OF INTERNAL REVENUE TAXES

         

          ââ 1.      What are the grounds for refund or credit of internal revenue taxes ?

          SUGGESTED ANSWER:  The grounds for refund or credit or internal revenue taxes are the following:

          a.            The tax was illegally collected.  There is no law that authorizes the collection of the tax.

          b.            The tax was excessively collected.  There is a law that authorizes the collection of a tax but the tax collected was more than what the law allows.

          c.            The tax was paid through a mistaken belief that the taxpayer should pay the tax (solution indebeti)

          ââ 2.      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)

          NOTES AND COMMENTS:

          a.            Proof of fact of withholding.  “Sec. 10.  Claim for tax credit or refund. – (a)  Claims for Tax Credit or Refund of Income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received has been declared as part of the gross income and the fact of withholding is established by a copy of the Withholding Tax Statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld therefrom xxx”  (Rev. Regs. No. 6-85, as amended)

          The document which may be accepted as evidence of the third condition, that is, the fact of withholding, must emanate from the payor itself, and not merely from the payee, and must indicate the name of the payor, the income payment basis of the tax withheld, the amount of the tax withheld and the nature of the tax paid.   (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007)

          3.            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)

          ââ 4.    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:  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  (2^nd 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)

          ââ 5.      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.)

ââ 6.  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)

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)

            ââ 7.    What is solutio indebeti as applied to tax cases ?

          SUGGESTED ANSWER:  Under the principle of solutio indebiti provided in Art. 2154, Civil Code, “If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.” The BIR received something “when there [was] no right to demand it,” and thus, it has the obligation to return it.   [State Land Investment Corporation v. Commissioner of Internal Revenue, G. R. No. 171956, January 18, 2008citing Citibank, N. A. v. Court of Appeals and Commissioner of Internal Revenue, G.R. No. 107434, October 10, 1997, 280 SCRA 459, in turn citing Ramie Textiles, Inc. v. Mathay, Sr., 89 SCRA 586 (1979)]. It is an ancient principle that no one, not even the state, shall enrich oneself at the expense of another.  Indeed, simple justice requires the speedy refund of the wrongly held taxes. (Ibid.)

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            56.   What are the reasons for requiring the filing of an administrative application for refund or credit with the BSUGGESTED  ââ      ââ 8.           Why is it necessary to file an administrative claim for refund with the BIR, before filing a case with the Court of Tax Appeals ?                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  a.              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 SCRA79)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      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

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          ââ 9.     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 ?                                                                                                                                                                                                                                                                                                                                                                                                                                                             SUGGESTED ANSWER:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    SUGGESTED             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) NOTE:  Reconciliation between above two numbers (8 and 9).  An application for refund or credit under Sec. 229 of the NIRC of 1997 is required where the case filed before the CTA is a refund case, which is not premised upon a disputed assessment.  There is no need for a prior application for refund or credit, if the refund is merely a consequence of the resolution of the BIR’s denial of a protested assessment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         Who could apply for a tax refund or credit ?

ââ 10. Who could apply for a refund or credit ?

SUGGESTED ANSWER:  The person who paid the tax may apply for a refund or credit.

A withholding tax agent may also apply for a refund.  In a sense, he is also a taxpayer because the tax may be collected from him if he does not withhold.

11.  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 ?

SUGGESTED 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)

          NOTES AND COMMENTS:

            a.         The choice, is given to the taxpayer,  whether to claim for refund under Sec. 76  or have its excess taxes applied as tax credit for the succeeding taxable year, such election is not final.  Prior verification and approval by the Commissioner of Internal Revenue is required.  The availment of the remedy of tax credit is not absolute and mandatory.  It does not confer an absolute right on the part of the taxpayer to avail of the tax credit scheme if it so chooses.  Neither does it impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole control and discretion of the taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004)

          ââ12.     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)

13.       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)

            NOTES AND COMMENTS:  The holding in  State Land Investment Corporation v. Commissioner of Internal Revenue, G. R. No. 171956, January 18, 2008 that the taxpayer is entitled to a refund because during the succeeding year there was no tax due against which the excess tax credits may be applied is not doctrinal.  This is so because it interpreted the provisions of then Sec. 69 of the NIRC, which did not provide for the “irrevocability rule” now contained in Sec. 76 of the NIRC of 1997.

         

          14.          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)

15.          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.)

            ââ 16.  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)

            NOTES AND COMMENTS:  It may be that there is no essential difference between a tax refund and a tax credit since both are moves of recovering taxes erroneously or illegally paid to the government.  (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004)

          17.          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.

            18.       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)

            19.       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,[1][3] 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)

TARIFF AND CUSTOMS LAWS

ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE

TARIFF AND CUSTOMS CODE

          ââ 1.   When does importation begin, and why is it important to know whether importation has already begun or not ?

           SUGGESTED ANSWER:  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.  Thus, the Bureau of Customs obtains jurisdiction over imported articles only after importation has begun.

          ââ 2.      When is importation deemed terminated and why is it important to know whether importation has already ended?

          SUGGESTED ANSWER:  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.

          ââ 3.  The flexible tariff clause is a provision in the Tariff and Customs Code, which implements the constitutionally delegated power to the Congress to further delegate 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.

          4.            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)

          5.  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.

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

          ââ 7.   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”]

          ââ 8.  When is the anti-dumping duty imposed ?

          SUGGESTED ANSWER:  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”]

          9.            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”]

          10.          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”]

          11.          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.

          12.  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”)

          13.  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.

          ââ14.  What are countervailing duties and when are they imposed ?

          SUGGESTED ANSWER:  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)

          15.  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”)

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

          ââ 17.  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.

          18.  The Commissioner of Customs imposes the marking duty.

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

          ââ 20.  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 re-exportation 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.

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

          ââ 22.  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.

          23.          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.

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

          ââ 25.  The basis of dutiable value of merchandise that is subject to ad valorem customs duties is 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)

          ââ 26.  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

         

          27.          How and to whom should claims for refund of customs duties be made ? 

          SUGGESTED ANSWER:  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)

          28.            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)

          29.  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)

         

          30.  Payment is not a defense in smuggling.  “When upon trial for violation of this section, the defendant is shown to have possession of the article in question, possession shall be deemed sufficient evidence to authorize conviction, unless the defendant shall explain the possession to the satisfaction of the court: Provided, however, That payment of the tax due after apprehension shall not constitute a valid defense in any prosecution under this section.”  (last par., Sec. 3601, TCC)

          31.          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)

          NOTES AND COMMENTS:

          a.            Importation consists of bringing an article into the country from the outside.  Importation begins when the conveying vessel or aircraft enters the jurisdiction of the Philippines with intention to unload therein.

          b.            When unlawful importation is complete.  In the absence of a bona fide intent to make entry and pay duties when the prohibited article enters the Philippine territory.  Importation is complete when the taxable, dutiable commodity is brought within the limits of the port of entry.  Entry through a custom house is not the essence of the act.  (Jardeleza v. People, G.R. No. 165265, February 6, 2006)

          âââ 32.  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.

          NOTES AND COMMENTS:  The Bureau of Customs could search and seize articles without need of a judicial warrant unless the place to be searched is a dwelling place.  In such a case customs requires a judicial warrant.

          33.          “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)

          34.          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)

          35.  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.

          36.  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.

          ââ 37.  Section 2301 of the TCCP states that seized articles may not be released under bond if there is prima facie evidence of fraud in their importation. Commissioner of Customs v. Court of Tax Appeals, et al., G. R. No. 171516-17, February 13, 2009

          Section 2301. Warrant for Detention of Property-Cash Bond. – Upon making any seizure, the Commissioner shall issue a warrant for the detention of the property; and if the owner or importer desires to secure the release of the property for legitimate use, the Collector shall, with the approval of the Commissioner of Customs, surrender it upon the filing of a cash bond, in an amount fixed by him, conditioned upon the payment of the appraised value of the article and/or any fine, expenses and costs which may be adjudged in the case: Provided, That such importation shall not be released under any bond when there is prima facie evidence of fraud in the importation of the article: Provided, further, That articles the importation of which is prohibited by law shall not be released under any circumstances whatsoever: Provided, finally, That nothing in this section shall be construed as relieving the owner or importer from any criminal liability which may arise from any violation of law committed in connection with the importation of the article. (emphasis supplied)

          38.          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)

          39.           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.

         

          ââ 40.    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)

          41.          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)

          NOTES AND COMMENTS:

           a.           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)         

          Forfeiture of seized goods in the Bureau of Customs is a proceeding against the goods and not against the owner. (Asian Terminals, Inc. v. Bautista-Ricafort, G .R. No. 166901, October 27, 2006 citing Transglobe)

           42.  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.

          43.  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.

            ââ 44. Decisions of the Commissioner of Customs “in cases involving liability for customs duties, fees or other money charges” that must be appealed to the Court of Tax Appeals Division within thirty (30) days from receipt specifically refer to his decisions on administrative tax protest cases, as stated in Section 2402 of the Tariff and Customs Code of the Philippines (TCCP):

Section 2402.  Review by Court of Tax Appeals. – The party aggrieved by a ruling of the Commissioner in any matter brought before him upon protest or by his action or ruling in any case of seizure may appeal to the Court of Tax Appeals, in the manner and within the period prescribed by law and regulations.

            Unless an appeal is made to the Court of Tax Appeals in the manner and within the             period prescribed by laws and regulations, the action or ruling of the Commissioner shall be         final and conclusive. [Emphasis supplied.]  (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)

            ââ 45. Administrative tax protest under the Tariff and Customs Code (TCCP).   A tax protest case, under the TCCP, involves a protest of the liquidation of import entries. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)

            46.       Liquidation, defined.  A liquidation is the final computation and ascertainment by the collector of the duties on imported merchandise, based on official reports as to the quantity, character, and value thereof, and the collector’s own finding as to the applicable rate of duty; it is akin to an assessment of internal revenue taxes under the National Internal Revenue Code where the tax liability of the taxpayer is definitely determined.  (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)

            ââ 47. The following letters of demand can not  be considered as a liquidation or an assessment of Shell’s import tax liabilities that can be the subject of an administrative tax protest proceeding before the Commissioner of Customs whose decision is appealable to the Court of Tax Appeals: 

            a.         the One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (the Center) November 3 letter, signed by the Secretary of Finance, informing it of the cancellation of the Tax Credit Certificates (TCCs);

            b.         the Commissioner of Customs’ November 19 letter requiring Shell to replace the amount equivalent to the amount of the cancelled TCCs used by Shell; and

            c.          the Commissioner of Customs’ collection letters, issued through Deputy Commissioner Atty. Valera, formally demanding the amount covered by the cancelled TCCs.

            None of these letters, however, can be considered as a liquidation or an assessment of Shell’s import tax liabilities that can be the subject of an administrative tax protest proceeding before the respondent whose decision is appealable to the CTA.  Shell’s import tax liabilities had long been computed and ascertained in the original assessments, and Shell paid these liabilities using the TCCs transferred to it as payment. 

            It is even an error to consider the letters as a “reassessment” because they refer to the same tax liabilities on the same importations covered by the original assessments.  The letters merely reissued the original assessments that were previously settled by Shell with the use of the TCCs.  However, on account of the cancellation of the TCCs, the tax liabilities of Shell under the original assessments were considered unpaid; hence, the letters and the actions for collection. 

            When Shell went to the CTA, the issues it raised in its petition were all related to the fact and efficacy of the payments made, specifically the genuineness of the TCCs; the absence of due process in the enforcement of the decision to cancel the TCCs; the facts surrounding the fraud in originally securing the TCCs; and the application of estoppel.  These are payment and collection issues, not tax protest issues within the CTA’s jurisdiction to rule upon. 

Shell never protested the original assessments of its tax liabilities and in fact settled them using the TCCs.  These original assessments, therefore, have become final, incontestable, and beyond any subsequent protest proceeding, administrative or judicial, to rule upon. 

To be very precise, Shell’s petition before the CTA principally questioned the validity of the cancellation of the TCCs – a decision that was made not by the Commissioner of Customs, but by the Center.  As the CTA has no jurisdiction over decisions of the Center, Shell’s remedy against the cancellation should have been a certiorari petition before the regular courts, not a tax protest case before the CTA.  Records do not show that Shell ever availed of this remedy. 

            Alternatively, as held in Shell v. Republic of the Philippines, G.R. No. 161953, March 6, 2008, 547 SCRA 701, the appropriate forum for Shell under the circumstances of this case should be at the collection cases before the RTC where Shell can put up the fact of its payment as a defense. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)

            ââ 48. A case becomes ripe for filing with the Regional Trial Court (RTC), as a collection matter after the finality of the Commissioner of Customs assessment.  (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009 citing Shell v. Republic of the Philippines, G.R. No. 161953, March 6, 2008, 547 SCRA 701)                                                   

            The assessment has long been final, and this recognition of finality removes all perceived hindrances, based on this case, to the continuation of the collection suits.                                                 

            A suit for the collection of internal revenue taxes, where the assessment has already become final and executory, the action to collect is akin to an action to enforce the judgment. No inquiry can be made therein as to the merits of the

In light of the conclusion that the present case does not involve a decision of the Commissioner of Customs on a matter brought to him as a tax protest, Atty. Valera’s lack of authority to issue the collection letters and to institute the collection suits is irrelevant.  For this same reason, the injunction against Atty. Valera cannot be invoked to enjoin the collection of unpaid taxes due from Shell. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, supra)

LOCAL GOVERNMENT TAXATION

          ââ 1.   The fundamental principles of local taxation are:

          a.            Uniformity;

          b.            Taxes, fees, charges and other impositions shall be equitable and based on ability to pay, for public purposes, not unjust, excessive, oppressive or confiscatory, not contrary to law, public policy, national economic policy or in restraint of trade;

          c.            The levy and collection shall not be let to any private person;

          d.            Inures solely to the local government unit levying the tax;

          e.            The progressivity principle must be observed.

          âââ 2.  A law which deprives local government units of their power to tax would be unconstitutional.  The constitution has delegated to local governments the power to levy taxes, fees and other charges.  This constitutional delegation may only be removed by a constitutional amendment.

          3.  Under the now prevailing Constitution, where there is neither a grant nor prohibition by statute, the taxing power of local governments must be deemed to exist although Congress may provide statutory limitations and guidelines in order to safeguard the viability and self-sufficiency of local government  units by directly granting them general and broad tax powers. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

          4.            The Local Government Code explicitly authorizes provinces and cities, notwithstanding “any exemption granted by any law or other special law” to impose a tax on businesses enjoying a franchise.  Indicative of the legislative intent to carry out the constitutional mandate of vesting broad tax powers to local government units, the Local Government Code has withdrawn tax exemptions or incentives theretofore enjoyed by certain entities. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

          5.            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 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.

          ââ 6.      Explain the concept of the “paradigm shift” in local government taxation. 

          SUGGESTED ANSWER:  “Paradigm shift” from exclusive Congressional power to direct grant of taxing power to local legislative bodies.  The power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution.  (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003) 

          7.   The fundamental law did not intend the direct grant to local government units to be absolute and  unconditional, the constitutional objective obviously is to ensure that, while local government units are being strengthened and made more autonomous, the legislature must still see to it that:

          a.            the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions;

          b.            each local government unit will have its fair share of available resources;

          c.            the resources of the national government will be unduly disturbed; and

          d.            local taxation will be fair, uniform and just. (Manila Electric Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)

          8.            Taxing power of the local government is limited.  The taxing power of local governments is limited in the sense that Congress can enact legislation granting tax exemptions.

          While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited.

          While the power to tax by local governments may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local taxation remains essentially the same,  “the power to tax is [still] primarily vested in the Congress.”  (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v.  Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No. 120082,  September 11, 1996, 261 SCRA 667, 680)

          9.            Further amplification by Bernas of the local government’s power to tax. “What is the effect of Section 5 on the fiscal position of municipal corporations?  Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation.  What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue.  They no longer have to wait for a statutory grant of these powers.  The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers.  Moreover, these limitations must be “consistent with the basic policy of local autonomy.”  The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations.  Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations.  It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v.  Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)

            10.       Reconciliation of the local government’s authority to tax and the Congressional general taxing power.  Congress has the inherent power to tax, which includes the power to grant tax exemptions.  On the other hand, the power of  local governments, such as provinces and cities for example Quezon City,  to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law, the City or a province may impose a franchise tax.  It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions. 

            The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and above the power of the local government’s delegated power to tax. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v.  Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)

            “Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy.  The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations.” [Ibid., referring to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao]

    ââ 11.    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: In Accordance with a taxing ordinance which should not 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. 

          ââ 12.    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.

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

      NOTE:  For the purpose of collecting the tax, the provincial or city treasurer or his duly authorized representative shall require from such professionals their current annual registration cards issued by competent authority before accepting payment of their professional tax for the current year.  The PRC shall likewise require the professionals presentation of proof of payment before registration of professionals or renewal of their licenses.   (last par., Art. 228, Rules and Regulations Implementing the Local Government Code of 1991)

          ââ 13.  Who are the professionals who, if they are in practice of their profession,  are subject to professional tax ?

          SUGGESTED ANSWER:  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]

          â 14.      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)

          â 15.      Authority of Local Government Units (LGUs) such as the City of Manila to impose business taxes.  Section 143 of the LGC, is the very source of the power of municipalities and cities to impose a local business tax, and to which any local business tax imposed by cities or municipalities such as the City of Manila must conform.  It is apparent from a perusal thereof that when a municipality or city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc. to a business tax under Section 143(h) of the same Code.  Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or percentage tax under the NIRC, and that are “not otherwise specified in preceding paragraphs.”  In the same way, businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC]. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845, August 4, 2009)

REAL PROPERTY TAXATION

          1.            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.

          NOTES AND COMMENTS:  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)

          2.            The reasonable market value is determined by the assessor in the form of a schedule of fair market values.

          The schedule is then enacted by the local sanggunian.

          3.            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 )

          NOTES AND COMMENTS:  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)

          Preparation of fair market values:

          a.            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

          b.  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)

          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)

          4.            Approaches in estimating the fair market value of real property for real property tax purposes ?

          a.            Sales Analysis Approach.  The sales price paid in actual market transactions is considered by taking into account valid sales data accumulated from among the Registrar of Deeds, notaries public, appraisers, brokers, dealers, bank officials, and various sources stated under the Local Government Code.

          b.            Income Capitalization Approach.  The value of an income-producing property is no more than the return derived from it.  An analysis of the income produced is necessary in order to estimate the sum which might be invested in the purchase of the property.

          c.            Reproduction cost approach is a formal approach used exclusively n appraising man-made improvements such as buildings and other structures, based on such data as materials and labor costs to reproduce a new replica of the improvement.

          The assessor uses any or all of these approaches in analyzing the data gathered to arrive at the estimated fair market value to be included in the ordinance containing the schedule of fair market values.  (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 citing Local Assessment Regulations No. 1-92)

          ââ 5.   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 INVALID  being contrary to public policy and for restraining trade 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)

           ââ 6.   Examples of personal property under the civil law that may be considered as real property for purposes of taxes.  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.            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.  (FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case)

          7.   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)

NOTES AND COMMENTS:  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 but 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.

         

           8.  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)

          9.            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)

          10.          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.

          11.          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)

          12.          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)

          ââ 13.    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 ay 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)

         

          14.    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 expenditure.

          15.  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.

          16.  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.

          17.  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.

          18.          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)

          NOTES AND COMMENTS:  In the above Allied Banking case, the Supreme Court provided for the starting date of computing the two-year prescriptive period within which to file the claim with the Treasurer, which is from finality of the Decision. The procedure to be followed is that shown below.

          19.          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, within two (2) years from the date the taxpayer is entitled to such reduction or readjustment,  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.

          âââ 20.             Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements that are actually, directly and exclusively used for religious, charitable or educational purposes are exempt from taxation.  [Sec.28 (3) Article VI, 1987 Constitution]

          âââ 21.             The constitutional tax exemptions refer only to real property that are actually, directly and exclusively used for religious, charitable or educational purposes, and that the only constitutionally recognized exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)

          The constitutional tax exemption covers property taxes only. What is exempted is not the institution itself, those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.  (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

          22.          The 1935 Constitution stated that the lands, buildings, and improvements are “used exclusively” but the present Constitution requires that the lands, buildings and improvements are “actually, directly and exclusively used.”  The change should not be ignored.  Reliance on past decisions would have sufficed were the words “actually” as well as :directly” are not added. There must be proof therefore of the actual and direct use to be exempt from taxation.  (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

          âââ 23.  The “actual, direct and exclusive use” of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized.  It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.

          If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purpose but is subject to taxation,.  The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without doing violence to the Constitution and the law. Solely is synonymous with exclusively.  (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

          24.  Portions of the land of a charitable institution, such as a hospital, leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from real property taxes.  On the other hand, the portion of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

          25.          As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government.  So long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.  (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

          âââ26.              Property that are exempt from the payment of real property tax under the Local Government Code.

          a.            Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted to a taxable person for a consideration or otherwise;

          b.            Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes;

          c.            Machineries and equipment, actually, directly and exclusively used by local water districts; and government owned and controlled corporations engaged in the supply and distribution of water and generation and transmission of electric power;

          d.            Real property owned by duly registered cooperatives;

          e.            Machinery and equipment used for pollution control and environmental protection.

        âââ27.    Manila International Airport Authority (MIAA) 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. City of Pasay, et al., G. R. No. 163072, April 2, 2009)

         

28.          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)

           

          âââ29.  The owner operator of a BOT and not the ultimate owner is subject to real property taxes.  Consistent with the BOT concept and as implemented, BPPC – the owner-manager-operator of the project – is the actual user of its machineries and equipment.  BPPC’s ownership and use of the machineries and equipment are actual, direct, and immediate, while NAPOCOR’s is contingent and, at this stage of the BOT Agreement, not sufficient to support its claim for tax exemption.  (National Power Corporation v. Central Board of Assessment Appeals, et al., G, R. No. 171470, January 30, 2009)

ADVANCE CONGRATULATIONS AND SEE YOU IN COURT

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