Quamto Tax 2018 - UST bar question and answer PDF

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University of Santo TomasFaculty of Civil LawTAXATIONLAWQuestions Asked MoreThan Once(QuAMTO 201 8)*QUAMTO is a compilation of past bar questions with answers assuggested by UPLC and other distinct luminaries in the academe, andupdated by the UST Academics Committee to fit for the 2018 Bar Exams.*Ba...

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University of Santo Tomas Faculty of Civil Law

TAXATION LAW Questions Asked More Than Once

(QuAMTO 2018) *QUAMTO is a compilation of past bar questions with answers as suggested by UPLC and other distinct luminaries in the academe, and updated by the UST Academics Committee to fit for the 2018 Bar Exams. *Bar questions are arranged per topic in accordance with the bar syllabus released by the Supreme Court and were selected based on their occurrence on past bar examinations from 1987 to 2017.

ACADEMICS COMMITTEE EDREA JEAN V. RAMIREZ

SECRETARY GENERAL

ARIANNA LAINE T. SARMIENTO MARIA ANGELICA J. HADLOC GENA MYRTLE P. TERRE MAICA A. PRUDENTE MARIELLA A. MARASIGAN

EXECUTIVE COMMITTEE

LAURISSE MARIE T. PERIANES JED NATHANIEL M. GONZALEZ

LAYOUT AND DESIGN

QUAMTO COMMITTEE MEMBERS MARHEN CASTRO MARIA ANGELICA HADLOC EDREA JEAN RAMIREZ ARIANNA LAINE SARMIENTO

ATTY. AL CONRAD B. ESPALDON ADVISER

QUAMTO (1987-2017) TAXATION QUAMTO

Corporation v. City of Cabanatuan, G.R. No. 149110, April 9, 2003 citing various cases) INHERENT LIMITATIONS

GENERAL PRINCIPLES OF TAXATION NATURE AND CHARACTERISTICS OF TAXATION (1996, 2003, 2005) Q: Describe the power of taxation. May a legislative body enact laws to raise revenues in the absence of a constitutional provision granting said body the power to tax? Explain. (2005 Bar) A:The power of taxation is inherent in the State being an attribute of sovereignty. As an incident of sovereignty, the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituents who are to pay it. (Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667) Being an inherent power, the legislature can enact laws to raise revenues even without the grant of said power in the Constitution. It must be noted that Constitutional provisions relating to the power of taxation do not operate as grants of the power of taxation to the Government, but instead merely constitute limitations upon a power which would otherwise be practically without limit. (Cooley, Constitutional Limitations, 1927 8th Ed., p. 787) Power of Taxation as distinguished from Police Power and Eminent Domain (1989, 1991, 2003) Q: The City of Manila passed an ordinance imposing an annual tax of P5,000.00 to be paid by an operator of a massage clinic and an annual fee of P50.00 to be paid by every attendant or helper in the said clinic. Is the imposition a tax or a license fee? (1989 Bar) A:The imposition on the operator of the massage clinic is both a tax and a license fee. The amount of P5,000.00 exceeds the cost of regulation, administration and control but it is likewise imposed to regulate a non-useful business in order to protect the health, safety and morals of the citizenry in general. The P50.00 impositions on the helpers or attendants are license fees sufficient only for regulation, administration and control. Theory and Basis of Taxation (1991, 2016) Q: Briefly explain the following doctrines: lifeblood doctrine xxx (2016 Bar) A: Lifeblood doctrine. Taxes are the lifeblood of the government [Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 614 SCRA 605 (2010)] for without taxes, the government can neither exist nor endure. (National Power

Q: Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (2009 Bar) A: The inherent limitations on the power to tax are: 1.

Taxation is for a public purpose– The proceeds of the tax must be used (a) for the support of the State or (b) for some recognized objective of the government or to directly promote the welfare of the community.

2.

Taxation is inherently legislative– Only the legislature has full discretion as to the persons, property, occupation or business to be taxed provided these are all within the State’s territorial jurisdiction. It can also finally determine the amount or rate of tax, the kind of tax to be imposed and the method of collection. (1 Cooley 176184)

3.

Taxation is territorial– Taxation may be exercised only within the territorial jurisdiction of the taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may determine the place of taxation” or “tax situs."

4.

Taxation is subject to international comity– This is a limitation which is founded on reciprocity designed to maintain a harmonious and productive relationships among the various states. Under international comity, a state must recognize the generally-accepted tenets of international law, among which are the principles of sovereign equality among states and of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken in that capacity.

Public Purpose (1989, 1991) Q: An ordinance of Quezon City on the operation of market stalls and the collection of market stall fees created a market committee “to formulate, recommend and adopt subject to the ratification of the SangguniangPanglungsod regulations in the operations of the market stalls.” It also entrusted the collection of the market stall fees to a private corporation. Does the entrusting of the collection of the market stall fees destroy the “public purpose” of the ordinance? (1989 Bar) A: Yes, because a portion of the fees collected would be diverted as fees to private

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TAXATIO TAXATION N LAW corporation. Entrusting of the collection of the market stall fees violates the limitation that local government units shall in no case let to any private person the collection of local taxes, fees, charges and other impositions. [Sec. 130 (c), R.A. No. 7160, The Local Government Code] As a result of this prohibition, public funds are therefore utilized for a private purpose, which is to pay the private corporation for its services.

A: The contention is not tenable. The exemption granted is in the nature of a unilateral tax exemption. Since the exemption given is spontaneous on the part of the legislature and no service or duty or other remunerative conditions have been imposed on the taxpayers receiving the exemption, it may be revoked at will by the legislature.[Manila Railroad Company v. Insular Collector of Customs, 12 PhiL 146 (1915)]

CONSTITUTIONAL LIMITATIONS Equality and Uniformity (1988, 2000, 2003, 2004)

Tax Exemption Granted to Non-Stock, NonProfit Educational Institutions (2004, 2017)

Q: RC is a law-abiding citizen who pays his real estate taxes promptly. Due to a series of typhoons and adverse economic conditions, an ordinance is passed by MM City granting a 50% discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the late payment.

Q: XYZ Colleges is a non-stock, non-profit educational institution run by the Archdiocese of BP City. It collected and received the following:

Arguing that the ordinance rewards delinquent taxpayers and discriminates against prompt ones, RC demands that he be refunded an amount equivalent to onehalf of the real taxes he paid. The municipal attorney rendered an opinion that RC cannot be reimbursed because the ordinance did not provide for such reimbursement. RC files suit to declare the ordinance void on the ground that it is a class legislation. Will his suit prosper? Explain your answer briefly. (2004 Bar) A: The suit will not prosper. The remission or condonation of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of taxes is a class by itself and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike. [Juan Luna Subdivision, Inc., v. Sarmiento, 91 Phil 371 (1952)]

Non Impairment of Obligations of Contracts (1997, 2004) Q: A law was passed granting tax exemption to certain industries and investments for a period of five years. But three years later, the law was repealed. With the repeal, the exemptions were considered revoked by the BIR, which assessed the investing companies for unpaid taxes effective on the date of the repeal of the law. NPC and KTR companies questioned the assessments on the ground that, having made their investments in full reliance with the period of exemption granted by the law, its repeal violated their constitutional right against the impairment of the obligations and contracts. Is the contention of the companies tenable or not? Reason briefly.

(a) Tuition fees (b) Dormitory Fees (c)Rentals from concessionaires

canteen

(d) Interest from money-market plcements of the tuition fees (e) Donation of a lot and building by school alumni Which of these abovecited income and donation would not be exempt from taxation? Explain briefly. (2004 Bar) A: The following are not exempt from taxation, viz: (c)xxx. Rental income is considered as unrelated to the scool operations; hence, taxable (DOF Order No. 137-87, Dec. 16, 1987) (d)xxx. The interest on the placement is taxable (DOF Order No. 137-87). If however, the said interest is used actually, directly and exclusively for educational purposes as proven by substantial evidence, the same will be exempt from taxation (CIR v. CA, 298 SCRA 83 [1998]). The other items of income which were all derived from school-related activities will be exempt from taxation in the hands of the recipient if used actually, directly and exclusively for educational purposes (Section 4 par. 3, Art. XIV, 1987 Constitution). The donation to a non-stock, non-profit educational institution will be exempt from the donor’s tax if used actually, directly and exclusively for educational purposes and provided, that, not more than 30% of the donation is used for administration purposes (Section 4, par. 4, Art XIV, 1987 Constitution, in relation to Section 101[A][3] NIRC). Q: San Juan University is a non-stock, nonprofit educational institution. It owns a piece of land in Caloocan City on which its three 2-storey school buildings stood. Two

UST BAR OPERATIONS

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QUAMTO (1987-2017) of the buildings are devoted to classrooms, laboratories, a canteen, a bookstore, and administrative offices. The third building is reserved as dormitory for student athletes who are granted scholarships for a given academic year.

tax, but as part of the purchase price. (Maceda v. Macaraig, Jr., 223 SCRA 217 [1993]) Examples of direct taxes are income tax, estate tax and donor’s tax. Examples of indirect taxes are value-added tax, percentage tax and excise tax on excisable articles.

In 2017, San Juan University earned income from tuition fees and from leasing a portion of its premises to various concessionaires of food, books, and school supplies. a. Can the City Treasurer of Caloocan City collect real property taxes on the land and building of San Juan University? Explain your answer. b. Is the income earned by San Juan University for the year 2017 subject to income tax? Explain your answer. (2017 BAR)

CONSTRUCTION AND INTERPRETATION OF TAX LAWS

A: a. Yes, but only on the leased portion. Article XIV, Section 4(3) of the 1987 Constitution provides that the assets of a non-stock, nonprofit educational institution shall be exempt from taxes and duties only if the same are used actually, directly, and exclusively for educational purposes. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. The leased portion of the building may be subject to real property tax since such lease is for commercial purposes, thereby, it removes the asset from the property tax exemption granted under the Constitution. (CIR v. De La Salle University, Inc., G.R. Nos. 196596, 198841, 198941, November 9, 2016) b. No, provided that the revenues are used actually, directly, and exclusively for educational purposes as provided under Article XIV, Section 4(3) of the 1987 Constitution. The requisites for availing the tax exemption under Article XIV, Section 4 (3) are as follows: (1) the taxpayer falls under the classification nonstock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes. Thus, so long as the requisites are met, the revenues may be exempt from tax. (CIR v. De La Salle University, Inc., G.R. Nos. 196596, 198841, 198941, November 9, 2016)

KINDS OF TAXES Direct and Indirect Taxes (1994, 2000, 2001, 2006) Q: Distinguish “direct taxes” from “indirect taxes." Give examples. (2006 Bar) A: Direct taxes are demanded from the very person who, as intended, should pay the tax which he cannot shift to another; while an indirect tax is demanded in the first instance from one person with the expectation that he can shift the burden to someone else, not as a

Tax Exemption and Exclusion (1996,2005, 2007) Q: Why are tax exemptions strictly construed against the taxpayer? (1996 Bar) A: Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and may almost be said to be odious to the law (Manila Electric Company vs. Vera, 67 SCRA351). The exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemptions, they being contrary to the life-blood theory which is the underlying basis for taxes. Q: An alien employee of the Asian Development Bank (ADB) who is retiring soon has offered to sell his car to you which he imported tax-free for his personal use. The privilege of exemption from tax is granted to qualified personal use under the ADB Charter which is recognized by the tax authorities. If you decide to purchase the car, is the sale subject to tax? Explain. (2005 Bar) A: Yes. The sale is subject to tax. Section 107 (B) of the NIRC provides that: "In the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importer thereof, who shall be liable for any internal revenue tax on such importation”. Tax exemptions are to be construed strictly and are not considered transferable in character. DOUBLE TAXATION (1996, 1997, 2004, 2015) Q: Differentiate between double taxation in the strict sense and in a broad sense and give an example of each. (2015 Bar) A: Double taxation in the strict sense pertains to the direct double taxation. This means that the taxpayer is taxed twice by the same taxing authority, within the same taxing jurisdiction, for the same property and same purpose. Example: Imposition of final withholding tax on cash dividend and requiring the taxpayer to declare this tax-paid income in his income tax returns.

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TAXATIO TAXATION N LAW On the other hand, double taxation in the broad sense pertains to indirect double taxation. This extends to all cases in which there is a burden of two or more impositions. It is the double taxation other than those covered by direct double taxation (CIR v.Solidbank Corp., 436 SCRA 416). Example: Subjecting the interest income of banks on their deposits with other banks to the 5% gross receipts tax (GRT) despite of the same income having been subjected to 20% final withholding tax (FWT), is only a case of indirect double taxation. The GRT is a tax on the privilege of engaging in business while the FWT is a tax on the privilege of earning income. Q: X, a lessor of a property, pays real estate tax on the premises, a real estate dealer’s tax based on rental receipts and income tax on the rentals. X claims that this is double taxation. (1996 Bar)

property for shares of stock, was secured from the BIR National Office and a Certificate Authorizing Registration was issued by the Revenue District Officer (RDO) where the property was located. Subsequently, she sold her entire stockholdings in MAS Corporation to EIP Corporation for P300 million. In view of the tax advice, Maria Suerte paid only the capital gains tax of P29,895,000 (P100,000x 5% plus P298,900,000 x 10%), instead of the corporate income tax of P104,650,000 (35% on P299 million gain from sale of real property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax evasion. Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to? Explain.(2008 Bar)

A: There is no double taxation. Double taxation means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, by the same taxing authority for the same purpose and with the same kind or character of tax. The real estate tax is a tax on property; the real estate dealer’s tax is a tax on the privilege to engage in business; while the income tax is a tax on the privilege to earn an income. These taxes are imposed by different taxing authorities and are essentially of different kind and character (Villanueva v. City of Iloilo, 26 SCRA 578).

A: The contention of the RDO is not tenable. Maria Suerte resorted to tax avoidance and not tax evasion. Tax avoidance is the use of legal means to reduce tax liability and it is the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes by means which the law permits. (Heng Tong Textiles Co., Inc. v. Commissioner). There is nothing illegal about transferring first the property to a corporation in a tax free exchange and later selling the shares obtained in the exchange at a lower tax than what could have been imposed if the property was sold directly.

ESCAPE FROM TAXATION (TAX AVOIDANCE V. TAX EVASION)

Q: Lucky V Corporation (Lucky) owns a 10storey building on a 2,000 square meter lot in the City of Makati. It sold the lot and building to Rainier for P80 million. One month after, Rainier sold the lot and building to Healthy Smoke Company (HSC) for P200 million, Lucky filed its annual return and declared its gain from the sale of the lot and building in the amount of P750, 000.00.

Tax avoidance and Tax Evasion (1989, 1996, 2000, 2005, 2008, 2014, 2016) Q: Distinguish tax evasion avoidance. (1996 Bar)

from

tax

A: Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other hand, is a tax saving device within the means sanctioned by law, hence legal. Q:Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of P1 million. Said property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. In October 2007, EIP Corporation, a real estate developer, expressed its desire to buy the Makati property at its fair market value of P300 million, payable as follows: (a) P60 million down payment; and (b) balance, payable equally in twenty four (24) monthly consecutive installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property for shares of stock of MAS Corporation. A BIR ruling, confirming the tax-free exchange of

An investigation conducted by the BIR revealed that two months prior to the sale of the properties to Rainier, Lucky received P40 million from HSC and not from Rainier. Said amount of P40 million was debited by HSC and reflected in its trial balance as “other inv. – Lucky Bldg.” The BIR concluded that there is tax evasion since the real buyer of ...