101 CHAPTER XXVI: JUDICIAL REMEDIES OF GOVERNMENT Q: When is an internal revenue tax considered delinquent? A: An internal revenue tax is considered delinquent when it is unpaid after the lapse of the last day prescribed by law for its payment. Likewise, it could also be considered as delinquent where an assessment for deficiency tax has become final and the taxpayer has not paid it within the period given in the notice of assessment. Q: Antonio Cruz was appointed by the Regional Trial Court as administrator in the testate proceedings for the settlement of the estate of his deceased father. On 12 February 1987 the Commissioner of Internal Revenue issued a deficiency estate tax assessment for the estate. The notice of deficiency assessment was received by the latter's office two (2) days later, the Administrator requested for a reconsideration of the assessment on the ground that the same is contrary to law and is not supported by sufficient evidence. He also requested for a period of fifteen (15) days within which to submit the estate's position paper. On 4 August 1988,not having received the promised position paper, the Commissioner filed with the Court a motion for allowance of claim and for an order of payment of estate taxes, praying therein that the administrator be required to pay the BIR the aforementioned deficiency tax. The administrator opposed the motion alleging that by reason of the pendency of his request for reconsideration the deficiency assessment has not become final and executory and, therefore, the absence of a decision on the disputed assessment is a bar against collection of taxes. He further argued that it is the Court of Tax Appeals, and not the Regional Trial Court, which has exclusive jurisdiction over the claim. Resolve the motion and issues raised. A: Evidently, the request for reconsideration referred to did not express or specify the grounds therefor. A request for reconsideration in the tenor stated in the problem is insufficient, not being substantiated,to stop the running of the 30-day period within which the assessment may be disputed (Dayrit v. Cruz,G.R. No.39919,September 26,1988).The failure of the taxpayer to submit the promised position paper within the said 30-day period had the effect of rendering the assessment final and executory.In addition,the pendency of a decision on a disputed assessment does not bar the collection of the taxes,and no injunction may be issued by any court (except by the Court of Tax Appeals as an incident to a timely petition for review).In the absence of a petition for review with the Court of Tax Appeals which may be brought by a taxpayer within 30 days from the receipts of the final decision of the Commissioner, the Court of Tax Appeals has no jurisdiction to take cognizance thereof (See Sec.11,R.A. 1125).Premises considered, the action taken by the Commissioner with the Regional Trial Court was appropriate and in accordance with law. The taxpayer's failure to dispute the assessment effectively by complying with the conditions laid down by the BIR, such as specifying under oath the grounds of his protest, paying one-half of the amount assessed and putting up a bond for the balance, provided a legal basis for the government to collect the taxpayer's liability by ordinary civil action (Republic v. Ledesma, G.R. No.L-18759,February 28,1967).
102 CHAPTER XXVII: CIVIL PENALTIES Q: Danilo, who is engaged in the trading business, entrusted to his accountant the preparation of his income tax return and the payment of the tax due. The accountant filed a falsified tax return by under-declaring the sales and overstating the expense deductions of Danilo. Is Danilo liable for the deficiency tax and the penalties thereon? What is the liability, if any, of the accountant? Discuss. A: Yes, Danilo is liable for the deficiency tax as well as for the deficiency interest. However, he is not liable for the fraud penalty because the accountant acted beyond the limits of his authority. A tax return which does not correctly reflect taxable income may only be false but not necessarily fraudulent, where it appears that the return was not prepared by the taxpayer himself but by his accountant. Accordingly, the 50% surcharge for fraud could not be imposed (Azanr v. CTA, 58 SCRA 719 [1974]). Q: Businessman Stephen Yang filed an income tax return for 1993 showing business net income of 350,000.00 Pesos on which he paid an income tax of 61,000.00 Pesos. After filing the return, he realised that he forgot to include an item of business income in 1993 for 50,000.00 Pesos. Being an honest taxpayer, he included this income in his return for 1994 and paid the corresponding income tax thereon. In the examination of his 1993 rerun, the BIR examiner found that Stephen Yang failed to report this item of 50,000.00 Pesos and assessed him a deficiency income tax on this item, plus 50% fraud surcharge. 1. Is the examiner correct? 2. If you were the lawyer of Stephen yang, what would you have advised your client before he included in his 1994 return the amount of 50,000.00 Pesos as 1993 income to avoid the fraud surcharge? 3. Considering that Stephen yang had already been assessed a deficiency income tax for 1993 for his failure to report the 50,000.00 Pesos income, what would you advise him to do to avoid the penalties for tax delinquency? 4. What would you advise Stephen to do with regard to the income tax he paid for the 50,000.00 Pesos in his 1994 return? In case your remedy falls, what is your other recourse? A: 1. The examiner is correct in assessing a deficiency income tax for table year 1993 but not in imposing the 50% fraud surcharge. The amount of all items of gross income must be included in gross income during the year in which received or realised (Sec. 38, NIRC). The 50% fraud surcharge attaches only if a false or fraudulent return is wilfully made by Mr. Yang (Sec. 248, NIRC). The fact that Mr. Yang included the income in his 1994 return belies any claim of wilfulness but is rather indicative of an honest mistake which was sought to be rectified by a subsequent act, that is the filing of the 1994 return. 2. Mr. Yang should have amended his 1993 income tax return to allow for the inclusion of the 50,000.00 income during the taxable period it was realised. 3. Mr. Yang should file a protest questioning the 50% surcharge and ask for abatement thereof 4. Mr. Yang should file a written claim for refund with the Commissioner of Internal revenue of the taxes paid on the 50,000.00 income included in 1994 within two years from payment pursuant to Section 204(3) of the Tax Code. Should this remedy fail in administrative level, a judicial claim for refund can be instituted before the expiration of the two-year period. Q: 1. What is a deficiency interest” for the purposes of the income tax? illustrate
103 2. What is a “delinquency interest” for purposes of the income tax? illustrate A: 1. Deficiency interest for purposes of the income tax is the interest due on any amount of tax due or instalment thereof which is not paid on or before the date prescribed for its payment computed at the rate of 20% per annum or the Manila reference rate, which is higher, from the date prescribed for its payment until it is fully paid. If for example after the audit of the books of XYZ Corp. for taxable year 1993 there was found to be due a deficiency income tax of 125,000.00 Pesos inclusive of the 25% surcharge imposed under Section 248 of the Tax Code, the interest will be computed on the 125,000.00 from April 15, 1994 up to its date of payment. 2. Delinquency interest is the interest of 20% or the Manila reference rate, whichever is higher, required to be paid in case of failure to pay: a. the amount of the tax due on any return required to be filed; or b. the amount of tax due for which return is required; or c. the deficiency tax or any surcharge or interest thereon, on the due date appearing in the notice and demand of the Commissioner of Internal Revenue. If in the above illustration the assessment notice was real eased on December 31, 1994 and the amount of deficiency tax, incisive of surcharge and deficiency interest, was computed up to January 30, 1995 which is the due date for payment per assessment notice, failure to pay on this latter date will render the tax delinquent and will require the payment of delinquency interest. The imposition of 1% monthly [now 20% annual] interest is but a just compensation to the state for the delay in paying the tax for the concomitant use by the taxpayer of funds that rightfully should be in the government’s hands (U.S. v. Goldstein, 189 F[2d] 752). The fact that the interest charged is made proportionate to the period of delay constitutes the best evidence that such interest is not penal but compensatory (Aguinaldo Industries Corporation v. Commissioner and CTA, L-29790, February 25,1982).
104 CHAPTER XXVIII: REMEDIES OF TAXPAYERS Q: Compare the taxpayers remedies under the national Internal Revenue Code and the Tariff and Customs Code. A: The taxpayers remedies under the National Internal Revenue Code may be categorised into remedies before payment and remedies after payment. The remedy before payment consists of administrative remedy which is the filing of protest within 30 days from receipt of assessment , and judicial remedy which is the appeal of the adverse decision of the Commissioner on the protest with the Court of Tax Appeals, thereafter to the Court of appeals and finally with the Supreme Court. The remedy after payment is availed of by paying the assessed tax within 30 days from receipt of assessment and the filing of a claim for refund or tax credit of these taxes on the ground that they are erroneously paid within two years from date of payment.if there is a denial of the claim, appeals of the CTA shall be made within 30 days from receipt of denial but within two years from date of payment. if the Commissioner fails to act on the claim for refund or tax credit and the two years period is about to expire, the taxpayer should consider the continuous inaction of the Commissioner as a denial and elevate the case to the CTA before the expiration of the two year period. Under the Tariff and Customs Code, taxpayer’s remedies arise only after payment of duties. The administrative remedies consist of filing a claim for refund which may take the form of abatement or drawback. The taxpayer can also file a protest within 15 days from payment if he disagrees with the ruling or decision of the Collector of Customs regarding the legality or correctness of the assessment of customs duties.if the decision of the Collector is adverse to the taxpayer, he can notify the Collector within 15 days from receipt of said decision of his desire to have his case reviewed by the Commissioner Government, is automatically elevated of the Commissioner, the same shall be automatically elevated to and finally reviewed by the secretary of Finance. Resort to judicial relief can be had by the taxpayer by appealing the decision of the Commissioner or of the Secretary of Finance (for cases subject to automatic review) within 30 days from the promulgation of the adverse decision to the CTA. Q: On March 10, 2010, Continental, Inc. received a preliminary assessment notice (PAN) dated March 1, 2010 issue by the Commissioner of Internal Revenue (CIR) for deficiency income tax for 2008.It failed to protest the PAN. The CIR thereupon issued final assessment notice (FAN) with letter of demand on April 30, 2010. The FAN was received by the corporation on May 10, 2010, following which or on May 25 2010,it filed its protest against it. The CIR denied the protest on the ground that the assessment had already become final and executory, the corporation having failed to protest the PAN. Is the CIR correct? Explain. A: No. Failure to file a Reply of PAN makes the taxpayer in default and authorises the revenue official to issue the FAN. However, no liability for additional or deficiency tax arises from such failure. Indeed, Revenue Regulation No. 12-99 makes the filing of such Reply to PAN merely directory, i.e the taxpayer may or may not reply to the PAN is for the CIR to issue a FAN, since the corporation timely filed the protest against the FAN, it cannot be said that the final assessment notice had already become final and executory.
105 CHAPTER XXIX: ASSESMENT AND PROTEST Q: Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels. A: The legal remedies of an aggrieved taxpayer under the tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and refund. a. After receipt of the Pre- Assessment Notice (PAN), he must within 15 days from receipt explain why no additional taxes should be assessed against him. b. if the Commission of Internal revenue issues an assessment notice, the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within 30 days from receipt of the notice of assessment (4th par, Sec. 228, NIRC). Q: After examining the book and records of EDS Corporation, the 2004 final assessment notice, showing basic tax of 1,000,000 Pesos, deficiency interest of 400,000 Pesos, and due for payment of April 20, 2007, but without the demand letter, was mailed and released by the BIR on April 15, 2007. The registered letter containing the tax assessment, was received by the EDS Corporation on April 25, 2007. a. What is an assessment notice? What are the requisites of a valid assessment? Explain. b. As tax lawyer of EDS Corporation, what legal defense(s) would you raise against the assessment? Explain. A: a. The assessment notice, without the demand letter, is void. Section 228 of the Tax Code expressly provides that “the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.” Since the assessment notice merely contains the basic tax, interest and due date for payment, it does not comply with the requirements of the law that it must state the factual and legal bases; hence, it is void. b. The demand letter is important not only because in such letter does the BIR makes a demand for the payment of the deficiency tax but more importantly, because of the findings of the facts and computations of the deficiency taxes by the revenue officers as we'll as the legal basis for such assessment are adequately explained therein. Q: What are the requisites before a taxpayer’s request for reinvestigation may be granted by the BIR? Discuss briefly. A: A request for reinvestigation refers to a plea for re-evaluation of an assessment on the basis of newly discovered evidence or additional evidence the taxpayer intends to present in the re-investigation. Q: The BIR issued in 2010 a final assessment notice and demand letter against X Corporation covering deficiency income tax deficiency for the year 2008 in the amount of PHP10 Million. X Corporation earlier requested the advice of a lawyer on whether or not it should file a request for reconsideration or a request for reinvestigation. The lawyer said it does not matter whether the protest filed against the assessment is a request for reconsideration or a request for reinvestigation, because it has the same consequences or implications. (a) What are the differences between a request for reconsideration and a request for reinvestigation? (b) Do you agree with the advice of the lawyer? A: a. Request for reconsideration is a plea for evaluation of the assessment on the basis of existing records without the need of presentation of additional evidence (Rev. Regs. No. 12- 99). It does not suspend the period to collect the deficiency tax (Sec. 223, NIRC). The 180-
106 day period within which the BIR shall act on the protest starts from the filing of the request for reconsideration (Sec. 228, NIRC). On the other hand, a request for reinvestigation is a plea for re-evaluation of the assessment on the basis of additional or newly discovered evidence which are to be introduced for examination for the first time. It suspends the running of the prescriptive period to collect. The 180-year period within which the BIR shall act on the protest starts only from the date of submission of the additional or newly discovered evidence (Sec. 228, NIRC; RCBC v. CIR, cited in Royal Bank of Scotland [Phil.] v. CIR, CTA EB Case No. 446, October 23, 2009) b. No, in view of the aforesaid differences between the request for reconsideration and the request for reinvestigation. Q: A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The taxpayer protested on July 31, 2000. The protest was initially given due course, but was eventually denied by the CIR in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the CTA, but the CTA dismissed the same. (a) is the CTA correct in dismissing the petition for review (b) Assume that the CTA’s decision dismissing the petition for review has become final. May the CIR legally enforce collection of the delinquent tax? A: a. Yes. The CTA is correct in dismissing the petition for review because the assessment had already become final and executory by the time the protest was filed on July 31, 2000. The fact that the petition for review was filed by the taxpayer before the CTA within 30 days from the date of receipt of the CIR’s final decision in the disputed assessment, this is not, however, relevant in this case because the taxpayer filed its protest against the assessment after the 30-day period mandated by law. b. Since the assessment had already become final and executory for failure of the taxpayer to file a timely protest against the assessment, particularly where the decision of the CTA also becomes final executory, the CIR can legally enforce the collection of the delinquent tax by administrative remedies through the issuance of warrants of distraints/garnishments and levy and/or by judicial remedies through the filing of civil actions or criminal actions within the time prescribed by law. Q: In the examination conducted by the revenue officials against the corporation taxpayer in 2010, the BIR issued a final assessment notice and demand letter which states: “It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency. This is our final decision based on investigation. If you disagree, you may appeal this decision within 30 days from receipt hereof, otherwise said deficiency tax assessment shall become final, executory and demandable.” The assessment was immediately appealed by the taxpayer to the court of Tax appeals, without filing its protest against the assessment and without a denial thereof by the BIR. If you were the judge, would you deny the petition for review filed by the taxpayer and consider the case as prematurely filed? A: No, the petition for review should not be denied. The case is an exception to the rule on exhaustion of administrative remedies. The BIR is estopped from claiming that the filing of the petition for review is premature because the taxpayer failed to exhaust all administrative remedies. The statement of the BIR in its final assessment notice and demand letter led the taxpayer to conclude that only a final judgment ruling in his favor would be accepted by the BIR. The taxpayer cannot be blamed for not filing a protest against the assessment since the language used and the tenor of the demand letter indicate that it is the final decision of the BIR on the matter. The CIR should indicate, in a clear and unequivocal language, whether his action on a disputed assessment constitutes his final determination thereon in order for the taxpayer concerned to determine when his or her
107 right to appeal to the tax court accrues. Although there was no direct reference for the taxpayer to bring the matter directly to the CTA, it cannot be denied that the word “appeal” under prevailing tax laws refers to the filing of a petition for review with the CTA (Allied Bank Corporation v. CIR, G.R. No. 175097, February 5, 2010). Q: On June 1, 2003, Global Bank received a final notice of assessment from the BIR for deficiency documentary stamp tax in the amount of 55 million. On June 20, 2003, Global Bank filed a request for reconsideration with the Commissioner of Internal Revenue. The Commissioner denied the request for reconsideration only on May 30, 2006, at the same time serving on Global Bank a warrant of distraint to collect the deficiency tax. If you were the counsel, what will be your advice to the bank? Explain. A: The denial of the request for reconsideration is a final decision of the Commissioner of Internal Revenue. I would advise Global Bank to appeal the Commissioner’s denial to the Court of Tax Appeals (CTA) within 30 days from receipt, if the remedy of appeal is still available, I will further advise the bank to file a motion for injunction with the CTA to enjoin the Commissioner from enforcing the assessment pending resolution of the appeal. While n appeal to the CTA will not suspend the payment, levy, distraint and/or sale of any property of the taxpayer for the satisfaction of its tax liability, the CTA is authorized to give injunctive relief if the enforcement would jeopardize the interest of the taxpayer, as in this case where the assessment has not become final. Q: A taxpayer received a tax deficiency assessment of 51.2 million from the BIR demanding payment within 180 days; otherwise, it would collect through summary remedies. The taxpayer requested for a reconsideration stating the grounds therefor. Instead of resolving the request for reconsideration, the BIR sent a Final Notice Before Seizure to the taxpayer. May this action of the Commissioner of Internal Revenue be deemed a denial of the request for reconsideration of the taxpayer to entitle him to appeal to the CTA? Decide with reasons. A: Yes. The action of the CIR is deemed a denial of the request for reconsideration of the taxpayer, thus entitling him to appeal to the CTA. The Notice was the only response received by the taxpayer and its content and tenor supports the theory that it was the BIR final act regarding the request for reconsideration. The very title of the Notice indicated that it was a “Final Notice Before Seizure” which means that the taxpayer’s properties will be subjected to seizure to enforce the deficiency assessment. Thus, in one decided case, the Supreme Court ruled that the Final Notice Before Seizure is a final decision of the Commissioner on the disputed assessment (CIR v Isabela Cultural Corp., 361 SCRA 71 [2001]). Q: RR disputed a deficiency tax assessment and upon receipt of an adverse decision by the Commissioner of Internal revenue, filed an appeal with the Court of Tax Appeals. While the appeal is pending, the BIR served a warrant of levy on the real properties of RR to enforce the collection of the disputed tax. Granting arguendo that the BIR can legally levy on the properties, what could RR do to stop the process? Explain briefly. A: RR should file a motion for injunction with the CTA to stop the administrative collection process. An appeal to the CTA shall not suspend the enforcement of the tax liability, unless a motion to that effect shall have been presented in court and granted by it on the basis that such collection will jeopardize the interest of the taxpayer or the Government (Pirovano v. CIR, 14 SCRA 832 [1965]). The CTA is empowered to suspend the collection of internal revenue taxes and customs duties in cases pending appeal only when: (1) in the opinion of the court the
108 collection by the BIR will jeopardize the interest of the government and/or the taxpayer; and (2) the taxpayer is willing to deposit the amount being collected or to file a surety bond for not more than double the amount of the tax to be fixed by the court (Sec. 11, R.A. 1125). Q: On March 15, 2000, the BIR issued a deficiency income tax assessment for the taxable year 1997 against the Valera Group of Companies (Valera) in the amount of P10 million. Counsel for Valera protested the assessment and requested a reinvestigation of the case. During the investigation, it was shown that Valera had been transferring its properties to other persons. As no additional evidence to dispute the assessment had been presented, the BIR issued on June 16, 2000 warrants of distraint and levy on the properties and ordered the filing of an action in the RTC for the collection of the tax, Counsel for Valera filed an injunctive suit in the RTC to compel the BIR to hold the collection of the tax in abeyance until the decision on the protest was rendered. A. Can the BIR file the civil action for collection, pending decision on the administrative protest? Explain. B. As counsel for Valera, what action would you take in order to protect the interest of your client? Explain your answer. A: A. Yes, because there is no prohibition for this procedure considering that the filing of the civil action for collection during the pendency of an administrative protest constitutes the final decision of the Commissioner on the protest (CIR v. Union Shipping Corp., 85 SCRA 548 [1990]). B. I will wait for the filing of the civil action for collection and consider the same as an appealable decision. I will not file an injunctive suit because it is not an available remedy. I would then appeal the case to the Court of Appeals and move for the dismissal of the collection case with the RTC. Once the appeal to the CTA is filed on time the CTA has exclusive jurisdiction over the case. Hence, the collection case in the RTC should be dismissed (Yabes v. Flojo, 115 SCRA 278 [1982]). Q: CFB Corporation, a domestic corporation engaged in food processing and other allied activities, received a letter from the BIR assessing it delinquency income taxes. CFB filed a letter of protest. One month after, a warrant of distraint and levy was served on CFB Corporation. If you were the lawyer engaged by CFB Corporation to contest the assessment made by the BIR, what steps will you take for your client? A: I shall immediately file a motion for reconsideration of the issuance of the warrant of distraint and levy and seek from the BIR Commissioner a denial of the protest “in clear and unequivocal language.” This is so because the issuance of a warrant of distraint and levy is not considered as a denial by the BIR of the protest filed by CFB Corporation (CIR v Union Shipping Corp., 185 SCRA 547). Within 30 days from receipt of such denial “in clear and unequivocal language,” I shall then file a petition for review with the CTA. Q: Spanflex Intl, Inc. received a notice of assessment from the BIR. It seasonably filed a protest with all the necessary supporting documents, but the BIR failed to act on the protest. Thirty days from the lapse of 180 days from filing the protest, Spanflex still has not elevated the matter to the CTA. What remedy, if any, can Spanflex take? A: Spanflex may wait for the final decision on the disputed assessment of the BIR and appeal it to the CTA within 30 days from receipt of such decision.
109 CHAPTER XXX: PRESCRIPTION Q: Mia, a compensation income earner, filed her income tax return for the year 2007 on March 30, 2008. On May 20, 2011, Mia received an assessment notice and letter of demand covering the year 2007, but the postmark on the envelope shows April 10, 2011. Her return is not a false or fraudulent return. Can she raise the defense of prescription? A: No. the 3-year prescriptive period started to run only on April 15, 2008 (and not on March 30, 2008). Internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return (Sec. 203, NIRC). Accordingly, the period to assess the deficiency tax for 2007 has not yet expired on April 10, 2011. Q: DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Every December 15 of the year, DEF Corporation paid annual royalties to DEF, Inc. for the use of the latter’s software, for which the former, as withholding agent of the government, withheld and remitted to the BIR the 15% final tax based on the gross royalty payments. The withholding tax return is filed and the tax remitted to the BIR on January 10 of the following year. On April 10, 2007, DEF Corporation filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes covering the years 2004 and 2005. The following day, DEF Corporation filed a petition for review with the CTA involving the tax credit claim for 2004 and 2005. a. As a BIR lawyer handling the case, would you raise the defense of prescription in your Answer to the claim for tax credit? Explain. b. Can the BIR lawyer raise the defense that DEF Corporation is not the proper party to file such claim for tax credit? Explain. A: a. No credit or refund of taxes shall be allowed, unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax. (Sec. 204, NIRC). No suit or proceeding shall be maintained in any court for the recovery of any tax hereafter alleged to have been erroneously or illegally assessed or collected, until a claim for refund or credit has been duly filed with the Commissioner. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax, regardless of any supervening cause that may arise after the payment (Sec. 229, NIRC). Based on the foregoing, the BIR lawyer can raise the defense of prescription for the year 2004, but not for 2005. Since the withholding tax return for 2004 was filed on January 10, 2005, and considering that the claim for refund or credit was filed only on April 10, 2007, more than two years have elapsed between the date of payment and the date of filing the written claim for refund or credit. b. The proper person to claim refund or tax credit is the person on whom the tax is imposed by the statute. In one case, the Supreme Court ruled that the BIR should not be allowed to defeat an otherwise valid claim for refund by raising the question of the withholding agent’s alleged incapacity to file the claim for refund for the first time on appeal. The Government must follow the same rules of procedure which bind private parties (Commissioner v Proctor & Gamble PMC, 204 SCRA 377). Q: Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been adopted on this score by: (a)The National Internal Revenue Code (b)The Tariff and Customs Code; and (c)The Local Government Code.
110 A: The rules that have been adopted on prescription are as follows: (a) National Internal Revenue Code—The Statute of Limitation for assessment of tax if a return is filed within three (3) years from the last day prescribed by law for the filing of the return, or if filed after the last day, within three years from the date of the actual filing. If no return is filed or the return filed is false or fraudulent, the period to assess is within ten years from discovery of the omission, fraud or falsity. The period to collect the tax is within three years from date of assessment. In the case, however, of omission to file or if the return filed is false or fraudulent, the period to collect is within ten years from discovery without need of assessment. (b) Tariff and Customs Code—It does not express any general Statute of Limitation. It provided, however, that “when articles have entered and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of one (1) year, from the date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of import entry was merely tentative” (Sec. 1603, TCC). (c) Local Government Code—Local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. In case of fraud or intent to evade the payment of taxes, fees or charges, the same may be assessed within ten years from discovery of the fraud or intent to evade payment. They shall also be collected either by administrative or judicial action within five (5) years from date of assessment (Sec. 194, LGC). Q: the Commissioner of Internal Revenue issued an assessment for deficiency income tax for taxable year 2000 last July 31, 2006 in the amount of P10 million, inclusive of surcharge and interests. If the delinquent taxpayer is your client, what steps will you take? What is your defense? A: Since my client has already lost the right to protest (the assessment having been issued on July 31, 2006, and that he is already categorized as a delinquent taxpayer), I will advise him to wait for a collection action to be instituted by the Commissioner. Once collection is pursued, I will file a petition for review with the CTA to question the validity of the Commissioner’s action. My defense would be prescription. Since the assessment was issued beyond the prescriptive period to assess, the assessment is invalid and any action to collect an invalid assessment is not warrant (Phil. Journalists, Inc. v. CIR, 447 SCRA 214 [2004]). Q: Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manage their business, filed a joint income tax return for 1997 on March 15, 1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the sum of P250,000 inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19, 2001 warrants of distraint and levy to enforce collection of the tax. If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary remedies of warrants of distraint and levy? Explain your answer. A: I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tax returns when the said return is filed on time (Sec. 203, NIRC). The last day for filing the 1997 income tax return is April 15, 1998. Since the assessment was issued only on April 20, 2001, the BIR’s right to assess has already prescribed.
111 Q: Mr. Castro inherited from his father, who died on June 10, 1994, several pieces of real property in Metro Manila. The estate tax return was filed and the estate tax due in the amount of P250,000.00 was paid on December 6, 1994. The Tax Fraud Division of the BIR investigated the case on the basis of confidential information given by Mr. Santos on January 6, 1998 that the return filed by Mr. Castro was fraudulent and that he failed to declare all properties left by his father with intent to evade payment of the correct tax. As a result, a deficiency estate tax assessment for P1,250,000.00, inclusive of 50% surcharge for fraud, interest and penalty, was issued against him on January 10, 2001. Mr. Castro protested the assessment, on the ground of prescription. Decide Mr. Castro’s protest. A: The protest should be resolved against Mr. Castro. What was filed is a fraudulent return making the prescriptive period for assessment 10 years from discovery of the fraud (Sec. 222, NIRC). Accordingly, the assessment was issued within the prescriptive period to make an assessment based on a fraudulent return. Q: On September 19, 1973, the BIR sent a notice of assessment to X to pay P300,000.00 as forest charges for the years 1970-1973. X made a partial payment of P100,000.00 on September 28, 1973. X died in November 1977. On July 29, 1979, the BIR filed in the Testate Estate Proceedings of X a claim for P200,000.00, the unpaid forest charges left by X. The administrator of the estate opposed the claim on the ground of prescription. Decide. A: Where the assessment was made, the tax may be collected within five (5) years (now three [3] years) from the date of assessment (Collector v. Pineda, 2 SCRA 401). In the case at bar, X, on the basis of the notice of assessment, voluntarily made partial payment to the BiR in the amount of P100,000.00. However, it took the BIR almost more than five (5) years to take the necessary legal action to collect the remaining amount of taxes due. This is clearly beyond the five (5) (now three [3] year) period for the collection of taxes. Hence, the claim filed by the BIR against the Estate of X for the payment of P200,000.00 has prescribed. (NOTE: Under R.A. 8424 [1998], the period to collect an assessed tax is five years from the date of the assessment.) Q: A Co., a Philippine Corporation, filed its 1995 income Tax Return (ITR) on April 15, 1996 showing a net loss. On Nov. 10, 1996, it amended its 1995 ITR to show more losses. After a tax investigation, the BIR disallowed certain deductions claimed by A Co., putting A co. in a net income position. As a result, on august 5, 1999, the BIR issued a deficiency income assessment against A Co. A Co. protested the assessment on the ground that it has prescribed. Decide. A: The right of the BIR to assess the tax has not prescribed. The rule is that internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return (Sec. 203, NIRC). However, if the return originally filed is amended substantially, the counting of the three-year period starts from the date the amended return was filed (CIR v Phoenix Assurance Co., 14 SCRA 52). There is a substantial amendment in this case because a new return was filed declaring more losses, which can only be done either (1) in reducing gross income, or (2) in increasing the items of deductions claimed. Q: (1)Distinguish a false return from a fraudulent return. (2)Explain the extent of the authority of the Commissioner of internal Revenue to compromise and abate taxes. A:
112 (1) The distinction between a false return and a fraudulent return is that the first merely implies a deviation from the truth or fact whether intentional or not, whereas the second is intentional and deceitful with the sole aim of evading the payment of the correct tax due. (2) The authority of the Commissioner to compromise encompasses both civil and criminal liabilities of the taxpayer. The civil compromise is allowed only in cases (a) where the tax assessment is of doubtful validity, or (b) when the financial position of the taxpayer demonstrates a clear inability to pay the tax. The compromise of the tax liability is possible at any stage of litigation and the amount of compromise is left to the discretion of the Commissioner, except with respect to final assessments issued against large taxpayers wherein the Commissioner cannot compromise for less than 50%. Any compromise involving large taxpayers lower than 50% shall be subject to the approval of the Secretary of Finance. [NOTE: this requirement had been deleted in R.A. 8424.] All criminal violations except those involving fraud, can be compromised by the Commissioner but only prior to the filing of the information with the Court. Q: What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a 50% surcharge on the deficiency tax due from a taxpayer? Explain. A:There is a prima facie evidence of false or fraudulent return when the taxpayer substantially under-declared his taxable sales, receipts or income, or substantially overstated his deductions. The taxpayer’s failure to report sales, receipts or income in an amount exceeding 30% of that declared per return, and a claim of deduction in an amount exceeding 30% of actual deduction shall render the taxpayer liable for substantial underdeclaration and over-declaration, respectively, and will justify the imposition of the 50% surcharge on the deficiency tax due from the taxpayer (Sec. 248, NIRC). Q: What constitutes prima facie evidence of a false or fraudulent return? A: There is prima facie evidence of a false or fraudulent return when the taxpayer has willfully and knowingly filed it with the intent to evade a part or all of the tax legally due from him (Ungab v. Cusi, 97 SCRA 877). There must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake, which is not culpable in respect of its value, would not constitute a false return (Words and Phrases, Vol. 16, page 173). Q: On August 5, 1997, Adamson co., Inc. (Adamson) filed a request for reconsideration of the deficiency withholding tax assessment on July 10, 1997, covering the taxable year 1994. After administrative hearings, the original assessment of P150,000.00 was reduced to P75,000.oo and a modified assessment was thereafter issued on August 5, 1999. Despite repeated demands, Adamson failed and refused to pay the modified assessment. Consequently, the BIR brought an action for collection in the RTC on September 15, 2000. Adamson moved to dismiss the action on the ground that the government’s right to collect the tax by judicial action has prescribed. Decide the case. A: The right of the Government to collect by judicial action has not prescribed. The filing of the request for reconsideration suspended the running of the prescriptive period and commenced to run again when a decision on the protest was made on August 5, 1999. It must be noted that in all cases covered by an assessment, the period to collect shall be five (5) years from the date of the assessment but this period is suspended the filing of a request for reconsideration which was acted upon by the Commissioner (Commissioner v. Wyeth Suaco Laboratories, 202 SCRA 125 [1991]).
113 Q: Mr. Reyes, a Filipino citizen engaged in the real estate business, filed his 1994 income tax return on March 20, 1995. On December 15, 1995, he left the Philippines as an immigrant to join his family in Canada. After the investigation of said return, the BIR issued a notice of deficiency of income tax assessment on April 15, 1998. Mr. Reyes returned to the Philippines as a balikbayan on December 8, 1998. Finding his name to be in the list of delinquent taxpayers, he filed a protest against the assessment on the ground that he did not receive the notice of assessment and that the assessment had prescribed. Will the protest prosper/ Explain. A: No. Prescription has not set in because the period of limitations for the BIR to issue an assessment was suspended during the time that Mr. Reyes was out of the Philippines or from the period December 15, 1995 up to December 8, 1998 (Sec. 223 in relation to Sec. 203, NIRC).
114 CHAPTER XXXI: TAX CREDIT OR REFUND Q:Congress enacts a law granting grade school and high school students a 10%discount on all school-prescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the discount as a tax credit. 1. If in taxable year a bookstore has no tax due on which to enjoy the tax credit, can the bookstore claim from the BIR a tax refund in lieu of tax credit? Explain 2. Can the BIR require the bookstore to deduct the amount of the discount from their gross income? Explain. 3. If a bookstore closes its business due to losses without being able to recoup the discount, can it claim reimbursement of the discount from the government on the ground that without such reimbursement, the law constitutes taking of private property for public use without just compensation? Explain. A: 1. No, the law is clear that bookstores can only claim the discount as a tax credit. The term “tax credit” connotes that the amount, when claimed, shall only be treated as a reduction from any tax liability, plain and simple. There is nothing in the law that grants a refund when the bookstore has no tax liability against which the tax credit can be used. (CIR v Central Luzon Drug Corp., 456 SCRA 414 [2005]). 2. No, tax credit which reduces the tax liability, is different from a tax deduction, which merely reduces the income to arrive at the tax base. Since the law allowed the bookstores to claim in the full discount as a tax credit, the BIR is not allowed to expand or contract the legislative mandate (CIR v Central Luzon Drug Corp., ibid.). 3. No, the bookstore cannot claim reimbursement The tax credit privilege given to it is the compensation for the subsidy taken by the government for the benefit of a class of taxpayers to which the students belong. However, the privilege granted is limited only to the reduction of a present or future tax liability, because by its nature, it is the existence of a lack of a tax liability that determines whether the discount can be used as a tax credit. Accordingly, if the business continues to operate at a loss and no other taxes are due, compelling the business to close shop, the credit can never be applied and will be lost altogether. (CIR v Central Luzon Drug Corp., ibid.). Q:On April 6, 2012, the corporation filed its annual corporate income tax return for 2011, showing an overpayment of income tax of P1 million, which is to be carried over to the succeeding year(s). On May 15, 2012, the corporate sought advice from you and said that it contemplates to files an amendment return for 2011, which shows that instead of carryover of the excess income tax payment, the same shall be considered as a claim for tax refund and the small box shown as “refund” in the return will be filled up. Within the year, the corporation will file the formal request for refund for the excess payment. (a) Will you recommend to the corporation such a course of action and justify that the amendment return is the latest official act of the corporation as to how it may treat such overpayment of tax or should you consider the option granted to taxpayers as irrevocable, once previously exercised by it? (b) Should the petition for review filed with the CTA on the basis of the amended tax return be denied by the BIR and CTA, could the corporation still carry over such excess payment of income tax in the succeeding
115 years, considering that there is no prescriptive period provided for in the income tax law with respect to carry over of excess income tax payments? A: a. No. Once the option to carry over and apply the excess quarterly income tax against the income tax due for the taxable quarters of the succeeding taxable years has been made, such options shall be considered irrevocable for the taxable year and no application for tax refund or issuance of tax credit certificate shall be allowed therefor (Sec. 76, NIRC). b. Yes. The carryover of excess income tax payments is no longer limited to the succeeding taxable year. Unutilized excess income tax payments may now be carried over to the succeeding taxable years until fully utilized. In addition, the option to carry over excess income tax payments is now irrevocable. Hence, unutilized excess income tax payments may no longer be refunded. (Belle Corporation v CIR, G.R. No. 181298, January 10, 2011; CIR v P.L. Management Int’l Phils, Inc., G.R. No. 160949. April 4, 2011). Q: a. State the conditions required by the Tax Code before the Commissioner of Internal Revenue could authorize the refund or credit of taxes erroneously or illegally received. b. Does a withholding agent have the right to file an application for tax refund? Explain. A: a. The conditions are: (1) a written claim for refund is filed by the taxpayer with the Commissioner of Internal Revenue (Sec. 24, NIRC); (2) the claim for refund must be a categorical demand for reimbursement (Bermejo v Collector of Internal Revenue, 87 Phil 96 [1950]) ; (3) the claim for refund or tax credit must be filed with the Commissioner, or the suit or proceeding therefor must be commenced in court within two years from date of payment of the tax or penalty, regardless of any supervening cause, (Sec. 29, NIRC). b. Yes. A withholding agent should be allowed to claim for tax refund, because under the law, said agent is the one who is held liable for any violation of the withholding tax law should such violation occur (Commissioner v Wander Philippines, 160 SCRA 570 [1988]). Furthermore, since the withholding agent is made personally liable to deduct and withhold any tax under Section 53(c) of the Tax Code, it is imperative that he be considered the taxpayer for all legal intents and purposes. Thus, by any reasonable standard, such person should be regarded as a party-in-interest to bring suit for refund of taxes (Commissioner v Procter & Gamble PMC and CTA, 204 SCRA 377 [1991]). Q:On March 12, 2001, REN paid his taxes. Ten months later, he realized that he had overpaid and so he immediately filed a claim for refund with the Commissioner of Internal Revenue. On February 27, 2003, he received the decision of the Commissioner, denying REN’s claim for refund. On March 24, 2003, REN filed an appeal with the CTA. Was his appeal on time or not? Reason. A:The appeal was not filed on time. The two-year period of limitation for filing a claim for refund is not only a limitation for pursuing the claim at the administrative level but also a limitation for appealing the case to the CTA. The law provides that “no suit or proceeding shall be filed after the expiration of two years from the date of payment of the tax or
116 penalty, regardless of any supervening cause that may arise after payment” (Sec. 29, NIRC). Since the appeal was only made on March 24, 2003, more than two years had already elapsed from the time taxes were paid on March 12, 2003. Accordingly, REN had lost his judicial remedy because of prescription. Q:Apple Computer Corp. (ACC) is a foreign corporation doing business in the Philippines through a local branch located at Makati, Metro Manila. In 1985, the local branch applied with the Central Bank for authority to remit to ACC branch profits amounting to P8,000.00. After paying the 15% branch remittance tax of P1,200,000.00, the branch office remitted to ACC the balance of P6,800,000.00. In January 1986, the branch office was advised by its legal counsel that it overpaid the branch remittance tax since the basis of the computation thereof should be the amount actually remitted and not the amount applied for. Accordingly, the branch office applied for a refund in the amount of P180,000.00. If you were the Commissioner of Internal Revenue, would you grant the claim for refund? A:If I were the Commissioner of Internal Revenue, I would allow the claim for refund. The remittance tax should be computed on the amount actually remitted (Marubeni Corporation v Commissioner, G.R. No. 76573, September 14, 1989). In the refund of taxes, the claim therefor can be filed within two years from the time of the payment so long as the tax payment was made before an assessment by the Commissioner has become final (Sec. 230, NIRC). Q: XCEL Corporation filed its quarterly income tax return for the first quarter of 1985 and paid an income tax of P500,000.00 on May 15, 1985. In the subsequent quarters, SCEL suffered losses so that on April 15, 1986, it declared a net loss of P1,000,000.00 in its annual income tax return. After failing to get refund, XCEL filed on March 1, 1988 a case with the Court of Tax Appeal store cover the P500, 000.oo in taxes paid on May 15, 1985. Is the action to recover the taxes filed timely? A:The action for refund was filed in the Court of Tax Appeals on time. In the case of Commissioner v TMX Sales, Inc., 205 SCRA 184, which is similar to this case, the Supreme Court ruled that in the case of overpaid quarterly corporate income tax, the two year period for filing claims for refund in the BIR as well as in the institution of an action for refund in the CTA, the two year prescriptive period for tax refunds (Sec 230, NRIC) is counted from the filing of the final, adjustment return under section 67 of the Tax Code, and not from the filing of the quarterly return and payment of the quarterly tax. The CTA action on March 1, 1988 was clearly within the reglementary two year period from the filing of the final adjustment return of the corporation on April 15, 1986. Q: A corporation files its income tax return on a calendar year basis. For the first quarter of 1993, it paid on 30 May 1993 its quarterly income tax in the amount of P3.0 million. On 20 August 1993, it paid the second quarterly income tax of P0.5 million. The third quarter resulted in a net loss, and no tax was paid. For the fourth and final return for 1993, the company reported a net loss for
117 the year, and the taxpayer indicated in the income tax return that it opted to claim a refund of the quarterly income tax payments. On 10 January 1994, the corporation filed with the Bureau of Internal Revenue a written claim for the refund of P3.5 million. BIR failed to act on the claim for refund; hence, on 2 March 1996, the corporation filed a petition for review with the Court of Tax Appeals on its claim for refund of the overpayment of its 1993 quarterly income tax. BIR, in its answer to the petition, alleged that the claim for refund was filed beyond the reglementary period. Did the claim for refund prescribe? A:The claim for refund has prescribed. The counting of the two year prescriptive period for filing a claim for refund is counted not from the date when the quarterly income taxes were paid but on the date when the final adjustment return or annual income tax return was filed (CIR v TMX Sales, G.R. No. 83736, January 15, 1992; CIR v Philam Life Insurance Co., Inc., G.R. No. 105208, May 29,1995). It is obvious that the annual income tax return was filed before January 10, 1994 because the written claim for refund was filed with the BIR on January 10, 1994. Since the two-year prescriptive period is not only a limitation of action for bringing the case to the judicial stage, the petition for review filed with the CTA on March 2, 1996 is beyond the reglementary period. Q: A.What must a taxpayer do in order to claim refund of, or tax credit of, taxes and penalties which he alleged to have been erroneously, illegally or excessively assessed or collected? A. Can the Commissioner grant a refund or tax credit even without a written claim for it? A: A. The taxpayer must comply with the following procedures in claiming a refund of, or tax credit for, taxes and penalties which he alleges to have been erroneously, illegally or excessively assessed or collected: 1. He should file a written claim for refund with the Commissioner within two years after the date of payment of the tax or penalty (Sec. 204, NIRC); 2. The claim filed must state a categorical demand for reimbursement (Mermejo v Collector, 87 Phil. 96 [1950]); 3. The suit or proceeding for recovery must be commenced in court within two years from date of payment of the tax or penalty regardless of any supervening event that will arise after payment (Sec. 229, NIRC). [NOTE: If the answer given is only number 1, it is suggested that the same shall be given full credit, considering that this is the only requirement for the Commissioner to acquire jurisdiction over the claim.] B. Yes. When the taxpayer files a return which on its face shows an overpayment of the tax and the option to refund/claim a tax credit was chosen by the taxpayer, the Commissioner shall grant the refund or tax credit without the need for a written claim. This is so, because a return filed showing an overpayment shall be considered as a written claim for credit or refund (Secs. 76 and 204, NIRC). Moreover, the law provides that the Commissioner may, even without a written claim therefore, refund or credit any tax where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid (Sec. 229, NIRC).
118 Q: On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the estate of Jose de la Cruz a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise penalty. The Executor of the estate of Jose de la Cruz (Executor) filed a timely protest against the assessment and requested for waiver of the surcharge, interest and penalty. The protest was denied by the Commissioner of Internal Revenue (Commissioner) with the finality on September 13, 1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997. The following day, the Executor filed a petition with the Court of Tax Appeals (CTA) praying for the refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case and ordered the Commissioner to make a refund. The Commissioner filed a petition for review with the Court of Tax Appeals assailing the jurisdiction of the CTA and the Order to make refund to the Estate on the ground that no claim for refund was filed with the BIR. a) Is the stand of the Commissioner correct? Reason. A: A.Yes. There was no claim for refund or credit that has been duly filed with the Commissioner of Internal Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229, NIRC). The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals jurisdiction over the refund case should the taxpayer decide to appeal on time. b) Why is the filing of an administrative claim with the BIR necessary? B: The filing of an administrative claim for refund with the BIR is necessary in order: 1) To afford the Commissioner an opportunity to consider the claim and to have a chance to correct the errors of subordinate officers (Gonzales v CTA, et al., 14 SCRA 79); and 2) To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue available for expenditures (Bermejo v Collector; G.R.No. L-3028, July 29, 1950) Q:Is a protest at the time of payment of taxes/duties a requirement to preserve the taxpayer’s right to claim a refund? Explain. A:For taxes imposed under the NIRC, protest at the time of payment is not required to preserve the taxpayers’ right to claim refund. This is clear under Section 230 of NIRC which provides that a suit or proceeding may be maintained for the recovery of national internal revenue tax or penalty alleged to have been erroneously assessed or collected, whether such tax or penalty has been paid under protest or not. For duties imposed under the Tariff and Customs Code, a protest at the time of payment is required to preserve the taxpayers’ claim for refund. The procedure under the TCC is to the effect that when a ruling or decision of the Collector of Customs is made whereby liability for duties is determined, the party adversely affected may protest such ruling or decision by presenting to the Collector, at the time when payment is made, or within fifteen days thereafter, a written protest setting forth his objections to the ruling or decision in question (Sec. 2308, TCC). Q:ABCD Corporation is a domestic corporation with individual and corporate shareholders who are residents of the US. For the 2nd quarter of 1983, these US-
119 based individual and corporate shareholders received cash dividends from the corporation. The corresponding withholding tax on dividend income – 30% for individual, and 35% for corporate nonresident stockholders – was deducted at source and remitted to the BIR. On May 15, 1984, ABCD filed with the CIR a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction of withholding tax on dividends was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the US. The Commissioner denied the claim. On January 17, 1985, ABCD filed a petition with the CTA, reiterating its demand for refund. (a) Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident stockholders? (b) Is the contention of ABCD Corporation correct? A: a. In Procter & Gamble PMC, supra, involving the refund of alleged over-withheld final withholding tax on dividends paid out to a non-resident foreign corporation, the defense of the Government against the claim to the effect that a mere withholding agent is not the proper party that should claim such refund, was not interposed by the Government in the lower court but was raised only for the first time on appeal. The Supreme Court sustained the Government’s position and ruled that estoppel does not preclude the Government from its right to bring up such defense even for the first time on appeal. However, the Supreme Court, in a subsequent resolution, ruled that the BIR should not be allowed to defeat an otherwise valid claim for refund by raising the question of the withholding agent’s alleged incapacity to file the claim for refund for the first time on appeal. The Government must follow the same rules of procedure which bind private parties. (Commissioner v Procter & Gamble, PMC, 204 SCRA 377). a. Yes, ABCD is correct. The applicable final withholding income tax rate on the cash dividends paid it to non-resident shareholders is only 25% of the gross dividend, pursuant to the RP-US Tax Treaty. Considering that the final withholding taxes deducted and remitted to BIR are 30% (for individuals) and 35% (for corporations), there was overpayment of income tax. Q: Lily’s Fashion Inc. is a garment manufacturer located and registered as a Subic Bay Freeport Enterprise under Republic Act No. 7227 and a non-VAT taxpayer. As such, it is exempt from payment of all local and national internal revenue taxes. During its operations, it purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted to Lily’s Fashion, Inc. the 10% VAT on the purchased items amounting to P500,000.00. Lily’s Fashion, Inc. filed with the BIR a claim for refund for the input tax shifted to it by the suppliers. If you were the Commissioner of Internal Revenue, will you allow the refund? A: No. The exemption of Lily’s Fashion, Inc. is only for taxes for which it is directly liable; hence, it cannot claim exemption for a tax shifted to it, which is not at all considered a tax to the buyer but a part of the purchase price. Lily’s Fashion, Inc. is not the taxpayer insofar as the passed-on tax is concerned and therefore, it cannot claim a refund of a tax merely shifted to it. Only taxpayers are allowed to file a claim for refund (Phil. Acetylene Co. v CIR, 20 SCRA 1056 [1987]).
120 Q: A Co. is the wholly owned subsidiary of B Co., a non-resident German company. A Co. has a trademark licensing agreement with B Co. On February 10, 1995, A Co. remitted to B Co. royalties of P10,000,000.00, which A Co. subjected to a WT of 25% or P2,500,000.00 with the BIR. Upon advice of counsel, A Co. realized that the proper WT rate is 10%. On March 20, 1996, A Co. filed a claim for refund of P2,500,000.00 with the BIR. The BIR denied the claim on November 15, 1996. On November 28, 1996 A Co. filed a petition for review with the CTA. The BIR attacked the capacity of A Co., as agent, to bring the refund case. Decide the issue. A: A Co., the withholding agent of the non-resident foreign corporation, is entitled to claim the refund of excess withholding tax paid on the income of said corporation in the Philippines. Being a withholding agent, it is the one held liable for any violation of the withholding tax law should such a violation occur. In the same vein, it should be allowed to claim a refund in case of over-withholding. (CIR v Wander Phils., Inc., GR No. 68378, April 15, 1988, 160 SCRA 573; CIR v Procter & Gamble PMC, 204 SCRA 377).
121 CHAPTER XXXII LOCAL BUSINESS TAXES Q:Congress, after much public hearing and consultations with various sectors of society, came to the conclusion that it will be good for the country to have only one system of taxation by centralizing the imposition and collection of all taxes in the national government. Accordingly, it is thinking of passing a law that would abolish the taxing power of all local government units. In your opinion, would such a law be valid under the present Constitution? Explain your answer. A: No. The law centralizing the imposition and collection of all taxes in the national government would contravene the Constitution which mandates that: “Each local government unit shall have the power to create their own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as Congress may provide consistent with the basic policy of local autonomy.” It is clear that Congress can only give the guidelines and limitations on the exercise by the local governments of the power to tax but what was granted by the fundamental law cannot be withdrawn by Congress. Q: In order to raise revenue for the repair and maintenance of the newly constructed City Hall of Makati, the City Mayor ordered the collection of P1.00, called “elevator tax”, every time a person rides any of the high-tech elevators in the city hall during the hours of 8:00am to 10:00 am and 4:00pm to 6:00 pm. Is the “elevator tax” a valid imposition? Explain. A: No. The imposition of a tax, fee or charge or the generation of revenue under the Local Government Code shall be exercised by the Sanggunian of the local government unit concerned through an approporiate ordinance (Sec. 132, LGC). The city mayor alone could not order the collection of the tax. As such, the “elevator tax” is an invalid imposition. Q:The City of Manila enacted an ordinance, imposing 5% tax on gross receipts on rentals of space in privately-owned public markets. BAT Corporation questioned the validity of the ordinance, stating that the tax is an income tax, which cannot be imposed by the city government. Do you agree with the position of BAT Corporation? Explain. A: Bo, I do not agree with the position of BAT Corporation. The 5% tax on gross receipts of rentals of space in privately-owned public markets imposed under the ordinance of City of Manila is not an income tax, which may not be imposed by the city government, but a valid license tax or fee for the regulation of business. (Progressive Development Corporation v Quezon City, GR No. 36081, April 24, 1989). Q: XYZ Shipping Corporation is a branch of an international shipping line with voyages between Manila and West Coast of the U.S. The company’s vessels load and unload cargoes at the Port of Manila, albeit it does not have a branch or sales office in Manila. All the bills of lading and invoices are issued by the branch in Makati which is also the company’s principal office. The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using the Port of Manila. Can the city government of Manila legally impose said levy on the corporation?
122 A: The situs is the place or incident of an event or location of property, and the situs of a tax is, therefore, the place where the tax has to be paid. Section 150 of the LGC provides for the situs of the tax imposed on taxpayers enumerated therein. The recording of sales of goods and services subject to the local business taxes shall be made in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality or city where such branch or sales outlet is located. In cases where there is no such branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality (Sec. 150[a], LGC). In this case, the principal office in Makati City which issued the bills of landing and the invoices to the customers has no branch in the City of Manila, where the business transactions take place. In view thereof, the sales allocation shall be made as follows: 30% to the sales recorded in the principal office in Makati City shall be taxable by the city where the principal office is located, and 70% of the total sales recorded in Makati City shall be taxable by the City of Manila, where transaction is had (Sec. 150[b], LGC). Q: What is the basis for the computation of business tax on contractors under the Local Government Code? A: “Gross sales or receipts” include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or the materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding discounts if determinable at the time of sales, sales return, excise tax, and value added tax (Sec.131 [n], LGC). Q: ABC Corporation is registered as a holding company and has an office in the City of Makati. It has no actual business operations. It invested in another company and its earnings are limited to dividends from this investment, interests on its bank deposits, and foreign exchange gains from its foreign currency account. The City of Makati assessed ABC Corporation as a contractor or one that sells services for a fee. Is the City of Makati correct? A: No. The corporation cannot be considered as a contractor because it does not render services for a fee. A contractor is one whose activity consists essentially in the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or its employees. To be considered as a contractor, the corporation must derive income from doing active business of selling services and not from deriving purely passive income. Only income arising from the performance of services to its customers is subject to local business tax. Accordingly, a mere holding company cannot be assessed by the City of Makati as a contractor (Sec. 131 [h], LGC; Orlyete Company [Phil. Branch]) v City of Makati, CTA, November 14, 2012). Q: Mr. Fermin, a resident of Quezon City, is a Certified Public Accountant-Lawyer engaged in the practice of his two professions. He has his main office in Makati City and maintains a branch office in Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati City and his professional tax as a lawyer in Pasig City.
123 a. May Makati City, where he has his main office, require him to pay his professional tax as a lawyer? Explain. b. May Quezon City, where he has his residence and where he also practices his two professions, go after him for the payment of his professional tax as a CPA and a lawyer? Explain. A: a. No. Mr. Fermin is given the option to pay either in the city where he practices his profession or where he maintains his principal office in case he practices his profession in several places. The professional tax paid as a lawyer in Pasig City, a place where he practices his profession, will entitle him to practice his profession in any part of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such profession (Sec. 139, in relation to Sec. 151, LGC). b. No. The professional tax shall be paid only once for every taxable year and the payment shall be made either in the city where he practices his profession or where he maintains his principal office. The city of residence cannot require him to pay his professional taxes (Sec. 139, in relation to Sec. 151, LGC). Q: MNO Corporation was organized on July 1, 2006 to engage in trading of school supplies, with principal place of business in Cubao, Quezon City. Its book of accounts and income statement show the following date: July 1, 2006 to December 31, 2006 P5,000,000 January 1,2007 to June 30, 2007 10,000,000 July 1, 2007 to December 31, 2007 15,000,000 Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for income tax purposes, it paid its 2%business tax for fiscal year ended June 30,2007 based on gross sales of P15,000,000. However, the Quezon City treasurer assesses the corporation for deficiency business tax for 2007 based on gross sales of P25,000,000, alleging that local business taxes should be computed based on calendar year. a. Is the position of the city treasurer tenable? Explain. b. May the deficiency business tax be paid on installments without surcharge and interest? Explain. A: a. Yes, the City Treasurer is correct in using the gross sales for the calendar year of P25 million for purposes of computing the 2% local business tax for the year 2007. The tax period of local taxes, fees and charges is the calendar year, except when otherwise provided in the Code (Sec. 165, LGC). The use of the fiscal year by corporations for purposes of computing taxes is allowed only under the National Internal Revenue Code, but not under the Local Government Code. b. The local levies may be paid on quarterly installments (Sec. 165, LGC) within the first twenty days of each quarter. The time for payment may be extended by the Sanggunian concerned, without surcharges or penalties, but only for a period not exceeding six months (Sec. 167, LGC). Q: Ferremaro, Inc., a manufacturer of handcrafted shoes, maintains its principal office in Cubao, Quezon City. It has branches/sales offices in Cebu and Davao. Its factory is located in Marikina City, where most of its workers live. Its principal office in Quezon City is also a sales office. Sales of finished product for 2009 in the amount of P10 million were made at the following locations: (i) Cebu – 25%; (ii)
124 Dacao – 15%’ and (iii) Quezon City – 60%. Where should the applicable local taxes on the shoes be paid? A: The sales made in the Cebu branch (25%) and the Davao branch (15%) shall be reported by the respective branches in their books and the local taxes due thereon will be paid to the city of Cebu and Davao, respectively. However, the sales recorded in the books of Quezon City to the extent of 60% shall be allocated as follows: 30% of 60% shall be paid to the Quezon City government, while the 70% of the 60% shall be allocated and paid to the Marikina City government, where the factory is located. Q:The municipality of Argao, Province of Cebu passed a tax ordinance requiring all professionals practicing in the municipality to pay a tax equivalent to 2% of their gross income. A certified true copy of the ordinance was sent to the Secretary of Finance for review on March 1, 1989 and was received by him on the same day. On 15 August 1989 even as the tax ordinance remained unacted upon by the Secretary of Finance, the municipality started collecting the tax to question. The members of the Philippine Bar in the municipality questioned the legality of the ordinance and sought the suspension of the collection of the tax, but the municipality argued that since the Secretary has not taken any action on the ordinance for more than one hundred twenty days after his receipt thereof, the legality of the ordinance can no longer be questioned and insisted on the collection of the tax. Is the tax ordinance in question legal? A: No, the tax ordinance is not legal as the Local Tax Code allows provinces and cities, to the exclusion of municipalities, to impose an annual occupation tax on all persons engaged in the exercise of practice of their profession or calling in specified amounts which in the case of lawyers is P75.00 per annum (Secs 11 and 12 in relation to Sec. 23, Local Tax Code). A person authorized to practice his profession or calling shall pay the tax to the province where he practices his professions or calling or maintains his office. No local government unit can impose a tax on income (Sec. 5. Local Tax Code). 2) Is the Municipality correct in insisting on collecting the tax? B: No, the Municipality was incorrect in insisting on the collection of the tax. Once the tax on occupation is paid as stated in paragraph (a) above, the lawyer is entitled to practice his profession or calling in all parts of the Philippines without being subject to any other national or local tax, license or fee for the practice of such profession or calling. 3) Will the inaction of the Secretary of Finance bar the professionals in the Municipality from questioning the legality of that ordinance? C: The inaction of the Secretary of Finance does not bar the professionals in the Municipality from questioning the legality of the ordinance. While it is true that the Secretary of Finance may himself suspend the tax ordinance within a 120-day period from receipt thereof, his failure to do so, however, has no preclusive effect on taxpayers who may be adversely affected by the ordinance. 4) What remedies are available to the taxpayer to enable him to question the legality of that ordinance? D: The taxpayer may pursue his remedies either administratively or judicially. He may, as the case warrants, file a formal protest with the Secretary of Finance or query with the Provincial Fiscal whose opinion is appealable to the Secretary of Justice whose decision may be contested in the proper court. The other remedy would be to file a special civil action for
125 declaratory relief (if circumstances still warrant) or to pay the tax and thereafter to file an action for refund within six [now 2] years after such payment. Q: 1. Tax lien- Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, not only upon any property or rights therein which may be subject to the lien but also upon property used in business, occupation, practice of profession or calling, or exerciseo f privilege with respect to which the lien is imposed. The lien may be extinguished upon full payment of the delinquent local tax fee or charge, including related surcharges or interest (Sec. 173, LGC). 2. Distraint and levy – The civil remedies for the collection of local taxes, fees or charges, including the applicable surcharges and interests, fees or charges, may either be (a) by the administrative remedies of distraint of personal property of whatever kind, including securities and bank accounts, and levy of real property and interest therein, or (b) by judicial action. Either of these remedies, or both, may be pursued concurrently or simultaneously at the discretion of the local government unit concerned (Sec. 174, LGC). 3. Judicial action. – The local government may institute an ordinary civil action with the regular courts of proper jurisdiction for the collection of delinquent taxes, fees, charges or revenues (Sec. 183, LGC). The term “civil action” would preclude a criminal case as a proper remedy for the collection of delinquent local taxes (Republic v Patanao, 20 SCRA 712) Q: How are retiring businesses taxed under the Local Government Code? A: Upon the termination of business subject to tax under Section 143 of the Local Government Code, it is required to submit a sworn statement of gross sales or receipts for the current year. If the tax paid during the year be less than the tax due on said gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired (Sec 145, LGC). Q: On May 15, 2009, La Manga Trading Corporation received a deficiency business tax assessment of P1,500,000 from Pasay City Treasurer. On June 30, 2009, the corporation contested the assessment by filing a written protest with the City Treasurer. On October 10, 2009, the corporation received a collection letter from the City Treasurer, drawing it to file on October 25, 2009 an appeal against the assessment before the Pasay Regional Trial Court. (a) Was the protest of the corporation filed on time? (b) Was the appeal with the Pasay RTC filed on time? A: a.Yes. Since the business tax assessment was received on May 15, 2009 and the protest thereto was filed on June 30, 2009, or a total period of 49 days, the taxpayer thus timely filed such protest. The law allows the taxpayer to files its protest within 60 days from the date of receipt of assessment. b.The taxpayer shall, within 30 days from receipt of the denial of the protest or from the lapse of the 60-day period prescribed within which to appeal with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and unappealable. The fifth sentence of Section 195 of the LGC of 1991 does not provide for any administrative appeal. Hence, the taxpayer can only appeal to a court of competent jurisdiction. In this case, the
126 local treasurer is acting as a quasi-judicial agency. Under Section 49 of the 1997 Rules of Civil Procedure, appeals from quasi-judicial agencies, in the exercise of judicial functions, shall be brought to the Court of Appeals. In this case, the appeal was brought by the corporation to the Pasay RTC, which is not the court of competent jurisdiction. Thus, the appeal was not filed on time. Q: X, a taxpayer who believes that an ordinance passed by the City Council of Pasay is unconstitutional for being discriminatory against him, wants to know from you, his tax lawyer whether or not he can file an appeal. In the affirmative, he asks you where such appeal should be made: the Secretary of Finance, or the Secretary of Justice, or the Court of Tax Appeals, or the regular courts. What would you advice your client, X? A: The appeal should be filed with the Secretary of Justice. Any question on the constitutionality or legality of a tax ordinance may be raised on appeal with the Secretary of Justice within 30 days from the effectivity thereof (Sec. 187, LGC; Hagonoy Market Vendor Association v Mun. of Hagonoy, GR No. 137621, February 6, 2002).
127 CHAPTER XXXIII: REAL PROPERTY TAX Q: Mr. Jose Castillo is a citizen, who purchased a parcel of land in Makati City in 1970 at a consideration of P1 million. In 2011, the land, which remained undeveloped and idle, had a fair market value of P20 million. The Assessor of Makati re-assessed in 20122 the property at P10 million. When is Mr. Castillo liable for real property tax on the land based on the re-assessed fair market value, beginning 2011 or 2012? A. Mr. Castillo shall be liable to the real property tax based on the re-assessed fair market value of P10 million beginning 2012. All re-assessments made after the first day of any year shall take effect on the first of January of the succeeding year (Sec. 21, LGC). The fair market value of P20 million as determined by the Commissioner shall be used only for the purposes of national internal revenue taxes. Q: A city outside of Metro Manila plans to enact an ordinance that will impose a special levy on idle lands located in residential subdivisions within its territorial jurisdiction in addition to the basic real property tax. If the lot owners of a subdivision located in the said city seeks your legal advice on the matter, what would your advice be? Discuss. A: My advice would be that the city’s plan to enact on ordinance that will impose such special levy on idle lands is not legally allowed, unless these lands are specially benefited by a public works projects or improvements funded by the city government (Sec. 240, LGC). I will likewise advise them that before the city council could enact an ordinance imposing a special levy, it shall conduct a public hearing thereon; notify in writing the owners of the real property to be affected or the persons having legal interest therein as to the date and place thereof and afford the latter the opportunity to express their positions or objections relative to the proposed ordinance (Sec. 242, LGC). Q: In view of the street widening and cementing of roads and the improvement of drainage and sewers in the district of Ermita, the City Council of the City of Manila passed on an ordinance imposing and collecting a special levy on lands in the district. Jose Reyes a landowner and resident of Ermita, submitted a protest again the special levy fifteen (15) days after the last publication of the ordinance alleging that the special levy was exorbitant since the rate thereof was more than the maximum rate of two percent (2%) of the assessed value of the real properties allowed by Section 39 of Presidential Decree No. 464, as amended. Assuming that Jose Reyes is able to prove that the rate of the special levy is more than the aforesaid percentage limitation of 2%, will his protest prosper? A: The special levy under the Real Property Tax Code on lands, specially benefited by the proposed infrastructure, may not exceed 60% of the cost of said improvement. All lands comprised within the district benefited are subject to the special levy except lands exempt from the real property tax (Sec. 47, Real Property Tax). The protest shall be filed not later than 30 days after the publication of the ordinance and may be submitted to the City Sanggunian signed by a majority of the landowners affected by the proposed work. If no such protest is filed in the manner above specified, the city ordinance shall become final and
128 effective. The levy imposed under the ordinance should be within the limit of 60% of the total cost of the proposed improvement. The rate of two percent (2%) of the assessed value under Section 39 of P.D. 464 refers to the real property tax and not to special levies. Q: May local governments impose an annual reality tax in addition to the basic real property tax on idle or vacant lots located in residential subdivisions within their respective territorial jurisdictions? A: Not all local government units may do so. Only provinces, cities, and municipalities within the Metro Manila area (Sec. 232, LGC) may impose an ad valorem tax not exceeding five percent (5%) of the assessed value (Sec. 236, LGC) of idle or vacant residential lots in a subdivision, duty approved by proper authorities regardless of area (Sec. 237, LGC)