Bar Exam 2018 Taxation Law


KM Corporation, doing business in the City of Kalookan, has been a distributor and retailer of clothing and household materials. It has been paying the City of Kalookan local taxes based on Sections 15 (Tax on Wholesalers, Distributors or Dealers) and 17 (Tax on Retailers) of the Revenue Code of Kalookan City  (Code). Subsequently, the SangguniangPanglungsod enacted an ordinance amending the Code by inserting Section 21 which imposes a tax on “Businesses Subject to Excise, Value-Added and Percentage Taxes under the National  Internal Revenue Code (NIRC),” at the rate of 50% of 1% per  annum on the  gross sales and receipts on persons “who sell goods and services in the course of trade or business.” KM Corporation paid the taxes due under Section 21 under protest, claiming that (a) local government units could not impose a tax on businesses already taxed under the NIRC and (b) this would amount to double taxation, since its business was already taxed under Sections 15 and 17 of the Code.

  • May local government units impose a tax on businesses already subjected to tax under the NIRC? (2.5%)


Yes. Section 143 in relation to Section 151 of the Local Government Code (LGC) provides for the power of cities to impose a local business tax, and one of those which may be subjected to such tax are those businesses  that are subject to “excise tax, value-added tax or percentage tax” under the NIRC, other than those specifically enumerated by the same provision.The tax to be imposed by the city shall not exceed 2% of gross sales or gross receipts of the preceding calendar year (Sec. 143(h), in relation to Sec. 151, LGC).

  • Does this amount to double taxation? (2.5%)


Yes. The three taxes are all in the nature of local business taxes on wholesalers, retailers and service providers which are imposed by the same taxing authority on the same subject matter for the same tax period; hence, the elements of double taxation are present (Nursery Care Corporation v. Anthony Acebedo, G.R. No. 180651, July 30, 2014).


Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design, engineering, and construction work. Its principal office is located in Makati City, but it has various infrastructure projects in the country  and abroad. Thus, KKI employs both local and foreign workers. The company  has adopted a policy that the employees’ salaries are paid in the currency of the country where they are assigned or detailed.

Below are some of the employees of KKI. Determine whether the compensation they received from KKI in 2017 is taxable under Philippine laws and whether  they are required to file tax returns with the Bureau of Internal Revenue (BIR). (2% each)

  • Kris Konejero, a Filipino accountant in KKI’s Tax Department in  the Makati office, and married to a Filipino engineer also working in KKI;


Taxable.(Sec. 23 & 24(A), NIRC). Kris must file tax returns with the BIR, unless she qualifies for substituted filing of income tax returns because the tax was correctly withheld by the employer (Sec. 51(A)(2)(b), NIRC).

  • Klaus Kloner, a German national who heads KKI’s Design

Department in its Makati office;


Taxable being an income earned by a resident alien from Philippine sources (Sec. 23 & 24(A), NIRC). Klaus is required to file a tax return, unless the compensation income from KKI is his only returnable income and the withholding tax thereon was correctly withheld by his employer (Sec. 51(A)(2)(b), NIRC).

  • KrisantoKonde, a Filipino engineer in KKI’s Design Department who was hired to work at the principal office last January 2017.  In April 2017,  he was assigned and detailed in the company’s project in Jakarta, Indonesia, which project is expected to be completed in April 2019;


His compensation from January 1 up to the time he left the Philippines is taxable and he must file tax returns, unless the compensation income is his only returnable income and the withholding tax thereon was correctly withheld by KKI (Sec. 51(A)(2)(b), NIRC). The compensation for his services abroad from the date of his actual assignment thereat up to the time of the completion of the project is tax-exempt being an income from without  earned by a non-resident citizen (Sec. 23 and Sec. 42, NIRC). He is not required to file a return for this income derived from without, because said income is not subject to income tax in the Philippines (Sec. 23, NIRC).

  • Kamilo Konde, Krisanto’s brother, also an engineer assigned to KKI’s project in Taipei, Taiwan. Since KKI provides for housing and other basic needs, Kamilo requested that all his salaries paid in Taiwanese dollars, be paid to his wife in Manila in its Philippine Peso equivalent;


Not taxable and no need to file tax returns. Kamilo is a non-resident citizen who is taxable only on income from within. Compensation for  services rendered outside of the Philippines is an income from without which is not subject to the Philippine income tax (Sec. 23 and Sec. 42, NIRC).

  • Karen Karenina, a Filipino architect in KKI’s Design Department who reported back to KKI’s Makati office in June 2017 after KKI’s project in Kuala Lumpur, Malaysia was completed.


Compensation from January 1 up to the time of her return in June 2017 is an income from without which is not taxable if received by a non- resident citizen (Sec. 23 and Sec. 42, NIRC). Compensation from June 2017  to December 31, 2017 is an income from within and taxable to Karen who is taxable on worldwide income from the time she regained the status of a resident citizen and accordingly, must file returns to pay for the tax, unless she is purely compensation income earner for which the withholding tax on wages was correctly withheld by KKI (Sec 51(A)(2)(b), NIRC).


Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was seconded to various KSI-affiliated corporations:

  1. from 1999 to 2004 as Vice President of K-Gold Inc.,
  2. from 2004 to 2007 as Vice President of KPB Bank;
  3. from 2007 to 2011 as CEO of K-Com Inc.;
  4. from 2011 to 2017 as CEO of K-Water Corporation, where Kim  served as CEO for seven years until his retirement last December 12, 2017 upon reaching the compulsory retirement age of 60 years.

All the corporations mentioned are majority-owned in common by the Koh family and covered by a BIR-qualified multi employer-employee retirement plan (MEERP), under which the employees may be moved around within the controlled group (i.e., from one KSI subsidiary or affiliate to another) without  loss of seniority rights or break in the tenure. Kim was well-loved by his  employer and colleagues, so upon retirement, and on his last day in office, KSI gave him a Mercedes Benz car worth PhP 5 million as a surprise, with a streamer that reads: “You’ll be missed. Good luck, Sir Kim.”

(a) Are the retirement benefits paid to Kim pursuant to the MEERP taxable? (2.5%)


  • No. The recipient having served the group of companies covered by the BIR-Qualified Retirement Plan for at least 10 years, not less than 50 years of age at the time of retirement and avails of the benefit only once, will receive his retirement benefits tax-free (Sec. 32(B)(6)(a), NIRC).
  • Which internal revenue tax, if any, will apply to the grant of the car to Kim by the company? (2.5%)


It is subject to the income tax. The value of the Mercedes Benz car is  an income to Kim. It is in the nature of a compensatory gift which is considered as income to the recipient. The car is in reality a recompense for Kim’s past services. Compensation for services in whatever form  paid is  part of gross income [Sec. 32(A)(1), NIRC; Commissioner v. Duberstein, 363 US 278 (1960)].


Years ago, Krisanto bought a parcel of land in Muntinlupa for only PhP65,000. He donated the land to his son, Kornelio, in 1980 when the property had a fair market value of PhP75,000, and paid the corresponding donor’s tax.

Kornelio, in turn, sold the property in 2000 to Katrina for PhP 6.5 million and  paid the capital gains tax, documentary stamp tax, local transfer tax, and other  fees and charges. Katrina, in turn, donated the land to Klaret School last August 30, 2017 to be used as the site for additional classrooms. No donor’s tax  was paid, because Katrina claimed that the donation was exempt from taxation.  At  the time of the donation to Klaret School, the land had a fair market value of PhP 65 million.

  • Is Katrina liable for donor’s tax? (2.5%)


No. Donations in favor of an educational institution is exempt from donor’s tax (Sec. 101, NIRC).

  • How much in deduction from gross income may Katrina claim on account of the said donation? (2.5%)


If Klaret School is an accredited non-government  organization,  having been established as a non-profit domestic corporation, organized and operated exclusively for educational purposes, the donation to it as a qualified donee-institution is deductible in  full  (Sec.  34(H)(2)(c),  NIRC). The deduction from gross income shall be the acquisition cost of said property by the donor which is P6.5 million (Sec. 34(H)(3), NIRC).


Spouses Konstantino and Korina are Filipino citizens and are principal shareholders of a restaurant chain, Korina’s, Inc. The restaurant’s principal office is in Makati City, Philippines.

Korina’s became so popular as a Filipino restaurant that the  owners decided to expand its operations overseas. During the period 2010-2015 alone, it opened ten (10) stores throughout North America and five (5) stores in various parts of Europe where there were large Filipino communities. Each store abroad was in the name of a corporation organized under the laws of the state or country in which the store was located. All stores had identical capital structures: 60% of the outstanding capital stock was owned by Korina’s, Inc., while the remaining 40% was owned directly by the spouses Konstantino and Korina.

Beginning 2017, in light of the immigration policy enunciated by US President Donald Trump, many Filipinos have since returned to the Philippines and the number of Filipino immigrants in the US dropped significantly. On account of these developments, Konstantino and Korina decided to sell their shares of stock in the five (5) US corporations that were doing poorly in gross sales. The spouses’ lawyer-friend advised them that they will be taxed 5% on the first PhP100,000 net capital gain, and 10% on the net capital gain in excess of PhP100,000.

Is the lawyer correct? If not, how should the spouses Konstantino and Korina be taxed on the sale of their shares? (5%)


The lawyer’s advice is wrong. The capital gains tax of 5% for the first P100,000 net capital gain, and 10% on the net capital gain in excess of P100,000 applies only to the net capital gains realized from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation (Sec. 24(C), NIRC). Since the shares of stock sold are shares of foreign corporations held as capital assets, the recognized portion of the capital gain realized from the sale must be reported as part of their gross income in their income tax returns where the taxable income will be subject to  the  graduated income tax rates for individuals (Sec. 24(A)(1)(a) in relation to  Sec. 39, NIRC).

[Note: We suggest that the question be treated as a bonus question because of the amendment of the tax regime under the TRAIN Law. The 5% and 10% on net capital gain will no longer apply when the Bar Examination takers become practising lawyers].


Kria, Inc., a Korean corporation engaged in the business of manufacturing electric vehicles, established a branch office in the Philippines in 2010. The Philippine branch constructed a manufacturing plant in Kabuyao, Laguna,  and  the construction lasted three (3) years. Commercial operations in the Laguna  plant began in 2014.

In just two (2) years of operation, the Philippine branch had remittable profits in an amount exceeding 175% of its capital. However, the head office in Korea instructed the branch not to remit the profits to  the Korean head office  until instructed otherwise. The branch chief finance officer is concerned that the BIR might hold the Philippine branch liable for the 10% improperly accumulated earnings tax (IAET) for permitting its profits to accumulate beyond reasonable business needs.

  • Is the Philippine branch of Kria subject to the 10% IAET under the circumstances stated above? (2.5%)


No. The IAET will not apply to a branch of a foreign corporation, it being a Resident Foreign Corporation (RR No. 2-2001). The IAET applies only to Domestic Corporations which permits their profits to accumulate beyond its reasonable business needs, instead of being distributed as dividends.

  • Is it subject to 15% branch profit remittance tax (BPRT)? (2.5%)


No. It will be subject to BPRT only when actual or constructive remittance of branch profits is made. The law provides that any profits remitted by a branch to its head office shall be subject to the BPRT (Sec. 28(A)(5), NIRC; Bank of America v. CA, G.R. No. 103092, July 21, 1994).


Karissa is the registered owner of a beachfront property in Kawayan, Quezon which she acquired in 2015. Unknown to many, Karissa was  only holding the property in trust for a rich politician who happened to be her lover. It was the politician who paid for the full purchase price of the Kawayan property. No deed of trust or any other document showing that Karissa was only holding  the property in trust for the politician was executed between him and Karissa.

Karissa died single on May 1, 2017 due to a freak surfing accident. She left behind a number of personal properties as well as real properties, including the Kawayan property. Karissa’s sister, Karen, took charge of registering Karissa’s estate as a taxpayer and reporting, for income tax and VAT purposes, the rental income received by the estate from real properties. However, it was only on October 1, 2017 when Karen managed to file an estate tax return for her sister’s estate. The following were claimed as deductions in the estate tax return:

  1. Funeral expenses amounting to PhP 250,000;
  2. Medical expenses amounting to PhP 100,000, incurred when Karissa was hospitalized for pneumonia a month before her death; and
  3. Loss valued at PhP 6 million, arising from the destruction of Karissa’s condominium unit due to fire which occurred on September 15, 2017.
  • Should the beachfront property be included in Karissa’s gross estate? (2.5%)


Yes. The property is registered in the name of the decedent, so it’s a property owned by her as of the time of death which must properly be included as part of her gross estate. The extent of her interest in the  property, which is full ownership, must form part of her gross estate (Sec. 85(A), NIRC).

  • Are the claimed deductions proper? (2.5%)


The claim of funeral expenses amounting to P250,000 is improper being excessive in amount. The amount allowable as deduction for funeral expenses is actual funeral expenses or 5% of the gross estate, whichever is lower, but in no case shall it exceed P200,000 (Sec. 86(a)(1)(a), NIRC). The law allows the claim of medical expenses within one year prior to the decedent’s death in an amount not exceeding P500,000. Since the amount claimed as deduction was only P100,000 and was incurred within one month from death, it constitutes a proper deduction (Sec. 86(A)(6), NIRC).  Likewise, the loss incurred during the settlement of the estate (after death) but not beyond the last day prescribed by law for payment of the estate tax  (6 months from date), is a proper deduction from the gross estate, provided, it is not compensated by insurance and not claimed as deduction for income tax purposes. (Sec. 86(A)(1)(e), NIRC)

[Note:  We suggest full credit be given  for any answer.  Exclude the  question on deduction. The provisions were amended by the TRAIN Law and is no  longer relevant to new entrants of the profession].


Upon the death of their beloved parents in 2009, Karla, Karlo, and Karlie inherited a huge tract of farm land in Kanlaon City. The siblings had no plans to use the property. Thus, they decided to donate the land, but were not sure to  whom the donation should be made. They consult you, a well-known tax law expert, on the tax implications of the possible donations they plan to make, by giving you a list of the possible donees:

  1. The Kanlaon City High School Alumni Association (KCHS AA), since the siblings are all alumni of the same school and are active members of the organization. KCHS AA  is  an  organization intended to promote and strengthen ties between the school and its alumni;
  2. The Kanlaon City Water District which intends to use the land for its offices; or
  3. Their second cousin on the maternal side, Kikay, who serves as the caretaker of the property.

Advise the siblings which donation would expose them to the least tax liability. (5%)


I would advise them that the proposed donation to Kanlaon City Water District, a government entity, will be exempt from donor’s tax, hence, would expose the siblings to the least donor’s tax liability (Sec. 101(A)(2), NIRC). Donation to KCHS AA and donation to Kikay, the siblings’ second cousin, are both donations to strangers, which will expose them to a donor’s tax of 30% based on the fair market value of the property to be donated  (Sec. 99(B), NIRC).

[Note: The group suggests that any answer be given full credit. The provisions were amended by the TRAIN Law].


Karlito, a Filipino businessman, is engaged in the business of metal fabrication and repair of LPG cylinder tanks. He conducts business under the name and style of “Karlito’s Enterprises,” a single proprietorship. Started only (5)years ago, the business has grown so enormously that Karlito decided to incorporate it by transferring all the assets of the business, particularly the inventory of goods on hand, machineries and equipment, supplies, parts, raw materials, office furniture and furnishings, delivery trucks and other vehicles, buildings, and tools to the new corporation, Karlito’s Enterprises, Inc., in exchange for 100% of the capital stock of the new corporation, the stock subscription to which shall be deemed fully paid in the form of the assets transferred to the corporation by Karlito.

As a result, Karlito’s Enterprises, the sole proprietorship, ceased to do business and applied for cancellation of  its  BIR  Certificate  of  Registration.  The BIR, however, assessed Karlito VAT on account of  the  cessation  of business based on the current market price of the assets transferred to Karlito’s Enterprises, Inc.

  • Is the transfer subject to VAT? (2.5%)


Yes, the transfer of properties is subject to VAT, but only if Karlito is VAT-registered or VAT registerable person. The transaction is a taxable exchange involving properties which are for sale or for use in the course of trade or business (Sec. 105, NIRC; Sec. 4.106-8, RR No. 16-2005).

  • Is the transfer subject to income tax? (2.5%)


No. The same is considered as tax-free exchange where no gain or loss shall be recognized in a transfer of property to a corporation by a person in exchange for stock or unit of participation in such corporation of which as a result of such exchange Karlito gained control of said corporation (Section 40(C)(2), NIRC).


Klaus, Inc., a domestic, VAT-registered corporation engaged in the land transportation business, owns a house and lot along Katipunan St., Quezon City. This property is being used by Klaus, Inc.’s president and single largest shareholder, Atty. Krimson, as his residence. No business  activity  transpires there except for the company’s Christmas party which is held there every December. Atty. Krimson recently grew tired of the long commute from Katipunan to his office in Makati City and caused the company to sell the house and lot. The sale was recorded in the books of Klaus, Inc. as investment in real property.

(a) Is the sale of the said property subject to VAT? (2.5%)


Yes. The real property sold is used in trade or business since it is utilized to extend a fringe benefit, free use of housing unit, to the president of Klaus, Inc. It is considered as a transaction incidental to the VAT- registered business of the seller (Mindanao Geothermal II v. CIR, G.R. No. 193301, March 11, 2013).

(c) Is the sale subject to 6% capital  gains  tax  or  regular  corporate  income tax of 30%? (2.5%)


The property used in trade or business is not a capital asset but an ordinary asset; hence, the gain from the sale will be subject to the regular corporate income tax of 30%.


Koko’s primary source of income is his employment with the government. He earns extra from the land he inherited from his parents, and which land he has been leasing to a private, non-stock, non-profit school since 2005.

Last January, the school offered to buy the land from Koko for an amount equivalent to its zonal value plus 15% of such zonal value. Koko agreed but required the school to pay, in addition to the purchase price, the 12% VAT. The school refused Koko’s proposal to pass on the VAT contending that it was an entity exempt from such tax. Moreover, it said that Koko was not regularly engaged in the real estate business and, therefore, was not subject to VAT. Consequently, Koko should not charge any VAT to the school.

  • Is the contention of the school correct? (2.5%)


No. The exemption of the buyer pertains only to taxes for which it is legally liable but not to taxes passed-on to it. The VAT is not a tax on the buyer but merely considered as part of the purchase price. Accordingly, if  the sale is subject to VAT, the tax-exempt buyer cannot invoke its exemption in order to avoid the imposition of the VAT on the transaction. Be that as it may, the transaction will be subject to VAT only if Koko is either (1) VAT- registered or (2) VAT-registerable person at the time of sale; otherwise, the sale of the rented property will not be subject to VAT.

  • Will your answer be the same if Koko signed up as a VAT- registered person only in 2017? (2.5%)


Yes. All transactions involving real property for sale or for lease in the course of trade or business by VAT-registered person will be subject to VAT(Sec. 106(A)(1)(a). Since the sale will take place at a  time when the  seller is already VAT-registered, the sale is subject to VAT.


The BIR Commissioner, in his relentless enforcement of the Run After Tax Evaders (RATE) program, filed with the Department of Justice (DOJ) charges against a movie and television celebrity. The Commissioner alleged that the celebrity earned around PhP 50 million in fees from product endorsements in 2016 which she failed to report in her income tax and VAT returns for said year.

The celebrity questioned the proceeding before the DOJ on the ground that she was denied due process since the BIR never issued any Preliminary Assessment Notice (PAN) or a Final Assessment Notice (FAN), both of which  are required under Section 228 of the NIRC whenever the Commissioner finds that proper taxes should be assessed.

Is the celebrity’s contention tenable? (2.5%)


No. In cases where a fraudulent return is filed with the intent to evade a tax, a proceeding in court for the collection of such tax maybe filed without assessment (Sec. 222(a), NIRC). Assessment is not necessary before the filing of a criminal complaint for tax evasion (CIR v. Pascor Realty and Development Corp., G.R. No. 128315, June 29, 1999).


The Collector at the Port of Koronadal seized 100 second-hand right-hand drive buses imported from Japan. He issued warrants of distraint and scheduled the vehicles for auction sale. Kamilo,  the importer of the second-hand buses,  filed a replevin suit with the Regional Trial Court (RTC). The RTC granted the replevin upon filing of a bond.

Did the RTC err in granting the replevin? (2.5%)


Yes. The RTC erred in granting the replevin. The Collector of Customs has primary and exclusive jurisdiction in seizure cases. Such exclusive jurisdiction precludes the regular courts from taking cognizance of the subject matter and divests such courts of the prerogative to replevin property subject to seizure and forfeiture proceedings for violation of the Tariff and Customs Code (Collector v. Villaluz, L-34038, June 18, 1976; 71 SCRA 356).


The City of Kabankalan issued a notice of assessment against KKK, Inc.  for deficiency real property taxes for the taxable years 2013 to 2017 in  the amount of PhP 20 million. KKK paid the taxes under protest and instituted a complaint entitled “Recovery of Illegally and/or Erroneously-Collected Local Business Tax, Prohibition with Prayer to Issue TRO and Writ of Preliminary Injunction” with the RTC of Negros Occidental.

The RTC denied the application for TRO. Its motion for reconsideration having been denied as well, KKK filed a petition for certiorari with the Court of Appeals (CA) assailing the denial of the TRO.

Will the petition prosper? (5%)


No. The Court of Appeals (CA) has no jurisdiction over the case considering that it is the CTA which has exclusive appellate jurisdiction over cases involving local taxes decided by RTC in the exercise of latter’s original jurisdiction. The power of the CTA includes that of determining whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court. It, thus, follows that it is the CTA, by constitutional mandate, which is vested with jurisdiction to issue writs of certiorari in these cases (Philam Life v. Secretary of Finance, G.R. No. 210987, November 24, 2014); hence, the petition filed with the CA will not prosper.


In 2015, Kerwin bought a three-story house and lot in Kidapawan, North Cotabato. The property has a floor area of 600 sq.m. and is located inside a gated subdivision. Kerwin initially declared the property as residential for real property tax purposes.

In 2016, Kerwin started using the property in his business of  manufacturing garments for export. The entire ground floor is now occupied by state-of-the-art sewing machines and other equipment, while the second floor is used as offices. The third floor is retained by Kerwin as his family’s residence. Kerwin’s neighbors became suspicious of the activities going on inside  the  house, and they decided to report it to the Kidapawan City Hall.  Upon  inspection, the local government discovered that the property was being utilized for commercial use. Immediately, the Kidapawan Assessor reclassified the property as commercial with an assessment level of 50% effective January 2017, and assessed Kerwin back taxes and interest. Kerwin claims that only 2/3 of the building was used for commercial purposes since the third floor remained as family residence. He argues that the property should have been classified  as partly commercial and partly residential.

  • Is the Kidapawan assessor correct in assessing back taxes and interest? (2.5%)


No. The assessor cannot assess back taxes and interest. Since this involves a reassessment of real property due to a major change in its actual use, the same cannot be given a retroactive effect. The reassessment shall only be effective at the beginning of the quarter next following the reassessment (Sec. 221, LGC).

  • Is Kerwin correct that only 2/3 of the property should be considered commercial? (2.5%)


Yes. The property must be classified,  valued  and assessed  on the  basis of its actual use regardless of where located, whoever owns it, and whoever uses it (Sec. 217, LGC).

  • If Kerwin wants to file an administrative protest against the assessment, is he required to pay the assessment taxes first? With whom shall the protest be filed and within what period? (2.5%)


(a) Yes. No protest shall be entertained unless Kerwin first pays the tax. The words “paid under protest” must be annotated on the tax receipts issued by the treasurer. The protest in writing must be filed with the treasurer within 30 days from payment of the tax (Sec. 252, LGC).


In an action for ejectment filed by  Kurt, the lessor-owner, against Kaka,  the lessee, the trial court ruled in favor of Kurt. However, the trial court first required Kurt to pay the realty taxes due on the property for 2016 before he may recover possession thereof.

Kurt objected, arguing that the delinquent realty taxes were never raised as an issue in the ejectment case. At any rate, Kurt claimed that it should be Kaka who should be made liable for the realty taxes since it was Kaka who possessed the property throughout 2016.

Is Kurt correct in resisting the trial court’s requirement to pay the taxes first? (2.5%)


No. The Court may require the payment of delinquent real property taxes before ruling on the ejectment case. The law provides that in  any action involving the ownership or possession of, or succession to, real property, the Court may, motu proprio upon representation of the local treasurer, award such ownership, possession or succession to any party  to the action upon payment to the court of the taxes with interest due on the property (Sec. 268, LGC). Kurt cannot invoke the possession by Kaka in order to escape payment, because the delinquent real property tax is a lien  on the property superior to all liens (Sec. 257, LGC).


Kilusang Krus, Inc. (KKI) is a non-stock, non-profit religious organization which owns a vast tract of land in Kalinga.

KKI has devoted 1/2 of the land for various uses: a church with a cemetery exclusive for deceased priests and nuns, a school providing K to 12 education, and a hospital which admits both paying and charity patients. The remaining 1/2 portion has remained idle.

The KKI Board of Trustees decided to lease the remaining 1/2 portion to a real estate developer which constructed a community mall over the property.

Since the rental income from the lease of the property was substantial, the KKI decided to use the amount to finance (1) the medical expenses of the charity patients in the KKI Hospital and (2) the purchase of books and other educational materials for the students of KKI School.

  • Is KKI liable for real property taxes on the land? (2.5%)


Yes, but only on the leased portion. Article VI, Section 28(3) of  the 1987 Constitution provides that “charitable institutions, churches and personages or convents appurtenant thereto,  mosques,  non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation”. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. The leased portion of the land may be subject to real property tax since such lease is for commercial purposes, thereby, removing 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).

  • Is KKI’s income from the rental fees subject to income tax? (2.5%)


Yes. Despite falling under the organizations enumerated under Section 30 of the NIRC, the last paragraph of the same provision makes KKI’s income of whatever kind and character from any of its properties, real or personal, or from any of its activities conducted for profit regardless of the disposition made of such income, subject to income tax (Sec. 30, NIRC last paragraph).


Kathang Isip, Inc. (KII) is a domestic corporation engaged in the business of manufacturing, importing, exporting, and distributing toys both locally and abroad. Its principal office is located in Kalookan City, Philippines. It has 50

branches in different cities and municipalities in the country. When KII applied for renewal of its mayor’s permit and licenses in its principal office in January  this year, Kalookan City demanded payment of the local business tax on the basis of the gross sales reported by the corporation in its audited financial statements  for the preceding year. KII protested, contending that Kalookan City may  tax only the sales consummated by its principal office but not the sales consummated by its branch offices located outside Kalookan City.

When Kalookan City denied the protest, KII engaged the services of Atty. Kristeta Kabuyao to file the necessary judicial proceedings to appeal the decision of Kalookan City. Atty. Kabuyao is a legal expert, but resides in Kalibo, Aklan where her husband operates a resort. She, however, practices in Metro Manila, including Kalookan City. The counsel representing the city, in the case filed in Kalookan City by KII, questioned the use of Atty. Kabuyao’s Professional Tax Receipt (PTR) issued in Aklan for a case filed in Kalookan City.

  • Is KII’s contention that Kalookan City can only collect local  business taxes based on sales consummated in the principal office meritorious? (2.5%)


Yes. Section 150 of the Local Government Code (LGC) provides that for purposes of collection of taxes on business, when the taxpayer is  operating a branch or sales outlet elsewhere, the tax on the sales made therein shall accrue and shall be paid to the city or municipality where such branch or sales outlet is located.

  • Is the Kalookan City counsel correct in saying that Atty. Kabuyao’s PTR issued in Aklan cannot be used in Kalookan? (2.5%)


No. As provided under Section 139 of the LGC, payment of Atty. Kabuyao of her PTR in Aklan entitles her to practice her profession in any part of the Philippines.


The BIR assessed Kosco, Inc., an importer of food products, deficiency income and value-added tax, plus 50% surcharge after determining that Kosco Inc. had under-declared its sales by an amount exceeding 30% of that declared in its income tax and VAT returns. Kosco denied the alleged under-declaration, protested the deficiency assessment for income and value-added taxes and challenged the imposition of the 50% surcharge on the ground that the surcharge may only be imposed if Kosco Inc. fails to pay the deficiency taxes within the time prescribed for their payment in the notice of assessment.

  • Is the imposition of the 50% surcharge proper? (2.5%


Yes. As provided under Section 248(B) of the NIRC, 50% surcharge  on tax or on deficiency tax is also imposable in case a false or fraudulent return is willfully made. Further, failure to report sales, receipts or income  in an amount exceeding 30% of that declared per return constitutes substantial underdeclaration of sales and is prima facie evidence of a false or fraudulent return. If not controverted, Kosco, Inc.’s underdeclaration of sales is considered substantial as to consider the tax returns it filed as falsified or fraudulent; hence, the imposition of 50% surcharge is proper.

  • If your answer to (a) is yes, may Kosco enter into a compromise  with the BIR for reduction of the amount of surcharge to be paid? (2.5%)


No. Surcharge is in the nature of a penalty, and not an internal  revenue tax that may be subject to compromise, pursuant to Section 204 of the NIRC.


Krisp Kleen, Inc. (KKI) is a corporation engaged in the manufacturing and processing of steel and its by-products. It is both registered with the Board of Investments, with a pioneer status, and with the BIR as a VAT  entity.  On October 10, 2010, it filed a claim for refund/credit of input VAT for the period January 1 to March 31, 2009 before the Commissioner of Internal  Revenue (CIR). On February 1, 2011, as the CIR had not yet made any ruling on its claim for refund/credit, KKI, fearful that its period to appeal to the courts might prescribe, filed an appeal with the Court of Tax Appeals (CTA).

  • Can the CTA act on KKI’s appeal? (2.5%)


No. Pursuant to the pronouncement made the Supreme Court in the case of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (G.R. No. 184823, February 12, 2013), the observance of the “120+30- day” period is jurisdictional. Now, counting 120 days from October 10, 2010, the last day for the CIR to act on the claim for refund/credit fell  on  February 7, 2011, thus making the February 1, 2011 filing premature.

  • Will your answer be the same if KKI filed its appeal on March 20, 2011 and CIR had not yet acted on its claim? (2.5%)


Yes. The filing on March 20, 2011 is still not compliant with the “120+30-day” rule. As mentioned, the CIR has until February 7, 2011 to decide on the claim for refund/credit of input VAT. After the lapse of the 120-day period, the taxpayer-claimant has 30 days to file an appeal before  the CTA. In the present case, KKI had until March 9, 2011 to file the appeal based on a deemed adverse decision on the claim for refund/credit; hence,  the filing on March 20, 2011 was belatedly done, and the CTA has no jurisdiction over such claim for refund/credit.