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University of Santo Tomas Faculty of Civil Law Taxation Law Questions Asked More Than Once (QuAMTO 2016) *QUAMTO is a compilation of past bar questions with answers as suggested by UPLC and other distinct luminaries in the academe, and updated by the UST Academics Committee to fit for the 2016 Bar Exams. *Bar questions are arranged per topic and were selected based on their occurrence on past bar examinations from 1990 t
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    University of Santo Tomas Faculty of Civil Law Taxation Law  Questions Asked More Than Once (QuAMTO 2016)   *QUAMTO is a compilation of past bar questions with answers as suggested by UPLC and other distinct luminaries in the academe, and updated by the UST Academics Committee to fit for the 2016 Bar Exams. *Bar questions are arranged per topic and were selected based on their occurrence on past bar examinations from 1990 to 2015.     A CADEMICS C OMMITTEE   K   ATRINA G RACE C.   O NGOCO  M  ANAGING E DITOR  R EUBEN B ERNARD M.   S ORIANO  E RINN M  ARIEL C.   P EREZ  M  A .   N INNA R OEM  A.   B ONSOL  E XECUTIVE C OMMITTEE  R EUBEN B ERNARD M.   S ORIANO  J UAN P  AOLO M  AURINO R.   O LLERO  L  AYOUT AND D ESIGN  J OHN R EE E.   D OCTOR   Q U  AMTO   C OMMITTEE M EMBERS   CALOS   LEANDRO   L.    ARRIERO ELISE   MARIE   B.   BERTOS GABRIELA   LOUISE   O.J.   CANDELARIA WARREN RODANTE D. GUZMAN MARY GRACE D. LUNA LEAN   JEFF   M.   MAGSOMBOL JUAN   PAOLO   MAURINO   R.   OLLERO  ANN CAIRA C. SURIO MARY    JANE   D.   VILARAY  A TTY  .    A L C ONRAD B.   E SPALDON   A DVISER    Q U AMTO  FOR TAXATION   LAW    (1991-2015) 1  UNIVERSITY    OF   SANTO   TOMAS FACULTY OF CIVIL LAW  TEAM   BARO PS   ACADEMICS   COMMITTEE   2016 GENERAL PRINCIPLES OF TAXATION Nature of Taxation Q: What is the nature of the power of taxation?   (1996, 2005)    A: The power to tax is an attribute of sovereignty  and is inherent in the State . It is a power emanating from necessity  because it imposes a necessary burden to preserve the State's sovereignty (PhiL Guarantee Co. vs. Commissioner, L-22074, April 30, 1965).  It is inherently legislative in nature  and character in that the power of taxation can only be exercised through the enactment of law.  ALTERNATIVE ANSWER: The nature of the power of taxation refers to its own limitations such as the requirement that it should be for  a public purpose , that it be legislative , that it is territorial  and that it should be subject to international comity . Q: Why is the power to tax considered inherent in a sovereign State? (2003)  A: It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty . Without this power no sovereign State can exist or endure. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent state or government. No sovereign state can continue to exist without the means to pay its expenses; and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax ( 51 Am. Jur.,Taxation 40 ). B. Principle of Sound Tax System   Q: Explain the principles of a sound tax system. (2015)  A: A sound tax system must be characterized by the following: a.   Fiscal Adequacy   –  which means that the sources of revenue should be sufficient    to meet the demands of public   expenditures ; b.    Administrative Feasibility   –  which means that the tax laws should be capable of convenient, just, and effective administration ; and c.   Theoretical Justice or Equality  - which means that the tax imposed should be proportionate to the taxpayer’s ability to pay . Doctrines in Taxation Imprescriptibility Q: May the collection of taxes be barred by prescription? Explain your answer. (2001)  A: Yes. The collection of taxes may be barred by prescription. The prescriptive periods for collection of taxes are governed by the tax law imposing the tax. However, if the tax law does not provide for prescription, the right of the government to collect taxes becomes imprescriptible. Q: Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been adopted on this score (a)   The National Internal Revenue Code; (b)   The Tariff and Customs Code; and (c)   The Local Government Code Answer: (1997)  A: The rules that have been adopted on prescription are as follows: a.   National Internal Revenue Code –  1.   3 years - The statute of limitation for assessment   of tax if a return is filed  is 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 date of actual filing.  A return filed before the last day prescribed by law shall be considered to have been filed on such last day. The period to collect the tax is within five years from date of assessment. 2.   10 years -   If no return is filed or the return filed is false or fraudulent with intent to evade the tax , the tax may be   assessed  , or a proceeding in court for the collection  of such tax may be filed without assessment  , at any time within ten (10) years after the discovery of the falsity, fraud or omission. Any internal revenue tax which has been assessed within the period of limitation as prescribed hereof may be collected within five (5) years following the assessment of the tax. b.   Tariff and Customs Code - It does not express any general statute of limitation; it provided, however, that “when articles have been entered and passed free of duty or final adjustments of duties made, with subsequent delivery, such entry and passage free of duty or settlements of duties will, after the expiration of three (3) years from the date of the final payment of duties, in the absence of fraud or protest or compliance audit pursuant to the provisions of this Code, be final and conclusive upon all parties, unless the liquidation of the import entry was merely tentative. (Sec. 1603 TCC, as amended by R.A. 9135)   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 maybe assessed within ten (10) 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).     Double Taxation Q: Differentiate between double taxation in the strict sense and in a broad sense and give an example of each. (2015)  A: Double taxation in the strict sense pertains to the direct double taxation. This means that the taxpayer is taxed twice by the same taxing authority , within the same taxing jurisdiction , for the same property  and for the same purpose . Example: Imposition of final withholding tax on cash dividends and requiring the taxpayer to declare this tax-paid income in his income tax returns.  QuAMTO for TAXATION LAW (1991-2015)   *QUAMTO is a compilation of past bar questions with answers as suggested by UPLC and other distinct luminaries in the academe, and updated by the UST Academics Committee to fit for the 2016 Bar Exams. 2  On the other hand, double taxation in the broad sense pertains to indirect double taxation. This extends to all cases in which there is a burden of two or more impositions. It is a double taxation other than those covered by direct double taxation (CIR v. Solidbank Corp, 436 SCRA 416 [2003]) . Example: Subjecting the interest income of banks on their deposits with other banks to the 5% gross receipt tax (GRT) despite of the same income having been subjected to 20% final withholding tax (FWT), is only a case of indirect double taxation. The GRT is a tax on the privilege of engaging in business while the FWT is a tax on privilege of earning income. (CIR v. Bank of Commerce, 459 SCRA 638 [2005]) . Q: When an item of income is taxed in the Philippines and the same income is taxed in another country, is there a case of double taxation? (1997)  A: Yes. However, it is only a case of indirect duplicate taxation  which is not legally prohibited  because the taxes are imposed by different taxing authorities. Q: X, a lessor of a property, pays real estate tax on the premises, a real estate dealer's tax based on rental receipts and income tax on the rentals. X claims that this is double taxation? Decide. (1996)  A: There is no double taxation. DOUBLE TAXATION means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, by the same taxing authority for the same purpose and with the same kind or character of tax. The REAL ESTATE TAX is a tax on property; the REAL ESTATE DEALER'S TAX is a tax on the privilege to engage in business; while the INCOME TAX; a tax on the privilege to earn an income. These taxes are imposed by different taxing authorities and are essentially of different kind and character ( Villanueva vs. City of Iloilo, 26 SCRA 578).   Q: Is double taxation a valid defense against the legality of a tax measure? (1997)  A: No. double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the legality of a tax measure (Pepsi Cola v. Tanawan 69 SCRA 460) . However, if double taxation amounts to a direct duplicate taxation , in that the same subject is taxed twice when it should be taxed but once, in a fashion that both taxes are imposed for the same purpose  by the same taxing authority , within the same jurisdiction  or taxing district, for the same taxable period  and for the same kind or character of a tax , then it becomes legally objectionable for being oppressive and inequitable . Q: What are the usual methods of avoiding the occurrence of double taxation? (1997)  A:  The usual methods of avoiding the occurrence of double taxation are: 1.   Allowing reciprocal exemption either by law or by treaty; 2.   Allowance of tax credit for foreign taxes paid; 3.   Allowance of deduction for foreign taxes paid; and 4.   Reduction of the Philippine tax rate. Escape from taxation Q: Distinguish tax evasion from tax avoidance. (1996)  A: Tax evasion  is a scheme used outside of those lawful means  to escape tax liability and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance , on the other hand, is a tax saving device within the means sanctioned by law , hence legal. Tax Avoidance Q: Mr. Pascual's income from leasing his property reaches the maximum rate of tax under the law. He donated one-half of his said property to a non-stock, non-profit educational institution whose income and assets are actually, directly and exclusively used for educational purposes, and therefore qualified for tax exemption under Article XIV, Sec. 4 (3) of the Constitution and Sec. 30 (h) of the Tax Code. Having thus transferred a portion of his said asset, Mr. Pascual succeeded in paying a lesser tax on the rental income derived from his property. Is there tax avoidance or tax evasion? Explain. (2000)  A:  There is tax avoidance. Mr. Pascual has exploited a fully permissive alternative method to reduce his income tax by transferring part of his rental income to a tax exempt entity through a donation of one-half of the income producing property. The donation is likewise exempt from the donor's tax. The donation is the legal means employed to transfer the incidence of income tax on the rental income. Q: Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of P1 million. Said property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. In October 2007, EIP Corporation, a real estate developer, expressed its desire to buy the Makati property at its fair market value P300 million, payable as follows: (a) P60 million down payment; and (b) balance, payable equally in twenty four (24) monthly consecutive installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property for shares of stock of MAS Corporation. A BIR ruling, confirming the tax-free exchange of property for shares of stock, was secured from the BIR National Office and a Certificate Authorizing Registration was issued by the Revenue District Officer (RDO) where the property was located. Subsequently, she sold her entire stock holdings in MAS Corporation to EIP Corporation for P300 million. In view of the tax advice, Maria Suerte paid only the capital gains tax of P29,895,000 ( P100,000 x 5% plus P298,900,00 x 10% ), instead of the corporate income tax of P104,650,00 ( 35% on P299 million gain from sale of real property ). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax evasion. Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to? Explain. (2008)  A: The contention of the RDO is not tenable. Maria Suerte resorted to tax avoidance and not tax evasion. Tax avoidance is the use of legal means to reduce tax liability and it is the legal right of taxpayer to decrease the amount of what otherwise would be his taxes by means which the
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