I.

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 Sangguniang
Panlungsod 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 and 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) thus would amount to DOUBLE
TAXATION, since its businesses was already taxed under Sections 15 and 17 of the Code.

a. May local government units impose a tax on businesses already subjected to tax under
the NIRC?

Yes. A local government unit may impose a tax on any business provided that any
business subject to the excise, value-added or percentage tax under the NIRC, the rate of tax
shall not exceed 2% of gross sales or receipts of the preceeding calendar year. Sec143(H) LGC

b. Does this amount to double taxation?

Yes. There is double taxation,

Same subject matter – privilige of doing business in the City of Kalookan
Same Purpose – same persons conducting business to contribute to city revenues
Same Taxing Authority – City of Kalookan
Same Taxing Period – per calendar year
Same Kind or Character – a business tax imposed on gross sales or receipts of the
business
(Coca-Cola v City of Manila)

II. 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. The company has adopted
a policy that the EMPLOYEE’S 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).

a. Kris Konejero, a FILIPINO ACCOUNTANT in KKI’s Tax Department in the Makati Office,
and married to a Filipino engineer also working in KKI;
 Yes. A resident citizen is subject to income tax within or without the Philippines and thus
required to file tax return with the BIR.

b. Klaus Kloner, a GERMAN NATIONAL who heads KKI’s Design Department in its Makati
office;
Yes. A resident alien engage in trade or business in the Philippines is subject to income
tax and required to file tax return with the BIR.

c. Krisanto Konde, 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
compnay’s project in Jakarta, Indonesia, which project is expected to be completed in April
2019;
Yes. Subject to income tax being resident of the Philippines and required to file income
tax return with the BIR.

d. Kamilo Konde, Krisanto’s brother, also and 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 Taiwanes dollars, be paid to his wife in Manila in its Philippine Peso
equivalent; and
No. Citizen of the Philippines working and deriving income from abroad is not subject to
income tax.

e. Karen Karenina, a Filipibo 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.

Yes, may be subjected to income tax if she stays on an aggregate period of more than
180days in the Philippines. In the case at bar, it is presumed that she stays for more than 180
days since she was tranferred in June 2017.

III. 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 of the corporations mentioned are majority-owned in common by the Koh family and covered by
a BIR-qualified multiemployer-employee retirement plan (MEERP), under which the employees
maybe 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 Mercedez Benz car
worth PhP 5 million as a surprise, with a streamer that reads: “You’ll be missed”. Goodluck, Sir Kim.”

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

Yes. Tax exemption for retirement benefits is applicable only when it is based on reasonable
plan. In the case at bar, the amount of car given is valued at 5million which is not reasonable.
It is also required that the employees has completed 10yrs of service in the company. In the
case, although Kim has served for more than ten years, it cannot be considered since the
employer has distinct and separate juridical personality.

b. Which internal revenue tax, if any, will apply to the grant of the car to Kim by the company?
(2.5%)

Donor’s Tax will apply because it is an excise tax imposed on the privilege to transfer property
given by mere liberality without any consideration.

IV. 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 the 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.

a. Is Katrina liable for donor’s tax?

Not liable for donor’s tax since the legal requirement that not more than 30% of the gift will be
used for administrative purposes has been complied with by using the site for classroom
building.
b. How much in deduction from gross income may Katrina claim on account of the said
donation?

Dedudctible amount is 6.5m only. The basis for the deduction is the acquisition cost of the
property and not the fair market of the lot donated.

V. Spouses Konstantine 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 o the immigration policy enunciated by the US President Donald Trump,
many Filipinos have since returned to the Philippine sand 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 theme that they will be taxed 5% on the first
PhP100, 000 net capital gain, and 1% on the net capital gain in excess of PhP 100, 000.

Is the lawyer correct? If not, how should the spouses Konstantine and Korina be taxed on the
sale of their shares?

No. The capital gains tax on sale of shares of stocks directly to buyer applies only to domestic shares.
The transaction having a foreign situs is subject to normal income tax.

VI. Kria, Inc, a Korean corporation engaged in the business of manufacturing electric vehicles,
established a branch office on the Philippine in 2010. The Philippine branch constructed a
manufacturing plant in Kabuyao, Laguna, and the construction lasted there (3) year. Commercial
operations in the Laguna plan 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.

a. Is the Philippine branch of Kria subject to the 10% IAET under the circumstances stated
above?

Yes it is liable to 10% IAET if it cannot justify that the accumulated earning is based on the
reasonable needs of the company by applying the immediacy test.

b. Is it subject to 15% branch profit remittance tax (BPRT)?

No since the profit of the branch is not yet remitted to its head office.
To be subject of the 15% BPRT, it shall be remitted by the branch tooffice to its head office
based on the total profits applied for remittance without any deduction from the tax component
thereof. (Sec28 A [5]) NIRC

VII. 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 I trust for the politician as executed between him and Karissa.

Karissa died single on May 1, 2017 due to 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 he death;

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

a. Should the beachfront property properly included in Karissa’s gross estate?

 a. Yes. She has interest over the property since no proof can be presented that it was held in trust
by the politician/lover. The law provides that the gross estate shall include all the properties,
real or personal, tangible or intangible, where the decedent has an interest.

b. Are the claimed deductions proper?

In that case, sa funeral expenses- can only claim as much as 200k or 5% of the gross estate whichever is lower

Medical expenses of 100k may be granted

Loss amounting to 6may likewise be granted provided that at the filing of the estate tax
return, such was not claimed as a deduction for income tax purposes in an income tax return
And not compensated for by insurance or otherwise
VIII. Upon the death of their beloved parents in 2009, Karla, Karto, and Karlie inherited a huge tract of
farmland in Kanlaon City. The sibling 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 al
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 Kanlao 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?

The donation made to Kanlaon City High School Alumni Association shall not be imposed donors tax
provided that the property donated shall be used for the benefit of the association’s purpose and not
more than 30% of the property shall be used for administratvie purposes. Thus, such donation would be
wise as they will not be liable for donor’s tax

The donation made to Kanlaon City Water Distrtict and to their second cousin shall be imposed donor’s
tax. They do not fall from the list provided by law that is exempt from donor’s tax.

IX. 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 five (5) years a 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 BIT 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.
a. Is the transfer subject to VAT?
No. One of the requisites for a transaction to be VAT-taxable is that the sale, barter or exchange
of goods is undertaken in the course of trade or business. In this case, the sale of the properties
is an isolated transaction not done in the ordinary course of “karlito’s Enterprises” and is thus
not subject to VAT. (CIR vs Magsaysay Lines 7/28/06)

b. Is the transfer subject to income tax?

No.
GR: Upon the sale or exchange of property, the entire amount of the gain or loss shall be
recognized.
XPN: If property is transferred to a corporation by a person in exchange for stock or unit of
participation in such corporation, as a result of such exchange said person gains control of said
corporation, provided that stocks issued for services shall not be considered as issued in return
for property.

“No gain or loss shall be rcognized” means that if there is a gain it shall not be subject to tax and
if there is a loss it shall not be allowed as a deduction.

CIR vs. Filinvest Development Corp. GR No. 163653 7/19/11

Requisites for the non-recognition of gain or loss are as follows:
1. The transferee is a corporation;
2. The transferee exchanges its shares of stock for property/ies of the transferor;
3. The transfer is made by a person, acting alone or together with others, not exceeding four
persons; and
4. As a result of the exchange, the transferor, alone or totgether with others, not exceeding
four, gains control of the transferee corporation.

X. Klause, 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
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. This 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?

No. In order that the sale may be subject to VAT, it must be made by a taxable person in the
course of trade or furtherance of his profession. Applying this in the case at bar, the sale of
the subject lot was not made in the course of trade or business, or in the regular conduct or
pursuit of a transactions incidental thereto. The sale may be considered as an isolated
transaction which is not subject to VAT.

b. Is the sale subject to 6% capital gains tax or regular corporate income tax of 30%

Yes, the lot being considered as a capital assetis subject to 6% capital gains tax.
BIR Ruling 27-12 [7/15/02] If the real property is a land or building which is not actually used in
the business of the seller and is treated as a capital asset, then a final tax of 6% shall be imposed
on the gain presumed to have been realized on its sale or disposition based on the gross selling
price or fair market value, whichever is higher. This rule shall apply whether or not the sellerr is
engaged in real estate business

XI. 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 its 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.

a. Is the contention of the school correct?

b. Will your answer be the same if Koko signed up a VAT-registered person only in 2017?

XII. 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?
 (YES) NO. ASSESSMENT is NOT NECESSARY BEFORE A TAXPAYER MAYBE PROSECUTED if
there is a prima facie showing of a willful attempt to evade taxes as in THE TAXPAYER'S
FAILURE to declare a specific item of taxable income in his income tax returns (Ungab v. Cusi
97 SCRA 877). On the contrary, if the TAXES ALLEGED TO HAVE BEEN EVADED is COMPUTED
BASED ON REPORTS APPROVED BY THE BIR there is a presumption of regularity of the
previous payment of taxes, so that unless and until the BIR has made a FINAL
DETERMINATION of what is supposed to be the correct taxes, the taxpayer should not be
placed in the crucible of criminal prosecution (CIR v. Fortune Tobacco Corp., GK No. 119322,
June 4, 1996).

XIII. 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 SECONDHAND BUSES, files a REPLEVIN SUIT with the Regional Trial
Court (RTC). The RTC granted the replevin suit upon the filing of a bond. Did the RTC err in granting
the replevin?

YES. The REGIONAL TRIAL COURTS are devoid of any competence to pass upon the validity
or regularity of seizure and forfeiture proceedings conducted by the Bureau of Customs and
to enjoin or otherwise interfere with these proceedings. It is the COLLECTOR OF CUSTOMS,
sitting in seizure and forfeiture proceedings, who has exclusive jurisdiction to hear and
determine all questions touching on the seizure and forfeiture of dutiable goods. Thus, the
RTC has no jurisdiction to take cognizance of the petition for replevin by respondents herein,
issue the writ of replevin and order its enforcement. The COLLECTOR OF CUSTOMS had
already seized the vehicles and set the sale thereof at public auction. The RTC should have
dismissed the petition for replevin at the outset. (Asian terminals vs Bautista)

XIV. 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 action prosper?

NO. It is the CTA which has JURISDICTION OVER A PETITION FOR CERTIORARI challenging an
interlocutory order involving a local tax case being tried by RTC. (City of Manila v. Grecia-
Cuerdo, 715 SCRA 182 [2014]) Since APPELLATE JURISDICTION FOR THE TAX REFUND is
VESTED IN THE CTA, petition for certiorari seeking nullification of an interlocutory order
issued in the case should likewise be filed in CTA. To rule otherwise would lead to an absurd
 situation where two courts decide on the same case. (City of Manila v. Grecia-Cuerdo, 715
SCRA 182 [2014])
XV. 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
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.

a. Is the Kidapawan assessor correct in assessing back taxes and interest?

(YES) SEC. 217 OF THE LOCAL GOVERNMENT CODE provides that "REAL PROPERTY SHALL
BE CLASSIFIED, VALUED, AND ASSESSED on the basis of its actual use regardless of where
located, whoever owns it, and whoever uses it". The law focuses on the ACTUAL USE OF THE
PROPERTY for classification, valuation and assessment purposes regardless of ownership.

b. Is Kerwin correct that only 2/3 of the property should be considered commercial?

(YES) In the case of ABRA VALLEY COLLEGE, INC. VS AQUINO, the court ruled that since
ONLY A PORTION is used for purposes of commerce, it is only fair that HALF OF THE
ASSESSED TAX be returned to the school involved. In the given case, ONLY A PORTION OF
THE PROPERTY USED FOR PURPOSES OF COMMERCE should be assessed with back taxes.

c. 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?
Yes, he is required. Section 252 of the LGC provides that no protest shall be entertained unless
the taxpayer first pays the tax. If you RECEIVED AN ASSESSMENT by the BIR, the remedies
are:
a. File a request for reconsideration of the assessment or this is a claim for re-evaluation of the
assessment based on the existing records.
b. File a request for investigation of the assessment --- it is also a claim for a re-evaluation of the
assessment on the basis of newly discovered evidence, or additional evidence that the taxpayer
intends to present in the reinvestigation.
 WHERE TO FILE: (a) & (b) >>>>> BIR Commissioner ISSUES which may be raised >>>>>
Question of law or fact or both questions of law and fact WHEN >>>>>>>>>>>>>>>>>>>>>>>
Within 30 days from receipt of such assessment

XVI. 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 its was
Kaka who possessed the property throughout 2016. Is Kurt correct in RESISTING the trial court’s
requirement to pay the taxes first?

Yes, Testate Estate of Concordia T. Lim, the unpaid tax attaches to the property and is chargeable
against the taxable person who had actual or beneficial use and possession of it regardless of whether or
not he is the owner. In an action for ejectment, the RTC cannot require the payment of the real property
taxes because the issue in ejectment cases only involves possessory rights.

XVII. Kilusang Krus Inc. (KKI) is a non-stock, non-profit religious organization which owns a vast tract
of land in Kalinga. KKI has DEVOTED ½ 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 ½ PORTION has remained idle. The KKI
Board of Trustees DECIDE TO LEASE the remaining ½ 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 decide 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.

a. Is KKI LIABLE FOR REAL PROPERTY TAXES on the LAND?

(YES) The LAND is subject to real property tax but ONLY FOR THE 1/2 PORTION LEASED to
the real estate developer because it is NOT actually, directly and exclusively used for
religious, educational or charitable purposes.

The LAND DEVOTED for church with cemetery, school and a hospital is EXEMPT because such
lots are actually, directly and exclusively used for religious and educational purposes. The ½
PORTION LEASED TO A REAL ESTATE DEVELOPER as well as the IDLE AND UNOCCUPIED
LAND are not tax exempt, since the property is not exclusively or solely used for religious and
educational purposes. The Constitution provides that “All lands, buildings and improvements
ACTUALLY, DIRECTLY and EXCLUSIVELY USED for charitable, religious and educational
purposes shall be exempt from taxation. To BE EXEMPT FROM REAL PROPERTY TAXES,
 Section 28(3), Article VI of the Constitution requires that such exempt institution use the
property "actually, directly and exclusively" for charitable, religious and educational purposes

b. Is KKI’s income from the rental fees subject to income tax?

(NO) The rental fees are NOT SUBJECT TO INCOME TAX because the INCOME FROM RENTAL
is exclusively used for charitable and educational purposes. The CONSTITUTION provides
that ALL REVENUES AND ASSETS OF NON-STOCK, NON-PROFIT EDUCATIONAL
INSTITUTION which are actually, directly and exclusively used for educational purposes are
EXEMPT FROM TAXATION (Sec. 4 par. 3, Article XIV, 1987 Constitution).

XVIII. Kathang isip Inc. (KKI) 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 KKI APPLIED FOR RENEWAL OF ITS MAYOR’S PERMIT AND LICENSES in its principal office in
January this year, Kalookan City DEMANDED THE 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. KKI 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, Kil 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 KKI, QUESTIONED the use of Atty. Kabuyao’s Professional Tax Receipt (PTR)
issued in Aklan for a case filed in Kalookan City.

a. Is KKI’s contention that KALOOKAN CITY can only collect local business taxes based on
sales consummated in the principal office meritorious?

(NO) Under the law, MANUFACTURERS maintaining a BRANCH OR SALES OUTLET shall
record the sale in the branch or sales outlet making the sale and PAY THE TAX in the city
or municipality where the branch or sales outlet is located. Since KKI maintains one
factory, the SALES RECORDED IN THE PRINCIPAL OFFICE shall be allocated and 30% OF
SAID SALES ARE TAXABLE in the place where the principal office is located while 70% IS
TAXABLE in the place where the factory is located (Sec. 150 LGC).

a. Is the Kalookan City counsel correct in saying that Atty. Kabuyao’s PTR ISSUED IN AKLAN
cannot be used in Kalookan City?
 (NO) A PROFESSIONAL TAX maybe paid to the province where he/she practices his/her
profession or where he/she maintains principal office in case the practice is in several places,
PROVIDED, AFTER PAYMENT he/she shall be ENTITLED to the practice his/her profession in
any part of the Philippines WITHOUT being subjected to any other national or local tax,
license, or fee for the practice of the profession.

XIX. The BIR assessed Kosco., Inc. an importer of food products, deficiency income and value-added
taxes, plus 50% surcharged 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, Inc. 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 surcharged 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.

a. Is the imposition of the 50% surcharge proper?

(YES) The SURCHARGE OF 50% is proper because the under declaration of its sales by an
amount exceeding 30% of that declared in its income tax and VAT returns falls within the
purview of FALSE OF FRAUDULENT RETURNS. There is a PRIMA FACIE EVIDENCE OF FALSE
OR FRAUDULENT RETURN when the TAXPAYER substantially underdeclared 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
OVERDECLARATION, respectively, and will justify the imposition of the 50% surcharge on the
deficiency tax due from the taxpayer (Sec. 248, NIRC).

b. If your answer to (a) is yes, may Kosco, Inc. enter into a compromise with the BR for reduction
of the amount of surcharged to be paid?

(NO) It CANNOT be subjected to a COMPROMISE PENALTY by reason of fraud. 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. (Sec. 204, NIRC)

XX. 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 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, lifted an appeal with the Court of Tax Appeal (CTA).
a. Can the CTA act on KKI’s appeal?

(NO) The TWO-YEAR PRESCRIPTIVE PERIOD TO FILE A CLAIM FOR REFUND refers to the
administrative claim with the BIR and NOT to the period to elevate the claim to the CTA.
Hence, the CTA cannot deny the refund for reasons that the first quarter claim was filed
beyond the two-year period prescribed by law. However, WHEN THE CLAIM IS MADE
BEFORE THE CTA on February 1, there is definitely NO APPEALABLE DECISION AS YET
because the 120-day period for the Commissioner to act on the claim for refund has not
yet lapsed. Hence, the ACT OF THE TAXPAYER IN ELEVATING THE CLAIM TO THE CTA is
premature and the CTA has no jurisdiction to rule thereon. (CIR vs. Aichi Forging
Company of Asia, Inc. G.R. No. 184823, Oct. 6, 2010; CIR vs. San Roque, G.R. No. 187485
[Feb. 12, 2013])

b. Will your answer be the same if KKI filed its appeal on March 20, 2011 and CIR had not
yet acted on its claim?

NO, The TWO-YEAR PERIOD TO FILE A CLAIM FOR REFUND refers to the administrative
claim and does NOT refer to period within which to elevate the claim to the CTA. The
FILING OF THE ADMINISTRATIVE CLAIM FOR REFUND was TIMELY DONE because it is
made within two years from the end of the quarter when the zero-rate transaction took
place (Sec. 112(A), NIRC). When KKI decided to ELEVATE ITS CLAIM TO THE CTA on
MARCH 20, 2011, it was after the lapse of 120 days from the filing of the claim for refund
with the BIR, hence, the APPEAL IS SEASONABLY FILED. The RULE ON VAT REFUND is
two years to file the claim with the BIR, plus 120 days for the Commissioner to act and
inaction after 120 days is a deemed adverse decision on the claim, APPEALABLE TO THE
CTA within 30 days from the lapse of the 120-day period (CIR v. Aichi Forging Company
of Asia, Inc. GR No. 184823, Oct. 6, 2010; CIR vs. San Roque G.R. No. 187485 [Feb.12,
2013])