BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

WITHHOLDING TAX

Question No. 5: (1993)

X owns a half-hectare property in Bacoor, Cavite which in 1980 was

expropriated by the national government, through the Department of Public Works
and Highways. After ten years, X was paid P 2,000,000.00 as just compensation
plus 6% annual interest by the DPWH but minus the withholding tax. Is the action
of DPWH proper? Reasons.

Answer:

No. The action of DPWH is not proper.

In the case of Province of Tayabas vs. Perez, 66 Phil. 467 just compensation
was defined as “the just and complete equivalent of the loss which the owner of a
thing expropriated has to suffer by reason of the expropriation”.

Further, in BIR Ruling 61-91 just compensation was defined as that which is
paid by the Government equivalent to the value of the property at the time of its
taking. It is the fair and full equivalent for the indemnity.

Based in the foregoing, it is clear therefore that the amount received after 10
years as just compensation is not in any way a profit, gain or income on the part of
X. In the same vein, the 6% annual interest paid by DPWH is not income. The
same partakes of the nature of a penalty or indemnity due and accruing to X for
having been deprived of the use and benefit by not being paid of the fair market
value of the property since its taking 10 years ago. Hence, the DPWH should not
have withheld taxes.

Alternative Answers:

a) No. The withholding tax (presumably on capital gains) should have been
based on the fair market value of the property at the time of the expropriation.
Thus, in this case, for purposes of computing the withholding tax on capital gains,
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

the amount representing the 6% annual interest should have been excluded from
the withholding tax base.

b) No. With respect to capital gains on sales of realty to the government, X

may elect to include the same in his gross compensation income or to pay the
corresponding capital gains tax. By withholding the taxes on the just compensation
(for which the basis should only be P 2,000,000.00) excluding the interest) DPWH
denied such option to X.

c) Assuming the property is an ordinary asset, the expropriation proceedings in

1980 is not subject to the creditable withholding tax under Revenue Memorandum
Circular 7-90 clarifying Revenue Regulations Nos. 12-89 and 1-90 implementing
Section 50 (b) of the NIRC, the transfer of the property was effected in 1980. The
above-mentioned revenue rules and regulations are applicable only to sales,
exchange or transfers of real properties consummated on or after 1 January 1990
(BIR Ruling 040-91). The 6% interest on the “just compensation” is not in the
nature of an interest on Philippine currency bank deposit and yield or any other
monetary benefit from deposit substitutes from trust fund and similar
arrangements, the same is not subject to the 20% final withholding tax under Sec.
21 of the NIRC (BIR Ruling 040-91).

Question No. 15: (1993)

Pacific, Inc. is engaged in overseas shipping. It time chartered one of its

ships to a Japanese company on a five-year term. The charter was consummated
through the efforts of Kamino Moto, a Tokyo based broker. The negotiation took
place in Tokyo. The agreement calls for Pacific, Inc. to pay Kamino Moto $
50,000.00. Your opinion is sought whether Pacific, Inc. should withhold the tax
before sending the compensation of Kamino Moto.

Answer:

The compensation of Kamino Moto is not subject to withholding tax.

Compensation for labor or personal services performed outside the Philippines are
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

considered as income from sources without the Philippines (Sec 36 (c) (3) and (a)
(3). Kamino Moto’s efforts in consummating the Charter is a form of labor or
services.

Considering further than Kamino Moto is a Tokyo-based broker, presumably

a non-resident foreign corporation, it is taxable only on income within the
Philippines. Since the contract was consummated in Japan, Kamino Moto’s
compensation, therefore, is not subject to withholding tax.

Alternative Answers:

a) Taxes should not be withheld as the income was derived from an activity
outside the country and therefore, from sources outside the Philippines. It has been
held in Commissioner v. Japan Air Lines, 202 SCRA 450 that for the source of
income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activities within the country. The time chartering of the
ship occurred outside the Philippine territory. Therefore, income derived therefrom
is not subject to income taxes that may be withheld at source.

b) Kamino Moto is a non-resident alien not engaged to trade or business in the

Philippines. According to Section 25 of the NIRC, he is liable to pay income tax if
the compensation income derived from sources within the Philippines. However,
the brokerage service of Kamino Moto was rendered in Tokyo. Applying the
source rule in Section 6 of the NIRC, the income derived by the taxpayer is income
derived from sources outside the Philippines. Thus, the compensation of Kamino
Moto is not subject to Philippine income tax. Pacific, Inc. should not withhold
income tax on the payment.

Question No. 18: (1994)

Bates Advertising Company is a non-resident corporation duly organized

and existing under the laws of Singapore. It is not doing business and has no office
in the Philippines. Pilipinas Garment Incorporated, a domestic corporation,
retained the services of Bates to do all the advertising of its products abroad. For
said services, Bates fees are paid through outward remittances.
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Are the fees received by Bates subject to any withholding tax?

Answer:

The fees paid to Bates Advertising Co. a non-resident foreign corporation

are not subject to withholding tax since they are not subject to Philippine tax. They
are exempt because they do not constitute income from Philippine sources, the
same being compensation for labor or personal services performed outside the
Philippines (Sec. 36 © (3) and Sec. 25 (b) (1), Tax Code).

XII. (1998)

Is the prize of one million pesos awarded by the reader’s Digest subject to
withholding of final tax? Who is responsible for withholding the tax? What are the
liabilities for failure to withhold such tax? [5%]

Suggested Answer:

a) It depends. If the prize is considered as winnings derived from sources

within the Philippines, it is subject to withholding of final tax (Sec. 24[B] in
relation to Sec. 57[A], NIRC). If derived from sources without the
Philippines, it is not subject to withholding of final tax because the
Philippine tax law and regulations could not reach out to foreign jurisdiction.
b) The tax shall be withheld by the Reader’s Digest or local agent who has
control over the payment of the prize.
c) Any person required to withhold r who willfully fails to withhold, shall, in
addition to the other penalties provided under the Code, be liable upon
conviction to a penalty equal to the total amount of tax not withheld (Sec.
251, NIRC). In this case of failure to withhold the tax or in the case of under
withholding, the deficiency tax shall be collected from the
payor/withholding agent (1st par., Sec. 2.57[A]. R.R. No. 2-98).

Any person required under the Tax Code or by rules and regulations to
withhold taxes at the time or times required by law or rules and regulations
shall, in addition to other penalties provided by law, upon conviction be
punished by a fine of not less than Ten thousand pesos (Php10,000) and
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

suffer imprisonment of not less than one (1) year but not more than ten (10)
years (1st par., Sec. 255, NIRC).

Comment:

It is suggested that any of the following answers to the question, “What are
the liabilities for failure to withhold such a tax?” be given full credit:

1. The payor shall be liable for the payment of the tax which was not
withheld.
2. The payor/withholding agent shall be liable to both civil and criminal
penalties imposed by the Tax Code.

XVI. (1998)

May the Commissioner of the Internal Revenue compromise the payment of

withholding tax (tax deducted and withheld at source) where the financial position
of the taxpayer demonstrates a clear inability to pay the assessed tax? [5%]

Suggested Answer:

No. A taxpayer who is constituted as withholding agent who has deducted

and withheld at source the tax on the income payment made by him holds the taxes
as trust funds for the government (Sec. 58[D] and is obligated to remit them to the
BIR. The subsequent inability of the withholding agent to pay/remit the tax
withheld is not a ground for compromise because the withholding tax is not a tax
upon the withholding agent but it is only a procedure for the collection of a tax.

VII. (1999)

HK Co. is a Hong Kong corporation not doing business in the Philippines. It

holds 40$ of the shares of A Co., a Philippine company, while the 60% is owned
by P Co., a Filipino-owned Philippine corporation. HK Co. also owns 100% of the
shares of B Co., an Indonesian company which has a duly licensed Philippine
branch. Due to worldwide restricting of the HK Co. group, HK Co. decided to sell
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

all its shares in A and B Cos. The negotiations for the buy-out and the signing of
the Agreement of Sale were all done in the Philippines. The Agreement provides
that the purchase price will be paid to HK Co’s bank account in the U.S and that
little to A and B Cos Shares will pass from HK Co. to P Co. in HK where the stock
certificates will be delivered. P Co. seeks your advice as to whether or not it will
subject the payments of purchase price to WT. Explain your advice. (10%)

Suggested Answer:

P Co. should not subject the payments of the purchase price to

withholding tax. While the seller is a non-resident foreign corporation which is not
normally required to file returns in the Philippines, therefore, ordinarily all its
income earned form Philippine sources is taxed via the withholding tax system,
this is not the procedure availing with respect to sale of shares of stock. The capital
gains tax on the sale of shares of stock of a domestic corporation is always required
to be paid through a capital gains tax return filed. The sale of the shares of stock of
the Indonesian Corporation is not subject to income tax under our jurisdiction
because the income derived therefrom is considered as a foreign-sourced income.

Alternative Answer:

Yes, but only on the shares of stocks of A Co. and only on the portion of the
purchase price, which constitutes capital gains. Under the Tax Code of 1997, the
capital gains tax imposed under Section 28 (B) (5) (c) is collectible via the
withholding of tax at source pursuant to Section 57 of the same Code.

(Note: The bar candidate might have relied on the provision of the Tax Code
of 1997 which provides that the capital gains tax is imposed as withholding taxes
(Section 57, NIRC). This procedure is impractical and therefore, not followed in
practice because the buyer/ withholding agent will not be in a position to determine
how much income is realized by the seller from the sale.

For this reason, any of the foregoing suggested answers should be given full
credit).
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

IX. (1999)

HK Co., is a Hong Kong Company, which has a duly licensed Philippine

branch, engaged in trading activities in the Philippines. HK Co. also invested
directly in 40% of the shares of stock of A Co., a Philippine corporation. These
shares are booked in the Head Office of HK Co. and are not reflected as assets of
the Philippines branch. In 1998. A Co. declared dividends to its stockholders.
Before remitting the dividends to HK Co. A Co. seeks your advice as to whether it
will subject the remittance to WT. No need to discuss WT rates, if applicable.
Focus your discussion on what is the issue (10%).

Suggested Answer:

I will advise A Co. to withhold and remit the withholding tax on the
dividends. While the general rule is that a foreign corporation is the same juridical
entity as its branch office in the Philippines, when, however, the corporation
transacts business in the Philippines directly and independently of tis branch, the
taxpayer would be the foreign corporation itself and subject to the dividend tax
similarly imposed on non-resident foreign corporation. The dividends attributable
to the Home Office would not qualify as dividends earned by a resident foreign
corporation, which is exempt from tax. (Marubeni Corporation v. Commissioner,
GR No. 76573, September 14, 1989).

X. (1999)

A Co., a Philippine corporation, has two divisions manufacturing and

construction. Due to the economic situation it had to close its construction division
and lay-off the employees in that division. A Co. has a retirement plan approved by
the BIR, which requires a minimum of 50 years of age and 10 years of service in
the same employer at the time of retirement.

There are 2 groups of employees to be laid off:

(a) Employees who are at least 50 years of age and has 10 years of service at the
time of termination of employment.
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

(b) Employees who do no meet either the age or length of service A Co. plans to
give the following:

For category (A) employees – the benefits under the BIR approved plan plus
an exgratia payment of one month of every year of service.

For category (B) employees - one month for every year of service.

For both categories, the cash equivalent of unused vacation and sick leave
credits.

A Co. seeks your advice as to whether or not it will subject any of these
payments to WT, Explain your advice. (5%)

Suggested Answer:

For category A employees, all the benefits received on account of their

separation are not subject to income tax, hence no withholding tax shall be impose.
The benefits received under the BIR approved plan upon meeting the service
requirement and age requirement are explicitly excluded from gross income. The
exgratia payment also qualifies as an exclusion from gross income payment also
qualifies as an exclusion from gross income being in the nature of benefit received
on account of separation due to causes beyond the employees control. (Section
32(B). NIRC). The cash equivalent of unused vacation and sick leave credits
qualifies as part of separation benefits excluded from gross income (CIR v. Court
of Appeals, GR NO. 96016, October 17, 1991).

For category B employees, all the benefits received by them will also be
exempt from income tax. Hence not subject to withholding tax. These are benefits
received on account of separation due to causes beyond the employees control
which are specifically excluded from gross income. (Section 32 (B), NIRC)

Alternative Answer:

All of the payments are not subject to income tax and should not also be
subject to WT. The employees were laid off, hence separated for a cause beyond
their control, Consequently, the amounts to be paid by reason of such involuntary
separation are excluded from gross income, irrespective of whether the employee
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

at the time of separation has rendered less than ten years of service and/or is below
fifty years of age. (Section 32(B), NIRC).

XIV. (2001)

Is a non-resident alien who is not engaged in trade or business or in the

exercise of profession in the Philippines but who derived rental income from the
Philippines required to file an income tax return on April of the year following his
receipt of said income? If not, why not? Explain your answer. (5%)

Suggested Answer:

No. The income tax on all income derived from Philippines sources by a
non-resident alien who is not engaged in trade or business in the Philippines is
withheld by the lessee as a Final Withholding Tax. [Section 57(A), NIRC]. The
government cannot require persons outside of its territorial jurisdiction to file a
return; for this reason, the income tax on income derived from within must be
collected through the withholding tax system and thus relieve the recipient of the
income the duty to file income tax returns. (Section 51, NIRC).

VI. (2002)

To start a business of his own, Mr. Mario De Guzman opted for an early
retiremet from a private company after ten (10) years of service. Pursuant to the
company’s qualified and approved private retirement benefit plan. He was paid his
retirement benefit which was subjected to withholding tax.

Is the employer correct in withholding the tax? Explain. (2%)

Under what conditions are retirement benefits received by officials and

employees of private firms excluded from gross income and exempt from taxation?
(3%)
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

a. It depends. An employee retiring under a company’s qualified and private

retirement plan can only be exempt from income tax on his retirement
benefits if the following requisites are met: (1) that the retiring employee
must have been in service of the same employer for at ten (10) years; (2) that
he is not less than 50 years of age at the time of retirement; and (3) the
benefit is availed of only once.
In the instant case, there is no mention whether the employee has likewise
complied with requisites number (2) and (3).

b. The conditions to be met in order that requirement benefits received by

official and employees of private firms are excluded from gross income and
exempt from taxation are as follows:

1. Under Republic Act No. 4917 (those received under a reasonable private
benefit plan):
a) The retiring official employee must have been in service of the same
employer for at least ten (10) years;
b) That he is not less than fifty (50) years of age at the time of
retirement; and
c) That the benefit is availed of only once.

2. Under Republic Act No. 7641 (those received from employers without
any retirement plan):
a) Those received under existing collective bargaining agreement and
other agreements are exempt; and
b) In the absence of retirement plan or agreement providing for
retirement benefits the benefits are excluded from gross income and
exempt from income tax if:
i. Retiring employee must have served at least five (5) years; and
ii. That he is not less that sixty (60) years of age but not more than
sixty five (65).
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IV. (2004)

A. Citing Section 10, Article VIII of the 1987 Constitution which provides that
salaries of judges shall be fixed by law and that during their continuance in
office their salary shall not be decreased, a judge of MM Regional Trial
Court questioned the deduction of withholding taxes from his salary since it
results into a net deduction of his pay.

Is the contention of the judge correct? Reason briefly. (5%)

Suggested Answer:

A. No. The contention is incorrect. The salaries of the judges are not tax-
exempt and their taxability is not contrary to the provisions of Section 10,
Article VIII of the Constitution of the non-diminution of the salaries of
members of the judiciary during their continuance in office. The clear intent
of the Constitution Commission that framed the Constitution is to subject
their salaries to tax as in the case of all taxpayers. Hence, the deduction of
withholding taxes, being a manner of collecting the income tax on their
salary, is not a diminution contemplated by the fundamental law. (Nitafan
et.al. v. Cur. 152 SCRA 284 (1987)).

B. A municipality, BB, has an ordinance which requires that all store,

restaurants, and other establishments, selling liquor should pay a fixed
annual fee of P20,000. Subsequently, the municipal mayor, CC, refused to
sign the ordinance on the ground that I would constitute double taxation.

Is the refusal of the mayor justified? Reason briefly. (5%)

Suggested Answer:

B. No. The refusal of the mayor is not justified. The impositions are different
nature and character. The fixed annual fee is in the nature of a license fee
imposed through the exercise of police power while the 5% tax on purchase
or consumption is a local tax imposed through the exercise of taxing powers.
Both a license fee and a tax may be imposed on the same business or
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

occupation, or for selling the same article and this is not in violation of the
rule against double taxation (Compania General de Tabacos de Filipinas v.
City of Manila, 8 SCRA 367 (1963)).

IX. (2005)

Company A decides to close its operations due to continuing losses and to

terminate the services of its employess. Under the labor code, employees who are
separated from service for such cause are entitled to a minimum of one-half month
pay for every year of service. Company A paid the equivalent of one month pay for
every year of service and the cash equivalent of unused vacation and sick leaves as
separation benefits.

Are such benefits taxable and subject to withholding tax under the Tax
Code? Decide with reasons. (5%)

Suggested Answer:

The separation benefits paid by company A to its employees are excluded

from gross income being in the nature of benefits given to employees whose
services were terminated due to causes beyond their control. (Sec. 32 (B)(6)(b)
NIRC). The entire benefits, thus, are not taxable and not subject to withholding tax
under the Tax Code.

VII. (2006)

Congress enacts a law imposing a 5% tax on the gross receipts of common

carters. The law does not define the term “gross receipts”. Expenses Transport,
Inc., a bus company plying the Manila-Baguio route, has time deposits with ABC
Bank. In 2005, Express Transport earned P1 Million interest, after deducting the
20% final withholding tax from its time deposits with the bank. The BIR wants to
collect a 5% gross receipts tax on the interest income of Express Transport without
deducting the 20% final withholding tax. Is the BIR correct? Explain. 5%
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Suggested Answer:

Yes. The term “gross receipts” is broad enough to include income not
physically received but constructively received by the taxpayers. After all, the
amount withheld is paid to the government on its behalf, in satisfaction of its
withholding taxes. The fact that it did not actually receive the amount does not
alter the fact that it is remitted for its benefit in satisfaction of its tax obligations.
Since the income withheld is an income owned by express transport, the same
forms part of its gross receipts. (CIR v. Bank of Commerce, 459 SCRA 638
[2005]; CIR v. Solid bank Corp., 416 SCRA 436 [2003]; CIR v. China Bank, 403
SCRA 634 [2003]).

XIII. (2007)

(5%)

ABC Corporation won a tax refund case for P50 Million. Upon execution of
the judgment and when trying to get the Tax Credit Certificates (TCC)
representing the refund, the Bureau of Internal Revenue (BIR) refused to issue the
TCC on the basis of the fact that the corporation is under audit by the BIR and it
has a potential tax liability. Is there a valid justification for the BIR to withhold the
issuance of the TCC? Explain your answer briefly.

Suggested Answer:

The BIR has no valid justification to withhold the TCC. Offsetting the
amount of TCC against a potential tax liability is not allowed, because both
obligations are not yet fully liquidated . While the amount of the TCC has been
determined, the amount of deficiency tax is yet to be determined through the
completion of the audit. (Philex Mining Corporation v. CIR, 294 SCRA
687[1998]).

Alternative Answer:

There is no valid justification to withhold the TCC. The requirement, that

the claim for refund/ TCC and liability for deficiency taxes must be settled under
 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

one proceeding to avoid multiplicity of suits, will not apply since the
determination of the entitlement to the refund was already removed from the BIR.
To reopen the claim for refund in order to give way to the introduction of evidence
of a deficiency assessment will lead to an endless litigation, which is not allowed.
(CIR v. Citytrust Banking Corporation, 499 SCRA 477 [2006]).

X. (2010)

True or False.

G. Informer’s reward is subject to a final withholding tax of 10%.

Suggested Answer:

TRUE. [Sec. 282, NIRC.]