Commercial

Question 1

Corporation

Answer 1

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence. Revised Corporation Code, Sec. 2

Question 2

Attributes of a corporation

Answer 2

1. Artificial being with separate and juridical personality
2. Created by operation of law
3. Has the right of succession
4. Has the powers, attributes, and properties expressly authorized by law or incident to its existence

Question 3

Kinds of Corporations

Answer 3

1. Stock vs. Nonstock
   Stock corporations are those which have capital stock divided into shares and are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held. All other corporations are nonstock corporations. (Sec. 3)

A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers: Provided, that any profit which a non-stock corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title.

2. Close corporations (Sec. 95)
   One whose articles of incorporation provides that:
   a) all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding 20;
   b) all the issued stock of all classes shall be subject to 1 or more specified restrictions on transfer permitted by this Title; and
   c) the corporation shall not list in any stock exchange or make any public offering of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.
3. Educational corporations
4. Religious corporations
5. Holding/Parent/Subsidiaries
   - SRC 12
   - wholly-owned vs. majority-owned subsidiary
6. De Facto corporation
   - Sec. 19
7. Corporation by estoppel
   - Sec. 20
8. One person corporation
   - Sec. 115
9. Corporations vested with public interest

Question 4

Who cannot be close corporations?

Answer 4

Mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest. (Sec. 95)

Question 5

One person corporation

Answer 5

a. may be formed by a natural person, trust or an estate. NOT allowed - Banks, NSSLAs, etc., and natural person licensed to exercise a profession (116)

b. NO minimum capital stock required (117)

c. Not required to have by-laws (119(

d. The sole stockholders shall also be the sole director and president (121)

e. The sole stockholder may not be the corporate secretary (122)

f. If he is also the treasurer, he must give a bond to the SEC, in the amount to be determined by SEC*, renewable every 2 years (122)

g. Sole stockholder must provide name of nominee and alternate nominee in the AOI of the OPC, as well as their authority in managing the affairs of the OPC (124)

Question 6

Corporations Vested with Public Interest

Answer 6

Sec. 22

a. Corporations covered by Sec. 17.2 of the SRC
b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, preneed, trust and insurance and other financial intermediaries
c. Corporations engaged in business vested with public interest similar to above, as determined by SEC

Question 7

Requirements of Corporations vested with public interest

Answer 7

a. 20% of the board must be composed of Independent Directors*
b. Stockholders have the right to vote in absentia, regardless of any provisions in the bylaws
c. Must submit an annual report of total compensation of each of the directors/trustees
d. Must elect a compliance officer
e. Material contracts involving directors, officers, spouses and 4th degree relatives must be approved by at least 2/3 vote of entire membership of the board, with at least a majority of the independent directors voting to approve the material contract
f. Must submit annually a director or trustee appraisal or performance report and the standards or criteria used to assess each director or trustee

Question 8

Formation of a corporation

Answer 8

1. Corporate Name
2. Purpose
3. Principal Office Address
4. Corporate Term
5. Incorporators (Sec. 10)
6. Board of Directors
7. Capitalization
8. Share distribution
9. Treasurer
10. Undertaking to Change Name
11. No Transfer Clause

Question 9

Capitalization

Answer 9

• Minimum capitalization of P5,000 has been deleted
• No minimum subscription

Question 10

Corporate Status

Answer 10

• Non-use of Corporate Charter: 5 years, otherwise revoked
• Continuous Inoperation: 2 years, otherwise delinquent
• Registered
• Revoked
• Delinquent: 2 years to resume operations otherwise revoked

Question 11

Doctrine of Centralized Management

Answer 11

Corporate powers are vested in a central body, the board of directors for stock corporations, board of trustees for non-stock corporations.

Question 12

Business Judgment Rule

Answer 12

Questions of policy and management are left to the sound discretion and honest decision of the officers and directors and the courts are without authority to substitute their judgment for the judgment of the board.

Question 13

What are the principal tests in determining the nationality of a corporation?

Answer 13

1. Place of Incorporation test: Under the place of incorporation test, the nationality of a corporation is determined by under whose laws it has been organized and registered, regardless of the nationality of majority of its stockholders (RCC, Sec. 140).
2. Control test: The nationality of a private corporation is determined by the character or citizenship of its controlling stockholders

Question 14

What is the primary test in determining the nationality of a corporation?

Answer 14

The place of incorporation test is the primary and general test used in determining the nationality of a corporation (RCC, Sec. 140). However, the control test may be used:

1. In times of war
2. In determining compliance with constitutional and statutory foreign equity restrictions; or
3. For corporations organized for the purpose of exploiting natural resources, and operating public utilities, mass media, advertising, and other corporations subject to foreign equity restrictions under Sec. 11 of Article XIl and Sec. 11 of Article XVI of the Constitution

Question 15

Under the Foreign Investments Act, when is a corporation considered as a Philippine National?

Answer 15

The term “Philippine National” shall mean a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines shall be considered a Philippine National.

A corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos is a Philippine National.

The Supreme Court held that what the Constitution requires is that full and legal beneficial ownership of 60% of the outstanding capital stock (OCS), coupled with 60% of the voting rights, must rest in the hands of Filipino nationals.

Thus, for purposes of determining compliance with constitutional or statutory ownership requirements, the required percentage of Filipino ownership shall be applied to both:
1. The total number of outstanding shares of stock entitled to vote in the election directors; and
2. The total number of outstanding shares of stock, whether or not entitled to vote. Both the Voting Controt Test and the Beneficial Ownership Test must be applied to determine whether a corporation is a “Philippine national.”

Question 16

What is the Grandfather Rule?

Answer 16

The Grandfather Rule is the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where corporate shareholders are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.

It involves further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations (Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines Corp, G.R. No. 195580, January 28, 2015).

The Strict Rule or the Grandfather Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt. If there is no doubt, the Grandfather Rule will not apply (Id.).

Note: It is only when the Control Test is first complied with that the Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the need to resort to the Grandfather Rule disappears.

Question 17

What is the beneficial ownership test?

Answer 17

Under the beneficial ownership test, mere legal title is insufficient to meet the required Filipino equity, he should also have full beneficial ownership of the share. If the voting right of a share held in the name of a Filipino citizen of national is assigned or transferred to an alien, that share is not to be counted in the determination of the required Filipino equity. In the same vein if the dividends and other fruits and accessions of the share do not accrue to a Filipino citizen or national, then that share is also to be excluded or not counted.

Question 18

What is the nationality of a corporation sole?

Answer 18

A corporation sole has no nationality as the framers of the Constitution did not have in mind the religious corporations sole - or any corporation sole, for that matter - when they provided the 60% requirement.

Question 19

What is the Doctrine of Separate Juridical Personality?

Answer 19

A corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members.

Question 20

What is the principle of limited liability?

Answer 20

The principle of limited liability provides that a corporate officer or a stockholder, as a general rule, is not personally held liable for corporate debts. Since a corporation has a separate and distinct personality, it may incur its own liabilities and is responsible for the payment of its debts. The liability of the stockholder is limited to the unpaid subscription.

Question 21

What is the Doctrine of Piercing the Corporate Veil?

Answer 21

The doctrine of separate juridical personality, a corporation has a legal personality separate and distinct from those individuals acting for and, in its behalf, and, in general, from those comprising it. This legal fiction may only be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.

Though the corporation has separate and distinct personality from its stockholders, such personality may be disregarded, or veil of corporate fiction may be pierced, attaching personal liability to the responsible person, if the corporate personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or use to defeat the labor laws Hence, the separate and distinct juridical personality of a corporation is disregarded or pierced.

Question 22

What are the kinds of piercing cases?

Answer 22

1. Traditional Veil-Piercing Action where a court disregard the existence of the corporate entity so a claimant can reach the assets of a corporate insider; and
2. Reverse Piercing Action has two (2) types:

a. Outsider reverse piercing occurs when a pany with a claim against an individual for corporation attempts to be, repaid with assets of a corporation owned or substantially controlled by the defendant. In contrast,

b. Insider reverse piercing the controlling members will attempt to ignore the corporate fiction in order to take adyantage of a benefit available to the corporation, such as ah interest in, a lawsuit or protection of personal assets.

Question 23

In what cases is the doctrine of piercing the corporate veil applied?

Answer 23

(DFA) The doctrine of piercing the corporate veil applies only 3 basic areas, namely:

1. Defeat of public convenience - as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
2. Fraud cases - when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or
3. Alter ego cases - where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation

Note: It has also been suggested that there is another group of cases where the doctrine of piercing the veil of corporate fiction can be applied known as Equity Cases. However, even “Fraud Cases” and “Alter Ego Cases” are oftentimes explained on the basis of equity and not on the basis of strict application of the rule on complete separation of legal personality. “Fraud Cases” and “Alter Ego cases” are oftentimes Equity Cases.

Question 24

What are the tests to determine the application of the Alter Ego Theory which would warrant the piercing of the corporate veil?

Answer 24

(CFC)

A Three-Pronged Test is used to determine the application of the alter ego theory, which is also known as the Instrumentality Theory, namely the:

a. Instrumentality or Control test - Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will, or existence of its own;

b. Fraud test - Such control must have been used by the defendant to commit fraud or wrong in contravention of plaintiff’s legal rights; and

c. Harm/Causal Connection test - The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any of these three elements prevents the piercing of the corporate veil.

Question 25

Does the corporation have to be impleaded in the case when invoking the doctrine of piercing the veil of corporate fiction?

Answer 25

Yes. Compliance with the modes of acquiring jurisdiction over the person of the defendant or respondent cannot be dispensed with in applying the doctrine of piercing the veil of corporate fiction A corporation not impleaded in a suit cannot be subject to the court’s process of piercing the veil of its corporate fiction.

However, in labor cases, the veil of corporate fiction can be pierced, and responsible corporate directors and officers or even a separate but related corporation, may be impleaded and held answerable solidarily in a labor case, even after final judgment and on execution, so long as it is established thät such persons have deliberately used the corporate vehicle to unjustly evade the judgment obligation, or have resorted to fraud, bad faith or malice in doing so. When the shield of a separate corporate identity is used to commit wrongdoing and opprobriously elude responsibility, the courts and the legal authorities in a labor case have not hesitated to step in and shatter the said shield and deny the usual protections to the offending party, even after final judgment. The key element is the presence of fraud, malice or bad faith.”

Question 26

What are the probative factors considered in alter ego cases that will justify the application of the doctrine of piercing the corporate veil?

Answer 26

(BIMB) The probative factors considered are:

1. Stock ownership by one or common ownership of Both corporations;
2. Identity of directors and officers;
3. Methods of conducting the business; and
4. Manner of keeping corporate Books and records

Question 27

What are the indicia that a subsidiary company is merely an alter ego of its parent corporation?

Answer 27

(OCF-SIPNo-DUIF)
A combination of two or more of the following circumstances, taken together, may be indicia that a subsidiary corporation is but a mere instrumentality or alter ego of its parent corporation:

1. The parent corporation Owns all or most of the capital stock of the subsidiary;
2. The parent and subsidiary corporations have Common directors or officers.
3. The parent corporation Finances the subsidiary;
4. The parent corporation Subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;

5. The subsidiary has grossly Inadequate capital;
6. The parent corporation Pays the salaries and other expenses or losses of the subsidiary;
7. The subsidiary has substantially No business except with the parent corporation or no assets except those conveyed to or by the parent corporation;
8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a Department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own;
9. The parent corporation Uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in the Interest of the subsidiary, but take their orders from the parent corporation; and
11. The Formal legal requirements of the subsidiary are not observed

Question 28

What is the Trust Fund Doctrine?

Answer 28

The Trust Fund Doctrine provides that the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims.

Question 29

What is covered by the Trust Fund Doctrine?

Answer 29

The Trust Fund Doctrine is not limited to reaching the stockholder’s unpaid subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts.

Additional Paid-in Capital is considered a contribution of a stockholder over and above the par value of shares and falls under the concept of corporate Trust Fund upon its recording in the books of the corporation (SEC Opinion dated June 11, 2004).

Question 30

In what instances would the Trust Fund Doctrine be violated?

Answer 30

(CDR-Traln)
The Trust Fund Doctrine is violated in the following instances:

1. Where the corporation has distributed its Capital among the stockholders without providing for the payment of creditors;
2. When there is payment of Dividends without unrestricted retained earnings;
3. Where it has Released the subscribers to the capital stock from their subscriptions;
4. Where it has Transferred the corporate property in fraud of its creditors; and
5. Where the corporation is Insolvent

Question 31

What are the Classes of Corporations?

Answer 31

(1) As to number of components:
a. Aggregate corporation - a corporation consisting of more than one member.
It has been defined as an artificial body of men, composed of diverse individuals, the ligaments of which body, the franchises and liberties bestowed upon it, bind and all unite, all into one. and consists the whole frame and essence of the corporation.
b. Corporation sole - a corporation consisting. of only one person or member
(RCC, Sec. 108)
c. One Person Corporation - a corporation with a single stockholder (RCC, Sec.
116).

(2) As to functions:
a. Public Corporation - a corporation organized for the government of a portion of a State (like cities and municipalities) for the purpose of serving general good and welfare.
b. Private Corporation - a corporation formed for some private purpose, benefit, aim or end.

(3) As to the manner of creation:
a. Corporation created by special law - a corporation directly created by Congress through a special law. Such corporation must be a government-owned or controlled corporation.
b. Corporation created under a general law - a corporation created under the Revised Corporation Code, the Corporation Code of the Philippines or the old Corporation Law.
c. Corporations by Prescription - a corporation that was not formally organized as such but has been duly recognized by immemorial usage as a corporation with rights and duties enforceable under the law.

(4) As to legal status:
a. De jure corporation -a corporation organized in accordance with requirements of the law.
b. De facto corporation - a corporation that is formed where there exists a flaw in its incorporation but there is colorable compliance with the requirements of law.
c. Corporation by estoppel - a group of persons which holds out itself as a corporation and enters into a contract with a third person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said contract (RCC, Sec. 20).

(5) As to existence of stocks:
a. Stock corporation - a corporation with capital stock that is divided into shares and is authorized to distribute to holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held
b. Non-stock corporation - a corporation that has no capital stock, does not issue stocks, and does not distribute dividends to its members (RCC, Sec.
87).

(6) As to laws of incorporation:
a. Domestic corporation - a corporation formed, organized or existing under Philippine laws (RCC, Sec. 140).
b. Foreign corporation - a corporation formed, organized or existing under laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State (RCC, Sec. 140).

Question 32

What are the distinguishing characteristics of a close corporation?

Answer 32

(ALGI-KPDA) The following are the distinguishing characteristics of a close corporation:

1. Stockholders may Act as directors without the need for Election and therefore are liable as directors;
2. Stockholders who are involved in the management of the corporation are Liable in the same manner as directors are;
3. Quorum may be Greater than mere majority when provided in the AOl;
4. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum are Invalid;
5. Corporate Acts may be binding even without a formal board meeting, if the stockholder had Knowledge or ratified the informal action of the others;
6. Preemptive right extends to all stock issues;
7. Deadlocks in board may be settled by the SEC, on the written petition by any stockholder; and
8. Stockholder may withdraw and avail of his right of Appraisal (RCC, Secs. 95-
104).

Question 33

What is the number and term of trustees for educational corporations?

Answer 33

The number of trustees in educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, That the number of trustees shall be in multiples of five (5) (RCC, Sec. 106).

The board of trustees of incorporated schools, colleges, or other institutions of learning shall so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year unless otherwise provided in the articles of incorporation or by-laws. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years (RCC, Sec. 106).

Question 34

Who may form an OPC?

Answer 34

Only a natural person, trust, or an estate may form an OPC (RCC, Sec. 116).

Question 35

What are the classes of religious corporations?

Answer 35

Religious corporations may be incorporated by one or more persons. Such corporations may be classified into:

1. Corporation Sole:
A corporation sole is one which is formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding, elder of a religious denomination, sect, or church for the purpose of administering and managing, as trustee, the affairs, property, and temporalities of such religious denomination, sect or church (RCC, Sec. 108).
2. Religious Societies:
Unless forbidden by competent authority, the Constitution, pertinent rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, any religious society, religious order, diocese or synod, or district organization of any religious denomination, sect or church, may, upon written consent and/ or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties, and estate by filing with the SEC, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church (RCC, Sec. 114).

Question 36

What is the rule regarding the bylaws of an OPC?

Answer 36

The OPC is not required to submit and file corporate bylaws (RCC, Sec. 119).

Question 37

What entities are prohibited from becoming an OPC?

Answer 37

The following may not incorporate as an OPC:

1. Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-chartered government-owned and controlled corporations; and
2. A natural person who is licensed to exercise a profession may not organize an OPC for the purpose of exercising such profession except as otherwise provided under special laws (RCC, Sec. 116).

Question 38

What is the minimum capital stock required for an OPC?

Answer 38

A One Person Corporation shall not be required to have a minimum authorized capital stock except as otherwise provided by special law (RCC, Sec. 117).

Question 39

What must be included in the corporate name of an/OPC?

Answer 39

A One Person Corporation shall indicate the letters “OPC” either below or at the end of its corporate name (RCC, Sec 129)

Question 40

What is the position of the single stockholder of the OPC?

Answer 40

The single stockholder shall be the sole director and president of the One Person Corporation (RCC, Sec. 121).

Question 41

What are the rules regarding the officers of the OPC?

Answer 41

The rules are as follows:
1. Within 15 days from the issuance of its certificate of incorporation, the OPC shall appoint a treasurer, corporate secretary, and other officers as it may deem necessary;

2. The OPC shall notify the SEC thereof within 5 days from appointment of the officers;
3. The single stockholder may not be appointed as the corporate secretary; and
4. A single stockholder who is likewise the self-appointed treasurer of the corporation shall:
   a. Give a bond to the SEC in such a sum as may be required;
   b. Undertake in writing to faithfully administer the OPC’s funds to be received as treasurer, and to disburse and invest the same according to the AOl as approved by the SEC;
   c. Renew the bond every 2 years or as often as may be required (RCC, Sec. 122).

Question 42

When is a single stockholder solidarily liable with the OPC?

Answer 42

Where the single stockholder cannot prove that the property of the OPC is independent of the stockholder’s personal property, the stockholder shall be jointly and severally liable for the debts and other liabilities of the OPC. The principle of piercing the corporate veil applies with equal force to an OPC (RCC, Sec. 130).

Question 43

In what instance may an ordinary corporation be converted into an OPC?

Answer 43

When a single stockholder acquires all the stocks of an ordinary stock corporation, the latter may apply for conversion into an OPC, subject to the submission of such documents as the SEC may require (RCC, Sec. 131).

Question 44

What is the effect of conversion of an ordinary corporation to an OPC?

Answer 44

The OPC converted from an ordinary stock corporation shall succeed the latter and be legally responsible for all the latter’s outstanding liabilities as of the date of conversion (RCC, Sec. 131).

Question 45

In what instances may an OPC be converted into an ordinary corporation?

Answer 45

An OPC may be converted into an ordinary-stock corporation after due notice to the SEC of such fact and of the circumstances leading to the conversion, and after compliance with all other requirements for stock corporations under this Code and applicable rules.

In case of death of the single stockholder, the legal heirs, within 60 days from the transfer of shares by the nominee or alternate nominee, shall notify the SEC of their decision to either wind up and dissolve the OPG or convert it into an ordinary stock corporation (RCC, Sec. 132).

Question 46

What is the effect of conversion from an OPC to an ordinary corporation?

Answer 46

The ordinary stock corporation converted from an OPC shall succeed the latter and be legally responsible for all the latter’s outstanding liabilities as of the date of conversion (RCC, Sec. 132).

Question 47

What is a Holding Corporation (Parent Corporation)?

Answer 47

It is one which controls another as a subsidiary by the power to elect majority of the latter’s board members. It is one that holds stocks in other companies for purposes of control rather than mere investment.

Question 48

What is a Subsidiary Corporation?

Answer 48

It is one which is so related to another corporation that the majority of its directors can be elected either directly or indirectly by such other corporation.

Question 49

What is the required number of incorporators in forming a corporation?

Answer 49

Any person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15) in number may organize a corporation (RCC, Sec. 10).

Question 50

Who can be incorporators?

Answer 50

Natural persons, partnerships, association, or corporations can be incorporators.

Question 51

What are the basic qualifications in order to be an incorporator?

Answer 51

(15-NOL) In order to become an incorporator, the following qualifications must be present:

1. The incorporator must be a Natural or juridical entity;
2. There must not be more than 15 incorporators;
3. If the incorporator is a natural person, he or she must be of Legal age; and
4. Each incorporator of a stock corporation must own or be a subscriber to at least One share of the capital stock.

Question 52

What is the required minimum capital stock in a stock corporation?

Answer 52

None. There is no required minimum capital stock in a stock corporation (RCC, Sec. 12).

Question 53

Are there corporations with required minimum capital stocks?

Answer 53

Yes. Corporations governed by special laws which impose initial capitalization requirements are required to have a minimum amount of capital stocks.

Question 54

How long does a corporation exist?

Answer 54

A corporation shall have perpetual existence unless its articles of incorporation provides otherwise (RCC, Sec. 11).

Question 55

When does a corporate term commence?

Answer 55

A corporate term commences upon issuance of the certificate of incorporation by the SEC (RCC, Sec. 19).

Question 56

Is a Certificate of Incorporation relevant?

Answer 56

A certificate of incorporation is an indispensable requirement before a corporate life can ensue. It is only then that the incorporators/stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for a period of time mentioned therein.

Question 57

Is a Certificate of Incorporation necessary if the corporation is created through a special law?

Answer 57

No. A certificate of incorporation is not necessary if the corporation is created by a special law. Its corporate existence commences as soon as the law takes effect and is expressly or impliedly accepted.

Question 58

How may a corporate term for a specific period be extended or shortened?

Answer 58

A corporate term for a specific period may be extended or shortened by amending the articles of incorporation (RCC, Sec. 11).

Question 59

How is the power to extend or shorten corporate term exercised?

Answer 59

A private corporation may extend or shorten its term as stated in the articles of incorporation:

1. When approved by a majority vote of the board of directors or trustees, and
2. Ratified at a meeting by the stockholders or members representing at least 2/3 of the outstanding capital stock or of its members (RCC Sec. 36).

Note: In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal under the conditions provided in this Code.

Question 60

When may a corporation extend its corporate term?

Answer 60

No extension may be made earlier than 3 years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the SEC (RCC, Sec. 11).

Question 61

When may a corporation apply for revival of its corporate existence?

Answer 61

A corporation whose term has expired may, at any time, apply for a revival of its corporate existence, together with all the rights and privileges under its certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to revival.

Upon approval by the SEC, the corporation shall be deemed revived and a certificate of revival of corporate existence shall be issued, giving it perpetual existence, unless its application for revival provides otherwise (RCC, Sec. 11).

Question 62

What are “shares?”

Answer 62

Unit into which the proprietary interests in a corporation are divided. It is the intangible interest or right which an owner has in the management, profit and assets of the corporation.

Question 63

What are the different kinds of shares?

Answer 63

(CVP-TRF) Shares may be classified into:

1. Common or Preferred Shares - Common shares or stocks represent the residual ownership interest in the corporation. It is a basic class of stock ordinaily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are those that entitle the shareholder to some priority on dividends and/or asset distribution.

Note: The most common forms of preferred shares may be classified into two;

2. Preferred Shares as to Assets - gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation;
3. Preferred Shares as to Dividends - a share the holder of which is entitled to receive dividences on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. It may be:

a. Cumulative - if a dividend is omitted in any year, it must be made up in a later year before any dividend may be paid on the most common (shares] in the later year;

b. Non Cumulative - there is no need to make up for undeclared dividends.
No right survives as to the undeclared dividends and the directors do not even have discretion to declare those past dividends subsequently; and

c. Participating or Non Participating - entitled to participate with the common shares in excess distribution

3. Voting or Non-voting Shares Shares may be voting or non-voting. In the absence of a provision in the Articles of Incorporation, and consistent with the Doctrine of Equality of Shares, the shares in a stock corporation are considered voting shares (AQUINO & AQUINO, Revised Corporation Code, supra at 169).
   
4. Par value or No par value Shares # Par value shares are those with fixed value stated in the Articles of Incorporation and the share certificate. No-par value shares refer to shares without such arbitrary amount (AQUINO & AQUINO,
   Revised Corporation Code, supra at 166; RCC, Sec, 6).
   
5. Treasury Shares Treasury shares are shares of stock that have been issued and fully paid for, but subsequently reacquired by the Issuing corporation by purchase, redemption, and donation or through, some other lawful means AQUINO & AQUINO, Revised Corporation Code, supra at 180; RCC, Sec. 9).
   
6. Redeemable Shares - Redéemable shares are shares of stocks issued by a corporation which said corporation can purchase or take up from their holders as expressly provide for in the articles of incorporation and certificates of stock representing said shares (AQUINO & AQUINO, Revised Corporation Code, supra at 175).
   
7. Founder’s Shares - Founders’ shares are shares that are given to those who helped organize the corporation. This may be a form of reward to the “founders” (AQUINO & AQUINO, Revised Corporation Code, supra at 174)

Question 64

What shares may be deprived of voting shares?

Answer 64

No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code.

Question 65

What are the contents of the Articles of Incorporation?

Answer 65

(PINT-15-DACO) The contents of the Articles of Incorporation are:

1. The Name of the corporation;

2. The specific Purpose or purposes for which the corporation is being formed.

3. Where a corporation has more than one stated purpose, the articles of incorporation shall indicate the primary purpose and the secondary purpose or purposes: Provided, That a nonstock corporation may not include a purpose which would change or contradict its nature as such;
4. The place where the Principal office of the corporation is to be located, which must be within the Philippines;
5. The Term for which the corporation is to exist, if the corporation has not elected perpetual existence;
6. The names, nationalities, and residence addresses of the Incorporators;
7. The number of directors, which shall not be more than fifteen (15) or the number of trustees which may be more than fifteen (15);
8. The names, nationalities, and residence addresses of persons who shall act as Directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code;
9. If it be a stock corporation, the amount of its Authorized capital stock, number of shares into which it is divided, the par value of each, names, nationalities, and residence addresses of the original subscribers, amount subscribed and paid by each on the subscription, and a statement that some or all of the shares are without par value, if applicable;
   
10. If it be a nonstock corporation, the amount of its capital, the names, nationalities, and residence addresses of the Contributors, and amount contributed by each; and
    Such Other matters consistent with law and which the Incorporators may deem necessary and convenient (RCC, Sec. 13).

Question 66

What is the voting requirement for the Articles of Incorporation to be amended?

Answer 66

Stock corporation: majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock.

Note: this is without prejudice to the appraisal right of dissenting stockholders

Non-stock corporation: by the vote or written assent of majority of the trustees and at least 2/3 of the members.

Question 67

What are the grounds in which an amendment of the Articles of Incorporation may be disapproved?

Answer 67

(Not-CUP)

The grounds for disapproval are:

1. The articles of incorporation or any amendment thereto is Not substantially in accordance with the form prescribed herein;
2. The purpose or purposes of the corporation are patently Unconstitutional, illegal, immoral or contrary to government rules and regulations;
3. The Certification concerning the amount of capital stock subscribed and/or paid is false; and
4. The required Percentage of Filipino ownership of the capital stock under existing laws or the Constitution has not been complied with. (RCC, Sec. 16)

Question 68

What is the Accomplished Fact Rule?

Answer 68

There are provisions of the Articles of Incorporation that cannot be amended because they are accomplished facts. For example, the names of the incorporators cannot be changed and their number cannot be increased because the names and number of the original incorporators are accomplished facts. Similarly, there can be no change in the names of the original directors for the same reason.

Question 69

What is the purpose of the By-Laws of a corporation?

Answer 69

The By-Laws of a corporation are the rules and regulations or private laws enacted by the corporation to regulate, govern, and control its own actions, affairs and concerns and of its stockholders or members and directors and officers in relation thereto and among themselves in relation to the corporation.

Question 70

What is the voting requirement for the adoption of by-laws of a corporation?

Answer 70

For the adoption of bylaws by the corporation, the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of nonstock corporations, shall be necessary (RCC, Sec. 45)

Note: The bylaws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified by a majority of the directors or trustees and countersigned by the secretary of the corporation, shall be filed with the Commission and attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, bylaws may be adopted and filed prior to incorporation; in such case, such bylaws shall be approved and signed by all the incorporators and submitted, to the Commission, together with the articles of incorporation (Id.).

Question 71

What are the contents of the By-Laws?

Answer 71

(DISQ-MPro-QAM-PIOA)

The contents of By-Laws are the following:

The time, place and manner of calling and conducting regular or special meetings of the Directors or trustees;
The time and manner of calling and conducting regular or special meetings and mode of notifying the Stockholders or members thereof;
The required Quorum in meetings of stockholders or members and the manner of voting therein
The Modes by which a stockholder, member, director, or trustee may attend meetings and cast their votes
The form for Proxies of stockholders and members and the manner of voting them;
The directors’ or trustees’ Qualifications, duties and responsibilities, the guidelines for setting the compensation of directors or trustees and officers, and the maximum number of other board representatives that an independent director or trustee may have which shall, in no case, be more than the number prescribed by the Commission;
The time for holding the Annual election of directors or trustees and the mode or manner of giving notice thereof;
The Manner of election or appointment and the term of office of all officers other than directors or trustees;
The Penalties for violation of the bylaws;
In the case of stock corporations, the manner of Issuing stock certificates;
Such Other matters as may be necessary for the proper or convenient transaction of its corporate affairs for the promotion of good governance and anti-graft and corruption measures; and
An arbitration agreement may be provided in the bylaws pursuant to Section 181 of the Revised Corporation Code (RCC, Sec. 46)

Question 72

What are the ways to amend the By-Laws of a corporation?

Answer 72

(OB) ANS: The ways are:

Amendment by the approval of the majority of the Board of Directors and at least a majority of the Outstanding capital stock or at least a majority of the members of a non-stock corporation; and
By the Board alone if there is prior delegation of such powers by the stockholders/members done through votes of the 2/3 of the outstanding capital stock or 2/3 members in a non-stock corporation (RCC, Sec. 47).

Question 73

Is the approval of the SEC required when amending the By-Laws?

Answer 73

Yes. The amended or new-by-laws shall only be effective upon the issuance by the Commission of a certification that the same is, in accordance with the code and other relevant laws.

Question 74

Who are the corporate officers and what are their qualifications?

Answer 74

Immediately after their election, the directors of a corporation must formally organize and elect:

President - must be a director

Treasurer - must be a resident of the Philippines

Secretary - must be a citizen and a resident of the Philippines

If the corporation is vested with public interest, the board shall also elect a compliance officer (Sec. 24).

Question 75

May an officer hold concurrently two or more positions?

Answer 75

The same person may hold two (2) or more positions concurrently, except that no one shall act as president and secretary or as president and treasurer at the same time, unless otherwise allowed in the RCC.

Question 76

What is a Promoter?

Answer 76

Promoters are persons who, acting alone or with others, take initiative in founding and organizing a business or enterprise (SRC, Sec. 3.1)

Question 77

What is the liability of a Promoter?

Answer 77

Contracts entered into by the promoter may, in certain cases, bind a corporation.

The general rule, however, is that the acts of the promoter are not binding on the corporation that will be organized. Nevertheless, any benefit derived by a promoter for the corporation should be given to the corporation. In a sense, promoters sustain a fiduciary relationship to the subscribers, the corporation, and the stockholders and cannot deal unfairly with them or retain any secret profit.

Question 78

What is the liability of the Corporation for Promoter acts?

Answer 78

The general rule is that the acts of the Promoter is not binding on the corporation that will be organized. An exception lies when the corporation ratifies the acts of the Promoter.

Question 79

What is a Subscription Contract?

Answer 79

Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed (RCC, Sec, 59)

Question 80

How is a Subscription Contract perfected?

Answer 80

A subscription contract is perfected as soon as the offer to take shares made by a person to a corporation is accepted by the corporation, or as soon as the person to whom the offer is made accepts an offer of shares by a corporation.

Question 81

Who are the parties to a subscription contract?

Answer 81

The parties are the subscriber and the corporation itself.

Question 82

How can a person become a stockholder in a corporation?

Answer 82

A person can be a stockholder by voluntarily acquiring a share. This may be done through: (1) Purchase; or (2) Subscription.

Question 83

What are the differences between the two modes of becoming a stockholder?

Purchase from a shareholder vs. Subscription

Answer 83

(1) as to time when they are entered into
P: made only after incorporation
S: can be made before or after incorporation

(2) as to time of payment if there is no agreement
P: purchaser must fully pay the purchase price at the time the shares are transferred
S: subscriber need not to pay unless there is a call

(3) as to obligation to pay
P: the stockholder who sells his shares can condone the obligation of the purchaser to pay
S: subscriber cannot be released from his obligation to pay the subscription price

(4) as to the applicability of Statute of Frauds
P: applies if the price is not less than P500
S: does not apply to subscription contracts

Question 84

What is a Pre-Incorporation Subscription?

Answer 84

Pre-Incorporation Subscription of shares refers to the subscription of shares in a corporation still to be formed (RCC, Sec. 60).

Question 85

May a Pre-Incorporation Subscription, be revoked?

Answer 85

No. Pre-Incorporation Subscription of shares shall be irrevocable for a period of at least six (6) months from the date of subscription.

Question 86

In what instances may a Pre-Incorporation Subscription be revoked?

Answer 86

A Pre-Incorporation Subscription may be revoked when:

All the other subscribers consent to the revocation, or
Corporation fails to incorporate within the same period on within a longer period stipulated in the contract of subscription unless the Articles of Incorporation is already submitted to the SEC.

Question 87

What are the considerations that the law allows to be exchanged for shares in subscription agreements?

Answer 87

(CUPIL-RAG) The considerations are:

1. Actual Cash paid to the corporation;

2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued:

3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred Indebtedness of the corporation;
5. Amounts transferred from Unrestricted retained earnings to stated capital:
6. Outstanding shares exchanged for stocks in the event of Reclassification or conversion;
7. Shares of stock in Another corporation; and
8. Other Generally accepted form of consideration (RCC, Sec. 61)

Question 88

What are the conditions imposed in order for a consideration to be exchanged for shares of stock?

Answer 88

(LPV) The conditions are:

1. Stocks shall not be issued for a consideration Less than the par or issued price thereof:

2. Shares of stock shall not be issued in exchange for Promissory notes or future services, and

3. Where the consideration is property, whether tangible or intangible, such as patents or copyrights, the Valuation thereof shall initially be determined by the stockholders or the board of directors, subject to the approval by the SEC.

Question 89

What are the requirements in order that a tangible or intangible property may be accepted as consideration?

Answer 89

(VRAND)

1. The property is actually Received by the corporation;
2. The property is Necessary or convenient for its use and lawful purposes;
3. It must be subject to a fair Valuation equal to the par or issued value of the stock issued;
4. The valuation thereof shall initially be Determined by the stockholders or the board of directors; and
5. The valuation is subject to Approval by the SEC.

Question 90

What is the effect of the non-use of the Corporate Charter?

Answer 90

(RD)

1. If failed to organize or commence business within five years from incorporation: The certificate of incorporation shall be Revoked as of the day following the end of the 5-year period

2. If commenced business but becomes inoperative for a period of at least 5 consecutive years: The commission may, after due notice and hearing, place the corporation under Delinquent status (RCC, Sec. 21).

Question 91

What is the period within which a delinquent corporation is required to resume operations and comply with all the requirements in order to lift its delinquent status?

Answer 91

Two (2) years within which to resume operations and comply with the requirements of the Commission. Upon its compliance, the Commission shall issue an order lifting its delinquent status.

Question 92

What is a de facto corporation?

Answer 92

(LAC)

A de facto corporation is an association of persons existing with:

A valid Law under which the corporation is organized;
A bona fide Attempt in good faith to incorporate; and
An assumption of Corporate Powers (Seventh Day Adventist Conference Church of Southern Philippines, Inc., v. Northeastern Mindanao Mission of Seventh Day Adventists, Inc., G.R. No. 150416, July 21, 2006).

Question 93

When is there a bona fide attempt in good faith to incorporate?

Answer 93

The issuance of the Certificate of Incorporation is essential to the claim of good faith. An association of persons claiming to exercise the powers of a corporation knowing that no Certificate of Incorporation had yet been issued cannot claim to be exercising such powers in good faith (Hall v. Piccio, G.R. No. L-2598, June 29, 1950).

Note: The filing of articles of incorporation (AOl) and the issuance of the certificate of incorporation are essential for the existence of a de facto corporation (Missionary Sisters of Our Lady of Fatima v. Alzona, G.R. No. 224307, August 6, 2018).

Question 94

What is the consequence of a de facto status?

Answer 94

For all intents and purposes, a de facto corporation has the same rights, powers, obligations, and liabilities as a de jure corporation. The only difference is that the due incorporation of a de facto corporation may be directly inquired into by the Solicitor General in a quo warranto proceeding (RCC, Sec. 19).

Question 95

When is there a corporation by estoppel?

Answer 95

There is a corporation by estoppel when a group of persons assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said transaction (RCC, Sec. 20).

Question 96

What is the consequence as to the liability incurred by a corporation by estoppel?

Answer 96

When any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use its lack of corporate personality as a defense.

Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation.

Question 97

To whom is estoppel an available defense against the ostensible corporation?

Answer 97

Estoppel, as a defense, is only available-to third persons; otherwise, there is no corporation by estoppel as the conflict arises orly among those assuming the form of corporation (Lozano v. De Los Santos, G.R. No. 125221, June 19, 1997).

Question 98

What are the differences between a de facto corporation and a corporation by estoppel?

Answer 98

(1) as to who can question its corporate existence
DFC: the state
CE: the state or any third person who relied in good faith on its representation

(2) as to the presence of juridical personality
DFC: it has a juridical personality
CE: there is no juridical personality

(3) as to being subject to a direct and collateral attack
DFC: subject to direct attack only
CE: subject to both direct and collateral attack

(4) as to creation
DFC: has not complied with all requirements but there has been a colorable compliance
CE: absence of conditions precedent needed for a de facto corporation

(5) as to liabilities of officers and directors
DFC: liable only to the extent of their subscription unless acted in bad faith
CE: all who have knowledge of its lack of authority to act as such are liable as general partners

(6) as to capacity to sue or be sued
DFC: can sue and be sued
CE: cannot sue or be sued except by a third party who relied on its representation in good faith

Question 99

What are the qualifications of directors or trustees?

Answer 99

In order for one to become a director or trustee, he/she must possess the following qualifications:

1. He must be of legal age;
2. In stock corporations, directors must own at least 1 share of stock. In non-stock corporations, trustees must be a member;
   3. He must not possess any of the disqualifications provided Sec, 26 of the RCC; and
   4. He must possess such other qualifications as may be prescribed by law and in the bylaws (RCC, Sec 22).

Note: There is no citizenship requirement for directors. However, the members of the board must comply with the same proportion of maximum equity participation under nationalization laws. Also, there is no more residence requirement. The requirement that the majority of the directors or trustees must be residents of the Philippines under Sec. 23 of the Corporation Code has been deleted.

Question 100

What are the grounds for disqualification of directors or trustees?

Answer 100

A person shall be disqualified from being a director, trustee or officer of any corporation if, within 5 years prior to the election or appointment as such, the person was:

1. Convicted by final judgment:
   a. Of an offense punishable by imprisonment for a period exceeding 6 years;
   b. For violating the RCC/ and
   c. For violating R.A. No. 8799, otherwise known as “The Securities Regulation Code;”
2. Found administratively liable for any offense involving fraudulent acts; and
3. By a foreign court or equivalent foreign regulatory authority for similar acts, violations or misconduct (RCC, Sec. 26).

The foregoing is without prejudice to other disqualifications, which the SEC, the primary regulatory agency, or the Philippine Competition Commission may impose.

Question 101

What is the number of directors or trustees allowed by law?

Answer 101

The number of directors or trustees allowed by law are as follows:

a. Stock Corporation - shall not be more than 15 (RCC, Sec. 10):

b. Ordinary Non-Stock Corporation - may be more than 15 (RCC, Sec. 91):

c. Educational corporations and Religious Society - not less than 5 nor more than 15 (RCC, Sec. 106, 114); and

d. Corporation Sole - none (RCC, Sec. 108).

Question 102

How many number of directors are allowed to be elected in a stock corporation?

Answer 102

The number of directors to be elected shall not exceed 15 (RCC, Sec. 13(1).

Question 103

How many number of trustees are allowed to be elected in a non-stock corporation?

Answer 103

The number of trustees to be elected may be more than 15 (RCC, Sec. 91).

Question 104

When are elections of directors or trustees held?

Answer 104

Elections must be held once a year. The Revised Corporation Code authorizes corporation to provide in the by-laws the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof (RCC, Sec. 46).

Question 105

What are the modes of voting directors and trustees?

Answer 105

(CRAP)
Stockholders or members may vote in the following ways:

1. In Person
2. Through a Representative authorized to act by written proxy; or
3. Through remote Communication or in Absentia, provided that:
   a. It is so authorized in the by-laws; or
   b. By a majority of the board of directors (RCC, Sec. 23).

Question 106

What is the quorum for purposes of election?

Answer 106

At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy, the owners of majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote (RCC, Sec. 23).

Question 107

Are stockholders or members who participated through remote communication or in absentia deemed present for purposes of quorum?

Answer 107

Yes. A stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum.

Question 108

What are the methods of voting in stock corporations?

Answer 108

(SOD)

The methods of voting are:

1. Straight Voting - A stockholder may vote such number of shares for as many votes as the humber of directors to be elected.

2. Cumulative Voting for One Candidate - A stockholder may cumulate said shares and give one (1) candidate as many-votes as the number of directors to be elected multiplied by the number of shares owned.

3. Cumulative Voting by Distribution A stockholder may distribute them on the same principle among as many candidates as may be seen fit (RCC, Sec. 23)

Question 109

What is the method of voting in non stock corporations?

Answer 109

The general rule for the election of trustees of a non-stock corporation is that members may cast as many votes as there are trustees to be elected but may cast only one vote per candidate. By way of exception, a non-stock corporation may adopt other modes of casting votes, including, but not limited to, cumulative voting, if the same is authorized in its articles of incorporation or by-laws (SEC-OGC Opinion No. 14-10).

Question 110

What is the term of office of directors or trustees?

Answer 110

Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation’s books, while trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation. Each director and trustee shall hold office until the successor is elected and qualified (RCC, Sec. 22).

Question 111

Who is an independent director?

Answer 111

An independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying but the responsibilities as a director (RCC, Sec. 22).

Question 112

What corporations are required by law to have an independent director?

Answer 112

The board of the following corporations vested with public interest shall have independent directors constituting at least 20% of such board:

1. Corporations covered by Section 17.2 of the Securities Regulation Code namely:

a. Those whose securities are registered with the SEC,

b. Corporations listed with an exchange or with assets of at least P50,000,000 and having 200 or more holders of shares, each holding at least 100 shares of a class of its equity shares;

2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, pre-need, trust and insurance companies, and other financial intermediaries; and
   
3. Other corporations engaged in business vested with public interest similar to the above, as may be determined by the SEC, after taking into account relevant factors which are germane to the objective and purpose of requiring the election of an independent director (RCC, Sec 22).

Question 113

What are the qualifications of an independent director?

Answer 113

(1-CIPA)

An independent director shall have the following qualifications:

1. He shall have at least 1 share of stock of the corporation;
2. He shall be at least a College graduate or he shall have been engaged or exposed to the business of the corporation for at least 5 years;
   
3. He shall possess Integrity/Probity; and
   
4. He shall be Assiduous (SEC Memorandum Circular No. 16, Series of 2012).

Question 114

What is the term of office of directors or trustees?

Answer 114

The following are the terms of office of directors or trustees:

1. Directors shall be elected for a term of 1 year from among the holders of stocks registered in the corporation’s book; and

2. Trustees shall be elected for a term not exceeding 3 years from among the members of the corporation (REC, Sec 22)

Question 115

What is the holdover principle?

Answer 115

The Holdover Principle states that upon failure of a quorum at any annual meeting, the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly provides that an office shall become vacant at the expiration of the term of office for which the officer was elected, the general rule is to allow the officer to holdover until his successor is duly qualified (Government of the Philippine Islands v. El Hogar Filipino, G.R. No. L-26649, July 13, 1927).

Note: Holdover is a situation that arises when no successor is elected due to a valid and justifiable reason (e.g. pending election protest on the outcome of the annual election), in which case, the incumbent holds over and continues to function until another officer is chosen and qualified (SEC Opinion No. 06-18, March 20, 2006).

Question 116

What is the procedure for the removal of directors or trustees?

Answer 116

(MS2NVoF)

The procedure for a valid removal is as follows:

1. Call for a regular or special Meeting;
2. Said meeting is called by the
   a. Secretary on order of the president; or
   b. Secretary upon the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock or a majority of the members entitled to vote;
3. Prior Notice to stockholders or members of the corporation of the time and place of such meeting as well as of the intention to propose removal at the meeting;
4. There must be a Vote of the stockholders representing 2/3 of the outstanding capital stock or members entitled to vote; and
5. Should the secretary Fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand (RCC, Sec. 27)

Question 117

Are directors and trustees entitled to compensation?

Answer 117

In the absence of any provision in the bylaws fixing their compensation, the directors or trustees shall not receive any compensation in their capacity as such, except for reasonable per diems (RCC, Sec. 29).

Question 118

Who can grant the directors and trustees compensation?

Answer 118

The stockholders representing at least a majority of the outstanding capital stock or majority of the members may grant directors or trustees with compensation and approve the amount thereof at a regular or special meeting (RCC, Sec. 29).

Note: Directors or trustees shall not participate in the determination of their own per diems or compensation (RCC, Sec. 29).

Question 119

What is the limitation for the compensation of directors and trustees?

Answer 119

In no case shall the total yearly compensation of directors exeeed ten percent (10%) of the net income before income tax of the corporation during the preceding year (RCC, Sec. 29).

Question 120

What is the additional requirement for the compensation of directors and trustees if the corporation is vested with public interest?

Answer 120

Corporations vested with public interest shall submit to their shareholders and the Commission, an annual report of the total compensation of each of their directors or trustees (RCC, Sec. 29).

Question 121

How are the vacancies in the board filled?

Answer 121

Any vacancy occurring in the board of directors or trustees other than by removal or by expiration of term may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum (RCC, Sec 28).

Note: the election must be held no later than forty-five (45) days from the time the vacancy arose. A director or trustee elected to fill a vacancy shall be referred to as replacement director or trustee and shall serve only for the unexpired term of the predecessor in office.

Question 122

When is there an emergency board?

Answer 122

When the vacancy prevents the remaining directors from constituting a quorum and emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation, the vacancy may be temporarily filled from among the officers of the corporation by unanimous vote of the remaining directors or trustees (RCC, Sec. 28).

Note: The corporation must notify the Commission within 3 days from the creation of the emergency board, stating therein the reason for its creation.

Question 123

What are the voting requirements in terms of election, vacancies and removal of directors, trustees and officers?

Answer 123

(1) Sec. 23 - election of directors or trustees
- Needs presence of quorum (majority of outstanding capital stock/members)

(2) Sec. 27 - removal of directors or trustees
- Needs 2/3 of OCS

(3) Sec. 28 - filling vacancy in the Board, if the ground is not expiration of term, removal, increase in number of directors
- Needs majority of the remaining directors (if still constitutes a quorum)

(4) Sec. 28 - filling vacancy in the Board due to any of the following grounds: expiration of term, removal, increase in number of directors, not among the grounds mentioned, but remaining directors do not constitute a quorum
- OCS/M: the candidates receiving the highest number of votes shall be declared elected (Secs. 23 and 28)
- The quorum can just be majority of the OCS/Members except if the replacement will be elected in the meeting when the director was removed.

(5) Sec. 28 - filling vacancy for Emergency Board if the vacancy prevents the remaining directors from constituting quorum; and emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation
- BoD/T: unanimous vote of the remaining directors/trustees

(6) Sec. 29 - grant of compensation to directors or trustees other than per diem allowance
- Majority of OCS/members

Question 124

What are the “three-fold duties” of director, trustee or officer?

Answer 124

The members of the board of directors;

1. Duty of Obedience - The members of the board of Directors shall direct the affairs of the corporation only in accordance with the purposes for which it was organized

Note: The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or as resolved by the board of directors (RCC, Sec. 25).

2. Duty of Diligence- Provides that the director, trustee or officer shall not:
   a. willfully and knowingly vote for or assent to patently unlawful acts of the corporation; or
   b. act in bad faith or with gross negligence in directing the affairs of the corporation

Note: The first ground applies exclusively to the members of Board of Directors, while the second ground could reasonably include and apply to members of the Management.

3. Duty of Loyalty - shall not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees

Note: In the discharge of his responsibilities and management of property, assets, and business enterprise of the corporation, a director trustee or officer should put the interest of the corporation and the shareholders or members above his personal interest and in the event of conflict-of interest, it would be a breach of his duty of loyalty to prefer his personal interest to that of his principal-the corporation, and of his beneficiaries-the shareholders or members.

Question 125

What is the effect of such disloyalty?

Answer 125

The director, trustee, or officer who commits an act of disloyalty shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation (RCC, Sec. 30).

A disloyal director under Sec. 33 of the RCC must account for and refund to the corporation all profits obtained to the prejudice of the latter, unless the act has been ratified by a vote of the stockholders owning or representing at 2/3 of the outstanding capital stock (RCC, Sec. 33).

Question 126

When is there disloyalty on the part of a director, trustee or officer?

Answer 126

There is disloyalty when a director, trustee, or officer attempts to acquire or acquires any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, and upon which, equity imposes a disability upon himself to deal in his own behalf (RCC, Sec. 30).

A director who, by virtue of such office, acquires a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, is also guilty of disloyalty (RCC, Sec. 33).

Question 127

What is the doctrine of corporate opportunity?

Answer 127

Where a director, by virtue of such office, acquires a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, the director must account for and refund to the latter all such profits, unless the act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked one’s own funds in the venture (RCC, Sec. 33).

Note: The doctrine of corporate opportunity rests fundamentally on the unfairness in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection (Gokongwei, Jr. SEC, G.R. No. L-45911, April 11, 1979).

Question 128

When does the corporate opportunity exist?

Answer 128

Corporate opportunity exists when a proposed activity is reasonably an incident to the corporation’s present or prospective business and is one in which the corporation has the capacity to engage (Total Office Products and Services (TOPROS) v. Chang, G.R. Nos. 200070-21, December 7, 2021).

Question 129

When are the board of directors or trustees solidarily liable for damages?

Answer 129

The board of directors or trustees shall be solidarily liable for damages when they willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees (RCC, Sec. 30).

Question 130

In what instances are the board of directors, trustees, or officers personally or solidarily liable?

Answer 130

(SAWGAV)

Directors, trustees, or officers may be held personally or solidarily liable in the following instances:

1. By virtue of a Specific provision of law;

2. Agreement or stipulation in a contract to hold himself personally liable with the corporation

3. Consent to the issuance of Watered stocks, or, having knowledge thereof, fails to file objections with the corporate secretary (RCC, Sec. 64);
4. Those found guilty of Gross negligence or bad faith in directing the affairs of the corporation (RCC, Sec. 30);
   
5. Acquire any personal or pecuniary interest in conflict with their duty (RCC, Sec. 30); and
6. Willfully and knowingly Vote for and assent to patently unlawful acts of the corporation (RCC, Sec. 30).

Note: Only the “responsible officer,” i.e., the person directly responsible for and who “acted in bad faith” is held solidarily liable. It is the person “actively engaged” in the management of the corporation who is held liable (Guillermo v. Uson, G.R. No. 198967 March 7, 2016). Thus, a director is not liable for misconduct of co-directors or other officers unless:

a. He connives or participates in it; or
b. He is negligent in not discovering or acting to prevent it

Question 131

What are the conditions for a director or officer to be personally liable for the obligations of the corporation?

Answer 131

(PGBG)

Settled is the rule that a ditector or officer shall only be personally liable for the obligations of the corporation, if the following conditions concur:

1. The complainant alleged in the complaint that;
   a. the director or officer assented to Patently unlawful acts of the corporation, or
   b. that the officer was guilty of Gross negligence or Bad faith; and
2. The complainant Clearly and convincingly proved such unlawful acts, negligence or bad faith

Question 132

What are watered stocks?

Answer 132

Watered stocks are stocks of a corporation issued for:

a. Less than their par or issued value in cash; or

b. Non-cash considerations which is valued in excess of its fair value (RCC, Sec. 64).

Question 133

Who are liable for watered stocks?

Answer 133

A director or officer of a corporation is liable for the issuance of watered stock when he:

a. Consents to the issuance of stocks for a consideration less than its par or issued value;

b. Consents to the issuance of stocks for a consideration other than cash, valued in excess of its fair value; or

c. Having knowledge of the insufficient consideration, does not file a written objection with the corporate secretary, shall be liable to the corporation or its creditors, solidarily with the stockholder concerned for the difference between the value received at the time of issuance of the stock and the par or issued value of the same (RCC, Sec. 64).

Note: Because the subscriber takes the stock for less than its par value, he has by fraud acquired property belonging to the corporation’s capital. Thus, he is liable to the corporation and its creditors for a constructive trust over the difference between the amount he paid and the par value of the stock (CIVIL CODE, Art. 1456)

Question 134

What is the basis for such liability?

Answer 134

Liability is incurred when watered stocks are issued, because the trust fund doctrine provides that the capital of a corporation constitutes a fund upon which its creditors have a right to rely for the payment of their claims, and that if the corporation, by knowingly issuing stock as fully paid when it is not, represents its capital to be greater than it really is, its action is a fraud upon its creditors.

Question 135

What is the Doctrine of Centralized Management?

Answer 135

Under the Doctrine of Centralized Management, the board of directors or trustees shall exercise the corporate powers, condyct allibusiness, ahd control all properties of the corporation (RCC, Sec. 22).

Question 136

What are the instances when the powers of the corporation are not exercised directly by the Board of Directors/Trustees?

Answer 136

The powers are not exercised directly by the Board when:

1. There is a management contract; and

2. The powers of the board are delegated by, a majority vote (of the Board) to an executive committee (AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 298; RCC, Sec. 34)

Question 137

Can corporate officers bind the corporation?

Answer 137

In some cases, corporäte officers like the President can bind the Corporation (AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 298 to 299). The authority of such individuals to bind the corporation is generally derived from:

1. Law;
   2. Corporate By-laws; or
   3. Authorization from the Board, either expressly or impliedly by habit, custom, or acquiescence in the general course of business (Inter-Asia Investments Industries v. CA, G.R. No. 125778, June 10, 2003)

Question 138

When is the Doctrine of Centralized Management not applicable?

Answer 138

In case of close corporations, the stockholders may directly manage the business of the corporation instead, if the AOl so provides (RCC, Sec. 96).

Question 139

What is the Business Judgment Rule?

Answer 139

The Business Judgment Rule provides that questions of policy or of management are left solely to the honest decisions of officers and directors of a corporation, and so long as they act in good faith, their orders are not reviewable by the courts (Saber v. CA, G.R. No. 132981, August 31, 2004).

Question 140

What are the two branches of the Business Judgment Rule?

Answer 140

The two branches of the Business Judgment Rule are:

1. Immunity for Decisions Made in Good Faith - There is a presumption that in making business decisions not involving direct self-interest or self-dealing, corporate directors act on an informed basis, in good faith, and in honest belief that their actions are in the corporation’s best interest; and

Note: The rule shields directors and officers from liability for unprofitable or harmful corporate transactions if the transactions were made in good faith, with due care, and within the directors’ or officer’s authority.

2. Beyond Judicial Review - Courts cannot undertake to control the discretion of the board of directors about administrative matters as to which they have legitimate power of, action and contracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority.

Question 141

What is the doctrine of apparent authority?

Answer 141

Apparent authority is determined by the acts of the principal and not by the acts of the agent. As applied to corporations, the doctrine of apparent authority provides that a corporation is estopped from denying the officer’s authority if it knowingly permits such officer to act within the scope of an apparent authority, and it holds him out to the public as possessing the power to do those acts.

Question 142

How do we determine it the doctrine of apparent authority is applicable?

Answer 142

The doctrine of “apparent authority,” with special reference to banks, has long been recognized in this jurisdiction. Apparent authority is derived not merely from practice. Its existence may be ascertained through 1) the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers.

Question 143

What are the other terms for Doctrine of Apparent Authority?

Answer 143

Apparent authority or what is sometimes referred to as the “holding out theory” or doctrine of ostensible agency.

Question 144

What is the doctrine of ratification or estoppel?

Answer 144

A corporation may be held in estoppel from denying as against innocent third persons the authority of its officers or agents who have been clothed by it with ostensible or apparent authority.

Question 145

What are the kinds of corporate powers?

Answer 145

Corporate powers are of the following kinds:

1. Express - those expressly authorized by the Corporation Code, applicable special laws, administrative regulations, and the articles of incorporation;
2. Implied - those essential and necessary to carry out its purpose/s as stated in the articles of incorporation; and
3. Incidental - those which a corporation can exercise by the mere fact of its being a corporation or powers which are necessary to its corporate existence.

Question 146

How does the board exercise its grant of corporate power?

Answer 146

Directors must act as a body in a meeting called pursuant to the law or the corporation’s bylaws, otherwise, any action taken therein may be questioned by any objecting director or shareholder.

Question 147

How are corporate powers exercised by the shareholders?

Answer 147

The shareholders participate in controlling the affairs of the corporation by exercising their right to vote. They can elect the directors who will actually govern the

corporation and they can also vote on important matters that are reserved to them by the Revised Corporation Code (RCC, Sec. 6 & 22)

Question 148

How are corporate powers exercised by the officers?

Answer 148

Corporate powers are exercised by the officers by managing the corporation and performing such duties as may be provided in the bylaws and/or as resolved by the board of directors (RCC, Sec. 24)

Question 149

What is the Test of Implied Powers?

Answer 149

The Test of Implied Powers provides that the act in question is part of implied powers of a corporation if it is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise.

Question 150

What are the general powers of a corporation?

Answer 150

(SESAB-IPEDPO)

1. To Sue and be sued in its corporate name;
2. To have perpetual Existence unless the certificate of incorporation provide otherwise;
3. To adopt and use a corporate Seal;
4. To amend its Articles of Incorporation;
5. To adopt Bylaws, amend or repeal the same:
   
6. For stock corporations: Issue and sell stocks to subscribers and treasury stocks; for non-stock corporations, admit members;
   
7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property, securities and bonds;
8. To Enter into a partnership, joint venture, merger, consolidation or any other
   
9. To make reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes, provided that no foreign corporation shall give donations in aid of any political party/candidate or for partisan political activity.
10. To establish Pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and
11. To exercise such Other powers essential or necessary to carry out its purpose as stated in the Articles of Incorporation (RCC, Sec. 35).

Question 151

What is the Theory of General Capacity?

Answer 151

The Theory of General Capacity provides that a corporation can perform such acts as long as it is not prohibited by general law and not contrary to morals and public policy

(RCC, Sec. 2 & 44)

A corporation is empowered to exercise any act which is in direct and immediate furtherance of its business, fairly incident to the express powers, and reasonably necessary to their exercise, even if said power is not expressly granted in the Corporation Code.

Question 152

What are the specific powers of a corporation?

Answer 152

(EID-SAC-DE)

1. Extend or shorten corporate term (RCC, Sec. 36);
2. Increase or decrease capital stock and incur, create or increase bonded indebtedness RCC, Sec 37)
3. Deny pre-emptive right (RCC, Sec, 38);
4. Sell or dispose its assets (RCC, Sec: 39);
5. Acquire own shares (RCC, Sec, 40);
6. Invest Corporate funds in another corporation or business or for any other purpose (RCC, Sec. 41):
7. Declare dividends (RCC, Sec. 42), and
8. Enter into management contract (RCC, Sec. 43)

Question 153

Can the SEC interfere in the decision to decrease capital stock?

Answer 153

No. Decreasing a corporation’s authorized capital stock, which is an amendment of the corporation’s Articles of Incorporation, is a decision that only the stockholders and the directors can make, considering that they are the contracting parties thereto. For third persons or parties outside the corporation like the SEC to interfere to the decrease of the capital stock without reasonable ground is a violation of the “business judgment rule.”

Question 154

When is the authorized capital stock/bonded indebtedness considered as increased/incurred/decreased?

Answer 154

(Al) The authorized capital stock/bonded indebtedness shall be considered increased/decreased/incurred upon:

1. Approval by SEC; and
2. Issuance by the SEC of its certificate of filing (RCC, Sec. 37).

Question 155

What is the right of first refusal?

Answer 155

The right of first refusal is the option granted, to the corporation and/or its stockholders to purchase the shares of a transferring stockholder upon reasonable terms and conditions. The corporation and its stockholders have no right of first refusal unless such restriction on transfer is embodied in the articles of incorporation, bylaws of the corporation, and stock certificates of the corporation.

Question 156

What are the requirements in order for a corporation to sell or dispose its corporate assets?

Answer 156

(M-MOM-T)

1. As a general rule, the Majority vote of the board shall only be required if the sale or disposition does not cover all or substantially all of the assets;
   
2. However, if it involves all or substantially all of the corporate assets including its goodwill, the following shall be required:
   a. Majority vote of the Board;
   b. Assent of stockholders representing at least 2/3 of the Outstanding capital stock or 2/3 of members in a non-stock corporation; and
   c. Meeting duly called for the purpose; and
3. In case of non-stock corporations where there are no members with voting rights, the vote of the majority of the Trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by Section 39 (RCC, Sec. 39, par. 1-3).

Question 157

How is the right of first refusal distinguished from pre-emptive right?

Answer 157

The following are the differences between the right of first refusal and pre-emptive right:

1. Pre-emptive rightis a common law right and may be exercised by shareholders even when no provision is granted in the law. The right of first refusal arises only by virtue of contractual stipulations and may also be provided for in specified statutory provisions (e.g.~ Section 97), and if pat provided for by law or in the arices of incorporation the right gi fret retual is essentially creatures o contract law;
2. Preemptive right pertains to unissued shares that are offered for subscription as well as treasury shares being disposed of. It is a right claimed against the corporation. A right of first refusal pertains to issued shares. It is a right exercisable against another shareholder; and
3. Preemptive right may be exercised by mere trustee or conservator. A right of first refusal can only be exercised by the owner and not mere trustee or conservator as it is an act of ownership.

Question 158

When is the authorization of the stockholders not required even if there is sale or disposal of all or substantially all of its assets?

Answer 158

1. If the transaction is necessary in the usual and regular course of business; or
   
2. If the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining business (RCC, Sec. 39, par. 7).

Question 159

Under what circumstance does a sale or disposition qualify as a sale of “all or substantially all of the corporation’s properties and assets”?

Answer 159

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated (RCC, Sec. 39, par. 4).

Question 160

What does the Nell Doctrine provide?

Answer 160

Under the Nell Doctrine, the sale or transfer of the assets of one corporation to another does not ipso facto include the debts and liabilities of the transferor.

Question 161

What are the exceptions to the Nell Doctrine?

Answer 161

(AMCo)

The following are the instances where the Nell Doctrine does not apply:

1. Where the purchaser expressly or impliedly Agrees to assume such debts of the transferee;
2. Where the transaction amounts to a consolidation or Merger of the corporations (RCC, Sec. 79 (c)
3. Where the purchasing corporation is merely a Continuation of the selling corporation; and
4. Where the transaction is entered into Fraudulently in order to escape liability for such debts

Question 162

What are the conditions before a corporation can acquire its own shares?

Answer 162

1. The acquisition must be for a legitimate purpose or purposes, such as the following:
   a. To eliminate fractional shares arising out of stock dividends;
   b. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during the said sale;
   c. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code (RCC, Sec. 40);
   d. To acquire treasury shares (RCC, Sec. 9);
   e. To effect a decrease in capital stock (RCC, Sec. 37);
   f. To purchase or take up redeemable shares (RCC, Sec. 8); and
   g. When the SEC orders a close corporation to purchase the shares of stockholders in case of deadlock in its management (RCC, Sec. 103).
2. The corporation must have unrestricted retained earnings to cover the purchase of the shares except if the purpose for Sec. 8 or Sec. 103.

Question 163

What are the instances when the corporation can acquire its own shares even when there are no available unrestricted retained earnings?

Answer 163

1. Redemption of redeemable shares; and
2. When the shares are, reacquired by a close corporation in case of a deadlock (RCC, Sec. 103).

Question 164

What are dividends?

Answer 164

Dividends are corporate profits allocated, lawfully declared and ordered by the directors to be paid to the stockholders on demand or at a fixed time (SEC Memorandum Circular 11-09, Sec. 2).

Question 165

Who has the power to declare dividends?

Answer 165

The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, property, or in stock to all stockholders on the basis of outstanding stock held by them (RCC, Sec. 42).

Question 166

What are the requirements before dividends may be declared?

Answer 166

(URA) The following requirements must be met before dividends may be declared by the corporation:

Unrestricted retained earnings:
Resolution of the board; and
In the case of declaration of stock dividends, the Approval of stockholders representing at least 2/3 of the outstanding capital stock at a regular or special meeting duly called for the purpose (RC, Sec. 42)

Question 167

What is unrestricted retained earnings?

Answer 167

(CAR) Unrestricted retained earnings is the amount of accumulated profits and gains realized out of normal operations of the company after deducting therefrom distributions to stockholders and transfers to capital stock or other accounts, and which is:

1. Not Covered by a restriction under a loan agreement;
2. Not Appropriated by the Board for corporate expansion; and
3. Not Required to be retained under special circumstances (SEC Memorandum Circular 11-09, Sec. 2).

Question 168

What corporate acts require the existence of unrestricted retained earnings?

Answer 168

(ADA) The following corporate acts require the existence of unrestricted retained earnings:

1. Power to Acquire own shares (RCC, Sec. 40);
2. Power to Declare dividends (RCC, Sec. 42); and
3. Payment of stocks to dissenting stockholder in exercise of his Appraisal right (RCC, Sec. 81).

Question 169

What is a management contract?

Answer 169

It is a contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise (RCC, Sec. 43).

Note: Management contracts may be necessary to assure not only technical competence but also continuity in management policy in the running of the corporation (AQUINO & AQUINO, Revised Corporation Code, supra at 554).

Question 170

What is the period of validity of a management contract?

Answer 170

A management contract must not be longer than 5 years for any 1 term except those contracts which relate to the exploration, development, exploitation or utilization of natural resources that may be entered into for such periods as may be provided by pertinent laws or regulations (RCC, Sec. 43).

Question 171

What are the requirements in order for a management contract to be valid?

Answer 171

The requirements, as a general rule, are as follows:

1. Approval by a majority of the board of directors;
2. Ratification by the majority of the stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in case of non-stock corporation of both the managing corporation and managed corporation; and
3. Meeting duly called for the purpose (RCC, Sec. 43).

Question 172

In entering into management contracts, under what circumstances shall the vote of at least 2/3 of the outstanding capital stock or 2/3 of the members be required?

Answer 172

It is required in the presence of either:

1. Interlocking stockholders - where a stockholder/s representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation; or
2. Interlocking directors - where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation (RCC, Sec. 43).

Question 173

What is the Principle of Indivisibility of Subscription?

Answer 173

Section 63 implicitly sets forth the doctrine that a subscription is one, entire and indivisible whole contract. It cannot be divided into portions, so that the stockholder shall not be entitled to a certificate of stock until he has remitted the full payment of his subscription together with any interests and expenses, if any is due. All partial payments on one subscription shall be deemed applied proportionately among the number of shares (AQUINO & AQUINO, Revised Corporation Code, supra at 643).

Question 174

What is the ultra vires doctrine?

Answer 174

Under the ultra vires doctrine, no corporation shall possess or exercise corporate powers other than those conferred by this Code or by its articles of incorporation and except as are necessary or incidental to the exercise of the powers so conferred (RCC, Sec. 44).

Question 175

When is an act ultra vires?

Answer 175

An act is ultra vires when it is committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law.

Question 176

What are the types of ultra vires acts?

Answer 176

(BIN)
1. Acts done Beyond the powers of the corporation as provided in the law or its articles of incorporation;

2. Acts or contracts, which are per se Illegal as being contrary to law; and
3. Acts or contracts entered into in behalf of a corporation by persons who have No corporate authority

Question 177

What are the effects of an ultra vires act with respect to contracts?

Answer 177

The effects depend on the executory stage of the contract:

1. Executed contract - courts will not set aside or interfere with such contracts;
   
2. Executory contracts - no enforcement even at the suit of either party (unenforceable);
   
3. Partly executed and partly executory - principle prohibiting unjust enrichment at the expense of another shall apply: and
   
4. Executory contracts apparently authorized but ultra vires - the principle of estoppel shall apply

Question 178

What is the effect of unauthorized acts performed or contracts entered into by an officer in behalf of the corporation?

Answer 178

Acts of an officer that are not authorized by the board of directors/trustees do not bind the corporation unless the corporation ratifies the acts or holds the officer out as a person with authority to transact on its behalf. Contracts entered into by persons without authority from the corporation shall generally be considered ultra vires and unenforceable against the corporation.

Question 179

What is Doctrine of Equality of Shares?

Answer 179

Under this doctrine, all stocks issued by the corporation are presumed to be equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences.

Question 180

What are the basic rights of shareholders?

Answer 180

1. Direct or Indirect participation in management;

2. Voting rights (RCC, Sec. 6 & 57);

3. Right to remove directors (RCC, Sec. 27);

4. Proprietary rights:
   a. Right to dividends;
   b. Appraisal right (RCC, Sec. 80);
   c. Right to issuance of stock certificates for fully paid shares (RCC, Sec. 63);
   d. Proportionate participation in the distribution of assets in liquidation
   (RCC, Sec. 139);
   e. Right to transfer of stocks in corporate books (RCC, Sec. 62);
   f. Pre-emptive right (RCC, Sec. 38);
5. Right to inspect books and records (RCC, Sec. 73);
6. Right to be furnished with the most recent financial statement/financial report (RCC, Sec. 74);
7. Right to recover stocks unlawfully sold for delinquent payment of subscription;
8. Right to the issuance of new certificates in lieu of lost, stolen, or destroyed certificates (RCC, Sec. 71); and
9. Right to file individual suit, representative suit, and derivative suits

Question 181

What are the obligations of a stockholder?

Answer 181

1. Liability to the corporation for unpaid subscription (RCC, Sec. 65 to 69);
   
2. Liability to the corporation for interest/on unpaid subscription if so required (RCC, Sec. 65 & 66),
3. Liability to the creditors of the corporation for unpaid subscription subject to the Limited Liability Rule
4. Liability for watered stocks (RCC, Sec, 64);
5. Liability for dividends unlawfully paid (RCC, Sec. 42) and
6. Administrative, civil and criminal liability of a stockholder responsible for violation of the RCC or for acts indispensable to the violation of the RCC (RCC, Sec. 171).

Question 182

What shares are deprived of voting rights under the RCC?

Answer 182

1. Where the right to vote in the election of directors is reserved for founders’ shares (RCC, Sec. 7)
2. Treasury shares which remain in the Treasury (RCC, Sec. 56); and
3. Delinquent stocks until and unless payment is made for the amount due on the subscription with accrued interest and the costs and expenses of advertisement, if any (RCC, Sec, 70).

Question 183

What are the instances wherein non-voting shares are entitled to vote?

Answer 183

(ARSIMID)
1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
   substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
   
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
   
8. Dissolution of the corporation (RCC, Sec. 6).

Question 184

What is a proxy?

Answer 184

Proxy is a written authorization given by one person to another so that the second person can act for the first such as that given by the shareholder to someone else to represent him and vote his shares at a shareholder’s meeting.

Note: For non-stock corporations, unless otherwise provided in the articles of incorporation or the bylaws, a member may vote by proxy, in accordance with the provisions of this Code (RCC, Sec. 88).

Therefore, unlike in the case of stock corporations where proxy representation cannot be legally denied, it may be denied entirely in a nonstock corporation when done through appropriate provisions in the AOl or bylaws (SEC Opinion, September 20, 1994).

Question 185

Are proxies revocable?

Answer 185

Proxies, even those with irrevocable terms, have always been considered as revocable, unless coupled with an interest. Revocation may be made through

a. Formal Notice;
b. Verbal Communication; or
c. Conduct i.e., when the stockholder votes or attends the meeting personally notwithstanding his appointment of a proxy. In such case, the proxy is deemed revoked (SEC Opinion, October 28, 1991).

Question 186

What are the requisites for a valid proxy?

Answer 186

(F5-SWV)
1. It shall be Filed before the scheduled meeting with the corporate secretary;

2. No proxy shall be valid and effective for a period longer than 5 years at any one time;
3. It shall be Signed by the stockholder or member concerned;
4. Proxies shall be in Writing; and
5. Unless otherwise provided in the proxy form, it shall be Valid only for the meeting which it was intended (RCC, Sec, 57)

Question 187

What is a voting trust agreement (VTA)?

Answer 187

A voting trust agreementels an agreement in writing whereby one or more stockholders of a corporation consent to transfer his or her shares to a trustee in order to vest in the latter voting or other rights pertaining to shares for a period of not exceeding 5 years and upon such other terms and conditions specified in the agreement.

Question 188

What are the powers and rights of the voting trustees?

Answer 188

The following are the powers and rights of the voting trustees:

1. They shall possess the right to vote and other rights pertaining to the shares so transferred and registered in his or their names subject to the terms and conditions of and for the period specified in the agreement;
2. May vote in person or by proxy unless the agreement provides otherwise;
3. The trustee may exercise the rights of inspection of all corporate books and records (RCC, Sec. 58); and
4. The trustee is the legal title holder or owner of the shares so transferred under the agreement. He is therefore qualified to be a director.

Question 189

What is the effect of the VTA on the status of a stockholder who is a party to its execution?

Answer 189

The effect of a voting trust agreement on the status of a stockholder who is a party to its execution is that from being the legal titleholder or owner of the shares subject of the voting trust agreement, he becomes the equitable or beneficial owner. The legal ownership of the stock is transferred to the trustee, and he becomes the stockholder of record vacated.

Question 190

What is the effect of a VTA on the qualification of a.director or trustee?

Answer 190

Because a VTA results in the parting of legal title from the trustor to the trustee, a shareholder or member who assigns his membership or all of his shares in a VTA ceases to become a shareholder or member of the corporation. Thus, he/she is disqualified from being elected as director or trustee. If he/she is an incumbent, he/she is immediately disqualified and the position is vacated.

Question 191

What are the instances when the concurrence or ratification of majority of the outstanding capital stock or members is necessary for the exercise of corporate powers?

Answer 191

1. To enter into a management contract under circumstances not covered by either of the two exceptional instances provided in Sec. 43. The vote requirement applies to both the managing and managed corporation (RCC, Sec. 43);
2. To adopt, amend, or repeal the new bylaws (RCC, Sec. 45 & 47); and
3. Voluntary dissolution where no creditors are affected (RCC, Sec. 134).

Question 192

What are the instances when the concurrence of at least 2/3 of the outstanding capital stock or 2/3 of the members is necessary for the exercise of corporate powers?

Answer 192

1. To amend the articles of incorporation (RCC, Sec. 15);
2. To extend or shorten the corporate term (RCC, Sec. 36);
3. To increase/decrease capital stock (RCC, Sec. 37);
4. To incur, create, or increase bonded indebtedness (RCC, Sec. 37);
5. To deny pre-emptive right after incorporation (RCC, Sec. 38);
6. To sell, dispose, lease, encumber all or substantially all of the corporate assets (RCC, Sec. 39);
7. To invest in another corporation, business other than the primary purpose like the secondary purpose (RCC, Sec. 41);
8. To declare stock dividends (RCC, Sec. 42);
9. To enter into a management contract where:
   a. a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or
   b. a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation (RCC, Sec. 43);
10. To approve a plan of merger or consolidation (RCC, Sec. 76);
11. To adopt a plan providing for the distribution of assets by a nonstock corporation (RCC, Sec. 94); and
    
12. Voluntary dissolution where creditors are affected (RCC, Sec. 135).

Question 193

What are the manner of voting of stockholders or members?

Answer 193

Stockholders or members may vote:

1. Directly, in person. (RCC, Sec. 49) or 2. Indirectly
   a. By means of a proxy (RCC, Sec: 49);
   b. Through remote communication or in absentia (RCC, Sec. 49);
   c. By a trustee under a voting trust agreement (RCC, Sec. 58); or
   d. By executors, administrators, receivers, or other legal representatives duly appointed by the court (RCC, Sec. 54).

Question 194

What matters may be acted upon by the stockholders/members without requiring the prior approval of the Board, and what is the vote required for each?

Answer 194

The following does not require prior approval of the board:

1. The delegation to the Board of the power to amend the bylaws - 2/3 of the outstanding capital stock or of the members (RCC, Sec. 47);
2. The revocation of the power of the Board to amend the bylaws, which was previously delegated - majority of the outstanding capital stock or the members (RCC, Sec. 47); and
3. To fix the issued value of no par value shares - majority of the outstanding capital stock or the members (RCC, See, 64)

Question 195

What are the rules on cumulative voting in stock and non-stock corporations?

Answer 195

In stock corporations, the stockholder is allowed to concentrate his aggregate voting power and allocate such number of aggregate votes in any manner as he wishes provided that the number of votes cast for all directors shall not exceed his total aggregate voting power (RCC, Sec. 23).

In non-stock corporations, the member may cast as many votes as there are trustees to be elected but may cast not more than 1 vote for 1 candidate. Cumulative voting is not available unless allowed and provided for by the AOl or bylaws.

Question 196

How do stockholders exercise their right to vote in a special or regular meeting?

Answer 196

Stockholders and members may vote in person or by proxy in all meetings of stockholders or members.

When so authorized in the bylaws or by a majority of the board of directors, the stockholders or members of corporations may also vote through remote communication or in absentia provided that the votes are received before the corporation finishes the tally of votes (RCC, Sec. 49 & 57).

Note: At all elections of directors or trustees, the right to vote through remote communication or in absentia may be exercised in corporations vested with public nterest, notwithstanding the absence of a provision in the bylaws of such corporations.

Question 197

What are the instances when voting right is not available?

Answer 197

(DAFTS) The following are the instances when voting right is not available:
1. Delinquent stocks (RCC, Sec. 70);

2. When provided for in the AOI (RCC, Sec. 6);
3. Fractional shares - Cannot be voted as they do not constitute at least one full share (2 VILLANUEVA-CASTRO,
4. Commercial Law Recap, supra at 136); and
5. Treasury shares (RCC, Sec. 56); and
6. Sequestered or escrowed shares satisfying the two-tiered test or the public character test

Question 198

What are the proprietary rights of stockholders?

Answer 198

Proprietary rights pertain to certain economic benefits that accrue to his shares, such as right to receive dividends and right to participate in the assets of the corporation upon dissolution and liquidation.

Question 199

When does the right to dividends accrue?

Answer 199

The accrual of right to dividends depends on the type of dividend declared:

1. Cash dividends - as soon as cash dividends are publicly declared, the stockholders have the right to their pro rata shares; or
2. Stock dividends - a stock dividend, aside from board approval, requires approval of stockholders representing at least 2/3 of the outstanding capital stock (RCC, Sec. 42).

Question 200

How does delinquency of a stockholder affect his/her right to dividends?

Answer 200

The delinquent stockholder is still entitled to dividends, subject to the following conditions:

1. Cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses; and
2. Stock dividends shall be withheld until their unpaid subscription is fully paid.

Question 201

What are the contents of the stock and transfer book?

Answer 201

1. A record of all stocks in the names of the stockholders alphabetically arranged;
2. The installments paid and unpaid on all stocks for which subscription has been made, and the date of payment of any installment;
3. A statement of every alienation, sale or transfer of stock made, the date thereof, by and to whom made; and
4. Such other entries as the bylaws may prescribe (RCC, Sec. 73).

Question 202

Who may make valid entries on the stock and transfer book?

Answer 202

Only the corporate secretary is duly authorized to make entries on the stock and transfer book. Hence, entries made by the Chairman or President are invalid.

Question 203

Who is a stock transfer agent?

Answer 203

A stock transfer agent is one engaged principally in the business of registering transfers of stocks in behalf ofja stock corporation (RCC, Sec. 73)

Note: The SEC may require stock corporations which transfer and/or trade stocks in secondary markets to have an independent transfer agent (RCC, Sec. 73).

Question 204

What is the basis of the right of the stockholders to inspect corporate books and records?

Answer 204

The stockholder’s right of inspection of the corporation’s books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property.

Question 205

What are the conditions for the exercise of the right to inspect corporate books and records?

Answer 205

(RIG-ConComp)

1. The right must be exercised at Reasonable hours on business days;
2. The director, trustee, stockholder, or member has not Improperly used any information he secured through any previous examination;
3. Demand is made in Good faith or for a legitimate purpose;
4. The inspecting Confidentiality rules under prevailing laws; and
5. The Inspecting or reproducing party is not a competitor, director, officer, controlling stockholder or otherwise represents the interest of a Competitor (RCC, Sec. 73).

Note: Right to inspect subsists even after dissolution of the corporation during the three-year liquidation period (Roque v. People of the Philippines, G.R. No. 211108, June 7, 2017).

Question 206

What are the requisites to give rise to an action for Denial of the Right to inspect?

Answer 206

1. A director, trustee, stockholder, or member has made a proper demand for exercise of his/her right to inspect; and

2. Any officer or agent of the concerned corporation, by himself, or by voting to do so in a board resolution, shall refuse to allow the said director, trustee, stockholder, or member to examine and copy said excerpts (RCC, Sec. 73).

Question 207

What are the remedies if a valid demand for Inspection is denied?

Answer 207

1. Mandamus (RULES OF COURT, Rule 65);
2. Damages;
3. Civil liability and criminal liability under Sec. 73 in relation to Sec. 161 of the RCC;
4. Report to SEC to request for Summary Investigation under SEC Memorandum Circular No. 25 Series of 2020; and
5. File a complaint under Rule l the interim Rule for Intra-Corporate Controversies

Note: While such judicial remedy still remains effective, the SEC remedy may be more expeditious.

Question 208

What are the acts which shall constitute a violation of right to inspect and/or reproduce corporate records?

Answer 208

1. Outright refusal to allow director, trustee, stockholder, or member of the corporation to inspect any of the corporate records in person, or by a representative;

2. Failure to take, within reasonable amount of time, the necessary steps that would allow the director, trustee, stockholder, or member of the corporation to inspect any of the corporate records imperson, or by a representative;

3. Failure to give the director trustee, stockholder. or member a reasonable amount of time to inspect any of the corporate records in person, or by a representative;
   
4. Outright refusal to allow the director, trustee, stockholder, or member of the corporation to reproduce any of the corporate records in person, or by a representative at his/her own expense;
   
5. Failure to take, within reasonable amount of time, the necessary steps that would allow the director, trustee, stockholder, or member of the corporation to reproduce any of the corporate records in person, or by a representative at his/her own expense; or
   
6. Failure to give the director, trustee, stockholder or member a reasonable amount of time to reproduce any of the corporate records in person, or by a representative at his/her own expense (Section 2, SEC Memorandum Circular No. 25 Series of 2020).

Question 209

What is pre-emptive right?

Answer 209

Pre-emptive right is the preferential right of shareholders to subscribe to all issues or disposition of shares of any class, in propartion to their respective shareholdings (RCC, Sec. 38).

Question 210

When can a stockholder exercise his pre-emptive right?

Answer 210

The following are the instances when pre-emptive right is available:

1. Original issuance of unissued shares forming part of the original authorized capital stock;

2. Original issuance of new shares resulting from increase of authorized capital stock (Dee v. CA, G.R. No. L-60502, July 16, 1991); and

3. Disposition of Treasury Shares (SEC Opinion, January 14, 1993).

Question 211

When is pre-emptive right not available? (PREP-DeWN)

Answer 211

1. Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the Public;

2. It does not apply to shares that are being Reoffered by the corporation after they were initially offered together with all the shares;

3. Shares issued in good faith, with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in Exchange for property needed for corporate purposes;
4. Shares issued, with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in Payment of previously contracted debts;
5. In case the right is Denied in the AOl or an amendment thereto;
6. Waiver of the right by the stockholder; and
7. In the case of Non-stock corporations, where the assignors have previously exercised their pre-emptive rights to subscribe to new shares. Otherwise, the pre-emptive right attached to the original stock would be exercised twice (SEC Opinion, November 28, 1990).

Question 212

What is appraisal right?

Answer 212

Appraisal right is the right of a stockholder to demand payment of the fair value of the shares after dissenting from certain corporate acts involving fundamental changes in corporate structure (RCC, Sec. 80)

Question 213

When may a right of appraisal be exercised? (AD-MIC)

Answer 213

Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of the shares in the following instances:

1. In case an Amendment to the articles of incorporation has the effect of:
   a. Changing or restricting the rights of any stockholder or class of shares,
   b. Of authorizing preferences in any respect superior to those of outstanding shares of any class, or
   c. Of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other Disposition of all or substantially all of the corporate property and assets;
3. In case of Merger or consolidation; and
4. In case of Investment of corporate funds for any purpose other than the primary purpose of the corporation (RCC, Sec. 80).
5. In a Close corporation, a Stockholder may, for any reason, compel the corporation to purchase his shares when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock (RCC, Sec. 104).

Question 214

What are the conditions for exercise of the appraisal right?

Answer 214

(AIDS-FUT)

1. Dissenting stockholder must have voted Against the proposed action;
2. Any of the Instances set forth by law must be present;
3. Demand for payment must be made within 30 days from the date vote is taken thereon;
   
4. Submission by withdrawing stockholder of his, shares to the corporation for notation of being dissenting stockholder within 10 days from written demand;
5. Price must be based on Fair value as of the day prior to date on which vote was taken;
   
6. Payment must be made only when the corporation has Unrestricted retained earnings in its books; and
   
7. Stockholder must Transfer his shares to the corporation upon payment by the corporation (RCC, Secs. 81, 82 and 85).

Question 215

What is a Derivative Suit?

Answer 215

A derivative suit is an action filed by stockholders to enforce a corporate action. It is an exception to the general rule that the corporation’s power to sue is exercised only by the board of directors or trustees (Villamor, Jr., v. Umale, G.R. No. 172843, September 24, 2014).

Question 216

When may stockholders or members file a derivative suit?

Answer 216

Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be sued and are in control of the corporation. It is allowed when the directors or officers are guilty of breach of trust, and not of mere error of judgment (Villamor, Jr., v. Umale, G.R. No. 172843, September 24, 2014).

Question 217

What requisites must be met in order for a derivative suit to prosper?

Answer 217

(SRAN2) A stockholder or member may bring an action in the name of a corporation or association, provided, that:

1. He was a Stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;

2. He exerted all Reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the relief he desires (Exhaustion of Infra-Corporate Remedies)

3. No Appraisal rights are available;
4. The suit is not a Nuisance or harassment suit (A.M. No. 01-2-04-SC, Interim Rules of Procedure for Intra-Corporate Controvers/es, Rule 8, Sec. 1); and
5. The action must be brought in the Name of the corporation. It is sine qua non that the corporation is impleaded or made a party to a, case (Chua v. CA, G.R No. 150793, November 18, 2004).

Question 218

Who is the real party-in-interest in derivative suits?

Answer 218

In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal party. Hence, the corporation is an indispensable party which must be impleaded in the derivative action.

Question 219

Where is the regular or special meeting of stockholders or members held?

Answer 219

The meeting of stockholders or members, whether regular or special, shall be held in the principal office of the corporation as set forth in the articles of incorporation, or, if not practicable, in the city or municipality where the principal office of the corporation is located.

Any city or municipality in Metro Manila, Metro Cebu, Metro Davao, and other Metropolitan areas shall, for purposes of this section, be considered a city or municipality (RCC, Sec. 50)

Note: The bylaws may provide that the members of a nonstock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located; Provided: That proper notice is sent to all members indicating the date, time and place of the meeting; and
That the place of meeting shall be within Philippine territory (RCC, Sec. 92).

Question 220

When is a regular meeting of stockholders or members held?

Answer 220

Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date after April 15 of every year as determined by the board of directors or trustees (RCC, Sec. 49).

Question 221

When is a special meeting of stockholders or members held?

Answer 221

Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws (RCC, Sec. 49).

Question 222

Who calls a special meeting of stockholders?

Answer 222

(OB-SP)
1. The Officer designated in the articles of incorporation or by-laws;

2. The Board of director if nobody is designated to call in the articles or by-laws (SEC Opinion, February 6, 2006);
   
3. The SEC, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order directing the petitioning stockholder or member to call a meeting of the corporation (RCC, Sec. 49);
4. In removal of directors, the secretary on order of the President, or upon written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or majority of the members entitled to vote.

Question 223

What are the rules on waiver of notice?

Answer 223

1. Notice of any meeting may be walved, expressly or impliedly;

2. General waivers of notice in the articles of incorporation or the bylaws shall not be allowed; and

3. Attendance at a meeting shall constitute a waiver of notice of such meeting, except when the person attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened (RCC. Sec. 49).

Question 224

When is prior notice served in regular and special meeting of stockholders or members?

Answer 224

For regular meetings, writen notice shall be sent to all stockholders or members of record at least 21 days prior to the meeting, unless a different period is required in the by-laws, law or regulation.

For special meetings, at least 1 week writter notice shall be sent to all stockholders or members, unless a different period is provided in the by-laws, law or regulation (RCC, Sec. 49).

Question 225

What is the effect if the meeting is improperly held or called?

Answer 225

All proceedings and any business transacted at a meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting is improperly held or called; Provided, That all the stockholders or members of the corporation are present or duly represented at the meeting and not one of them expressly states at the beginning of the meeting that the purpose of their attendance is to object to the transaction of any business because the meeting is not lawfully called or convened (RCC, Sec. 50).

Question 226

What constitutes a quorum?

Answer 226

Unless otherwise provided for in the RCC or in the bylaws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or majority of the members in case of nonstock corporations (RCC, Sec. 51).

Question 227

When are unpaid subscriptions due and payable?

Answer 227

Subject to the provisions of the subscription contract, the board of directors may, at any time, declare due and payable to the corporation unpaid subscriptions and may collect the same or such percentage thereof, in either case, with accrued interest, if any, as it may deem necessary (RCC, Sec. 66).

Question 228

When shall payment of the unpaid subscriptions be made?

Answer 228

Payment of unpaid subscription or any percentage thereof, together with any interest accrued, shall be made on the date specified in the subscription contract or on the date stated in the call made by the board (RCC, Sec. 66).

Question 229

What is the liability of stockholder if he fails to render the entire balance of the subscription on such date?

Answer 229

Failure to pay on the date specified in the subscription contract or on the date stated in the call shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different interest rate is provided in the subscription contract (RCC, Sec. 66).

Note: The notice is regarded as a condition precedent to the right of recovery. It must, therefore, be alleged and proved to maintain an action for the call (Baltazar v. Lingayen Gulf Electric Power Co., Inc., G.R. No. L-16236, June 30, 1965).

Question 230

When are shares declared delinquent?

Answer 230

If the stockholder does not pay within 30 days from the date specified in the contract of subscription or in the call, all the stocks covered by the subscription shall be declared delinquent and shall be subject to the sale under Section 67, unless the board of directors orders otherwise (RCC, Sec. 66).

Question 231

What is the effect of delinquency of shares?

Answer 231

No delinquent stock shall be voted for, be entitled to vote, or be represented at any stockholders’ meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of the RCC. It is only upon payment of the amount due on the subscription with accrued interest, and costs and expenses of advertisement, if any, that the stockholder will be stored to his full rights (RCC, Sec. 70).

Question 232

What is the procedure for the sale of delinquent stocks?

Answer 232

The procedure for the sale of delinquent stocks is as follows:

1. Resolution - The board of directors may, by resolution, order the sale of delinquent stock on a date which shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent;

2. Notice - Notice of the sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally, by registered mail, or through other means provided in the bylaws

3. Publication - The notice shall be published once a week for 2 consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located;

4. Auction sale - The delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share (RCC Sec. 67).

Question 233

When may the board of directors not proceed with auction sale?

Answer 233

The delinquent stock shall not be sold at a public auction if the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due plus accrued interest, costs of advertisement and expenses of sale, or when the board of directors otherwise orders (RCC, Sec. 67).

Question 234

What is the effect of the sale of the delinquent stock?

Answer 234

The stock so purchased shall be transferred to such purchaser in the books at the corporation and a certificate for such stock shall be issued in the purchaser’s favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares (RCC, Sec. 67).

Note: If there is no qualified bidder, the corporation may, subject to the provisions of the RCC, bid for the same, and the total amount due shall be credited as fully paid in the books of the corporation, as treasury shares (RCC, Sec. 67).

Question 235

What does “call” by the board of directors refer to?

Answer 235

A call is the resolution or formal declaration of the board that the unpaid subscriptions are due and payable. The unpaid subscription is not due and payable without the call.

Question 236

When is a call by the board of directors for the payment of the balance of subscription not necessary?

Answer 236

A call is not necessary in the following instances:

1. When the date of payment is specified in the subscription agreement (RCC, Sec. 66); and
2. When the corporation becomes insolvent

Question 237

When are restrictions on transfer of stocks considered valid and enforceable?

Answer 237

In order to be valid and enforceable, any restriction on the right to transfer shares must be explicitly provided for in the articles of incorporation (RCC, Sec. 6, par. 1).

Question 238

What are the requirements for a valid transfer of stocks?

Answer 238

(DER) If represented by a certificate, the following must be complied with:

1. There must be Delivery of the certificate;
   
2. It must be Endorsed by the owner or his agent;

Note: It is delivery of the certificate, coupled with the endorsement by the owner or his duly authorized representative that is the operative act of transfer of shares from the original owner to the transferee

3. To be valid against the corporation and third parties, the transfer must be Recorded in the books of the corporation. Otherwise, the transfer shall be binding only as between the parties (RCC, Sec. 62).

Note: No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation (RCC, Sec: 62)

Question 239

What is the nature of a certificate of stock?

Answer 239

A certificate of stock is not necessary to render one a stockholder in a corporation. Nevertheless, a certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein.

The certificate is not stock in the corporation but is merely evidence of the holder’s interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership.

It is the paper representative or tangible evidence of the stock itself and of the various interests therein. It expresses the contract between the corporation and the stockholder.

Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner, his attorney-in fact, or any other person legally authorized to make the transfer (RCC, Sec. 62).

Question 240

What are uncertificated shares?

Answer 240

Uncertificated shares are securities evidenced by electronic or similar records (R.A. No. 8799, otherwise known as “The Securities Regulation Code”, Sec. 3.14 [hereinafter SRC)).

Question 241

What are the rules on uncertificated shares?

Answer 241

Notwithstanding Section 63 (now Section 62) of the Corporation Code, a corporation whose shares of stock are registered pursuant to the Code or listed on a stock exchange may:

1. If so resolved by its Board of Directors and agreed by a shareholder, investor or securities intermediary, issue shares to, or record the transfer of some or all of its shares into the name of said shareholders, investors or, securities intermediary in the form of uncertificated securities;
2. The use of uncertificated securities shall be without prejudice to the rights of the securities intermediary subsequently to require the corporation to issue a certificate in respect of any shares recorded in its name; and
   
3. If so provided in its articles of incorporation and bylaws, issue all of the shares of a particular class in the form of uncertificated securities and subject to a condition that investors may not require the corporation to issue a certificate in respect of any shares recorded in their name (SRC, Sec. 43.1)

Question 242

Why is a stock certificate regarded as quasi-negotiable instrument and not a negotiable one?

Answer 242

A certificate of stock is regarded as quasi-negotiable in the sense that it may be transferred by endorsement, coupled with delivery, but it is not negotiable because the holder thereof takes it without prejudice to such rights or defenses as the registered owners or transferor’s creditor may have under the law. except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel.

Question 243

When may a certificate of stock be issued?

Answer 243

No certificate of stock shall be issued to a subscriber until the full amount of the subscription together with the interest ard expenses (in case of delinquent shares), if any is due, has been paid (ROC, Sec. 63).

Note: Doctrine of Indivisibility of Subscription. Section 63 implicitly sets forth the doctrine that a subscription is one, entire and indivisible whole contract. It cannot be divided into portions, so that the stockholder shall not be entitled to a certificate of stock until he has remitted the full payment of his subseription together with any interests and expenses, if any is due. All partial payments on one subscription shall be deemed applied proportionately among the number of shares (SEC-DGC No. 10-15 dated April 23, 2010, SEC Opinion dated November 12, 1993).

Question 244

What is the situs of shares of stock?

Answer 244

The situs of shares of stock is deemed to be the State where the corporation has its domicile which is ordinarily the State under whose laws it was created (Wells Fargo Bank & Union Trust Co. v. Collector of Internal Revenue, G.R. No. 46720, June 28, 1940).

Question 245

What is merger?

Answer 245

A merger is a consolidation of two or more corporations, which results in one or more corporations being absorbed into one surviving corporation. The separate existence of the absorbed corporation ceases.

Question 246

What is consolidation?

Answer 246

Consolidation is one where two or more existing corporations are combined to form a new corporation called the consolidated corporation (RCC, Sec. 75).

Question 247

Distinguish constituent corporations from a consolidated corporation.

Answer 247

Constituent corporations are the parties to the merger or consolidation, while a consolidated corporation is the new corporation formed by virtue of a valid consolidation (RCC, Sec. 75).

Note: The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation (RCC, Sec. 80).

Question 248

What is the procedure for merger and consolidation?

Answer 248

The procedure for merger and consolidation may be summarized in this wise:

1. The board of directors or trustees of each corporation shall approve a plan of merger or consolidation;
2. The plan of merger or consolidation shall be approved by majority vote of each of the of the concerned corporations at separate meetings;
3. The plan of merger or consolidation shall be approved by 2/3 of the outstanding capital stock or members for non-stock corporations;
4. An articles of merger or consolidation shall be executed by each of the constituent corporations, signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation;
   
5. The artices of merger or consolidation shall be submitted to the SEC for approval. A favorable recommendation. from the appropriate government agency in certain cases shall first be obtained.
6. If the SEC is Satisfied that the merger or consolidation is consistent with the RCC and existing laws, it shall issue a certificate approving the articles and plan of merger or consolidation; and
7. If, upon investigation, the SEC has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard (RCC, Sec, 75-78)

Question 249

What are the contents of a plan of merger or consolidation?

Answer 249

(NTCO) A plan of merger or consolidation shall set forth the following:

1. The Names of the corporations proposing to merge or consolidate;
2. The Terms of the merger or consolidation and the mode of carrying the same into effect
3. A statement of the Changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and
4. Such Other provisions as are deemed necessary or desirable (RCC, Sec 75).

Question 250

What are the contents of the articles of merger or consolidation?

Answer 250

1. The plan of the merger or consolidation;

2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members;

3. As to each corporation, the number of shares or members voting for or against such plan, respectively;

4. The carrying amounts and fair values of the assets and liabilities of the respective companies as of the agreed cut-off date;
   
5. The method to be used in the merger or consolidation of accounts of the companies;
   
6. The provisional or pro forma values, as merged or consolidated, using the accounting method; and
7. Such other information as may be prescribed by the SEC (RCC, Sec. 77).

Question 251

When is merger or consolidation deemed effective?

Answer 251

The merger or consolidation shall only be effective upon issuance by the SEC of a certificate approving the articles and plan of merger or consolidation (RCC, Sec. 78).

Note: If, upon investigation, the SEC has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard (RCC, Sec. 78).

Question 252

What are the effects of merger or consolidation?

Answer 252

1. The constituent corporations shall become a single corporation;

2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation;

3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities, and powers and shall be subject to all the duties and liabilities of a corporation organized under the RCC;

4. All real or personal property, all receivables due on whatever account and every other interest of, belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed;

5. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each constituent corporation; and

6. Any pending claim, action or proceeding brought by or against any constituent corporation may be prosecuted by or against the surviving or consolidated corporation (RCC, Sec: 79).

Question 253

What is “Asset-Only Transfers’?

Answer 253

In asset-only transfers, the transferee is not bound to retain the employees of the transferor since the former does not really step into the shoes of the latter. In addition, the transferee is not liable for any of the claims against the transferor, even if the sale of the business assets of the transferor should result in the “shutting down of the transferor’s operations and the laying-off of the transferor’s employees.

Question 254

What is “Business Enterprise Transfer”?

Answer 254

In such transfer, the transferee corporation’s interest goes beyond the assets of the transferor’s assets and its desires to acquire the latter’s business enterprise, including its goodwill. The transferee is liable for the debts and liabilities of his transferor arising from the business enterprise conveyed. The transferee corporation assumes the debts and liabilities of the transferor corporation because it is merely a continuation of the latter’s business.

Question 255

What is the purpose of Business Enterprise Transfer?

Answer 255

The purpose of the business-enterprise transfer is to protect the creditors of the business by allowing them a remedy against the new owner of the assets and business enterprise. Otherwise, creditors would be left “holding the bag,” because they may not be able to recover from the transferor who has “disappeared with the loot,” or against the transferee who can claim that he is a purchaser in good faith and for value. Based on the foregoing, as the exception of the Nell Doctrine relates to the protection of the creditors of the transferor corporation, and does not depend on any deceit committed by the transferee corporation, then fraud is certainly not an element of the business enterprise doctrine.

Question 256

What is dissolution?

Answer 256

Dissolution is the termination of the life of a juridical entity. It is the extinguishment of the corporate franchise and the termination of corporate existence.

As distinguished from the actual business enterprise operations, dissolution legally affects the nature and capacity of the “juridical person” of the corporate being. The mere fact that the corporation has ceased to do business does not necessarily constitute a dissolution or diminution of the legal power and capacity of the corporation.

Question 257

What are the modes of corporate dissolution?

Answer 257

A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or involuntarily (RCC, Sec. 133).

Question 258

What are the methods of voluntary corporate dissolution?

Answer 258

(EV-JAS)
1. Expiration of the original term (RCC Sec.11 par. 2)

2. Vote of the board of directors or trustees and the stockholders or members where NO Creditors are affected (RCC, Sec. 134)
3. Judgment of the SEC after hearing of petition for voluntary dissolution where creditors are affected (RCC, Sec. 135)
4. Amending the AOl to shorten the corporate term (RCC, Sec 136); or
5. In the case of a corporation Sole, by submitting to the SEC a verified declaration of dissolution for approval (RCC, Sec. 113)

Question 259

When does voluntary dissolution take effect?

Answer 259

In both cases where creditors are affected or not, voluntary dissolution shall take effect only upon issuance by the SEC of the certificate of dissolution (RCC, Sec. 134 & 135).

Question 260

How is a corporation dissolved by shortening the corporate term?

Answer 260

The dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of the RCC (RCC, Sec. 136).

Question 261

When is the corporation deemed dissolved when the corporate term is shortened?

Answer 261

The corporation shall be deemed dissolved without any further proceedings, subject to provisions on liquidation, upon the expiration of the shortened term as stated in the approved amended articles of incorporation. In the case of expiration of corporate term, dissolution shall automatically take effect on the day following the last day of the corporate term stated in the articles of incorporation, without need for the issuance by the SEC of a certificate of dissolution. (RCC, Sec. 136)

Question 262

How is a corporation dissolved involuntarily?

Answer 262

A corporation may be dissolved involuntarily by the SEC motu proprio or upon filing a verified complaint by any interested party (RCC, See. 138).

Question 263

What are the grounds for involuntary dissolution?

Answer 263

(NI-OFF) The following may be grounds for dissolution of a corporation:

1. Non-use of corporate, charter;

2. Continuous Inoperation of a corporation;

3. Upon recept of a lawful court Order dissolving the corporation;

4. Upon finding by final judgment. that the corporation procured its incorporation through Fraud; and
5. Upon finding by Final judgment that the corporation:
   a. Was created for the purpose of committing, concealing or aiding the commission of securities violation, smuggling, tax evasion, money laundering, or graft and corrupt practices;
   b. Committed or aided in the commission of such acts, and its stockholders knew of the same;
   c. Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent or illegal acts by its directors, trustees, officers, or employees (RCC, Sec. 138).

Question 264

What are the methods of corporate liquidation?

Answer 264

(BoT-MaRe)
1. By the corporation itself through its Board of directors or trustees (RCC, Sec. 139, par. 1)
2. Through a Trustee to whom the corporate assets have been conveyed (RCC, Sec. 139, par. 2); and
3. By a Management committee or rehabilitation Receiver appointed by the SEC (RCC, Sec. 135, par. 3).

Question 265

What is liquidation?

Answer 265

Liquidation involves the winding up of the affairs of the corporation, which means the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if any, among the stockholders thereof.

It is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to the stockholders or members.

Question 266

When may the corporation effect its liquidation?

Answer 266

A corporation shall remain as a body corporate for 3 years after the effective date of dissolution and may effect liquidation within such period through its board of directors or trustees (RCC, Sec. 139).

Question 267

For what purpose may the corporation effect its liquidation?

Answer 267

The corporation, through its board, may effect liquidation:

a. To prosecute and defend suits by or against it;
b. To settle and close its affairs:
c. To dispose of and convey its property; and
d. To distribute its assets.

Note: However, the corporation cannot continue the business for which it was established.

Question 268

In what instance may liquidation be effected even after the three-year period?

Answer 268

If a trustee has been designated, the trustee may continue to prosecute a case commenced by the corporation within 3 years from its dissolution until rendition of the final judgment, even if such judgment is rendered beyond the 3-year period allowed by Section 122 (now Sec. 139) of the Corporation Code. However, an already defunct corporation cannot initiate a suit after the lapse of the said three-year period.

If the corporation had already pending actions at the time that its corporate existence was terminated (as compared to actions commenced within the 3-year period), the board of directors or trustees (in the absence of a trustee designated) may be permitted to so continue as “trustees” by legal implication to complete the corporate liquidation even after the lapse of the three-year period.

There is no time limit within which the trustees must complete a liquidation placed in their hands. It is provided only that the conveyance to the trustees must be made within the three-year period.

Question 269

What happens when the person to whom an asset is distributable is unknown or cannot be found?

Answer 269

Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated in favor of the national government (RCC, Sec. 139, par. 3).

Question 270

What is a foreign corporation?

Answer 270

A foreign corporation is one formed, organized or existing under laws other than the Philippines’ and whose laws allow Filipino citizens and corporations to do business in its own country or State (RCC, Sec. 140).

Question 271

What are the bases of authority over foreign corporations?

Answer 271

The bases of authority over foreign corporations are:

1. Consent (RCC, Sec. 140); and
2. Doctrine of doing business (RCC, Sec. 146).

Question 272

What are the principles on the personality of a foreign corporation to sue?

Answer 272

The principles regarding the right of a foreign corporation to bring suit in Philippine courts are:

1. If a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts;

2. If a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction;

3. If a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation’s corporate personality in a suit brought before Philippine courts; and

4. If a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction.

Question 273

When may a foreign corporation be sued in the Philippines?

Answer 273

A foreign corporation transacting business in the Philippines, whether or not with a license, may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws (RCC, Sec. 146 & 150).

Question 274

When may an unlicensed foreign corporation be allowed to sue?

Answer 274

A foreign corporatión needs no license to sue before Philippine courts on an isolated transaction. The phrase “isolated transaction” refers to a transaction of series of transactions set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of the business organization.

Question 275

What are the instances when unlicensed foreign corporations may be allowed to sue?

Answer 275

The following are the instances when an unlicensed foreign corporation may be allowed to sue in the Philippines courts.

1. To seek redress for an isolated business transaction;
2. To protect its corporate reputation, name, and goodwill;
3. To enforce a right not arising out of a business transaction;
4. When the parties have contractually stipulated that the Philippines is the venue of actions; and
5. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation

Question 276

What is an isolated transaction?

Answer 276

The Court has not construed the term “isolated transaction” to literally mean “one” or a mere single act. The phrase “isolated transaction” has a definite and fixed meaning, i.e., a transaction or series of transaction set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in progressive pursuit of the purpose and object of the business organization.

Question 277

What are the laws applicable to a foreign corporation lawfully doing business in the Philippines?

Answer 277

A foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class (RCC, Sec. 140).

Note: This rule shall not apply with respect to the creation, formation, organization or dissolution of corporations or to those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation (RCC, Sec. 140).

Question 278

What acts of a foreign corporation are included in the phrase “doing business” in the Philippines?

Answer 278

The phrase “doing business” shall include:

1. Soliciting orders, service contracts opening offices, whether called “liaison” offices or branches;

2. Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more;
3. Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and
4. Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization (R.A. No. 7042 also known as Foreign Investments Act as amended.

Question 279

What are the test on whether a foreign corporation is doing business in the Philippines?

Answer 279

1. Substance test - Whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over another; and
   
2. Continuity test - Whether there is continuity of commercial dealings and arrangements, contemplating to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization (Agilent Technologies Singapore v. Integrated Silicon Technology Phil. Corp., G.R. No. 154618, April 14, 2004).

Question 280

What acts of a foreign corporation do not constitute as “doing business” in the Philippines?

Answer 280

The Implementing Rules and Regulations (IRR) of the FIA recognizes the following acts as NOT constituting “doing business” in the Philippines:

1. Mere investment as a shareholder in a domestic corporation and/or the exercise of rights as such investor;
2. Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account;
3. Publication of a general advertisement through any print or broadcast media;
4. Maintaining a Stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;
5. Having a nominee Director or officer to represent its interest in such corporation;
6. Consignment by the foreign corporation of equipment with a local company to be used in the processing of products for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis (IRR of FIA, Sec. 1).

The mere ownership by a foreign corporation of a property in unaccompanied by its active use in furtherance of the business for which it was formed, is insufficient in itself to constitute “doing business.”

Question 281

When is the consent to transact business in the Philippines obtained by a foreign corporation?

Answer 281

A foreign corporation shall have the right to transact business in the Philippines after obtaining a license for that purpose in accordance with the RCC and a certificate of authority from the appropriate government agency (RCC, Sec: 140).

Question 282

What are the requisites for issuance of a license?

Answer 282

(LACS-SA)

1. An application for License under oath;

2. A copy of its AOl and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary;

3. Attached to the application for license shall be a duly executed Certificate under oath by the authorized official, attesting to the fact that the laws of the country allow Filipino citizens and corporations to do business therein;

4. The application shall be accompanied by a Statement under oath of the President of the corporation, showing that applicant is solvent and in sound financial condition, and stating its assets and liabilities as of the date not exceeding 1 year immediately prior to the filing of the application;
   
5. Corporations governed by Special laws (such as banks and insurance companies) shall also submit a previously issued authority from the appropriate government agency as may be required by law for corporations in its line of business (RCC, Sec. 142); and
6. Appointment of a Resident Agent (RCC, Sec. 145).

Question 283

What is a resident agent?

Answer 283

A resident agent is a resident of the Philippines designated by the corporation, on whom summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office (RCC, Sec. 145).

Question 284

Who could be a resident agent?

Answer 284

1. An individual, who must be of good moral character and of sound financial standing, residing in the Philippines; or
2. A domestic corporation lawfully transacting business in the Philippines designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines (RCC,/Sec. T44).

Question 285

What are the grounds for revocation of the license to transact business in the Philippines?

Answer 285

(AR-CAMOLU)
1. Failure to file its Annual report or pay any fees as required by the Code;

2. Failure to appoint and maintain a Resident agent in the Philippines;

3. Failure, after Change of its resident agent or address, to submit to the SEC a statement of such change;

4. Failure to submit to the SEC an authenticated) copy of any Amendment to its articles of incorporation or bylaws or of any articles of merger or consolidation within the time prescribed;

5. A Misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation;
   
6. Failure to Pay any and all taxes, ‘imposts, assessments or penalties, it any, lawfully due to the Philippine Government or any of its agencies or political subdivisions;
   
7. Transacting business in the Philippines Outside of the purpose or purposes for which such corporation is authorized under its license;
   
8. Transacting business in the Philippines as agent of or acting on behalf of any foreign corporation or entity not duly Licensed to do business in the Philippines; or
   
9. Any other ground as would render it Unfit to transact business in the Philippines (RCC, Sec. 151).

Question 286

How does the doctrine of estoppel apply to foreign corporations?

Answer 286

The doctrine of estoppel states that the other contracting party may no longer challenge the foreign corporation’s personality after acknowledging the same by entering into a contract with it. This principle is applied in order to “prevent a person (or another corporation) contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract.”

Question 287

P. 78 commmercial law

Answer 287

see table

Question 288

What is a “partnership”?

Answer 288

By a contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves (CIVIL CODE, Art. 1767).

Question 289

What are the characteristics of a partnership?

Answer 289

(P3C3BON)
1. Principal - does not depend for its existence on other contracts;

2. Preparatory - entered as means to an end;

3. Profit-oriented - purpose is for profit and not just common enjoyment;
4. Commutative - undertaking of each one is considered equal with the others;
5. Consensual - perfected by mere consent;
6. Capable of suit - endowed with legal personality unless it is an unlawful partnership. It can sue and be sued;
7. Bilateral - entered by two or more persons and the rights and obligations arising therefrom are always reciprocal;
8. Onerous - certain contributions have to be made; and
9. Nominate - has a special designation in law

Question 290

Who are the persons prohibited from giving donation to each other and from engaging in universal partnership?

Answer 290

MaCoPa-CP
1. Legally Married spouses (FAMILY CODE Ar. 87);

2. Common-law spouses (FAMILY CODE, Art. 87);
3. Parties guilty of adultery or concubinage at the time of donation (CIVIL CODE, Art. 739, par. 1);
4. Between persons found guilty of the same Criminal offense, in consideration thereof (CIVIL CODE, Art. 739, par. 2); and
5. Person and a public officer, or his wife, descendants, and ascendants, by reason of his office (CIVIL CODE, Art. 739, par. 3).

Question 291

What are the different kinds of partners?

Answer 291

1. As to Membership:
   a. Real partner - one who is really a contributing member of an existing legal partnership like a general, limited, or industrial partner; or
   b. Partner by estoppel or quasi-partner - one who is not really a partner but represents himself as one.
2. As to Liability:
   a. General Partner - his liability to third persons extends to his separate property when assets had been exhausted; or
   b. Limited Partner - liable to third persons only to the extent of his contribution.
3. As to the Nature of Contribution:
   a. Capitalist Partner - contributes capital (money or property); or
   b. Industrial Partner - contributes industry or labor.
4. As to Exposure to Public Perception:
   a. Ostensible Partner - one who takes active part and known to the public as a partner in the business, whether or not he has actual interest in the firm;
   b. Silent Partner - participates in the profits and losses of the firm but does not take any active part in the partnership although may be known as partner;
   c. Secret Partner - participates in the profits and losses of the firm but is not publicly known as a partner; or
   Dormant Partner - does NOT take an active part in the business of the firm and NOT publicly known as a partner.

Question 292

Colet started working as caretaker in Bini Beach, which is operated by Sheena. Colet cleaned, watched, and secured the beach area, cottages, rest house, store, and other properties in the resort, as well as entertained guests and occupants of the cottages from 5 a.m. to 9 p.m. every day (inclusive of holidays and weekends) for an allowance of one thousand pesos (Php. 1,000.00) per week. Later on, Maloi, the sister of Colet, was employed to manage the store in 2007 for P1,000.00 a week and entitled to 15% commission on the rentals collected from the cottages and rest house. Few years later on, Sheena notified Colet and Maloi that she will be leasing Bini Beach because the business was not profitable, thus their services are no longer needed. Due to this Colet and Maloi, no longer reported for work and subsequently filed a complaint asserting that they were illegally dismissed and deprived of procedural due process. Sheena denied employment relationship with Colet and Maloi and asserted that they were her industrial partners alleging that the complainants receive their share on the profits of the Beach. Is Sheena correct?

Answer 292

No, it is beyond dispute that receipt by a person of share in the profits of a business does not by itself establish the existence of a partnership, if the amounts are received as wages of an employee. Neither does the sharing of gross returns establish partnership, most especially, in light of the absence”of the any other evidence to establish the existence of the partnership. The existence of a partnership is established when it is shown that:

(1) two or more persons bind themselves to contribute money, property, or industry to a common fund; and

(2) they intend to divide the profits among themselves, however, as in this case, there is no-clear indication that the parties agreed to contribute money, property or industry to engage in particular business (Dusol v. Lazo, G.R. No. 200555, July 20, 2021; Lopez Case.)

Question 293

Is the Doctrine of Separate Juridical Personality applicable to partnership?

Answer 293

Yes, the partnership has a juridical personality separate and distinct from that of each of partners, even in case of failure to comply with the requirements of Article 1772, first paragraph (CIVIL CODE, Art. 1768).

Question 294

What is a “partnership by estoppel?”

Answer 294

A partnership by estoppel arises when a person, by words spoken or by conduct, represents himself, or consents to another representing him to anyone, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such persons to whom such representation has been made, who has, on the faith of such representation given credit to the actual or apparent partnership (CIVIL CODE, Art. 1825).

Question 295

What are the kinds of partnership according to its object?

Answer 295

1. Universal partnership - may refer to all the present property or to all the profits (CIVIL CODE, Art. 1777); and
2. Particular partnership - has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation (CIVIL CODE, Art. 1783)

Question 296

What is a “universal partnership of all present property?”

Answer 296

A universal partnership of all present property is that in which the partners contribute all the property which actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as all the profits which they may acquire therewith (CIVIL CODE, Art. 1778).

Question 297

What is a “universal partnership of profits?”

Answer 297

It comprises all that the partners may acquire by their industry or work during the existence of the partnership. The movable or immovable property which each of the partners may possess at the time of the celebration of the contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership (CIVIL CODE, Art. 1780).

Question 298

Define “general professional partnership.”

Answer 298

A general professional partnership is a partnership for the exercise of a profession (CIVIL CODE, Art. 1767). A “profession” has been defined as “a group of men pursuing a learned art as a common calling in the spirit of public service.”

Note: In a professional partnership, it is the individual partners who are deemed engaged in the practice of profession and not the partnership. Thus, they are responsible for their own acts.

Question 299

What are the relations created by a contract of partnership?

Answer 299

(APTS)
1. Relations Among the Partners Themselves;
2. Relations of the Partners with the Partnership;
3. Relations of the Partnership with Third Persons with Whom it Contracts; and
4. Relations of the Rarthers with Such Third Persons

Question 300

What are the obligations of the partners?

Answer 300

(ConConCo-ADam-CS)

1. To give his Contribution (CIVIL CODE, Arts. 1786, 1788)
2. Not to Convert firm money or property for his own use (CIVIL CODE, Art. 1788);
3. Not to engage in unfair Competition with his own firm (CIVIL CODE, Art. 1808);
4. To Account for and hold as trustee, unauthorized personal profits (CIVIL CODE, Art. 1807);
5. Pay for Damages caused by his own fault (CIVIL CODE, Art. 1794);
6. Duty to Credit to the firm the payment made by a debtor who owes him and the firm (CIVIL CODE, Art 1792); and
7. To Share with the other partners the share of the partnership credit which he has received from an insolvent firm debtor (CIVIL CODE, Art. 1793).

Question 301

What are the rights of the partners?

Answer 301

(PRAID)
1. Property Rights of a Partner (CIVIL CODE, Art. 1810);

2. Right to Reimbursement for amounts advanced to the partnership and to indemnification for risks in consequence of management (CIVIL CODE, Art. 1796);

3. Right to Associate with another person in his share (CIVIL CODE, Art. 1804);
   
4. Right of Access and inspection of partnership books (CIVIL CODE, Art. 1805);
   
5. Right to a formal Account of partnership affairs under certain circumstances (CIVIL CODE, Art. 1809);
   
6. Right to demand true and full Information of all things affecting the partnership (CIVIL CODE, Art. 1806);
   
7. Right to ask for the Dissolution of the firm at the proper time (CIVIL CODE, Arts. 1830-1831).

Question 302

What are the liabilities of an industrial partner?

Answer 302

An industrial partner is exempted from losses. (CIVIL CODE, Art. 1797). However, such exemption is limited Only as between or among the parthers Neither on principle nor on authority can the industrial partner be relieved from liability to third persons for the debts of the partnership.

Question 303

Industrial Partner vs. Capitalist Partner

Answer 303

IP: Cannot engage in any business for himself, unless the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm, or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case (Art. 1789)

CP: Cannot engage for their own account in any operation which is of the kind of business in which the partnership is engaged, unless there is a stipulation to the contrary (Art. 1808)

Question 304

What is the remedy when a capitalist partner engages in the same business in which the partnership is engaged without being authorized by stipulation?

Answer 304

Any capitalist partner violating this prohibition shall bring to the common funds any profits accruing to him from his transactions, and shall personally bear all the losses (CIVIL CODE, Art. 1808).

Question 305

What is the effect of failure to contribute additional capital in case of imminent loss of the business of the partnership?

Answer 305

If there is no agreement to the contrary, in case of an imminent loss of the business of the partnership, any partner who refuses to contribute an additional share to the capital, except an industrial partner, to save the venture, shall be obliged to sell his interest to the other partners (CIVIL CODE, Art. 1791).

Question 306

What are the rules on the risk of loss of the things contributed?

Answer 306

1. The risk of specific and determinate things which are not fungible and contributed to the partnership so that only their use and fruits may be for the common benefit, shall be borne oy the partner who owns them;
   
2. If the things contributed are fungible or cannot be kept without deteriorating, the risk shall be borne by the partnership
   
3. If the thing contributed is to be sold, the risk shall be borne by the partnership; and
   
4. If the thing is brought and appraised in the inventory the risk shall be borne by the partnership (CIVIL CODE, Art. 1795).

Question 307

How are profits and losses distributed among the partners?

Answer 307

1. Profits are distributed according to agreement; if nohe, according to amount of contribution;
2. Losses are distributed according to agreement,
3. If there is no agreement as to losses, but profit sharing has been agreed upon, losses shall be distributed according to the same proportion;
   
4. If there is no agreement, then losses shall be distributed proportionately according to amount contribution,
5. Industrial partner’s profit is such share as may be just and equitable under the circumstances; and
   
6. While an industrial partner may be held liable by third persons, he can recover whatever he has paid from the partners; for he is exempted from losses with or without stipulation to this effect.

Question 308

May a partner associate another person with him in his share?

Answer 308

Yes. Every partner may associate another person with him in his share, but the associate shall not be admitted in the partnership without the consent of all the other partners (CIVIL CODE, Art. 1804).

“delectus personae”

Question 309

What is the obligation of a managing partner who collects debt?

Answer 309

As a general rule, where a person is separately indebted to the partnership and to the managing partner at the same time, any sum received by the latter shall be applied to the two credits in proportion to their amounts even though he may have given receipt for his own credit only. An exception to the rule is when the partner received it entirely for the account of the partnership, in which case the whole sum shall be applied to the partnership credit (CIVIL CODE, Art. 1792).

Question 310

What is the obligation of the partner who receives his share in partnership credit?

Answer 310

A partner who has received. in whole or in part, his share of a partnership credit. when the other partners have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to the partnership capital what he received even though he may have given receipt for his share only (CIVIL CODE, Art. 1793).

Question 311

Art. 1792 vs. Art. 1793

Answer 311

(1) as to number of credits
1792: two distinct credits - one in favor of the partnership and another in favor of the managing partner
1793: only one credit - in favor of the partnership

(2) as to applicability
1792: applies if the partner is a managing partner
1793: applies whether the partner is authorized to manage or not

Question 312

What is the obligation of the partner for damages to the partnership?

Answer 312

Every partner is responsible to the partnership for damages suffered by it through his fault and he cannot compensate them with the profits and benefits which he may have earned for the partnership by his industry (CIVIL CODE, Art. 1794).

Question 313

Who shall manage the partnership?

Answer 313

The management of the partnership may be vested by agreement in one, or some, or all of the partners, or even in a third person, either in the articles of partnership or after the partnership had already been constituted (CIVIL CODE, Arts. 1800, 1801, 1802).

If there is no agreement, it is vested in all of the partners (CIVIL CODE, Art. 1803)

Question 314

What are the property rights of a partner?

Answer 314

(SIM)
1. His rights in Specific partnership property;
2. His Interest in the partnership; and
3. His right to participate in the Management (CIVIL CODE, Art. 1810).

Question 315

What is the nature of a partner’s right in specific partnership property?

Answer 315

A partner does not actually own any part of partnership property or property owned by the partnership as a separate business entity, although he has equal rights with his partners to possess specific parthership property (CIVIL CODE, Art. 1811).

Question 316

What are the Incidents of co-ownership for specific partnership property?

Answer 316

(PAAL)
1. Include the right to Possess for partnership purposes. For other purposes, the possession must be with the consent of the other partners;

Note: This right is subject to Title IX (Partnership) of the Civil Code and to any agreement between the partners.

2. Are not Assignable except in connection with the assignment of rights of all the partners in the same property;
3. Are not subject to Attachment or execution, except on a claim against the partnership; and
4. Are not subject to Legal support under Art. 291 (now Art. 195 of the Family Code) (CIVIL CODE, Art. 1811).

Question 317

What are the obligations of the parties with respect to the contribution of property?

Answer 317

(CoW-DADI)

1. To Contribute what had been promised (CIVIL CODE, Art. 1786):

2. To Warrant specific and determinate property contributed to the partnership in case of eviction (CIVIL CODE, Art. 1786);

3. To Deliver the fruits of the property from the time they should have been delivered without the need of any demand (CIVIL CODE. Art. 1786);

4. When contribution is in goods, the amount thereof must be determined by proper Appraisal of the value thereof at the time of contribution (CIVIL CODE, Art. 1787);
5. To preserve the property with Diligence of a good father of a family pending delivery to the partnership (CIVIL CODE, Art. 1163); and
6. To indemnify for any interest and damages caused by the retention of the property or by delay in its obligation to contribute a sum of money

Question 318

What is the requirement under the law for a partnership’s firm name?

Answer 318

Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners. Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner (CIVIL CODE, Art. 1815).

Question 319

What are the rules regarding the liability of partners for partnership obligations?

Answer 319

1. All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract (CIVIL CODE, Art. 1816);

Note: The term pro rata must be understood to mean equally or jointly, and not proportionately, because the pro-rating is based on the number of partners and not on the amount of their contributions

2. A stipulation which excludes one of more partners from any share in the profits or losses is void (CIVIL CODE, Art. 1799). The exception is in case of industrial partners whom the law itself excludes from losses (CIVIL CODE, Art. 1797);
   
3. All partners are liable solidarily with the partnership for everything chargeable to the partnership under Articles 1822 (wrongful acts or omission of any partner acting in the ordinary course of business) and 1823 (to make good the loss) (CIVIL CODE, Art. 1824);
   
4. A newly admitted partner into an existing parthership is liable for all the obligations of the partnership arising before his admission but out of partnership property shares (CIVIL CODE, Art. 1826); and
5. Upon dissolution of the partnership, the partners shall contribute the amounts necessary to satisfy the partnership liabilities (CIVIL CODE, Art. 1839 (4), (7)).

Question 320

What is the nature of a partner’s obligation for partnership liabilities?

Answer 320

A partner’s obligation for partnership liabilities is subsidiary in nature. They shall only be liable with their property after all partnership assets have been exhausted. The subsidiary nature of the partners fiability with the partnership is one of the valid defenses against a premature execution of judgment directed to a partner. As to third persons, Article 1816 provides that the partners obligation to third persons with respect to the partnership liability is pro rata or joint (Guy v. Gacott, G, R. No. 206147, January 13, 2016).

Question 321

What is the extent of the authority of a partner to act?

Answer 321

(ADIC-EAR)
Except when authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to:

1. Assign the partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership:
2. Dispose of the good-will of the business;
3. Do any other act which would make it Impossible to carry on the ordinary business of a partnership;
4. Confess a judgment;
5. Enter into a compromise concerning a partnership claim or liability;
6. Submit a partnership claim or liability to Arbitration; and
7. Renounce a claim of the partnership.

Note: No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction (CIVIL CODE, Art. 1819).

Question 322

What are the conditions for an admission of a partner to be considered as an admission against the partnership?

Answer 322

An admission by a partner is an admission against the partnership under the following conditions:

1. The admission must concern partnership affairs;
2. Within the scope of his authority (CIVIL CODE, Art. 1820); and
3. Admission was done during the existence of the partnership. (REVISED RULES ON EVIDENCE, Rule 130, Section 30)

Question 323

What is the liability of an incoming partner?

Answer 323

A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary. (CIVIL CODE, Art. 1826)

Question 324

What is a Charging Order?

Answer 324

A “charging order” subjects the interest of the debtor partner in the partnership with the payment of the unsatisfied amount of a judgment secured in favor of a separate creditor. By virtue of such, any amount or portion thereof which the partnership would otherwise pay to the debtor partner should instead be given to the judgment creditor.

Question 325

Define “dissolution of a partnership”

Answer 325

Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on, as distinguished from the winding up, of the business (CIVIL CODE, Art. 1828).

Question 326

Dissolution vs. Winding Up vs. Termination

Answer 326

D: the change in the relation of the partners caused by any partner ceasing to be associated in the carrying of the business (Art. 1828); it is that point of time when the partners cease to carry on the business together

W: the process of setting business affairs after dissolution

T: the point in time after all the partnership affairs have been wound up

Question 327

Enumerate the causes for extrajudicial dissolution.

Answer 327

(WovCET-DICiDe)

1. Without violation of the agreement between the partners: (TE3)
a. By the Termination of the definite term or particular undertaking specified in the agreement;
b. By the Express will of any partner, who must act in good faith, when no definite term or particular undertaking is specified;
c. By the Express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking; or
d. By the Expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners;

2. In Contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this Article, by the express will of any partner at any time;

3. By any Event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership;
4. When a specific Thing which a partner had promised to contribute to the partnership, perishes before the delivery; in any case by the loss of the thing, when the partner who contributed it having reserved the ownership thereof, has only transferred to the partnership the use or enjoyment of the same; but the partnership shall not be dissolved by the loss of the thing when it occurs after the partnership has acquired the ownership thereof
5. By the Death of any partner;
6. By the Insolvency of any partner or of the partnership:
7. By the Civil interdiction of any partner (CIVIL CODE, Art 1830): and
8. By Decree of court under Article 1831 (CIVIL CODE, Art. 1830).

Question 328

What are the grounds for judicial dissolution?

Answer 328

(I2G-BLOP)

On application by or for a partner, the court shall decree a dissolution whenever:

1. A partner has been declared Insane in any judicial proceeding or is shown to be of unsound mind;

2. A partner becomes in any other way Incapable of performing his part of the partnership contract;

3. A partner has been Guilty of such conduct as tends to affect prejudicially the carrying on of the business;

4. A partner wilfully or persistently commits a Breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him;
5. The business of the partnership can only be carried on at a Loss;
6. Other circumstances render a dissolution equitable, and
7. On the application of the Purchaser of a partner’s interest under Articles 1813 or 1814; (1) after the termination of the specified term or particular undertaking or; (2) at any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued (CIVIL CODE, Art. 1831).

Question 329

Can a partnership continue to use its partnership name even upon dissolution?

Answer 329

Yes. As a general rule, upon the dissolution of a commercial partnership, the succeeding partners or parties have the right to carry on the business under the old name, provided that there is no stipulation forbidding it. This is because the name of a commercial partnership is a partnership asset inseparable from the goodwill of the firm.

Question 330

What is the order of the application of partnership assets for the satisfaction of liabilities?

Answer 330

1. Partnership creditors
2. Those owing to partners other than for capital and profits
3. Return of capital contributed by the partners
4. Profits to the partners in the proportion in which profits are to be shared (CIVIL CODE, Art. 1839)

Question 331

What are the rights of a partner who retires of dies, when the business is continued?

Answer 331

In the event that the business continues its existence and operations, the rights of the retiring partner or the estate of the deceased partner are:

1. To have the value of the interest of the retiring or deceased partner ascertained as of the date of dissolution; and

2. To receive, as an ordinary creditor, an amount equal to the value of his interest in the dissolved partnership, with interest, or at his option, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership (CIVIL CODE, Art. 1841).

Question 332

What is a “limited partnership?”

Answer 332

A limited partnership is one formed by two or more persons under the provisions of Article 1844 of the Civil Code, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership (CIVIL CODE, Art. 1843).

Question 333

How is a limited partner different to a general partner in terms of contribution?

Answer 333

The contribution of a limited partner in a limited partnership may be cash or other property, but not services (CIVIL CODE, Art. 1845).

Question 334

When may the name of a limited partner appear in the partnership name?

Answer 334

As a rule, the surname of a limited partner shall not appear in the partnership name unless:

1. It is also the surname of a general partner; or
2. Prior to the time when the limited partner became such, the business had been carried on under a name in which his surname appeared.

Note: A limited partner whose surname appears in the partnership name contrary to the provisions of the first paragraph is liable as general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner (CIVIL CODE, Art. 1846).

Question 335

When may a limited partner be held liable as a general partner?

Answer 335

A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business (CIVIL CODE, Art. 1848)

Question 336

How can additional limited partners be admitted to the partnership?

Answer 336

After the formation of a limited partnership, additional limited partners may be admitted upon:

1. Filing an amendment to the original certificate,

2. The signing and swearing to by all the partners, (including the new limited partners) (CIVIL CODE, Art 1849); and

3. Filing in the Securities and Exchange Commission where the certificate is recorded (CIVIL CODE, Art: 1865)

Question 337

What are the rights of a limited partner?

Answer 337

(KIP-RAID)
1. To require that the partnership books be Kept at the principal place of business of the partnership (CIVIL CODE, Art 1851);

2. To Inspect and copy at a reasonable hour partnership books or any of them (CIVIL CODE, Art. 1851)
3. To receive a share of the Profits or other compensation by way of income (CIVIL CODE, Art. 1856);
   
4. To receive the Return of his contribution provided the partnership assets are in excess of all its liabilities (CIVIL CODE, Art. 1857);
5. To demand a formal Account of partnership affairs whenever circumstances render it just and reasonable (CIVIL CODE, Art. 1851):
   
6. To demand true and full Information of all things affecting the partnership (CIVIL CODE, Art. 1851); and
7. To ask for Dissolution and winding up by decree of court (CIVIL CODE, Art. 1851).

Question 338

In what instance may a person be a general and limited partner at the same time?

Answer 338

A person may be a general and limited partner at the same time, provided the same is stated in the certificate signed, sworn to, and recorded in the office of the Securities and Exchange Commission. His rights are those of a general partner. However, regarding his contribution, he would be considered a limited partner, with the rights of a limited partner insofar as the other partners are concerned.

Question 339

What are the liabilities of a limited partner?

Answer 339

1. The difference between his contribution as actually made and that stated in the certificate as having been made;
2. Any unpaid contribution which he agreed in the certificate to make, in the future at the time and on the conditions stated in the certificate; (CIVIL CODE, Art .1858, par 1)
3. Liable as a trustee for the partnership for:
   a. Specific property stated in the certificate as contributed by him but which he had not contributed;
   b. Specific property of the partnership which had been wrongfully returned to him;
   c. Money wrongfully paid or conveyed to him on account of his contribution; and
   d. Other property wrongfully paid or conveyed to him on account of his contribution. (CIVIL CODE, Art. 1858, par 2)
4. Liable to the partnership for the return of contribution lawfully received by him (CIVIL CODE, Art 1857, par. 3 (2)).

Question 340

What are the obligations of a limited partner?

Answer 340

1. To the partnership: Since limited partners are not principals in the transaction of a partnership, their liability as a rule, is to the partnership, not to the creditors of the partnership.
   NOTE: the general partners cannot, however, waive any liability of the limited partners to the prejudice of such creditors.
2. To the partnership creditors and other partners: a limited partner is liable in the following instances:
   a. When he contributed services instead of only money or property to the partnership (Art. 1845);
   b. When he allows his surname to appear in the firm name (Art. 1846)
   c. When he fails to have a false statement in the certificate corrected, knowing it to be false (Art. 1847)
   d. When he takes part in the control of the business (Art. 1848)
   e. When he receives partnership property as collateral security, or receives from a general partner or the partnership any payment, conveyance, or release from liability when partnership assets are not sufficient to discharge partnership liabilities, in fraud of partnership creditors (Art. 1854); and
   f. When there is failure to substantially comply with the legal requirements governing the formation of limited partnerships (Art. 1844)
3. To separate creditors: as in a general partnership, the creditor of a limited partner may, in addition to other remedies allowed under existing laws, apply to the proper court for a charging order subjecting the interest in the partnership of the debtor partner for the payment of his obligation (Art. 1862)

Question 341

What is the effect of death, retirement, insolvency, civil interdiction of a general partner of partnership?

Answer 341

As a rule, the partnership is dissolved, unless the remaining general partners continue the business:

1. Under a right to do so as stated in the certificate, or
2. With the consent of all members (CIVIL CODE, Art. 1860).

Question 342

When can the limited partner have the partnership dissolved and wound up?

Answer 342

A limited partner may have the partnership dissolved and its affairs wound up when:

1. He rightfully but unsuccessfully demands the return of his contribution; or

2. The other liabilities of the partnership have not been paid, or the partnership property is insufficient for their payment as required by the first paragraph, No. 1 of Article 1857, and the limited partner would otherwise be entitled to the return of his contribution (CIVIL CODE, Art. 1857).

Question 343

Who is a “substituted limited partner?”

Answer 343

He is a person admitted to all the rights of a limited partner who has died or has assigned his interest in the partnership (CIVIL CODE, Art. 1859).

Question 344

What is the rule concerning the assignment of a limited partner of his interest to a substituted limited partner?

Answer 344

If a limited partner (LP) assigned his interest to substituted limited partner (SLP), SLP is considered as/have acquired the right to become a substituted limited partner if:

1. All the members consented to the assignee becoming a substituted limited partner or the assignee was given the right by a limited partner to become an SLP:
2. The Certificate was amended;
3. The Certificate las amended was registered in the Securities and Exchange Commission. (CIVIL CODE, Art. 1859 par. 3-4).

Question 345

What is the order of priority in settling accounts after dissolution?

Answer 345

1. Those to creditors, in the order of priority as previded by law, except those to limited partners on account of their contributions, and to general partners;
   
2. Those to limited partners in respect to their share of the profits and other compensation by way of income on their contributions;
   
3. Those to limited partners in respect to the capital of their contributions;
   
4. Those to general partners other than for capital and profits;
5. Those to general partners in respect to profits;
6. Those to general partners in respect to capital.

Note: Subject to any statement in the certificate or to subsequent agreement, limited partners share in the partnership assets in respect to their claims for capital, and in respect to their claims for profits or for compensation by way of income on their contribution respectively, in proportion to the respective amount of such claims (CIVIL CODE, Art. 1863).

Question 346

What are the instances when a Certificate of Limited Partnership may be amended?

Answer 346

(NSA2-RCET2D)
1. There is a change in the Name of the partnership or in the amount or character of the contribution of any limited partner;

2. A person is Substituted as a limited partner;
   
3. An Additional limited partner is admitted;
4. A person is Admitted as a general partner;
   
5. A general partner Retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction and the business is continued under Article 1860;
6. There is change in the Character of the business of the partnership;
7. There is a false or Erroneous statement in the certificate;
8. There is a change in the Time as stated in the certificate for dissolution of the partnership or for the return of a contribution;
   
9. A Time is fixed for the dissolution of the partnership, or the return of a contribution, no time having been specified in the certificate; or
   
10. The members Desire to make a change in any other statement in the certificate in order that it shall accurately represent the agreement among them (CIVIL CODE, Art. 1864).

Question 347

What is a contract of insurance?

Answer 347

A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event.

Question 348

What are the distinguishing elements of a contract of insurance?

Answer 348

(InS-PAR)

1. The insured has an Insurable interest;
2. The insurable interest is Subject to a risk of loss by the happening of the designated peril;
3. The insurer’s promise is in consideration of the Payment of a premium;
4. The insurer Assumes the risk; and
5. Such assumption of risk is part of a Risk-distribution scheme

Question 349

What is the principal object and purpose test?

Answer 349

The principal object and purpose test have been applied to determine whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance.

Note: Even if a contract contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance.

Question 350

What are the characteristics of an insurance contract?

Answer 350

(RAPA-CUCU-IE)

1. Risk-Distributing Device - all members of a group are exposed to a particular risk contribute premiums to an insurer, and from these contributory funds are paid whatever losses occur due to the exposure to the peril insured against

2. Aleatory - the contract is effective upon its perfection although the occurrence of a condition or event may later dictate the demandability of certain obligations thereunder

3. Personal - each party in an insurance contract had in view the character, credit, and conduct of the other

4. Contract of Adhesion or Fine Print Rule - most of the terms of the contracts do not result from mutual negotiations between the parties as they are prescribed in printed form to which the insured may adhere if he chooses to but which he cannot change

5. Consensual - the contract is perfected by mere consent without the need of delivery or any other formality

6. Uberrimae Fidei Contract - both parties must not only perform their obligations in good faith but must avoid material concealment or misrepresentations as contracts of insurance are one of utmost good faith
7. Conditional - the right of the insured to claim the proceeds is dependent upon the happening of the event which constitutes the obligation of the insurer to pay the principal of which is the happening of the event periled against, and other conditions which the parties stipulated must be complied with (CIVIL CODE, Art. 1181).
   
8. Unilateral - it is a contract which imposes legal duty only to the insurer who promises to indemnify. in case of loss. The payment of premium is not an obligation but an event that gives the contract an obligatory force. Upon payment, it is only the insurer who has an obligation to pay in case of loss
   
9. Contract of Indemnity - except for life and accident insurance, the measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof (INSURANCE CODE, Sec. 17)
   
10. Executory - it is executed as to the insured after the payment of the premium and executory on the part of the insurer in the sense that it is not executed until the payment of the loss; executory upon the insurer subject to the condition of the happening of the event

Question 351

Can there be insurance for or against chance?

Answer 351

An insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize is not allowed (INSURANCE CODE, Sec. 4). Every policy executed by way of gaming or wagering is void (INSURANCE CODE, Sec. 25). While it is based on a contingency, it is not a contract of chance and is not used for profit. The very purpose of insurance is the reimbursement of the holder of insurance for actual loss suffered from specified risks.

Question 352

Who may be considered as an insurer?

Answer 352

An insurer may be a foreign or domestic insurance company or corporation, or a partnership or an association (INSURANCE CODE, Sec. 6).

The term “insurer” no longer includes “individuals” under the Insurance Code. Hence, an individual natural person is no longer allowed to be an insurer.

Question 353

In life insurance policy, who is a Cestui Que Vie?

Answer 353

He is the person whose life is the subject of a life insurance policy. It is the person whose life is used to measure the duration of a trust, gift or insurance contract.

Question 354

What is the effect of death of the policy owner in a life insurance?

Answer 354

Upon the death of the policy owner all his rights, title, and interest in the policy of insurance on the life or health of the cestui que vie shall automatically vest in the latter, unless otherwise provided for in the policy (INSURANCE CODE, Sec. 3, par. 3).

Question 355

Who are disqualified from being beneficiaries of a life insurance policy?

Answer 355

Any person who is forbidden from receiving any donation under Article 739 of the Civil Code cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said article (CIVIL CODE, Art. 2012). The following donations shall be void:

1. Those made between persons who were guilty of adultery or concubinage at the time of the donation;
2. Those made between persons found guilty of the same criminal offense, in consideration thereof; or
3. Those made to a public officer or his wife, descendants and ascendants, by reason of his office (CIVIL CODE, Art. 739).

Question 356

What happens when the beneficiary dies before the life insured?

Answer 356

Unless otherwise stipulated in the policy. the beneficiary, even if irrevocable, who predeceases the life insurd transmits nothing to his heirs (CIVIL CODE, Art. 856).

Question 357

What is an insurable interest?

Answer 357

Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured (INSURANCE CODE, Sec. 13)

Question 358

What can be the subject matter of insurable interest?

Answer 358

1. The life and health of:
   a. Himself, his spouse, and his children;
   b. Any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest in;
   c. Any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and
   d. Any person upon whose life any estate or interest vested in him depends (INSURANCE CODE, Sec. 10).
2. Property - Whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured (INSURANCE CODE, Sec. 13). It may consist in:
   a. An existing interest;
   b. An inchoate interest founded on an existing interest; or
   c. An expectancy coupled with an existing interest in that out of which the expectancy arises (INSURANCE CODE, Sec. 14).

Question 359

When must insurable interest exist?

Answer 359

1. Life or health of a person insured - when the insurance takes effect, but need not exist thereafter or when the loss occurs; or

2. Property insured - when the insurance takes effect, and when the loss occurs, but need not exist in the meantime (INSURANCE CODE, Sec. 19)

Question 360

Is the beneficiary required to have an insurable interest?

Answer 360

As a general rule, the beneficiary of a life insurance policy need not have insurable interest, except in the following cases:

1. If the insured takes out an insurance on the life of another designating himself or herself as beneficiary, the insurable interest on the part of the insured is necessary;

2. If one takes out an insurance on the life of another and designates a third person as the beneficiary, it is necessary for the beneficiary to have insurable interest (AQUINO, Essentials of Insurance. Law (2022), p. 131 [hereinafter AQUINO, Insurance Law]); and

3. In property insurance, the beneficiary therein must have insurable interest over the property insured (AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 33-34).

Question 361

What is the legal effect of the change in insurable interest after the loss?

Answer 361

A change of interest in a thing insured, after the occurrence of an injury which results n a loss, does not affect the right of the insured to indemnity for the loss (INSURANCE CODE, Sec. 21).

Question 362

What is the rule on the insurable interest on a mortgaged property?

Answer 362

As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and both interests may be one policy, or each may take out a separate policy covering his interest, either at the same or at separate times.

Question 363

What is the extent of the mortgagor’s interest in the mortgaged property?

Answer 363

The extent of the mortgagor’s insurable interest in the mortgaged property is, as owner of such property, to the extent of its entire value regardless of the amount of the mortgaged debt.

Note: Insurable interest of the owner of the ship hypothecated by bottomry is only the excess of its value over the amount secured by bottomry. (INSURANCE CODE, Sec. 103).

Question 364

What is the extent of the mortgagee’s interest in the mortgaged property?

Answer 364

The mortgagee’s insurable interest is to the extent of the debt, since the property is relied upon as security thereof, and in insuring he is not insuring the property but his interest or lien thereon. His insurable interest is prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property.

Question 365

What are the methods in insuring the interest of both the mortgagor and mortgagee in a single policy?

Answer 365

The methods in insuring the interest of both the mortgagor and mortgagee in a single policy are as follows:

1. “As their interest may appear” clause;
2. Loss payable clause - it is a clause under which acts of the mortgagor affect the mortgagee, the reason being that the mortgagor does not cease to be a party to the contract (INSURANCE CODE, Sec. 8);
3. Standard mortgage clause - it is a clause under which subsequent acts of the mortgagor cannot affect the rights of the assignee, the reason being that it is as if the insurer made a new and independent contract with the mortgagee (INSURANCE CODE, Sec. 9);
4. A separate assignment of the policy;
5. An assignment in pledge; or
6. Establishment of an equitable lien on the proceeds of the insurance (AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 116).

Question 366

What are the effects of loss payable clause?

Answer 366

(IPARA)
1. The contract is deemed to be upon the Interest of the mortgagor, who does not cease to be a party to the contract;

2. In case of loss, the mortgagee is entitled to the Proceeds to the extent of his credit;

3. Any act of the mortgagor prior to the loss, which would otherwise avoid the insurance Affects the mortgagee even if the property is in the hands of the mortgagee;

4. Upon Recovery by the mortgagee to the extent of his credit, the debt is extinguished; and

5. Any Act, which under the contract of insurance is to be performed by the mortgagor, may be performed by the mortgagee with the same effect (INSURANCE CODE, Sec. 8).

Question 367

What is a mortgage redemption insurance?

Answer 367

Mortgage redemption insurance is a device for the protection of both the mortgagee and the mortgagor. On the part of the moitgagee, it has to enter into such form of contract so that in the event of the death of the mortgagor during the subsistence of the mortgage contract, the proceeds from such insurance will be applied to the payment of the mortgage debt. As for the mortgagor, in the event of death, the mortgage obligation will be extinguished by the application of the insurance proceeds to the mortgage indebtedness.

Question 368

What are the grounds for the rescission of an insurance contract?

Answer 368

(COM-WaP)
1. Intentional or unintentional Concealment (INSURANCE CODE, Sec. 27);

2. Intentional or fraudulent Omission, on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty (INSURANCE CODE, Sec. 29);

3. Misrepresentation - it is when representation is false on material point whether affirmative or promissory (INSURANCE CODE, Sec. 45);
4. Violation of material Warranty or other material provisions of the policy (INSURANCE CODE, Sec. 74); and
5. Violation of a Provision wherein the policy declares that violation of which would avoid the policy (INSURANCE CODE, Sec. 75).

Question 369

What is concealment?

Answer 369

Concealment is the neglect to communicate that which a party knows and ought to communicate (INSURANCE CODE, Sec. 26).

Question 370

What are the requisites of concealment?

Answer 370

(KD-MNO)

1. A party Knows a fact which he neglects to communicate or disclose to the other;
2. Such party concealing is Duty bound to disclose such fact to the other;
3. The fact concealed is Material to the contract;
4. Such party concealing makes No warranty of the fact concealed; and
5. The Other party has not the means of ascertaining the fact concealed (INSURANCE CODE, Sec. 28).

Note: Proof of fraudulent intent is unnecessary for the rescission of an insurance contract on account of concealment.

Question 371

What is the Test of Materiality?

Answer 371

Materiality is determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries (INSURANCE CODE, Sec. 31).

Question 372

What are the matters that need not be disclosed except upon inquiry?

Answer 372

(KnOW-PRiNa) Neither party to a contract of insurance is bound to communicate information of the matters following, except in answer to the inquiries of the other:

1. Those which the other Knows;
2. Those which, in the exercise of ordinary care, the other Ought to know, and of which the former has no reason to suppose him ignorant;
3. Those of which the other Waives the communication;
4. Those which Prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material;
5. Those which relate to a Risk excepted from the policy and which are not otherwise material (INSURANCE CODE, Sec. 30); and
6. Information of the Nature or amount of the interest of one insured except if he is not the absolute owner of the property insured (INSURANCE CODE, Sec. 34 & 51(e)).

Question 373

What are the matters, that need not be disclosed even in answer to inquiries?

Answer 373

(JuG)

1. Information of his own Judgment (INSURANCE CODE, Sec. 35); and
2. General causes which are open to his inquiry, equally with the other, and all general usages of trade (INSURANCE CODE, Sec, 32).

Question 374

May the right to material information be waived?

Answer 374

The right to material information may be waived, either by terms of insurance or by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated (INSURANCE CODE, Sec. 33).

Question 375

Is there a distinction between intentional and unintentional concealment?

Answer 375

There is none. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. (INSURANCE CODE, Sec. 27)

Question 376

When must the insurer exercise the right to rescind the contract on the ground of concealment or misrepresentation?

Answer 376

The insurer must exercise the right to rescind the contract before the commencement of an action on the contract. After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of 2 years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent (INSURANCE CODE, Sec. 48).

Question 377

What is the “incontestability clause”?

Answer 377

The incontestability clause provides that after a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of 2 years from the date of its issue or of its last reinstatement, the insurer cannot prove, that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent (INSURANCE CODE, Sec. 48, par. 2)

Question 378

What Defenses are not Barred by the Incontestability Clause?

Answer 378

(FAB-P2C3) The insurer may still contest the policy by way of defense to a suit brought upon the policy or by action to rescind the same, on any of the following grounds:

1. That the Fraud is of a particular vicious type;
2. That the Action was not brought within the time specified;
3. That the Beneficiary failed to furnish proof of death or comply with any conditions imposed by the policy after the loss has happened;
4. That the Person taking the insurance lacked insurable interest as required by law;
5. That the Premiums have not been paid;
6. That the Cause of death of the insured is an excepted risk; and
7. That the Conditions of the policy relating to military or naval service have been violated (DE LEON & DE LEON JR., Insurance Code, p. 176).

Question 379

What are the prohibited stipulations in an insurance policy?

Answer 379

1. Stipulation for the payment of loss whether the person insured has or has no interest in the subject matter of the insurance (INSURANCE CODE, Sec. 25);
   
2. Stipulation that the policy shall be received as a proof of insurable interest (Id.); and
   
3. A condition, stipulation or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than one (1) year from the time when the cause of action accrues (INSURANCE CODE, Sec. 63)

Question 380

What is the effect of transfer of thing Insured?

Answer 380

The mere transfer of a thing insured does not transfer the property insurance policy, but suspends it until the same person becomes the owner of both the policy and the thing insured (INSURANCE CODE, Sec. 58).

Question 381

What are the kinds of insurance policy?

Answer 381

Insurance policy may be

a. Open Policy - whichithe value of the property insured shall be ascertained at the time of the loss and the amount of insurance merely represents the insurer’s maximum liability (INSURANCE CODE: Sec. 60).

b. Valued Policy - which expresses on its face agreement that the thing insured shall be valued at a specified sum (INSURANCE CODE, Sec. 61).

c. Running Policy - Which contemplates successive insurances and which provides that the object of the policy may be from time to time defined especially as to the subjects of insurance, by additional statements or endorsements (INSURANCE CODE, Sec. 62)

Question 382

What theory is followed regarding insurance contracts through correspondence?

Answer 382

The cognition theory, which states that an acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge.

Question 383

What is cancellation of policy?

Answer 383

Cancellation is the termination or rescission, by either the insurer or the insured, of a policy of insurance before its expiration (DE LEON & DE LEON JR., Insurance Code, supra at 226). The insurer has the right to cancel a policy of insurance other than life (INSURANCE CODE, Sec. 64-65).

Question 384

What are the requisites of cancellation of policy?

Answer 384

(WANG)

1. Notice must be in Writing, mailed, or delivered to the insured at the address shown in the policy or to his broker, provided the broker is authorized in writing by the policy owner to receive the cancellation of his behalf (INSURANCE CODE, Sec/ 65);

2. Notice must be based on the occurrence After the effective date of the policy of one or more of the grounds mentioned (INSURANCE CODE, Sec. 04);

3. Prior Notice of cancellation to the insured (Id); and
4. Notice must state the Grounds relied upon and upon request of the insured to furnish facts on which cancellation is made (INSURANCE CODE, Sec. 65).

Question 385

What are the grounds for cancellation of policy?

Answer 385

(Non-Con-FrAPOV)
1. Non-payment of premiums;
Note: The premium referred to must be a premium subsequent to the first installment because it speaks of non-payment “after the effective date of the policy”

2. Conviction of a crime out of acts increasing the hazard insured against;
3. Discovery of Fraud or material misrepresentation;
4. Willful or reckless Acts or omissions increasing the risk insured against;
5. Physical changes in the property insured making it uninsurable;
   
6. Discovery of Other insurance coverage that makes the total insurance in excess of the value of the property insured; or
   
7. Determination by the Insurance Commissioner that the policy would Violate the Insurance Code (INSURANCE CODE, Sec. 64).

Question 386

What is a claim?

Answer 386

A claim is a demand for the satisfaction of a loss suffered within the purview of an insured’s policy. It may be made by the party insured, the insurer with the right of subrogation, or a non-party but with a right against the insured.

Question 387

What constitutes unfair claim settlement practices?

Answer 387

(FaCISS)
1. Knowingly misrepresenting to claimants pertinent Facts or policy provisions relating to coverage at issue;

2. Failing to acknowledge with reasonable promptness pertinent Communications with respect to claims arising under its policies;
3. Failing to adopt and implement reasonable standards for the prompt Investigation of claims arising under its policies;
   
4. Not attempting in good faith to effectuate prompt, fair and equitable Settlement of claims submitted in which liability has become reasonably clear; or
   
5. Compelling policyholders to institute Suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them (INSURANCE CODE, Sec. 247(a)).

Question 388

When must the proceeds of an insurance policy be paid?

Answer 388

1. For Life insurance policy:
   a. Immediately upon maturity:
   b. As installments or annuities become due, in case proceeds are made payable by installments or as annuities under the policy; and
   c. Within 60 days after presentation of the claim and filing of the proof of death of the insured in case the policy matures upon the death of the insured (INSURANCE CODE, Sec. 248).
2. For policy other than life insurance policy:
   a. Thirty (30) days after proof of loss is received by the insurer and ascertainment of the loss or damage. is made elther by agreement between the insured and the insurer or by arbitration; and
   b. Ninety (90) days after receipt of the proof of loss if no such ascertainment of loss is made within 60 days after the receipt of such proof (INSURANCE CODE, Sec. 249):

Note: There is prima facie presumption of unreasonable delay if the insurer fails to pay any such claim within the time prescribed (INSURANCE CODE, Sec. 250).

Question 389

What are the rules on prescription of action to claim on an insurance policy?

Answer 389

1. A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than 1 year from the time when the cause of action accrues, is void (INSURANCE CODE, Sec. 63);
2. In case the claim was denied by the insurer but the insured filed a petition for reconsideration, the prescriptive period should be counted from the date the claim was denied at the first instance and not from the denial of the reconsideration (Sun Life Office, Ltd. v. CA, G.R. No. 89741, March 13, 1991);
3. If the absence of stipulation or if the stipulation is void, the insured may bring an action within 10 years, in case the contract is written (CIVIL CODE, Art. 1144).

Question 390

M Company insured all of its properties against “all risks of physical loss, destruction of, or damage, including fire” for the period March 31, 2009, to March 31, 2010. The insurance policy provides;

“IF a claim be made and rejected and an action or suit be not commenced either in the Insurance Commission or any Court of competent jurisdiction within twelve (12) months from receipt of notice of such rejection, or in case of arbitration taking place as provided herein within twelve (12) months after due notice of the award made by the arbitrator or arbitrators of umpire, then the claim shall for all purposes be deemed to have beeh abandoned and shall not thereafter be recoverable hereunder. “

On May 24, 2009, fire broke out at Integrated M Company’s building causing damage to its production equipment and machineries, prompting the M Company to file a claim for indemnity on the following day, which the respondent B Insurance Company rejected on February 24, 2010, on the ground that the cause of the loss was an excluded peril. M Company filed a motion for reconsideration which respondent rejected in a letter dated April 12, 2010, which the petitioner received on April 15, 2010. Subsequently a year after, on April 11, 2011, M Company filed a complaint for specific performance and damages against Standard Insurance before the RTC. B Insurance Company contends that petitioner’s cause of action had prescribed because it filed the complaint beyond the 12-month period from the rejection of the claim. Is M Company’s cause of action prescribed?

Answer 390

Yes, the insurance policy is explicit that if a claim is made and rejected, an action or suit should be commenced within a period of 12 months. The accrual of the cause of action for filing an insurance claim shall commence when there is a final rejection by the insurance company to avoid unnecessary suit which refers to the rejection by the insurance company. the rejection referred to should be construed as the rejection, in the first instance, for if what is being referred to is a reiterated rejection conveyed in a resolution of a petition for reconsideration, such should have been expressly stipulated.

Question 391

What is subrogation?

Answer 391

Subrogation is the substitution of one person in place of another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities.

Question 392

What is the basis for the right of subrogation in a contract of insurance?

Answer 392

If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract (CIVIL CODE, Art. 2207).

Question 393

What are the requisites of subrogation?

Answer 393

(PARC)
1. The insurance involved is Property Insurance;
2. There is a loss Arising from the risk insured against;
3. The insured Received indemnity ftom the insurer for the loss; and
4. The indemnity is Covered by the face value of the policy (AQUINO, Insurance Law, supra at 266).

Question 394

What is the extent of subrogation?

Answer 394

The insurer is subrogated only to the extent of the amount paid. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury (CIVIL CODE, Art. 2207).

Question 395

In what instances will subrogation not be available?

Answer 395

(OPENL)

1. The assured by his Own at releases the wrongdoer or third party liable for the loss or damage, from liability, the insurer’s right of subrogation is defeated;

2. The insurer Pays the assured the value of the lost goods without notifying the carrier who has in good faith settled the assured’s claim for loss, the settlement is binding on both the assured and the insurer. and the latter cannot bring an action against the carrier on his right of subrogation;

3. The insurer pays the assured for a loss which is Not a risk covered by the policy, thereby effecting “voluntary payment”, the former has no right of subrogation against the third party liable for the loss (Pan Malayan Insurance Corporation v. CA, G.R. No. 81026, April 3, 1990):
Life Insurance is involved (CIVIL CODE, Art. 2207); and

4. Recovery of loss is in Excess of the insurance coverage (CIVIL CODE, Art. 2207).

Question 396

What is the prescriptive period for the subrogee-insurer to file a claim against the wrongdoer based on a quasi-delict?

Answer 396

The prescriptive period is 4 years from the time the tort is committed against the insured by the wrongdoer.

Question 397

What is the effects of breach of Material Warranty?

Answer 397

Violation of material warranty or of a material provision of a policy will entite the other party to rescind the contract, In order that the insurer may be entitled to rescind a contract of insurance on the ground of a breach of warranty, fräud is not essential, but this merely exonerates an insurer from the time that it occurs, or where it is broken in its inception, prevents the policy from attaching to the risk (INSURANCE CODE, Secs. 74 & 76)

Question 398

When does a breach of a warranty relating to the future NOT avoid the policy?

Answer 398

The omission to fulfill the warranty does not avoid the policy when, before the time arrives for the performance of a warranty relating to the future:

1. A loss insured against happens; or

2. The performance becomes unlawful at the place of the contract or impossible (INSURANCE CODE, Sec. 73).

Question 399

When may an immaterial warranty becomes material?

Answer 399

A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy (INSURANCE CODE, Sec. 75).

Question 400

What is an insurance premium?

Answer 400

It is the agreed price for assuming and carrying the risk, i.e., the consideration paid to an insurer for undertaking to indemnify the insured against a specified peril.

Question 401

When is the insurer entitled to the payment of premiums?

Answer 401

An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against (INSURANCE CODE, Sec. 77).

Question 402

What is the Cash and Carry Rule?

Answer 402

The Cash and Carry Rule provides that, notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid (INSURANCE CODE, Sec. 77).

Question 403

What are the exceptions to the Cash and Carry Rule?

Answer 403

(GrACIE)

1. In case of life or industrial life policy, whenever the Grace period provision applies (INSURANCE CODE, Sec. 77);
2. Where the insurer Acknowledged in the policy or contract of insurance itself the receipt of premium, even if premium has not been actually paid (INSURANCE CODE, Sec. 79);
3. Where the insurer granted the insured a Credit term for the payment of the premium, and loss occurs before the expiration of the term;
4. Where the parties agreed that premium payment shall be in Installments and partial payment has been made al the time of loss: and
5. Where the insurer is in Estoppel as when it has consistently granted a 60 to 90-day credit term for the payment of premiums (Gaisano v. Development Insurance and Surety Corporation, G.R. No. 190702 February 27, 2017).

Question 404

Is payment by installment allowed in insurance contracts?

Answer 404

While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of the contract, we are not prepared to rule that the request to make installment payments duly approved by the insurer, would prevent the entire contract of insurance from going into effect despite payment and acceptance of the initial premium or first installment. An understanding to allow insured to pay premiums in installments is not so proscribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted.

Question 405

What are the effects of the non-payment of premiums?

Answer 405

1. Non-payment of First Installment - it prevents the contract from becoming binding notwithstanding the acceptance of the application or the issuance of policy unless waived (INSURANCE CODE, Sec. 77); and
2. Non-payment of Subsequent Installments - non-payment of the balance of the premium due does not produce the cancellation of the contract unless, by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse (Philippine Phoenix Surety and Insurance, Co., Inc., v. Woodworks, Inc., G.R. No. L-22684, August 31, 1967).

Question 406

When may the insured be entitled to a return of the whole premium?

Answer 406

1. If no part of his interest in the thing insured be exposed to any of the perils insured against (INSURANCE CODE, Sec 80 (a)); and
2. When the contractis voidable, and subsequently annulled under the provisions of the Civil Code; or on account of the fraud or misrepresentation of the insurer, or of his agent, or on account of facts, of the existence of which the insured was ignorant of without his fault or when by any default of the insured other than actual fraud, the Insurer never incurred any liability under the policy (INSURANCE CODE, Sec. 82).

Note: A person insured is not entitled to a return of premium if the policy is annulled, rescinded or if a claim is denied by reason of fraud (INSURANCE CODE, Sec. 82).

Question 407

What devices can be used to prevent forfeiture of premium paid in a life insurance in case of failure to pay subsequent installments?

Answer 407

1. Cash Surrender Value - a fractional amount of insurance benefit the insurer agrees to pay the insured in exchange for surrendering the policy in the event of inability or unwillingness to pay the outstanding premium (INSURANCE CODE, Sec. 233 i)):
   
2. Automatic Loan Clause - if at the end of the grace period the premium due has not been paid, a policy loan will automatically be made from the policy’s cash value to pay the premium. The primary purpose is to prevent unintentional lapse of the policy (AQUINO, Insurance Law, supra at 125);
   
3. Grace Period - the period after the date of the premium is due during which the premium can be paid with no interest charged and policy remaining in force (ld. at 116); and
   
4. Reinstatement provision that the holder of the policy shall be entitled to reinstatement of the contract at anytime within three years from the date ot default in the payment of premium on due proceedings (INSURANCE CODE, Sec. 233 (7))

Question 408

When may the insured be entitled to a proportionate return of the premium?

Answer 408

1. Where the insurance is made for a definite period of time and the insured surrenders his policy - in this case, the insured is entitled to such portion of the premium as corresponds with the unexpired time, at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy, after deducting from the whole premium any claim for loss or damage under the policy which has previously accrued: Provided, no holder of a life insurance policy may avail himself of such privileges without sufficient cause as otherwise provided by law (INSURANCE CODE, Sec 80(b)); and
   
2. Where there is an over insurance by several insurers other than life - the insured herein is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk (INSURANCE CODE, Sec. 83).

Question 409

What kind of negligence may allow for the right to recover under the insurance contract?

Answer 409

Distinction must be made between ordinary negligence and gross negligence. The negligence must not be of such gross character as to amount to misconduct or wrongful acts; otherwise, such negligence shall release the insurer from liability under the insurance contract (AQUINO, Insurance Law, 165, supra at 293).

Question 410

What is double insurance?

Answer 410

Double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest (INSURANCE CODE, Sec. 95).

Question 411

What are the requisites of double insurance?

Answer 411

(TIRIS)

1. Two or more Insurers insuring separately;
2. Same Insured person;
3. Same Risk or peril insured against;
4. Same Interest insured; and
5. Same Subject matter

Question 412

What is over-insurance?

Answer 412

There is Over-insurance when the insured takes out an insurance over the property insured in an amount which is in excess of the value of his insurable interest (AQUINO, Insurance Law, supra at 359).

Question 413

When is there an over-insurance by double insurance?

Answer 413

It exists when there are two or more policies on the same adventure and interest or any part of it, and the sums insured exceed the insurable interest value in the case of an unvalued policy or the value fixed by the policy in the case of a valued policy (DIZON, The Insurance Code of the Philippines (2009), p.525).

Question 414

What are the rules on payment when the insured, in a policy other than life, is over insured by double insurance?

Answer 414

When the insured in a policy other than life is over insured by double insurance:

1. The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts;
2. Where the policy under which the insured claims is a valued policy, any sum received by him under any other policy shall be deducted from the value of the policy without regard to the actual value of the subject matter insured;
   
3. Where the policy under which the insured claims is an unvalued policy, any sum received by him under any policy shall be deducted against the full insurable value, for any sum received by him under any policy;
   
4. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves; and
   
5. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract (INSURANCE CODE, Sec. 96).

Question 415

What is the nature of the liability of the several insurers in double insurance?

Answer 415

Under the Principle of Contribution or Contribution Clause, each insurer is bound, as between himself and other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract (INSURANCE CODE, Sec. 96 (e)).

Question 416

What is “Other Insurance” or “Additional Insurance” clause?

Answer 416

Where the insurance policy specifies as a condition the disclosure of existing co-insurers, non-disclosure thereof is a violation that entitles the insurer to avoid the policy. This condition is common in fire insurance policies and is known as the other insurance clause.

Question 417

When is there a violation of the “other insurance” clause?

Answer 417

The other insurance must be upon the same subject matter, the same interest therein, and the same risk. Thus, even though the multipte insurance policies involved were all issued in the name of the same assured, over the same subject matter and covering the same risk, it was ruled that there was no violation of the “other insurance clause” since there was no double insurance.

Question 418

What is reinsurance?

Answer 418

A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance (INSURANCE CODE, SEC. 97). Reinsurance is therefore the insurance of an insurance (AQUINO, Insurance Law, supra at 366)

Question 419

Who are the parties to a reinsurance contract?

Answer 419

The parties to a reinsurance contract are the reinsured and the reinsurer (AQUINO, Insurance Law, supra at 366). The Reinsurer agrees to indemnify Reinsured, either in whole or in part, against loss or liability which the latter may sustain or incur under a separata and original contract of insurance with a third party, the original insured (DE LEON & DE LEON JR., Insurance Code, supra at 320).

Note: The original insured has no interest in a contract of reinsurance (INSURANCE CODE, Sec. 100).

Sec. 100 of the Insurance Code makes it clear that “the original insured has no interest in a contract of reinsurance.” Thus, the original insured cannot file an action to recover from the reinsurer even if he has difficulty in recovering from the original insurer. There is no privity between the original insured and the reinsurer. (AQUINO, Insurance Law, supra at 366)

Question 420

What is the nature of Reinsurance Contracts?

Answer 420

A reinsurance contract is presumed to be a contract of indemnity against liability, and not merely against damage (INSURANCE CODE, Sec. 99).

Question 421

Double Insurance vs. Reinsurance Contracts

Answer 421

(1) as to interest
DI: involves same interest
R: involves different interests

(2) as to subject
DI: property
R: original insurer’s risk

(3) insurer
DI: Insurer remains in such capacity
R: insurer becomes the insured in relation to the reinsurer

(4) as to insured
DI: insured is the party in interest in the 2 insurance contracts
R: insurer becomes the insured in relation to the reinsurer

(5) as to insured’s consent
DI: insured has to give his consent
R: insured’s consent is not necessary

Question 422

What is the coverage of Fire Insurance?

Answer 422

It shall include insurance against loss by fire, lightning, windstorm, tornado, or earthquake, and other allied risks when such risks are covered by extension to fire insurance policies or under separate policies (INSURANCE CODE, Sec. 169).

Note: Such risks must be expressly covered by an extension to fire insurance policies or under separate policies to allow the insured to recover loss arising therefrom.

Question 423

How is the indemnity measured under Fire Insurance?

Answer 423

Indemnity in an insurance against fire may be measured as follows:

1. Open Policy - Only the expense necessary to replace the thing lost or injured in the condition it was at the time of the injury (INSURANCE CODE, Sec. 173);
2. Valued Policy - The effect shall be the same as in a policy of marine insurance.

Question 424

What is Option to Rebuild Clause?

Answer 424

The parties may stipulate on the repairing, rebuilding of replacing of buildings or structures wholly or partially damaged or destroyed in lieu of payments for the value of the loss (INSURANCE CODE Sec. 174).

Question 425

What is Non Alienation Clause?

Answer 425

No policy of fire insurance shall be pledged hypothecated, on transferred to any person, firm, or company who acts as agent for or otherwise represents the issuing company, and any such pledge, hypothecation, or transfer hereafter made shall be void and of no effect insofar as it may affect other creditors of the insured (INSURANCE CODE Sec. 175).

Question 426

What is Casualty Insurance?

Answer 426

Casualty Insurance is an insurance covering loss or liability arising from accident or mishap, excluding certain types of loss falling under other types of insurance such as fire or marine (INSURANCE CODE, Sec. 176).

Question 427

What are the risks that may be covered by Casualty Insurance?

Answer 427

1. Theft, Robbery and Burglary Insurance
   Except: Persons in the insured’s service and employment.
2. Compulsory Motor Vehicle Liability Insurance
3. Plate Glass Insurance
4. Personal Accident Insurance and Health Insurance
5. Employer’s Liability and Workmen’s Insurance
6. Other substantially similar kinds.

Question 428

What is Suretyship?

Answer 428

It is an agreement whereby a surety guarantees the performance by the principal or obligor of an obligation or undertaking in favor of a third party called the obligee (INSURANCE CODE, Sec. 177);

Note: It is considered an insurance contract if it is executed by the surety as a vocation, and not incidentally (INSURANCE CODE, Sec. 2).

Question 429

What is the nature of liability of surety/sureties?

Answer 429

The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee (INSURANCE CODE, Art. 178).

NOTE: The surety has no right to intervene in the principal contract because the surety possesses no direct or personal interest over the obligations.

Question 430

What are the rules on payment of premiums in Surety?

Answer 430

1. The premium becomes a debt as soon as the contract of suretyship or bond is perfected and delivered to the obliger;
2. The contract of suretyship or bond shall not be valid and binding unless and until the premium therefor has been paid;
3. Where the obligee has accepted the bond it shall be valid and enforceable notwithstanding the non-payment of premiums;
4. If the contract of suretyship or bond is not accepted by or filed with the obligee, the surety shall collect only a reasonable amount, not exceeding 50% of premium due thereon as service fee, and
   If the non-acceptance of the bond be due to the fault of negligence of the surety, no service fee, stamps, or taxes imposed shall be collected by the surety (INSURANCE CODE, SeC: 179);

Note: Pertinent provisions of the Civil Code of the Philippines shall be applied in a suppletory character whenever necessary in interpreting the provisions of a contract of suretyship (INSURANCE CODE, Sec. 180).

Question 431

What is Life Insurance?

Answer 431

It is an insurance on human lives and insurance appertaining thereto or connected therewith (INSURANCE CODE, Sec, 181).

Question 432

What are the kinds of life insurance?

Answer 432

1. Ordinary Life Policy - One under the terms of which the insured is required to pay a certain fixed premium annually or at more frequent intervals throughout his entire lifetime and the beneficiary is entitled to receive fixed payment under the policy only after the death of the insured. This type of policy is also known as the whole life or regular life, or straight life or cash-value insurance (DE LEON & DE LEON JR., Insurance Code, supra at 461-462);
2. Limited Payment Life Policy - One under the terms of which the premiums are payable only during a limited period of years, usually 10, 15, or 20. When the specified number of premium payments has been made, the insurance is paid up and fully effective during the insured’s life. This kind of policy is also called limited premium insurance policy (Id. at 462);
   
3. Endowment Policy - One providing for fixed premium payments for a definite term, under the terms of which the insurer binds himself to pay a fixed sum to the insured if he survives for a specified period, or , if he dies within such period, to some other person indicated (Id. at 462-463); and
   
4. Term Insurance Policy - One also providing for fixed premium payments for a specified term. It provides coverage only if the insured dies during the limited period. It is an insurance for a fixed or a specific term, such as 2, 5, or 10 years. If the insured dies within the period specified, the policy is paid to the beneficiary. If he survives the period, the contract terminates at the end of the time period. This kind of insurance is also known as temporary insurance (Id. at 463-464);
   
5. Industrial Life - That form of life insurance under which the premiums are payable either monthly or oftener, if the face amount of insurance provided in any policy is not more than five hundred times that of the current statutory minimum daily wage in the City of Manila, and if the words industrial policy are printed upon the policy as part of the descriptive matter (INSURANCE CODE, Sec. 235); and
   
6. Retirement Pension Trusts. A contract or undertaking for the payment of annuities including contracts for the payment of lump sums under a retirement program where a life insurance company manages or acts as a trustee for such retirement program (INSURANCE CODE, Sec. 181).

Question 433

In what cases is the insurer liable even if the insured commits suicide?

Answer 433

The insurer in a life insurance contract shall be liable in case of suicide only:

1. When it is committed after the policy has been in force for a period of 2 years from the date of its issue or of its last reinstatement, unless the policy provides a shorter period; or
2. When it is committed in the state of insanity regardless of the date of commission (INSURANCE CODE, Sec. 183).

Question 434

May a life insurance policy be an object of transfer?

Answer 434

The policy of life insurance may be the object of voluntary and involuntary transfer.

Insurable interest on the part of the transferee is not necessary. Notice to the insurer is also not necessary (INSURANCE CODE, Secs. 184-185). A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered (INSURANCE CODE, Secs. 184).

Question 435

What is the measure of indemnity in Life Insurance?

Answer 435

Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy (INSURANCE CODE, 186).

Question 436

What is Compulsory Motor Vehicle Liability Insurance (CMLVI)?

Answer 436

It is a special type of casualty insurance against passenger and third-party liability for death or bodily injuries and damage to property arising from motor vehicle accidents (INSURANCE CODE, Sec. 386(1))

Note: The limit of liability with regard to the items listed in the Schedule of Indemnities is the amount provided therein, while the limit of liability with regard to other kinds of damages not listed in the same Schedule of Indemnities is the total amount of insurance coverage. It then follows that the amounts in excess of the limits of liability in the schedule for items listed therein are not covered by the total coverage and such excess is already for the personal account of the insured or an excess coverage provider (Malayan Insurance Co., Inc. v. Stronghold Insurance Co., Inc., G.R. No. 203060; June 28, 2021).

Question 437

Who are the persons subject to the CMLVI?

Answer 437

CMLVI is mandatory among the following:

1. Motor Vehicle Owner - One who is the actual legal owner of a motor vehicle in whose name such vehicle is registered with the Land Transportation Office (INSURANCE CODE, Sec. 386(d)); and
2. Land Transportation Operator - One who is the owner of a motor vehicle or vehicle being used for conveying passengers for compensation including school buses (INSURANCE CODE, Sec. 386(e)).

Note: The land transportation operator or a motor vehicle owner cannot operate his vehicle in public highways if there is no policy insurance or guaranty in cash or surety bond in force to indemnify the death or injury and/or damage to property of the third party or passenger (INSURANCE CODE, Sec. 387)

Question 438

Who pays for the premiums in CMLVI?

Answer 438

Premiums are paid by the operator or owner of the vehicle, It shall be unlawful to require their driver or employees to contribute in the payment of premium (INSURANCE CODE, Sec. 399).

Question 439

What is the “No Fault Clause?”

Answer 439

The no fault clause provides that any claim for death or bodily injuries sustained by a passenger or third party under a CMVLI policy shali berpaid without the necessity of proving fault or negligence of any kind provided the total indemnity in respect of any person shall be P15,000 and proofs of loss are, submitted under oath (INSURANCE CODE, Sec. 391).

Question 440

What are the limitations of “No-Fault Claim?”

Answer 440

1. The total indemnity in respect of any person shall not be more than P15,000.00;
2. The following proof of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim:
   a. Police report of accident; and
   b. Proof of injury or death
   c. Death certificate and evidence sufficient to establish the proper payee; or
   d. Medical report and evidence of medical or hospital disbursement in respect of which refund is claimed; and
3. No double recovery - claim may be made against one motor vehicle only in case two or more vehicles are involved:
   a. If claimant is the occupant of a vehicle, the claim is to be made on the insurer of the vehicle in which he was an occupant; or
   b. In any other case, claim shall lie against the insurer of the directly offending vehicle (INSURANCE CODE, Sec. 391).

Note: The “No Fault Indemnity” is without prejudice to the proper determination of the proper party at fault from whom liability for damages may be demanded (P.D. No. 1455, Sec. 26)

Question 441

Does the “No-Fault Claim” apply to property damage?

Answer 441

The no-fault claim does not apply to property damage. An insured may choose to avail of an insurance policy which may cover damage to property of a third-party or passenger, as the case may be, if it is offered by an insurer subject to the payment of the computed premiums as may be approved by the Insurance Commission (Insurance Circular Letter No. 2014-52, December 15, 2014).

Question 442

What is the scope of Marine Insurance?

Answer 442

1. Insurance against loss of or damage to:

a. Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, instruments of debts, valuable papers, bottomry, and respondentia interests and all other kinds of property and interests therein;

b. Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance, including liability for loss of or damage arising out of or in connection with the construction, repair, operation, maintenance or use of the subject matter of such insurance;

c. Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise, and

d. Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, docks and slips, and other aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways (INSURANCE CODE, Sec. 101 (a)).

2. Marine protection and indemnity insurance it is an insurance against legal liability of the insured for loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft, or instrumentality in use of ocean or inland waterways, including liability of the insured for personal injury, illness, of death: or for loss of or damage to the property of another person (INSURANCE CODE, Sec. 101 (b)).

Question 443

What is “Seaworthiness?”

Answer 443

Whether or not the ship is reasonably fit to perform the service and to encounter the ordinary perils of the voyage (INSURANCE CODE, Sec. 116).

Note: A ship which is seaworthy for the purpose of an insurance upon the ship may, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for the purpose of insurance upon the cargo (INSURANCE CODE, Sec. 121).

Question 444

What is the coverage of the Warranty of Seaworthiness?

Answer 444

(CPC-SRO)

1. Condition of the structure of the ship;
2. It must be Properly laden;
3. Provided with a Competent Master;
4. Sufficient Number of Competent Officers and seamen;
5. Requisite appurtenances and equipment; and
6. Other necessary or proper stores and implements for the voyage (INSURANCE CODE, Sec. 118)

Note: When the ship becomes unseaworthy during the voyage to which an insurance relates, an unreasonable delay in repairing the defect exonerates the insurer on ship or shipowner’s interest from liability from any loss arising therefrom (INSURANCE CODE, 120).

Question 445

What are common carriers?

Answer 445

Common carriers are persons, corporations, firms, or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public (CIVIL CODE, Art. 1732).

Question 446

What are the tests to determine whether a party is a common carrier of goods?

Answer 446

1. Two-Pronged test
   a. Part of General Business Test
   b. Public Representation Test
2. Four-Fold Test

Question 447

What is the Four-Fold Test?

Answer 447

1. He must be engaged in the business of carrying goods for others as public employment, and must hold himself out as ready to engage in the transportation of goods for person generally as a business and not as casual occupation;
2. He must undertake to carry goods of the kind to which his business is confined;
3. He must undertake to carry by the method by which his business is conducted and over his established roads; and
4. The transportation must be for hire (First Philippine Industrial Corporation v. CA, G.R. No. 125948, December 29, 1998).

Note: The true test for a common carrier is not the quantity or extent of the business actually transacted, or the number and character of the conveyances used in the activity, but whether the undertaking is a part of the activity engaged in by the carrier that he has held out to the general public as his business or occupation (Sps. Pereña v. Sps. Nicolas, G.R. No. 157917, August 29, 2012).

Question 448

Common carrier vs. Private carrier

Answer 448

(1) as to definition
CC: persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public
PC: a private carrier is one who, without making the activity a vocation, or without holding himself/itself out to the public as ready to act for all who may desire his or its services, undertakes, by special agreement in a particular instances only, to transport goods or persons from one place to another either gratuitously or for hire.

(2) as to governing law
CC: provisions on common carriers of the Civil Code, Public Service Act and other Special Laws relating to transportation
PC: provisions on ordinary contracts of the Civil Code

(3) as to state regulation
CC: subject to extensive state regulation
PC: limited state regulation

(4) as to availability
CC: holds himself out for all people indiscriminately
PC: contracts with particular individuals or groups only

(5) as to diligence
CC: extraordinary diligence
PC: diligence of a good father of a family

(6) as to presumption of negligence
CC: there is always a presumption of negligence or fault unless proved that they exercised extraordinary diligence under Article 1733 of the Civil Code.
PC: no presumption of negligence

(7) as to exemption for employees’ negligence
CC: cannot stipulate that it is exempt from liability for the negligence of its agents or employees
NOTE: it is against public policy
PC: may validly enter into such stipulation

(8) as to obligation to carry
CC: a common carrier is bound to carry for all who offer such goods as it is accustomed to carry and tender reasonable compensation for carrying them
PC: a private carrier is not bound to carry for any person, unless it enters a special agreement to do so.

(9) as to stipulation limiting liability
CC: parties may agree on limiting the carrier’s liability except when provided by law. It cannot stipulate that it is exempt from liability for the negligence of its employees or agents, being contrary to public policy.
PC: parties may limit the carrier’s liability provided it is not contrary to law, morals, or good customs. It can stipulate that it is exempt from liability for the negligence of its employees or agents.

Question 449

What are the exceptions to extraordinary diligence?

Answer 449

(OR)

1. A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of Other passengers or of strangers, if the common carrier’s employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission (CIVIL CODE, Art. 1763); and

2. Extraordinary diligence need not be exercised over the goods that are unloaded temporarily if the shipper or owner has made use of the Right of stoppage in transitu (CIVIL CODE, Art. 1737).

Question 450

What is the difference between the liability of a common carrier between Article 1759 and Article 1756?

Answer 450

Article 1759 of the Civil Code does not establish a presumption of negligence because it explicitly makes the common carrier liable in the event of death or injury to passengers due to the negligence or fault of the common carmer’s employees. On the other hand, Article 1756 of the Civil Code lays down the presumption or negligence against the common carrier in the event of death or injury of its passenger (Sulpicio Lines, Inc., v. Sesante, G.R. No. 172682, July 27, 2016).

Question 451

What is the basis of a cause of action of a passenger against the common carrier?

Answer 451

The basis of a cause of action of a passenger against the common carrier is either culpa contractual or culpa aquilana because although the relation of passenger and carrier is contractual both in origin and nature, nevertheless, the act that breaks the contract may also be a tort. Passengers do not contract merely for transportation. They have a right to be treated by the carrier’s employees with kindness, respect, courtesy and due consideration (Air France v. Carrascoso, G.R. No. L-21438, September 28, 1966).

Question 452

Mr. A was invited to be a keynote speaker by UN-WHO in Kazakhstan. Mr. A had to take two connecting flights on board ABC Airlines. On the first leg of his two-day flight, Mr. A checked in his suitcase containing the materials for his speech and his personal items. Upon checking, his suitcase did not arrive with him, he then informed ABC Airlines which reassured him that his suitcase will arrive with him in the next leg. His suitcase did not arrive, and he had to conduct the speech without his materials. Mr. A wrote a demand letter to ABC Airlines. ABC Airlines insisted that it performed extraordinary diligence in transporting Mr. A’s suitcase and that liability should be with the first or last carrier. Is ABC Airlines’ argument correct?

Answer 452

No, ABC Airlines’ argument is incorrect. Considering that a contract of carriage is vested with public interest, a common carrier is presumed to have been at fault or to have acted negligently in case of lost or damaged goods unless they prove that they observed extraordinary diligence. Hence, in an action based on a breach of contract of carriage, the aggrieved party does not need to prove that the common carrier was at fault or was negligent. He or she is only required to prove the existence of the contract and its nonperformance by the carrier. Since the existence of the contract is proved by the tickets purchased by Mr. A from ABC Airlines, and ABC Airlines failed to overcome the presumption of negligence, ABC Airlines is liable. (KLM Royal Dutch Airlines v. Tiongo, G.R. No. 212136, October 4, 2021, Lopez Case).

Question 453

What are the causes which exempt a common carrier from responsibility for the loss, destruction, or deterioration of goods?

Answer 453

(FASCOE)
1. Flood, storm, earthquake, lightning, or other natural disaster or calamity;

2. Act of the public enemy in war, whether international or civil;
3. Act or omission of the Shipper or owner of the goods;
4. The Character of the goods or defects in the packing or in the containers;
5. Order or act of competent public authority (CIVIL CODE, Art. 1734); and
6. Exercise of Extraordinary Diligence (CIVIL CODE, Art. 1735).

Note: No other defense may be raised by the common carrier in the carriage of goods.

The above enumeration which exempts the common carrier for the loss or damage to the cargo is a closed list. If not one of those enumerated is present, the carrier is liable (AQUINO & HERNANDO, Transportation Law supra at 220; Philippine Charter Insurance Corp. v. Unknown Owner of the Vessel M/V. G.R. No. 161833, July 8, 2005).

Question 454

What are the requisites of a fortuitous event?

Answer 454

(Im-INA)

1. It must be Impossible to foresee the event which constitutes the caso fortuito or if it can be foreseen it must be impossible to avoid;

2. The cause of the unforeseen and unexpected occurrence, or of the failure of the debtor to comply with his obligation must be Independent of the human will;

3. The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a Normal manner, and

4. The obligor (debtor) must be free from any participation in or the Aggravation of the injury resulting to the creditor (Servando v. Philippine Steam Navigation, G.R. No. L-36481-82, October 23, 1983).

Question 455

When is a common carrier exempt from responsibility in case of loss, destruction, or deterioration of goods due to a natural disaster?

Answer 455

(PODD)

1. The natural disaster must have been the Proximate and Only cause of the loss;
2. The common carrier must exercise Due diligence to prevent or minimize loss before, during and after the occurrence of flood, storm or other natural disaster (CIVIL CODE, Art. 1739); and
3. The common carrier does not incur in Delay in the transportation of goods (CIVIL CODE Art. 1740).

Question 456

What events do NOT fall within the ambit of a natural disaster or calamity?

Answer 456

(FMTH-WH)
1. Fire
2. Mechanical defects of the conveyance
3. Tire blow-out
4. Heavy Rains
5. Strong Wind; and
6. Hijacking

Question 457

When does the liability of a common carrier in the delivery of goods begin?

Answer 457

The liability of the carrier as common carrier, and its duty of extraordinary diligence begins with the actual delivery of the goods, and not when:

1. The common carrier received the goods not for transportation but only for safekeeping,
2. When a receipt of bill of lading is executed, since the issuance of a bill of lading is not necessary to complete delivery and acceptance.

Question 458

What does actual delivery mean?

Answer 458

There is actual delivery in contracts for the transport of goods when:

1. Possession has been turned over to the consignee or to his duly authorized agent; and
2. A reasonable time is given to him to remove the goods

Question 459

What is the liability of the common carrier in case of temporary unloading or storage?

Answer 459

The common carrier’s duty to observe extraordinary diligence over the goods remains in full force and effect even when they are temporarily unloaded or stored in transit, unless the shipper or owner has made use of the right of stoppage in transitu (CIVIL CODE, Art. 1737).

Note: The extraordinary liability of the common carrier continues to be operative even during the time the goods are stored in a warehouse of the carrier at the place of destination, until the consignee has been advised of the arrival of the goods and has had reasonable opportunity thereafter to remove them or otherwise dispose of them (CIVIL CODE, Art. 1738).

Question 460

What is the effect of the shipper’s contributory negligence as to the common carrier’s liability?

Answer 460

If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be liable in damages, which however, shall be equitably reduced (CIVIL CODE, Art. 1741).

Question 461

Is a stipulation that limits the common carrier’s liability to the value of the goods appearing in the bill of lading binding?

Answer 461

A stipulation that the common carrier’s liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding (CIVIL CODE, Art. 1749).

Note: If the goods are to be shipped from a foreign port to the Philippines, the liability of the carrier is US$500 per package in the absence of a shipper’s declaration of a higher value in the bill of lading (COGSA, Sec. 4 (5))

Question 462

When is a contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods be valid?

Answer 462

A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and just under the circumstances, and has been fairly and freely agreed upon (CIVIL CODE, Art. 1750).

Note: The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common carrier’s liability is reasonable, just and in consonance with public policy (CIVIL CODE Art 1751).

Question 463

What are the rules when it comes to the limitation of liability of the common carrier in a contract of carriage of passengers?

Answer 463

Generally, the responsibility of a common carrier for the safety of passengers cannot be dispensed with or lessened by stipulation by the posting of notices, by statement on tickets, or otherwise (CIVIL CODE, Art. 1757).

However, when a passenger is carried gratuitously, a stipulation limiting the common carrier’s liability for negligence is valid; such a stipulation limiting the common carrier’s liability for willful acts or gross negligence is invalid (CIVIL CODE, Art. 1758).

Question 464

When are common carriers liable for the acts of their employees?

Answer 464

Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the former’s employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers (CIVIL CODE, Art. 1759 (1)).

Exceptions: (FA-NL)

1. The liability of the carrier for the personal violence of its employees or agents upon its passengers extends only to those acts which that the carrier could Foresee or Avoid through the exercise of the degree of diligence required; and

2. The carrier is not liable for acts of the employee Not on duty or in the Line of duty. However, the rule on strangers apply to them

Question 465

What is the effect on the liability of the common carriers upon proof of diligence in the selection and supervision of employees?

Answer 465

The liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees (CIVIL CODE, Art. 1759).

Note: If the source of obligation is under Art. 2176 of the Civil Code or a cause of action based on quasi-delict, the exercise of due care and diligence in the selection and supervision of their employees is available as a defense (Del Prado v. Manila Electric Co., G. R. No. 29462, March 7, 1929).

Question 466

What is the basis of the carrier’s liability for assaults on passengers committed by its drivers?

Answer 466

It is based on the following:

1. The doctrine of respondeat superior, or
2. The principle that it is the carrier’s implied duty to transport the passenger safely (Maranan v. Perez, G.R. No. L-22272, June 26, 1967).

Question 467

What stipulations eliminating.or limiting the liability of a common carrier for the carriage of passengers are deemed void?

Answer 467

(WA-DI)
1. A stipulation timiting the common carrier’s liability for its Willful Acts or gross negligence, when a passenger is carried gratuitously (CIVIL CODE, Art. 1758 par. 1); and
2. A stipulation limiting the common carrier’s liability for the Death of/or Injuries to passengers through the negligence or willful acts of the former’s employees (CIVIL CODE, Art. 1760).

Question 468

What diligence must a passenger observe?

Answer 468

The passenger must observe the diligence of a good father of a family to avoid injury to himself (CIVIL CODE, Art. 1761)

Question 469

What is contributory negligence?

Answer 469

Contributory negligence is conduct on the part of the injured party, contributing as legal cause to the harm he has suffered, which falls below the standard to which he is required to conform for his own protection (Sealoader Shipping Corporation v. Grand Cement Manufacturing Corp., et al., G.R. Nos. 167363 and 177466, December 15, 2010).

Question 470

When is a common carrier liable to its passenger for the acts of other passengers or strangers?

Answer 470

A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the common carrier’s employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission (CIVIL CODE, Art. 1763).

Question 471

When is a common carrier bound to start the exercise of utmost diligence with respect to passengers?

Answer 471

Such duty of a common carrier to provide safety to its passengers so obligates it not only during the course of the trip but for so long as the passengers are within its premises and where they ought to be in pursuance to the contract of carriage (Light Rail Transit Authority v. Navidad, G.R. No. 145804, February 6, 2003).

Question 472

What is the Continuing Offer Rule?

Answer 472

A public utility bus, once it stops, is in effect making a continuous offer to bus riders.

Hence, it becomes the duty of the driver and the conductor, every time the bus stops, to do no act that would have the effect of increasing the peril to a passenger while he was attempting to board the same (Dangwa Transportation Co., Inc., v. CA, G.R. No. 95582, October 7, 1991).

Question 473

When is a common carrier no longer bound to exercise utmost diligence with respect to passengers?

Answer 473

A common carrier is no longer bound to exercise utmost diligence with respect to passengers when the carrier-passenger relationship is terminated. Once created, the relationship will not ordinarily terminate suntil the passenger has, after reaching his destination, safely alighted from the carrier’s conveyance or had a reasonable opportunity to leave the carrier’s premises (Aboitiz Shipping v. CA, G.R. No. 84458, November 6, 1989).

Note: All persons who remain on the premises for a reasonable time after leaving the conveyance are to be deemed

passengers (Aboitiz Shipping v. CA, G.R. No. 84458, November 6, 1989).

Question 474

What is the basis of cause of action of a passenger and shipper against a common carrier?

Answer 474

Passengers and shippers who suffered damages because of the breach of the contractual obligation of the carrier may sue the latter for damages. The source of obligation is culpa-contractual (AQUINO & HERNANDO, Transportation Law supra at 350).

Question 475

What are concurrent causes of action of a passenger or shipper?

Answer 475

The same act that breaches the contract may also be tort. Hence, a negligent act

that breaches the contract may give rise to a liability based on contract as well as quasi-delict under Article 2176 of the Civil Code.

Note: With respect to employee of carrier, civil liability may be based on quasi-delict as well as on criminal liability under Article 100 of the Revised Penal Code.

Question 476

Concurrence of causes of action

Answer 476

Against common carrier - culpa contractual
Against the driver - culpa aquilina; the driver of the carrier, not being an agent but an employee, has himself no contractual relationship with the passenger
Note: Same act or omission may give rise to both causes of action. Tort may be a mode of breach

Where the passenger was injured because the carrier collided with another vehicle:
a. Against the driver and/or his employer - quasi-delict
b. Against third person - may be held criminally and civilly liable based on delict

Where it is a non-passenger who was injured by the common carrier, third person may hold the common carrier liable based on quasi-delict.

NOTE: in case of negligence of the carrier’s driver and of third person concur, the liability of the parties—carrier and his driver, third person—is joint and several.

Question 477

What are the different kinds of recoverable damages?

Answer 477

(MENTAL)

1. Moral Damages: Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant’s wrongful act or omission (CIVIL CODE, Art. 2217).
   
2. Exemplary Damages: Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated, or compensatory damages (CIVIL CODE, Art. 2229).
3. Nominal Damages: Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him (CIVIL CODE, Art. 2221).
   
4. Temperate or Moderate Damages: Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be provided with certainty (CIVIL CODE, Art. 2224).
   
5. Actual or Compensatory Damages: Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or compensatory damages (CIVIL CODE, Art. 2199).
6. Liquidated Damages: Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof (CIVIL CODE, Art. 2226).

Question 478

What is the right of recourse by the carrier?

Answer 478

The carrier who may be compelled to pay damages for the loss or damage to the goods or passengers has the right of recourse against the employee who committed the negligent, intentional or fraudulent act.

Question 479

What is the scope of application of the Montreal Convention?

Answer 479

The Montreal Convention applies to all international carriage of persons, baggage, or cargo performed by aireraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking (MONTREAL CONVENTION, Art. 1 (1))

Question 480

What is international carriage?

Answer 480

Any carriage in which, according to the agreement between the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transhipment, are situated either within the territories of two State Parties, or within the territory of a single State Party if there is an agreed stopping place within the territory of another State, even if that State is not a State Party (MC99, ART. 1 (2))

Question 481

What is a Special Drawing Right?

Answer 481

The sums mentioned in terms of Special Drawing Right in this Convention shall be deemed to refer to the Special Drawing Right as defined by the International Monetary Fund (MC99, Art. 23 (1)).

Question 482

When is a carrier liable for death or injury to passenger?

Answer 482

When the following concur:

1. There is international carriage by air;
2. The passenger died or suffered bodily injury;
3. Death or Bodily injury was cause by an accident; and
4. The death or Injury took place:
a. On board the aircraft; or
b. In the course of any of the Operations of embarking or disembarking

Question 483

When is a carrier liable for loss or damage to passenger’s baggage?

Answer 483

(1) checked baggage
a. There is international carriage by air
b. The baggage is a checked baggage
c. The passenger sustained damage in case of destruction or loss of, or of damage to, checked baggage; and
d. The destruction, loss or damage took place on board the aircraft or during any period within which the checked baggage was in the charge of the carrier

(2) unchecked baggage
Damage resulted from its fault or that of its servants or agents
NOTE: this includes personal items

(3) lost baggage
If the carrier admits the loss of the checked baggage, or if the checked baggage has not arrived at the expiration of 21 days after the date on which it ought to have arrived, the passenger is entitled to enforce against the carrier the rights which flow from the contract of carriage

Question 484

Who shall exercise the powers and functions of the BSP?

Answer 484

The powers and functions of the Bargko Sentral shall be exercised by the Bangko Sentral Monetary Board (hereinafter, MB) Its members shall serve a term of 6 years, and no member shall be appointed more than once (NOBA, Sec. 6).

Question 485

What is the composition of the MB?

Answer 485

(CCPP)
There shall be 7 members appointed-by the President of the Philippines for a term of 6 years, with no member reappointed more than once. The members consist of:

1. A Chairman who is the BSP Governor;
2. A Cabinet member to be designated by the President of the Philippines; and
3. 5 Members who shall come from the Private sector, all shall serve full time (NCBA, Sec. 6 and 26).

NOTE: In absence of the Governor, a Deputy Governor shall act as chief executive of the BSP and shall exercise the powers and duties of the Governor and whenever the governor is unable to attend meeting, a deputy governor shall be vested with the author to participate and exercise the right to vote in such meeting (NCBA, Sec. 26).

Question 486

What are the powers and functions of the MB?

Answer 486

(IDEA-IA)

1. Issue rules and regulations;

2. Direct the management, operations, and administration of the BSP;

3. Establish a human resource management system;

4. Adopt its annual budget and authorize expenditures

5. Indemnify its members and other officials of the BSP against all costs and expenses which were reasonably incurred by reason of the performance of their functions in accordance with the free and harmless indemnification clause (Sec. 15 and 16); and

6. Authorize entities or persons to engage in money service businesses (R.A. 7653 as amended, Sec. 3).

Question 487

What is Liquidity?

Answer 487

The ability of an asset to be converted into cash quickly and without any price discount.

Question 488

What is Solvency?

Answer 488

The condition that exists when liabilities amount to less than total assets, thus providing the ability to pay debts. The test of insolvensy is measured by determining whether the realizable assets of bank are less than its liabilities.

Note: Hence, a bank is solvent if the fair cash value of all its assets, realizable within a reasonable time by a reasonable prudent person, would equal or exceed its total liabilities exclusive of stock liability; but if such cash value so realizable is not sufficient to pay such liabilities within a reasonable time, the bank is insolvent.

Question 489

What are the two tests for insolvency?

Answer 489

There are two tests for insolvency:

1. Technical or Balance Sheet Test - When the actual market value of assets is insufficient to pay one’s total liabilities (Banco Filipino Savings and Mortgage Bank v. Monetary Board, G.R. No. 70054 December 11, 1991).
2. Cash Flow Insolvency (Lack of Liquidity) - Although realizable assets are considered sufficient as a whole, where such assets are immediately available to pay liabilities within a reasonable time, after they fall due (NCBA, Sec. 30(b)).

Question 490

What are the remedies/processes by which the BSP handles banks in distress?

Answer 490

Whenever a bank is in distress, whether seriously or otherwise, as in the case where it is having liquidity problems, the BSP may perform any of the following:

1. Grant emergency Loans to the Bank
2. Appoint a Conservator; and
3. Appoint a Receiver and order the liquidation of the bank

Question 491

When may the BSP grant an emergency loan?

Answer 491

The BSP, upon the approval of at least five (5) members of the MB, may also grant emergency loans or advances in the amount not exceeding 50% of its total deposits and deposit substitutes. The loans shall be released in two tranches (AQUINO & AQUINO, Banking Law supra at 412; NCBA Sec. 84).

Note: BSP may grant emergency loans or advances to banking institutions, even during normal periods, for the purpose of assisting a bank in a precarious financial condition or under serious financial pressures brought by unforeseen events, or events which, though foreseeable, could not be prevented by the bank concerned: Provided, however, That the MB has ascertained that the bank is not insolvent and has the assets defined hereunder to secure the advances (NCBA as amended, Sec. 84)

Question 492

What are the requisites in placing an institution under conservatorship?

Answer 492

(RFDN)

1. Report to the head of the supervising or examining department involving the

2. Finding of the MB of the existence of any of the grounds for conservatorship or receivership;

3. Decision of the MB to:
a. Place institution under conservatorship; or
b. Summarily and without need for prior hearing forbid the institution from doing business and place institution under receivership

4. Notice in writing to the Board of Directors informing the institution of the order of the MB directing conservatorship or receivership (NCBA, Sec. 29 and 30)

Question 493

What are the powers and duties of a conservator?

Answer 493

(CORRECt)

1. To Report to the MB
2. To take Charge of the Assets, liabilities, and the management of the institution;
3. To Recognize the management;
4. To colleCT all monies and debts due said institution;
5. To Overdue or revoke the actions of the previous management and board of directors of the bank or quasi bank; and
6. To Exercise all powers necessary to restore the institution’s viability

Question 494

Scope of Powers of Conservator

Answer 494

The exercise of conservatory powers must be related to:

1. Preservation of the assets;
2. Reorganization of management; and
3. To restoration of viability
   Note: Such power to revoke cannot extend to post-facto repudiation of perfected transactions; otherwise, they would infringe the non-impairment clause of the Constitution (Producers Bank of the Philippines v. NLRC, G.R. No. 119069, November 16, 1998).

Question 495

May the conservator unilaterally revoke all previous dealings?

Answer 495

The conservator’s power is not unilateral and he cannot simply repudiate valid obligations of the bank. His authority would be to only bring court actions to assail such contracts. To rule otherwise would enable a failing bank to become solvent, at the expense of third parties by simply getting the conservator. to unilaterally revoke all previous dealings which come to be considered unfavorable to the bank, yielding nothing to perfected contractual rights nor vested interests of third parties who. had dealt with the bank (First Philippine International Bank v. CA, G.R. No. 115849, January 24, 1996).

Question 496

How is the conservatorship terminated?

Answer 496

Expiry of the one-year term;
Note: The conservatorship cannot exceed one year.

When MB finds that the institution can continue to operate on its own and the conservatorship is no longer necessary; and
When the continuance in business of the bank would involve probable loss to its depositors or creditors, in which case receivership and liquidation shall be pursued (NCBA, Sec. 29).

Question 497

What is a receiver?

Answer 497

(C-GPA-CL-DWA)
It is a commission, person or other agency charged by the law with the following duties:

1. To take Charge of the assets and liabilities of a bank which has been forbidden from doing business in the Philippines;
2. To Gather, Preserve and Administer such assets and liabilities for the benefit of the depositors and creditors or said bank;
3. To Continue into Liquidation wherever authorized under the PDIC Act or other laws; and
4. To Dispose of assets and to Wind up the Affairs of such closed bank (R.A. 3591, as amended, Sec: 4(c) [hereinafter PDIC Law]).

Question 498

What is a receivership?

Answer 498

It is a proceeding wherein the Monetary Board may summarily and without need for prior hearing forbid a bank or quasi - bank from doing business in the Philippines and designate a receiver. Such authority may also be exercised over non-stock saving and loan association (NSSLAs) (R.A. 7653 as amended, Sec. 30).

This is referred to as the close as the “Close now, Hear Later” scheme (Vivas v. The Monetary Board of the Bango Sentral ng Pilipinas Deposit Insurance Corporation, G.R. No. 191424, August 7, 2013).

Question 499

When may an institution be placed under receivership?

Answer 499

(U60-PI-CoWi-HU) The Monetary Board may appoint a receiver when it finds that a bank of quasi-bank:

1. Has notified the BSP or publicly announced a Unilateral closure; or

2. Has been dormant for at least 60 days or in any manner has suspended the payment of its deposit/ deposit substitute liabilities; or

3. Is unable to Pay its liabilities as they become due in the ordinary course of business; or

4. Has Insufficient reliable assets, as determined by the Bangko Sentral to meet its liabilities; or
   
5. Cannot Continue in business without involving probable losses to its depositors or creditors; or
   
6. Has Willfully violated a cease-and-desist order under Section 37 of this Act that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution (NCBA as amended, Sec. 30);
7. Bank notifies the Bangko Sentral or publicly announces a bank Holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than 30 days (R.A. No. 8971, otherwise known as “General Banking Law of 2000”) [hereinafter, GBL], Sec. 53): or
8. Has persisted in conducting its business in an Unsafe or unsound manner (GBL, Sec. 56).

Question 500

What are the consequences of receivership?

Answer 500

(SCILP)

1. Business operations are Suspended.

2. Assets shall be deemed Custodia legis in the hands of the receiver and shall not be exempt from garnishment, levy, attachment or execution.

3. The bank is not liable to pay Interest on deposits during the period of suspension of operation.
4. Banks under liquidation retain their Legal personality.
5. There will be no Preference even if the claimant-depositor obtained a writ of preliminary attachment.

Question 501

Conservator vs. Receiver

Answer 501

(1) grounds for appointment
C: when the MB finds, based on appropriate report that the institution is in a state of continuing inability or inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors
R: 1. Has willfully violated a cease and desist order for fraud or dissipation of assets
2. Has persisted in conducting its business in an unsafe or unsound manner
3. Can only continue business at a loss
4. Has announced a continuous bank holiday even if 30 days has not yet lapsed because of suspension of payment of deposits which follows that there is a bank holiday
5. Has, in many other manner, suspended withdrawal of accounts
6. Dormancy of at least 60 days
7. Has commenced unilateral closure
8. Cash flow insolvency
9. Technical insolvency except when caused by bank run

(2) purpose of appointment
C: to restore the bank or quasi-bank’s liquidity adequate to protect stakeholders
R: generally to restore the bank or quasi-bank’s liquidity and solvency or to recommend the liquidation of the bank; specifically to receive collectibles, to preserve the bank’s assets in substitution of its former management; and to prevent the dissipation of its assets to the detriment of the creditors of the bank

(3) qualification of appointee
C: any person who is competent and knowledgeable in the bank operations and management
R: for banks: the PDIC; for quasi-bank: any person of recognized competence in the banking or finance

(4) duration of appointment
C: 1 year
R: as long as necessary to rehabilitate a business provided that the receiver determines, within 90 days from appointment, whether the institution may be allowed to continue business be rehabilitated, or be liquidated

Question 502

What is liquidation?

Answer 502

The acquisition of assets and their conversion into cash for distribution to all creditors in compliance with the concurrency and priority criteria for claims. PDIC is the receiver and liquidator (AM No. 19-12-02-SC, Sec. 1 (m), Rule 2).

Question 503

What are the two modes of liquidation by PDIC?

Answer 503

The modes of liquidation by PDIC are:

1. Purchase of Assets and/or Assumption of Liabilities (PDIC Law, Sec. 15); or
2. Conventional liquidation (PDIC LAW, Sec. 16).

Question 504

What is “voluntary liquidation”?

Answer 504

Liquidation is voluntary when it is commenced by written notice to the MB. MB shall have the right to intervene and take such steps as may be necessary to protect the interest of creditors (GBL, Sec. 68).

Question 505

What is the effect of the placement of a bank under liquidation on its corporate franchise or existence?

Answer 505

Upon placement by the Monetary Board of a bank under liquidation, it shall continue as a body corporate unit until the termination of the winding up period. Such continuation as a body corporate shall only be for the purpose of liquidating, settling and closing of its affairs and for the disposal, conveyance or distribution of its assets.

Note: In no case shall the bank be reopened and permitted to resume banking business after being placed under liquidation (PD/C Law, Sec. 13).

Question 506

What is the effect of the placement of a bank under liquidation on its assets?

Answer 506

Upon service of notice of closure, all the assets of the closed bank shall be deemed in custodia legis in the hands of the receiver, and as such, these assets may not be subject to attachment, garnishment, execution, devy or any other court processes (PDIC Law, Sec. 13).

Question 507

What is a closed bank?

Answer 507

A closed bank refers to a bank placed under liquidation by the Monetary Board.

Question 508

What is the “Close now, Hear later” scheme?

Answer 508

In cases of existence of the grounds for receivership and liquidation, the MB may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the person or entity authorized by law to act as receiver of a banking institution (NCBA, Sec. 30(d); Alfeo Vivas v. MB, G.R. No. 191424, August 7, 2013).

Question 509

Is prior notice and hearing needed?

Answer 509

Prior notice and hearing is NOT required before a bank may be directed to stop operations and placed under receivership. When the law provided for the filing of a case within 10 days after the receiver takes charge of the assets of the bank, it is unmistakable that the closure should precede the filing of the case (Central Bank v. CA, G.R. No. 76118, March 30, 1993).

Question 510

What is the remedy from Order of Closure?

Answer 510

Closure Actions of the MB taken under Sec. 29 or 30 shall be final and executory and may not be restrained or set aside (NCBA, Sec. 29 and 30). Only remedy is Petition for Certiorari under Rule 65 on the ground that the action of the MB taken was in excess of jurisdiction, or with such grave abuse of discretion as to amount to lack or excess of jurisdiction (NCBA, Sec. 29-and 30).

Only stockholders of record representing the majority of the capital stock have the personality to file a petition for certiorari to be filed within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship (NCBA, Sec. 30).

Note: The pendency of the case does NOT diminish the authority of the liquidator to administer and continue the bank’s transactions. He is allowed to continue receiving collectibles and receivables or paying off creditor’s claims and other transactions pertaining to normal operations of a bank such as the prosecution of suits against debtors for collection and for foreclosure of mortgages. The bank was allowed to collect interest on its loans while under liquidation, provided that the interests were legal.

Question 511

What are the purposes of R.A No. 1405?

Answer 511

To encourage people to deposit their money in banking institutions; and
To discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country (R.A. No. 1405, also known as Secrecy of Bank Deposits, Sec. 1, [hereinafter R.A. No. 1405]).

Question 512

What are the prohibited acts under R.A. No. 1405?

Answer 512

1. Examination and inquiry or looking into all deposits of whatever nature, with the banks IN THE PHILIPPINES including investments in bonds issued by the Government, its pollical subdivisions and instrumentalities (R.A. No. 1405, as amended, Sec. 2); and
   
2. Any disclosure by any official or employee of any banking institution to any unauthorized person of any information concerning the said deposits (R.A. No. 1405, as amended by P.D No. 1792, Sec. 3).
3. Disclosure of an Independent Auditor hired by a bank to conduct its regular audit to any person apart from the bank director, official or employee authorized by the bank, of any information concerning sald deposits

Note: Trust Accounts are covered by the term “deposits”. The use of the term ‘deposits’ is to be understood broadly and not limited only to accounts which give rise to creditor-debtor relationship between the depositor and the bank (Ejercito v. Sandiganbayan, G.R. No. 157294-95, November 30, 2006).

Question 513

Is outsourcing of internal audit for areas covered by the deposit secrecy law?

Answer 513

Yes, banks may outsource, in accordance with existing Bangko Sentral regulations on outsourcing, internal audit activities except for areas covered under existing statutes on deposit secrecy (2018 MORB, Sec. 163; BSP Circular Nos. 969 dated August 22, 2017 and 871 dated March 5, 2015).

Question 514

What are deposits covered by R.A No. 1405?

Answer 514

It covers all deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities (R.A. No. 1405 as amended, Sec 2).

The phrase “of whatever nature” in Sec. 2 of R A No. 1405 proscribes any restrictive interpretation of deposits. R.A. No. 1405 applies not only to money which is deposited but also to those which are invested such as in those placed under a trust agreement. To hold that a trust account is not protected by R.A. No. 1405 would encourage private hoarding of funds that could otherwise be invested by banks in other ventures, contrary to the policy behind the law Ejercito v. Sandiganbayan, G.R. Nos. 157294-95, November 30, 2006).

Note: Foreign currency deposits are not covered, because they are governed by the Foreign Currency Deposit Act (R.A. No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, as amended, Sec. 8).

Question 515

Is there an absolute confidentiality in R.A. No. 6426?

Answer 515

Yes, deposits covered by law are considered as absolutely confidential in nature and may not be examined, inquired or looked into by any person, governmental official, bureau, or office (R.A. No. 1405, Sec. 2).

Question 516

What are the exceptions to the law on secrecy of bank deposits under R.A. No. 1405?

Answer 516

(MAPIB-L)

Under R.A. No. 1405, deposits may be examined, inquired, or looked into:

1. When it is made in the course of a special or general examination of a bank and is specifically authorized by the Monetary Board;
2. When it is made by an independent Auditor hired by the bank to conduct its regular audit for audit purposes only for the exclusive use of the bank;
3. Upon written Permission of the depositor;
4. In cases of Impeachment or
5. Upon order of a competent court in cases:
   a. Of Bribery or dereliction of duty of public officials; and
   b. Where the money deposited or invested is the subject matter of the Litigation (R.A. No. 1405 as amended, Sec 2). The money deposited should be the very thing in dispute (Mellon Bank, N.A. v. Magsino, G.R. No. 71479, October 18, 1990)

Question 517

When may the monetary board authorize the examination of deposits?

Answer 517

The Monetary Board may authorize the examinatión after being satisfied that there is reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or irregularity (R.A. No. 1405 as amended, Sec, 2)

Question 518

What are the exceptions to the law on secrecy of bank deposits under other laws?

Answer 518

Deposits may be examined, inquired or looked into:

1. Upon order of the competent or tribunal in cases involving unexplained wealth (R.A. No. 3019, otherwise known as under the Anti-Graft and Corrupt Practices

2. By the Court of Appeals, designated as a special court, in issuing an order authorizing law enforcement officers to examine and gather information on the deposits, placements, trust accounts, assets and records in a bank or financial institution in connection with anti-terrorism case (R.A. No. 9372, otherwise known as the “Human Security Act of 2007”, Sec. 27);
3. Upon inquiry by the Commissioner of Internal Revenue for the purpose of determining the gross estate of the decedent, or considering an application for compromise of tax liability by reason of financial incapacity (R.A. No. 8424, otherwise known as the “National Internal Revenue Code”, as amended by R.A. No. 10963, Sec. 6(F));
   
4. By the Commission on Audit which is authorized to examine and government deposits pertaining to the revenue and receipts of, and expenditures or uses of funds and properties, owned or held in trust by, or pertaining to, the Government or any of its subdivisions, agencies instrumentalities, including government-owned and controlled corporations with original charters (1987 Constitution, Art. IX-D and P.D. No. 1445);
5. Upon order of any competent court when it has been established that probable cause exists that the deposits or investments involved, including related accounts, are In any way related to an unlawful activity or a money laundering offense, or in proper cases by the Anti-Money Laundering Council (AMLC) wherein court order is not required (R.A. No. 9160 as amended R.A. No. 9194, otherwise known as the Anti-Money Laundering Act, Sec. 11);
   
6. Upon waiver of the secrecy of deposits by any director, officer or stockholder as required by the New Central Bank Act (R.A. No. 7653 as amended, Sec. 26);
   
7. By the Bangko Sentral to:
   a. inquire into or examine bank deposits or Investments in the course of a perlodic or special examination to ensure compliance with The Anti-Money Laundering Law, in accordance with the rule of examination of the Bangko Sentral (R.A. No. 9160, as amended, Sec. 11); and
   b. conduct annual testing which is limited to the determination of the existence and true identity of the owners of numbered accounts (R.A. No. 9160, as amended, Sec. 9);
8. By the PDIC and/or the Bangko Sentral in case there is a finding of unsafe or unsound banking practice (R.Al No. 3591, as amended, Sec. 9);
9. By the PDIC when there is a failare of prompt corrective action by a bank as declared by the Monetary Board due to capital deficiency (R.A. No. 3591 as amended, Sec. 11);
   
10. Upon the disclosure to the Treasurer of the Philippines of dormant deposits for at least 10 years (Act, No. 3936/as amended-by P.D 679, Sec 2);
    
11. By the AMLC without court order in relation to violations of R.A. No. 11479 (R.A. No. 11479, otherwise known as “The Anti-TerrorismAct of 2020, Sec. 35);
12. By the Ombudsman, who has the power to issue subpoena and subpoena duces tecum take testimony in any investigation or inquiry, as well as examine and access bank accounts and records (R.A, No. 6770% otherwise known as “The Ombudsman Act of 1989”, Sec, 15(8) and
    
13. By the PCGG, in the conduct of its investigations to recover ill-gotten wealth accumulated by former Pres. Ferdinand E. Marcos, his immediate family, relatives, subordinates and close associates, which may issue subpoenas requiring the attendance and testimony of witnesses and/or the production of books, papers, contracts, records, statement of accounts and other documents (E.O. No. 1, Sec. 3).

Question 519

When is court order not required for examination?

Answer 519

(KiD-HiDeS-T)

No court order shall be required in cases of money laundering offense involving the following unlawful activities:

1. Kidnapping for ransom under Art. 267 the Revised Penal Code;
2. Violations of the Comprehensive Dangerous Drugs Act of 2002 (R.A. No. 9165, Secs. 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16);
3. Hijacking and other violations under R.A. No. 6235;
4. Destructive arson and murder under RPC, including those perpetrated by terrorists against non-combatant persons and similar targets;
5. Felonies or offenses of a nature similar to those mentioned above. Similar which are punishable under the penal laws of other countries; and
6. Terrorism and conspiracy to commit terrorism as defined and penalized under R.A. No. 9372 (R.A. No. 9160, as amended by R.A. 10167, Sec. 11).

NOTE: A bank deposit may be inquired into in cases of Report of Banks to the Anti-Money Laundering Council of covered and/or suspicious transactions (R.A. No. 9160, Sec. 9).

Question 520

Why can deposit accounts be garnished without violating R.A. No. 1405?

Answer 520

The prohibition against examination of or inquiry into a bank deposit does not preclude its being garnished to insure satisfaction of a judgment.

There is no real inquiry in such a case, and if the case, and if the existence of the deposit is disclosed, the disclosure is purely incidental to the execution process (China Banking Corporation v. Ortega, G.R. No. L-34964, January 31, 1973).

Question 521

What is the rule on the garnishment of foreign currency deposits?

Answer 521

Foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever (R.A. 6426 as amended, Sec 8).

Question 522

When may the garnishment of foreign currency deposits be allowed?

Answer 522

Foreign currency deposit of a foreign transient may be garnished whenever injustice would result, especially to a citizen aggrieved by a foreign guest. Otherwise, this would negate Art. 10 of the New Civil Code which provides that “in case of doubt in the interpretation or application of taws, it is presumed that the lawmaking body intended right and justice to prevail (Salvacion v. Central Bank of the Philippines, G.R. No. 94723, August 21, 1997).

Question 523

What are the exceptions to the absolute confidentiality nature of foreign deposits?

Answer 523

(POA)
Foreign currency deposits may be examined, inquired or looked into:

1. Upon written Permission of the depositor (RA. No. 6426 as amended, Sec 8);
   
2. Upon the Order of a competent court or in proper cases by the AMLC where there is probable cause of money laundering;
3. By the AMLE without court order in relation to violations of R.A. No. 11749 (R.A. No. 11479, otherwise known as The Anti-Terrorism Act of 2020, Sec. 35).

Question 524

What are penalties for violation under R.A. No, 1405?

Answer 524

Any violation of this law will subject offender upon conviction, to an imprisonment of not more than 5 years or a fine of not more than P20,000 or both, in the discretion of the court (R.A. No. 1405 as amended, Sec 5).

Question 525

What are banks?

Answer 525

Banks shall refer to entities engaged in the lending of funds obtained in the form of deposits (R.A. No. 8791 also known as “General Banking Law”, Sec. 3, [hereinafter GBL)).

Question 526

What are the classification of banks?

Answer 526

(UCTRCIO)

1. Universal banks;
2. Commercial banks;
3. Thrift banks;
4. Rural banks, as defined in R.A. No. 7353;
5. Cooperative banks, as defined in R.A. No. 6938;
6. Islamic banks as defined in R.A. No. 6848; and
7. Other classifications of banks as determined by the MB of the BSP (GBL, Sec 3.2)

Question 527

What are quasi-banks?

Answer 527

Quasi-Bank shall refer to a non-bank financial institution authorized by the BSP to engage in quasi-banking functions and to borrow funds from more than 19 lenders through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes (as defined in Section 95 of the NCBA as amended) for purposes of relending or purchasing of receivables and other obligations (R.A. No. 9474, otherwise known as “Lending Company Regulation Act of 2007”, Sec. 3(c)).

Question 528

What is a trust entity?

Answer 528

A trust entity shall refer to a:

1. Bank or Non-Bank Financial Institution (NBFI), through its specifically designate business unit to perform trust functions; and
2. Trust Corporation, authorized by the BSP to engage in trust or other fiduciary business under Section 79 of the GBL or to perform investment management services under section 53 of GBL (2020 MORB, Sec. 403(a)).
   Note: Only a stock corporation or a person duly authorized by the Monetary Board to engage in trust business shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behoof of others (GBL, Sec. 79).

Question 529

What is the nature of bank deposits?

Answer 529

Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans (Serrano v. Central Bank of the Philippines, G.R, No. L-30511, February 14, 1980).

Question 530

What is the relationship between the bank and the depositor with respect to bank deposits?

Answer 530

There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand (Consolidated Bank and Trust Corp. v. Court of Appeals, G.R. No. 138569, September 41, 2009).

Question 531

What is the standard of diligence required of a bank with respect to deposit accounts?

Answer 531

The diligence required of banks is more than that ofa good father of a family. Banks are required to exercise the highest degree of diligence in its banking transactions (Bank of the Philippine Islands vi Sps. Quiaoit, G.R. No. 199562, January 16, 2019).

But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduclary relationship with their depositors (Spouses Reyes v. Court of Appeals, G.R. No. 118492) August 15, 2001).

Question 532

L Company obtained a loan from F Bank in the amount of P3M subject to a 17% interest per annum. The said loan is secured by a Real Estate Mortgage over L Company’s two condominium. F Bank subsequently merged with BP| Bank, the latter being the surviving bank. When L Company failed to pay its indebtedness including interests and penalties, the BPI applied for extrajudicial foreclosure of the real estate mortgage. BP being the highest bidder, obtained a title in its favor.

L Company filed an action for the annulment of the title in the exercise of its right of redemption. In determination of the redemption price, the RTC applied 6% interest rate per annum and excluded the real estate taxes that BPI paid. Is the RTC correct?

Answer 532

No, the applicable interest rate is 17% as provided for in the mortgage contract, and not the legal interest of 6%. Section 78 of R.A. No. 337 or the “General Banking Act,” as amended, (now Section 47 of RA No. 8791 or the “General Banking Law of 2000”) shall govern in cases where the mortgagee is a bank, and not the Rules of Court in relation to Section 6 of Act No. 3135. The RTS erred in applying the legal interest of 6% per annum given that the stipulated interest is neither excessive nor unconscionable. As part of the redemption price, Section 78 of RA Na..337, as further amended, is explicit that the principal obligation shall earn interest at the rate specified in the mortgage contract. Thus, the interest rate of 17% per annum which the parties specified in the contract of loan and the mortgage deed should be imposed and the real estate taxes should be included as part of the redemption price (BPI v. LCL Capital Inc.) G.R. No. 243396, September 14, 2021; Lopez Case).

Question 533

What are the covered transactions of the AMLA?

Answer 533

(CDC)

1. A transaction in Cash or other equivalent monetary instrument in excess of P500,000 within 1 banking day;
2. For Casinos, including internet-based casinos and ship-based casinos, with respect to their casino cash transactions related to their gaming operations, a single casino cash transaction involving an amount in excess of P5,000,000 or its equivalent in any other currency
3. For Real estate developers and brokers, a single cash transaction involving an amount in excess of P7,500,000 or its equivalent in any other currency (AMLA, Sec. 3(b)).

Question 534

What are the suspicious transactions covered by AMLA?

Answer 534

(No-CASt-DUS)

“Suspicious Transactions” are transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist:

1. There is No underlying legal or trade obligation, purpose, or economic justification;
2. The Client is not properly identified;
3. The Amount involved is not commensurate with the business or financial capacity of the client;

4. Taking into account all known circumstances, it may be perceived that the client’s transaction is Structured in order to avoid being the subject of reporting requirements under the AMLA,

5. Any circumstance relating to the transaction which is observed to Deviate from the profile of the client/and/or the client’s past transactions with the covered person,
6. The transaction is in any way related to an Unlawful activity or any money laundering activity or offense that is about to be, is being, or has been committed; or
7. Any transaction that is Similar or analogous to any of the foregoing (AMLA, Sec. 3(b-1)

Question 535

What is the safe harbor provision?

Answer 535

The safe harbor provision provides that no administrative, criminal or civil proceedings shall lie against any person for having made a covered transaction report in the regular performance of his duties and in good faith, whether or not such reporting results in any criminal prosecution under the AMLA or any other Philippine law (AMLA, Sec. 9(C)).

Question 536

What is money laundering?

Answer 536

Money laundering is a crime whereby the proceeds of an unlawful activity are transacted thereby making them appear to have originated from legitimate sources

(AMLA, Sec. 4)

Question 537

How is money laundering committed?

Answer 537

(T-CAP) Money laundering is committed by any person who, knowing that any monetary instrument or property represents, involves, or relates to the proceeds of any unlawful activity:

1. Transacts said monetary instrument or property;
   
2. Converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property;
   
3. Conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with respect to said monetary instrument or property;
   
4. Attempts or Conspires to commit money laundering offenses referred to in numbers (1) (2) and (3);
   
5. Aids, abets, assists in or counsels the commission of the money laundering offenses referred to in numbers (1), (2) or (3) above; and
   
6. Performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in numbers (1), (2) or (3) above

Note: Money laundering is also committed by any covered person who, knowing that a covered or suspicious transaction is required under the AMLA to be reported to the AMLC, fails to do so (AMLA, Sec. 4)

Question 538

What are the three basic steps in money laundering?

Answer 538

(PLI)

1. Placement- At this stage, the launderer inserts the dirty money into a legitimate financial institution usually in the form of cash bank deposits;
   
2. Layering - Involves sending money through various financial transactions to change its form and make it more difficult to follow: It may consist of bank-to-bank transfers, changing currency, or purchasing high value items. This is the most complex step; and
3. Integration - The money re-enters mainstream economy in legitimate-looking form, appearing to have come from some legitimate transaction.

Note: It may involve a final bank transfer into the account of a local business in which the launderer is “investing” in exchange for a cut of the profits or the sale of high value items bought during the layering stage (DIZON &RIZON, Barking Laws, supra at 431-432).

Question 539

What are the unlawful activities or predicate crimes subject to AMLA?

Answer 539

Unlawful activity refers to any act or omission or series or combination thereof involving or having direct relation to the following:

1. Kidnapping for Ransom under Art. 267 of Act No. 3815 (RPC), as amended;
   
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of the Comprehensive Dangerous Drugs Act of 2002 (R.A. No. 9165);
   
3. Section 3 paragraphs B, C, E, G, H and I of the Anti-Graft and Corrupt Practices Act (R.A. No. 3019);
4. Plunder (R.A. No. 7080 as amended);
5. Robbery and Extortion under Arts. 294, 295, 296, 299. 300, 301 and 302 of the RPC, as amended;
6. Jueteng and Masiao punished as illegal gambling (P.D. No. 1602);
7. Piracy on the High Seas under the RPC and P.D. No. 532;
8. Qualified Theft under Art. 310 of the RPC, as amended;
9. Swindling under Art. 315 and Other Forms of Swindling under Art. 316 of the RPC, as amended;
   
10. Smuggling punished under the Tariff and Customs Code (R.A. No. 455, and R.A. No. 1937, as amended);
    
11. Violations of the Electronic Commerce Act of 2000 (R.A. No. 8792);
12. Hijacking and other violations under the Anti-Hijacking Law (R.A. No. 6235);
13. Destructive Arson and Murder, as defined under the RPC, as amended;
    
14. Terrorism and Conspiracy to Commit Terrorism as defined and penalized under Sections 3 and 4 of R.A. No. 9372;
    
15. Financing of Terrorism under Section 4, and offenses punishable under Sections 5, 6, 7 and 8 of the Terrorism Financing Prevention and Suppression Act of 2012 (R.A. No. 10168);
    
16. Bribery under Arts. 210, 211 and 211-A of the RPC, as amended, and Corruption of Public Officers under Art. 212 of the RPC, as amended;
    
17. Frauds and Illegal Exactions and Transactions under Arts. 213, 214, 215 and 216 of the RPC, as amended;
    
18. Malversation of Public Funds and Property under Arts. 217 and 222 of the RPC, as amended;
19. Forgeries and Counterfeiting under Arts. 163, 166, 167, 168, 169 and 176 of the RPC, as amended;
    
20. Violations of Sections 4 to 6 of the Anti-Trafficking in Persons Act of 2003 (R.A. No. 9208);
    
21. Violations of Sections 78 to 79 of Chapter IV, of the Revised Forestry Code of the Philippines, as amended (PID. No. 705);
    
22. Violations of Sections 86 to 106 of Chapter VI, of the Philippine Fisheries Code of 1998 (R.A. No. 8550);
    
23. Violations of Sections 101 to 107, and 110 of the Philippine Mining Act of 1995 (R.A. No. 7942);
    
24. Violations of Section 27(c), (®), (f), (g) and i), of the Wildlife Resources Conservation and Protection Act (R.A. No. 9147);
    
25. Violation of Section 7(b) of the National Caves and Cave Resources
    Management Protection Act (R.A. No. 9072);
    
26. Violation of the Anti-Carnapping Act of 2002, as amended (R.A. No. 6539);
    
27. Violations of Sections. 1, 3 and 5: of the decree Codifying the Laws on Illegal/Unlawful Possession, Manufacture, Dealing in, Acquisition or Disposition of Firearms, Ammuñition or Explosives (P.D. No. 1866 as amended);
28. Violation of the Anti-Fencing Law (PD.No. 1612);
    
29. Violation of Section 6 of the Migrant Workers and Overseas Filipinos Act of 1995 (R.A. No. 8042 as amended by R.A. No. 10022);
    
30. Violation of the Intellectual Property Code of the Philippines (R.A. No. 8293);
    
31. Violation of Section 4 of the Anti-Photo and Video Voyeurism Act of 2009 (R.A. No. 9995);
    
32. Violation of Section 4 of the Anti-Child Pornography Act of 2009 (R.A. No. 9775);
    
33. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of the Special Protection of Children Against Abuse, Exploitation and Discrimination (R.A. No. 7610);
34. Fraudulent practice and other violations under The Securities Regulation Code of 2000 (R.A. No. 8799);
    
35. Violation of Section 9 (a)(3) of Strategic Trade Management Act (R.A. No. 10697), in relation to the proliferation of weapons of mass destruction and its financing pursuant to United Nations Security Council Resolution Numbers 1718 of 2006 and 2231 of 2015;
36. Violation of Section 254 of Chapter II, Title X of the National Internal Revenue Code of 1997, as amended, where the deficiency basic tax due in the final assessment is in excess of P25,000,000 per taxable year, for each tax type covered and there has been a finding of probable cause by the competent authority: Provided, further, That there must be a finding of fraud, willful misrepresenting or malicious intent on the part of the taxpayer: Provided, finally, That in no case shall the AMLC institute forfeiture proceedings to recover monetary instruments, property or proceeds representing, involving, or relating to a tax crime, if the same has already been recovered or collected by the BIR in a separate proceeding; and
37. Felonies and offenses of a similar nature that are punishable under the penal laws of other countries (AMLA, Sec. 3(0).

Note: In determining whether or not a felony or offense punishable under the penal laws of other countries is “of a similar nature” so as to constitute an unlawful activity under the AMLA, it is sufficient that both the Philippines and the other jurisdiction criminalize the conduct or activity underlying the offense, regardless of whether both countries place the offense within the same category, or denominate the offense under the same nomenclature (2018 IRR of AMLA, Rule 3, Sec. 2).

Question 540

When can the AMLC inquire into bank deposits?

Answer 540

As a general rule, the AMLC may inquire into or examine any particular deposit or investment, including related accounts, with any banking institution or non-bank financial institution upon order of any competent court based oh an ex parte application in cases of violations of this Act, when it has been established that fhere is probable cause that the deposits or investments, including related accounts involved, are related to an unlawful activity as defined in Section 3(i) or a money laundering offense under Section 4 (AMLA, Sec. 10).

By authority of the AMLG, the AMLC Secretariat shall file before the Court of Appeals, through the OSG, an ex parte application for the Issuance of Bank Inquiry Order to examine or inquire into any particular deposit or investment account that is related an unlawful activity or money laundering offense (2018 IRR of AMLA, Rule 11, Sec. 1, 1.1). A court order ex parte must be obtained before the AMLC can inquire into the related accounts (2018 IRR of AMLA, Rule 11, Sec. 1, 1.2)

Note: No prior criminal charge/ pendency of a case, or conviction for an unlawful activity or money laundering offense js necessary for the filing or the resolution of an application for issuance of bank inquiry order. (2018 IRR of AMLA, Rule 11, Sec. 1, 1.3).

Question 541

When may the AMLC issue an ex parte Bank Inquiry Order?

Answer 541

(KD-HATTS) No court order or the AMLC shall issue an ex parte order authorizing the AMLC Secretariat to inquire into or examine any particular deposit or investment account, including related accounts, with any banking institution or non-bank financial institution and their subsidiaries and affiliates when it has been established that probable cause exists that the deposits or investments involved, including related accounts, are in any way related to any of the following unlawful activities:

1. Kidnapping for ransom as defined under the RPC;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15, and 16 of the Comprehensive Dangerous Drugs Act of 2002 (R.A. No. 9165);
3. Hijacking and other violations under the Anti-Hijacking Law;
4. Destructive Arson and murder, as defined under the RPC;
5. Financing of Terrorism under Section 4, and offenses punishable under Secs. 5, 6, 7, and 8 of the Terrorism Financing Prevention and Suppression Act of 2012
6. Terrorism and conspiracy to commit terrorism as defined and penalized under R.A. No. 9372; and
7. Felonies or offenses of a nature Similar to those mentioned in Section 3(i) (1), (2), and (12) of the AMLA which are punishable under the penal laws of other countries (2018 IRR of AMLA, Ruie 11, Sec. 2, 2.1).

Question 542

What is a freeze order?

Answer 542

“Freeze Order” refers to a provisional remedy aimed at blocking or restraining monetary instruments or properties in any way related to an unlawful activity, as herein defined, from being transacted, withdrawn, deposited, transferred, removed, converted, concealed, or otherwise moved or disposed without affecting the ownership thereof (2018 IRR of AMLA, Rule 2, Sec. 1(mm)). A freeze order is an extraordinary and interim relief issued by the Court of Appeals to prevent the dissipation, removal, or disposal of properties that are suspected to be the proceeds of, or related to, unlawful activities as defined in Section 3 (i) of the AMLA (Ligot v. Republic, G.R. No. 176944, March 6, 2013).

Question 543

Who has the power to freeze accounts?

Answer 543

The Court of Appeals may issue a freeze order which shall be effective immediately, for a period of 20 days upon a verified ex parte petition by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) (AMLA, Sec. 10).

Note: The court should act on the petition to freeze within 24 hours from filing of the petition. If the application is filed a day before a nonworking day, the computation of the 24-hour period shall exclude the nonworking days (AMLA, Sec. 10)

Question 544

When can the AMLC issue a freeze order ex parte?

Answer 544

For purposes of implementing targeted financial sanctions in relation to proliferation of weapons of mass destruction and its financing, the AMLE shall have the power to issue, ex parte, an order to freeze without delay.

The freeze order shall be effective until the basis for its issuance shall have been lifted.

During the effectivity of the freeze order, the aggrieved party may, within twenty 20 days from issuance, file with the Court of Appeals a petition to determine the basis of the freeze order according to the principle of effective judicial protection: Provided, That the person whose property or funds have been frozen may withdraw such sums as the AMLC determines to be reasonably needed for monthly family needs and sustenance including the services of counsel and the family medical needs of such person (AMLA, Sec. 10).

Note: The AMLC, if circumstance warrant, may initiate civil forfeiture proceedings to preserve the assets and to protect it from dissipation (AMLA, Sec. 10).

Question 545

What are the requirements for the issuance of freeze orders?

Answer 545

(CAT)

1. No prior Criminal charge, pendency of a case, or conviction for an unlawful activity or ML offense is necessary for the commencement or the resolution of a petition for freeze order;

2. No Asset shall be frozen to the prejudice of a candidate for an electoral office during an election period; and

3. No court shall issue a Temporary restraining order or a writ of injunction against any freeze order, except the Supreme Court (2018 IRR of AMLA, Rule 10, Sec. 1)

Question 546

What is the limitation as to the period of a freeze order?

Answer 546

The total period of the freeze order issued by the Court of Appeals shall not exceed 6 months (AMLA, Sec. 10).

Note: This is without prejudice to an asset preservation order that the Regional Trial Court having jurisdiction over the appropriate anti-money laundering case or civil forfeiture case may issue on the same account depending upon the circumstances of the case, where the Court of Appeals will remand the case and its records (AMLA, Sec. 10).

Question 547

Who can issue a temporary restraining order or a writ of injunction against any freeze order?

Answer 547

No court shall issue a temporary restraining order or a writ of injunction against any freeze order, except the Supreme Court (AMLA, Sec. 10).

Question 548

What is a civil forfeiture?

Answer 548

Civil Forfeiture refers to the non-conviction-based proceedings aimed at forfeiting. in favor of the government, monetary instruments or properties related to an unlawful activity or money laundering (ML) offense (2018 IRR of AMLA, Rule 2, Sec. 1(r)).

Question 549

When may the AMLE file a petition for civil forfeiture?

Answer 549

Upon determination that probable cause exists, that any monetary instrument or property is in any way related to.an unlawful activity or ML offense, the AMLC shall file with the RTC, through the OSG, a verified-petition for civil forfeiture (2018 IRR of AMLA, Rule 12, Sec. 1, 1,1).

Question 550

When is asset forfeiture proper?

Answer 550

Where there is conviction for money laundering, the court shall issue a judgment of forfeiture in favor of the Government of the Philippines with respect to the monetary instrument or property found to be proceeds of an unlawful activity (2018 IRR of AMLA, Rule 12, Sec. 2).

Question 551

When may the court enforce payment in lieu of forfeiture?

Answer 551

(LoS-CO-CP) When the order of forfeiture cannot be enforced because any particular monetary instrument or property:

1. Cannot, with due diligence, be Located;
2. Has been Substantially altered, destroyed, diminished in value or otherwise rendered worthless by any act or omission, directly or indirectly, attributable to the offender;
   
3. Has been Concealed, removed, converted or otherwise transferred to prevent the same from being found or to avoid forfeiture thereof;
4. Is located Outside the Philippines or has been placed or brought outside the jurisdiction of the court;
   
5. Has been Commingled with other monetary instruments or property belonging to either the offender himself or a third person or entity, thereby rendering the same difficult to identify or be segregated for purposes of forfeiture; or
   
6. The court may, instead of enforcing the order of forfeiture of the monetary instrument or property or part thereof or interest therein, accordingly, order the convicted offender to Pay an amount equal to the value of said monetary instrument or property (AMLA, Sec. 12(c)).

Question 552

What is Intellectual Property?

Answer 552

Intellectual Property is basically a creation of the mind, and the resultant product is just the manifestation of one’s creative thinking process. It is considered an intangible in character.

Question 553

What comprises Intellectual Property Right?

Answer 553

1. Copyright or Related Neighboring Rights
2. Trademark and Service Marks (IPG, Sec. 4,1(5)):
3. Geographic Indications (IPC, Sec. 41(c);
4. Industrial designs (PC Sec. 4,1 (d));
5. Patents (IPC, Sec. 4(e));
6. Layout Designs (Topographies) of Integrated Circuits (IPC, Sec 4.11); and
7. Protection of Undisclosed Information (IFC, Sec: 4. 1(g))

Question 554

What are the differences between copyright, trademark and patents?

Answer 554

(1) as to nature
P: granted to provide rights and protection to the inventor after an invention is disclosed to the public
C: confined to literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation
T: any visible sign capable of distinguishing an enterprise

(2) as to term of protection
P: 20 years
C: copyright in works under Sections 172 and 173 of the IPC shall be protected during life of the author and for 50 years after his death
T: 10 years

(3) as to what may be registered and protected
P: any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable shall be patentable. It may be, or may relate to a product, or process, or an improvement of any of the foregoing
C: original works and derivative works
T: marks may be registered as long as it is not non-registrable mark

Question 555

What is a patent?

Answer 555

It is an exclusive right granted for a product process or an improvement of a product or process which is new, inventive and useful. This exclusive right gives the inventor the right to exclude others from making, using, or selling the product of his invention during the life of the patent.

Question 556

What is an invention?

Answer 556

“Invention” refers to the conception and not the physical embodiment of the idea.

The Intellectual Property Code does not require that the invention must first be reduced to practice before it can be filed for a patent.

Question 557

What are patentable inventions?

Answer 557

Patentable inventions refer to any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable shall be patentable. It may be, or may relate to, a product, or process, or an improvement of any of the foregoing (IPC Sec. 21).

Question 558

What are the requisites of a patentable invention?

Answer 558

(TINIP)

1. Technical solution of a problem in any field of human activity (IPC, Sec. 21);
2. Inventive Step - An invention involves an inventive step it, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention (IPC, Sec. 26);
3. Novelty - An invention shall not be considered new if it forms part of a prior art (PC, Sec. 23);
   Note: For the patentee to be entitled to protection, the invention must be new to the world The element of novelty is an essential requisite of the patentability of an invention or discovery. If a device or process has been known or used by others prior to its invention or discovery by the applicant, an application for a patent therefor should be denied; and if the application has been granted, the court, in a judicial proceeding in which the validity of the patent is drawn in question, will hold it void and ineffective (Manzano v. CA, G.R. No. 113388, September 5, 1997);
4. Industrial Applicability An invention that can be produced and used in any industry (IPC, Sec. 27), and
   Note: This requirement demonstrates the practical nature of patent jaw, which requires that the invention should be something which can be made industrially or relate to an industrial process. The invention has to be something that can be worked industrially, and to some extent this requirement distinguishes patents from other forms of intellectual property (FUNA, Intellectual Property Law, Supra at 65);
5. Patentable Subject Matter - is not otherwise listed as non-patentable (IPC, Sec. 22).

Question 559

What is the Non-Obviousness Rule?

Answer 559

The rule provides that even if the subject matter sought to be patented is not exactly shown by the prior art, and involves one or more differences over the most nearly similar thing already known, a patent may still be refused if the differences would be obvious. The subject matter sought to be patented must be sufficiently different from what has been used or described before that it may be said to be non-obvious to a person having ordinary skill in the area of technology related to the invention (FUNA, Intellectual Property Law, supra at 62).

Question 560

What are non-patentable inventions?

Answer 560

(DMe-SAM-PAA)

1. Discoveries, scientific theories, and mathematical methods, a law of nature, a scientific truth, or knowledge as such;
2. In the case of drugs and Medicines, the mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance, or the mere discovery of any new property or new use for a known substance, or the mere use of a known process, unless such known process results in a new product that employs at least one new reactant;
   
3. Schemes, rules, and methods of performing mental acts and playing games, or doing business, and programs for computers;
   
4. Abstract ideas or theories, fundamental concepts apart from the means or processes for carrying the concept to produce a technical effect;
   
5. Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body;
   
6. Plant varieties or animal breeds or essentially biological processes for the production of plants or animals;.
   
7. Aesthetic creations; and
8. Anything which is contrary to public order or morality (Revised Implementing Rules and Regulations for Patents, Utility Models and Industrial Designs, Rule 202).

Question 561

Who owns the right to a patent?

Answer 561

The right to a patent belongs to the inventor- his heirs, or assigns. When two or more persons have jointly made an invention, the right to a patent shall belong to them jointly (IPC, Sec. 28).

Question 562

Who owns an invention created pursuant to a commissioned work or employment?

Answer 562

If the invention is created:

1. Pursuant to a commission - The person who commissions the work shall own the patent, unless otherwise provided in the contract (IPC, Sec. 30.1); or
2. In the course of his employment:
   a. The invention belongs to the employee if the inventive activity is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer; or

b. The invention belongs to the employer if the invention is the result of the performance of his regularly-assigned duties, unless there is an agreement, express or implied, to the contrary (IPC, Sec. 30.2).

Question 563

What is the right of priority?

Answer 563

An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application, provided that:

1. The local application expressly claims priority;
2. It is filed within 12 months from the date the earliest foreign application was filed; and
3. A certified copy of the foreign application together with an English translation is filed within 6 months from the date of filing in the Philippines (IPC, Sec. 31).

Question 564

What are the rights conferred by a patent?

Answer 564

A patent shall confer on its owner the following exclusive rights:

1. To restrain, prohibit and prevent any unauthorized person or entity from:
   a. Making, using, offering for sale, selling or importing that product, where the subject matter is a product;
   b. Using the process, and from manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained directly or indirectly from such process, where the subject matter is a process (IPC, Sec. 71.1); and
2. To assign, or transfer by succession the patent, and to conclude licensing contracts for the same (IPC, Sec, 712).

Note: It seeks to restrain and prevent unauthorized persons from unjustly profiting from a protected invention (E. Dupont De Nemours and Co. v. Francisco, G.R. No. 174379, August 31, 2016).

Question 565

What are the limitations of patent rights?

Answer 565

(TPG)

1. Unauthorized use by a Third party that cannot be prevented by the owner of the patent (IPC, Sec. 72);
2. Use by Prior user (IPC, Sec. 73); and
3. Use by the Government (IPC, Sec. 74).

Question 566

What acts may be performed by third parties without the authorization of a patent owner?

Answer 566

The owner of a patent has no right to prevent third parties from performing, without his authorization, the acts conferred by a patent, in the following circumstances:

1. Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed after that product has been so put on the said market
2. Where the act is done privately and on a non-commercial scale or for a non-commercial purpose: Provided, that it does not significantly prejudice the economic interests of the owner of the patent (IPC, Sec. 72.2);
3. Where the act consists of making or using exclusively for experimental use of the invention for scientific purposes or educational purposes and such other activities directly related to such scientific or educational experimental use (IPC, Sec. 72.3);
4. In the case of drugs and medicines, where the act includes testing, using, making or selling the invention including any data related thereto, solely for purposes reasonably related to the development and submission of information and issuance of approvals by government regulatory agencies required under any Philippines or foreign law (IPC, Sec. 72.4);
5. Where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical prescription or acts concerning the medicine so prepared (IPC, Sec. 72.5); and
   
6. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country entering the territory of the Philippines temporarily or accidentally (IPC, Sec. 72.6).

Question 567

What are the limitations on the use of invention by the Government?

Answer 567

A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where:

1. The public interest, in particular national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires;

2. A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee is anti-competitive;

3. In the case of drugs and medicines, there is a national emergency or other circumstance of extreme urgency requiring the use of the invention;

4. In the case of drugs and medicines, there is public non-commercial use of the patent by the patentee, without satisfactory reason; or

5. In the case of drugs and medicines, the demand for the patented article in the Philippines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health (IPC, Sec. 74.1).

Note: Unless otherwise provided herein, the use by the Government, or third person authorized by the Government shall be subject, where applicable, to the following provisions:

1. In situations of national emergency or other circumstances of extreme urgency as provided under Section 74.1 (c), the right holder shall be notified as soon as reasonably practicable;
   
2. In the case of public non-commercial use of the patent by the patentee, without satisfactory reason, as provided under Section 74.1 (d), the right holder shall be informed promptly: Provided, That, the Government or third person authorized by the Government, without making a patent search, knows or has demonstrable ground to know that a valid patent is or will be used by or for the Government;
3. If the demand for the patented article in the Philippines is not being met to an adequate extent and on reasonable terms as provided under Section 74.1 (e), the right holder shall be informed promptly;
4. The scope and duration of such use shall be limited to the purpose for which it was authorized;
5. Such use shall be non-exclusive
6. The right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization; and
7. The existence of a national emergency or other circumstances of extreme urgency, referred to under Section 74.1 (c), shall be subject to the determination of the President of the Philippines for the purpose of determining the need for such use or other exploitation, which shall be immediately executory (IPC, Sec. 74.2).

Question 568

How are the rights, title or interest in and to patents and invention assigned?

Answer 568

Inventions and any right, title or interest in and to patents and inventions covered thereby, may be assigned or transmitted by inheritance or bequest or may be the subject of a license contract (IPC, Sec. 403).

Question 569

What constitutes patent infringement?

Answer 569

The making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the patentee constitutes patent infringement (IPC, Sec. 76.1, as amended by RA. No. 9502).

Note: That, this shall not apply to instances covered by:

1. Limitations of Patent Rights (Sect. 72.1 and 72.4)
2. Use of Invention by Government (Sec. 74)
3. Compulsory Licensing (Sec, 93.6);
4. Procedures on issuance of a Special Compulsory License under the Trade-Related Aspects of Intellectual Property Rights TRIPS Agreement (Sec. 93-A)

Question 570

What is the Doctrine of Patent Exhaustion?

Answer 570

The exclusive right of the patent owner is exhausted after the first authorized sale, meaning, the purchaser may thereafter use, repair and resell the product. However, the purchaser may not reconstruct the product from the parts of products that were already used (AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 688).

Question 571

What are the tests to determine patent infringement?

Answer 571

1. Literal infringement test; and
2. Doctrine of equivalents (Godines v. CA, G.R. No. 97343, September 13, 1993)

Question 572

When is there literal infringement?

Answer 572

There is infringement of patent under this test if one makes, uses, or sells an item that contains all the elements of the patent claim. This test is satisfied in either of the following:

1. Exactness Rule: The item that is being sold, made or used conforms exactly to the patent claim of another;
2. Addition Rule: One makes, uses, or sells an item that has all the elements of the patent claim of another plus other elements (AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 691)

Question 573

What is the doctrine of equivalents?

Answer 573

The doctrine of equivalents provides that an infringement also takes place when a device appropriates a prior invention by incorporating its innovative concept and, although with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result (Smith Kline Beckman Corporation v. CA, G.R. No. 126627, August 14, 2003).

Question 574

What are the tests of equivalency that would warrant the finding of patent infringement under the doctrine of equivalents?

Answer 574

1. Insubstantial Difference Test - Under the insubstantial difference test, there is patent infringement when the infringer appropriates the patent but adopts insubstantial changes. The change is insubstantial if a person skilled in the art is aware that the change is a mere substitute for the replaced element;
2. Triple Identity Test / Function-Means-and-Result Test - Under the triple identity test, there is patent infringement if the allegedly-infringing device or process performs substantially the same function and accomplishes substantially the same result by using substantially the same means; and
3. All elements Test - Under this test, courts consider the individual elements in a patent claim to define the scope of the patented invention, rather than considering the invention as a whole.

Note: Each element contained in a patent claim is deemed material to defining the scope of the patented invention, and thus the doctrine of equivalents must be applied to individual elements of the claim, not to the invention as a whole (Phillips Seafood Philippines Corp., v. Tuna Processors, Inc. G.R. No. 214148, February 6. 2023).

Question 575

TPI is the patentee of “Method for curing Fish and Meat by Extra Low Temperature Smoking”, which includes, as its independent claim, the process of curing tuna meat by exposing it to a filtered smoke cooled in a cooling unit to between 0° and 5°C while retaining ingredients exerting highly preservative and sterilizing effects. On the other hand, PSP Corp.’s process uses filtered smoke at ambient temperature. TPI filed an administrative complaint for patent infringement against PSP Corp., alleging that the claims of its patent could be read literally from PSP Corp.’s process, as well as the steps in its patent claims are equivalent to respondent’s process. Is there a patent infringement?

Answer 575

No. Using literal infringement test, a comparison between the elements of TPI’s claim and PSP Corp.’s process shows that the inventive step of using filtered smoke cooled to between 0° and 5°C is absent from the latter. Neither is there an infringement under the doctrine of equivalents, TPI failed to establish that the simultaneous cooling of the filtered smoke and tuna meat will cure tuna meat in substantially the same way as the pre-cooled filtered smoke. The eventual cooling of the filtered smoke in PSP Corp.’s process does not ipso facto indicate similarities in the effect of the smoke on tuna meat. (Phillips Seafood Philippines Corp., v. Tuna Processors, Inc., G.R. No. 214148, February 6. 2023; Lopez Case).

Question 576

Who is a contributory infringer?

Answer 576

A contributory infringer is anyone who:

1. Actively induces the infringement of a patent; or
2. Provides the infringer with a component of a patented product or of a product produced because of a patented process knowing it to be especially adopted for infringing the patented invention and not suitable for substantial non-infringing use (IPC, Sec. 76.6).
   Note: The contributory infringer shall be jointly and severally liable with the infringer.

Question 577

What are the defenses in an action for infringement?

Answer 577

In an action for infringement, the defendant may show the invalidity of the patent, or any claim thereof, on any of the grounds on which a petition of cancellation can be brought (IPC, Sec. 81).

Question 578

What are the remedies against patent infringement?

Answer 578

(CIDC)

1. Civil action for damages plus attorney’s fees and other expenses for litigation (IPC, Sec. 76.2);
2. Injunction (IPC, Sec. 76.2);
3. Disposal or destruction of the infringing materials (IPC, Sec. 76.5); and
4. Criminal action for repetition of infringement (IPC, Sec. 84).

Question 579

May a Foreign National file an Infringement Action?

Answer 579

Any foreign national on juridical entity who meets the requirements of Section 3 and not engaged in business in the Philippines, to which a patent has been granted or assigned under this Act, may bring an action for infringement of patent, whether or not it is licensed to do business in the Philippines under existing law (IPC, Sec. 77)

Question 580

What are the limitations in an action to recover damages?

Answer 580

1. Recoverable damages are limited to acts of infringement committed within 4 years before institution of action (IPC, Sec. 79);

2. Damages cannot be recovered if the infringer did not know, or had no reasonable grounds to know, about the patent (IPC, Sec. 80);
Note: It is presumed that the infringer had known of the patent if on the patented product, or on the container or package in which the article is supplied to the public, or on the advertising material relating to the patented product or process, are placed the words “Philippine Patent” with the number of the patent (IPC, Sec. 80).

3. If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court may award by way of damages a sum equivalent to reasonable royalty (IPC, Sec. 76.3); and
4. The court may, according to the circumstances of the case, award damages in a sum above the amount found as actual damages sustained, provided, that the award does not exceed three times the amount of such actual damages (IPC, Sec. 76.4).

Question 581

When is a criminal action for infringement warranted?

Answer 581

If infringement is repeated by the infringer or by anyone in connivance with him after finality of judgment of the court, the offenders shall, without prejudice to the institution of a civil action for damages, be criminally liable therefore. Upon conviction [the infringer] shall suffer imprisonment for 6 months to 3 years and/or a fine of P100,000 to P300,000, at the discretion of the court (IPC, Sec. 84). The action shall prescribe in 3 years from date of the commission of the crime (IPC, Sec. 84).

Question 582

What are the grounds for cancellation of patents?

Answer 582

(NDC) Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grounds:

1. That what is claimed as the invention is not New or patentable;

2. That the patent does not Disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or
   
3. That the patent is Contrary to public order or morality (IPC, Sec. 61.1).

Note: Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be effected to such extent only (IPC, Sec. 61.2).

Question 583

What is compulsory licensing?

Answer 583

Compulsory licensing is when the government allows another person to produce the patented product or process without the consent of the patent owner or plans to use the patented invention (Il DIVINA, Commercial Law, supra at 256).

Question 584

What are the grounds for compulsory licensing and their respective period?

Answer 584

1. If the patented invention is not being worked in the Philippines on a commercial scale, although capable of being worked, without satisfactory reason - within 4 years from the date of filing of the application OR 3 years from the date of the patent whichever period expires last
2. National emergency or other circumstances of extreme urgency - at ANY TIME after the grant of the patent
3. Where the public interest, in particular, national security, nutrition, health or the development of other vital sectors of the national economy as determined by the appropriate agency of the Government, so requires - at ANY TIME after the grant of the patent
4. Where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anti-competitive; in case of public non-commercial use of the patent by the patentee, without satisfactory reason - at ANY TIME after the grant of the patent
5. Where the demand for patented drugs and medicines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health - at ANY TIME after the grant of the patent
6. Compulsory license based on interdependence of patents - at ANY TIME after the grant of the patent

Question 585

What court has jurisdiction to issue Temporary Restraining Order or Preliminary Injunction or other Provisional Remedies against a grant of Speciail Compulsory License?

Answer 585

No court, except the Supreme Court of the Philippines, shall issue any temporary restraining order or preliminary injunction or such other provisional remedies that will prevent the grant of the special compulsory license.

Question 586

When may a compulsory license be granted for a manufacturer and exporter of drugs and medicines?

Answer 586

A compulsory license shall also be available for the manufacture and export of drugs and medicines to any country having insufficient or no manufacturing capacity in the pharmaceutical sector to address public health problems: Provided, That, a compulsory license has been granted by such country or such country has, by notification or otherwise, allowed importation into its jurisdiction of the patented drugs and medicines from the Philippines in compliance with the TRIPS Agreement (IPC, Sec. 93-A-2).

Note: The right to grant a special compulsory license under this section shall not limit or prejudice the rights, obligations and flexibilities provided under the TRIPS Agreement and under Philippine laws, particularly Section 72.1 and Section 74 of the Intellectual Property Code, as amended under this Act. It is also without prejudice to the extent to which drugs and medicines produced under a compulsory license can be exported as allowed in the TRIPS Agreement and applicable laws (IPC, Sec. 93-A-3)

Question 587

What are the requirements to obtain a License on Reasonable Commercial Terms?

Answer 587

The license will only be granted after the petitioner has made efforts to obtain authorization from the patent owner on reasonable commercial terms and conditions but such efforts have not been successful within a reasonable period of time (IPC, Sec. 95.1).

This shall not apply in the following cases:

1. Where the petition for compulsory license seeks to remedy a practice determined after judicial or administrative process to be anti-competitive;

2. In situations of national emergency or other circumstances of extreme urgency;
Note: In these situations, the right holder shall be notified as soon as reasonably practicable (IPC, Sec. 95.3).

3. In cases of public non-commercial use.
   Note: where the government or contractor, without making a patent search, knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government, the right holder shall be informed promptly. (IPC, Sec. 95.4)

Question 588

What is voluntary license?

Answer 588

A voluntary license is an authorization given by the patent holder to another person allowing him to produce the patented article. The license usually fixes the amount of royalties, sets quality requirements and defines the markets in which the licensee can sell the product (Il DIVINA, supra at 253).

To encourage the transfer and dissemination of technology, prevent or control practices and conditions that may in particular cases constitute, an abuse of intellectual property rights having an adverse effect, on competition and trade, all technology transfer arrangements shall comply with the provisions of this Chapter (IPC, Sec. 85).

Question 589

Who has jurisdiction over/disputes on royalties?

Answer 589

The Director of the Documentation, Information and Technology Transter Bureau shall exercise quasi-judicial jurisdiction in the settlement of disputes between parties to a technology transfer arrangement arising from technology transfer payments, including the fixing of appropriate amount or rate of royalty (IPC, Sec. 36).

Question 590

What are the differences among mark, collective mark and trade name?

Answer 590

Mark: mark means any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods

Collective Marks: collective mark means any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark

Trade Names: trade name means the name of designation identifying or distinguishing an enterprise

Question 591

When is a mark considered well-known?

Answer 591

A mark is well-known when it is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration, and used for identical or similar goods or services (IPC, Sec. 123.1).

Question 592

What factors are considered in determining whether a mark is well-known?

Answer 592

In determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark (IPC, Sec. 123).

Note: It is not required that the well-known mark be used in commerce in the Philippines but only that it be well-known in the Philippines (Fredco Manufacturing Corporation v. President and Fellows of Harvard College, G.R. No. 185917, June 1, 2011).

Question 593

What are the rules on the registrability of the mark which is identical, or confusingly similar to, or constitutes a translation of a well-known mark?

Answer 593

The mark cannot be registered:

1. Whether or not registered in the Philippines - when it is used for identical or similar goods or services (IPC, Sec. 123.1(e)); or

2. If registered in the Philippines - with respect to goods or services which are NOT similar to those with respect to which the registration is applied for. provided that the use of the mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mark; and the interests of the owner of the registered mark are likely to be damaged by such use (IPC, Sec. 123.1(f)).

Question 594

What are non-registrable marks?

Answer 594

(IFNI3-MG-CD-SC2)

1. Consists of Immoral and deceptive matter, or matter which may disparage or falsely suggest a confection with persons, living of dead, institutions, beliefs or national symbols, or bring them into contempt or distepute (IPC, Sec. 123.1.a);

2. Consists of the Flag or coat of arms or other insignia of the Philippines or any of its political subdivisions, or of any foreign nation or any simulation thereof (IPC, Sec. 123,1.6);
   
3. Consists of a Name, portrait or signature identifying a living person, except by his written consent, or the name, portrait or signature of a deceased President of the Philippines during the life of his widow, if any, except by written consent of the widow (IPC, Sec. 123.1.c);
4. Is Identical with a registered mark belonging to a different proprietor or a mark with an earlier filing priority date, in respect of:
   a. Same goods or service;
   b. Closely-related goods or services; or
   c. If it nearly resembles such mark as to be likely to deceive or cause confusion (IPC, Sec. 123.1.d)
5. Is Identical with, or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration, and used for identical or similar goods or services. Provided, that in determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark (IPC, Sec. 123.1.e);
6. Is Identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph, which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for. Provided, that use of the mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mark. Provided further, that the interests of the owner of the registered mark are likely to be damaged by such use (IPC, Sec. 123.1.f);

7. Is likely to Mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services (IPC, Sec. 123.1.g);

8. Consists exclusively of signs Generic for the goods or services
9. Consists exclusively of signs or of indications that have become Customary or usual to designate goods or services in everyday language or bona fide and established trade practices (IPC, Sec. 123.1.i);
10. Consists exclusively of signs or of indications that may serve in trade to Designate the quality, quantity, intended purpose, value, geographical origin, time or production of goods or rendering of the services, or other characteristics of goods (IPC, Sec. 123.1.j);
11. Consists of Shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value (IPC, Sec. 123.1.k);
    
12. Consists of Color alone, unless defined by a given form (IPC, Sec. 123.1.1); and
    
13. Is Contrary to public order or morality (IPC, Sec. 123.1.m).

Question 595

What is the Doctrine of Secondary Meaning?

Answer 595

Acquiring secondary meaning is when “a mark that is initially nondistinctive and thus not protectible may acquire distinctiveness and become a trademark through use. Specific requirements have to be met in order to conclude that a mark has acquired secondary meaning, to wit:

1. The secondary, meaning must have arisen as a result of substantial commercial use of a mark in the Philippines;
   
2. Such use must result in the distinctiveness of the mark insofar as the goods or the products are concerned; and
   
3. Proof of substantially exclusive and continuous commercial use in the Philippines for five (5) years before the date on which the claim of distinctiveness is made (Shang Properties Realty Co. and Shang Properties, Inc. v. St. Francis Dev’t Co., G.R. No. 190706, Jaly 21, 2014).

Question 596

What prohibited marks may acquire secondary meaning?

Answer 596

While generic, indicative, or descriptive marks (paragraphs (i), (k), and (1) of Sec. 123. 1) are generally non-registrable, nothing shall prevent the registration of any such sign or device which has become distinctive in relation to the goods for which registration is requested as a result of the use that have been made of it in commerce in the Philippines (IPC, Sec. 123.2).

Question 597

How are the rights in a trademark acquired?

Answer 597

The rights in a mark shall be acquired through registration made validly in accordance with the provisions of this law (SALAO, Essentials of Intellectual Property Law (2019), p. 135).

Note: It must be emphasized that registration of a trademark, by itself, is not a mode of acquiring ownership. If the applicant is not the owner of the trademark, he has no right to apply for its registration. Registration merely creates a prima facie presumption of the validity of the registration, of the registrant’s ownership of the trademark, and of the exclusive right to the user thereof. Such presumption, just like the presumptive regularity in the performance of official functions, is rebuttable and must give way to evidence to the contrary (SALAO, Essentials of Intellectual Property Law (2019), p.135).

Question 598

Why is prior use of the mark no longer required for the filing of a trademark registration?

Answer 598

The requirement of prior use of the mark before filing of trademark registration has been dispensed with. Hence, it is no longer a condition for ownership (IPC, Sec. 122).

The present law now requires that the applicant or registrant shall file regularly a declaration of actual use of the mark within:

1. Three (3) years from the filing date of the application (IPC, Sec. 124.2); and
2. One (1) year from the fifth anniversary of the date of the registration of the mark (IPC, Sec. 145).

Note: Prior use no longer determines the acquisition of ownership of a mark in light of the adoption of the rule that ownership of a mark is acquired through registration made validly in accordance with the provisions of the IPC (Zuneca Pharmaceutical v. Natrapharm, Inc., G.R. No. 211850, September 8, 2020).

Question 599

How are the rights in a trade name acquired?

Answer 599

Trade Names are acquired by adoption and use and belong to the one who first uses them and gives them value (FUNA, Intellectual Property Law (2012, supra at 489).

Note: Trade names shall be protected, even prior to or without registration, against any unlawful act committed by third parties (IPC, Sec. 165.2.a)

Question 600

Is actual use necessary before one can register or own a trademark?

Answer 600

Prior use in the Philippines is not required before registration. However, there must be an actual use after registration (AQUINO. & SUNDIANG, Reviewer on Commercial Law, supra at 644).

Question 601

On what periods is a Declaration of Actual Use (DAU) filed and what are the consequences for non-filing?

Answer 601

All applicants or registrants shall file a Declaration of Actual Use (DAU) of the mark with evidence to that effect and upon payment of the prescribed fee on the following periods:

1. Within 3 years from the filing date of the application;
2. Within 1 year from the filth anniversary of the registration;
3. Within 1 year from date of renewal; and
4. Within 1 year from the fifth anniversary of each renewal.

Otherwise, the application shall be refused registration or the registered mark shall be removed from the Register by the Director (Trademark Regulations, Rule 204).

Question 602

Until when is the registration of a trademark effective?

Answer 602

A certificate of registration (of a trademark) shall remain in force for 10 years (IPC, Sec. 145). A certificate of registration may be renewed for periods of 10 years at its expiration upon payment of the prescribed fee and upon filing of a request (IPC, Sec. 146.1).

Question 603

When is the trademark registration considered void?

Answer 603

The registration is void:

1. When the mark was registered in bad faith-one can have a registration in bad faith only if he applied for the registration of the mark despite knowing that someone else has created, used, or registered that mark;
   
2. When an unregistrable mark which was mistakenly allowed to be registered was already inherently unregistrable even prior to its registration (Zuneca Pharmaceutical, et al. v. Natrapharm, Inc., G.R. No. 211850, September 8, 2020).

Question 604

What is trademark infringement?

Answer 604

Trademark infringement refers to the unauthorized use of a trademark. It is the colorable imitation of a registered mark or a dominant feature thereof. It is an invasion of the property rights of another and is committed against the registered mark.

Question 605

Who are persons liable for trademark infringement?

Answer 605

Any person who shall commit the following acts without the consent of the owner shall be liable in a civil action for infringement:

1. Use in commerce of any reproduction or colorable imitation of a registered mark or a dominant feature thereof, in connection with: (SODA)
   a. Sale;
   b. Offering for sale;
   c. Distribution; or
   d. Advertising of any goods or services including other preparatory steps necessary to carry out the sale of any goods or services, on or in connection, with which such use is likely to cause confusion, or to cause mistake, or to deceive and
2. Reproduction, counterfeit, copy or colorable imitation of a registered mark or dominant feature thereof and application of the same to labels, signs, prints packages, wrappers, receptacles, or advertisements intended to be used in commerce upon or in connection with the: (SODA)
   a. Sale;
   b. Offering for sale;
   c. Distribution, or
   d. Advertising of any goods or services on grin connection with which such use is likely to cause confusion, or to cause mistake, or to deceive (IPC, Sec. 155)

Question 606

What are the elements of trademark or trade name infringement?

Answer 606

(RI-ULW)

1. Trademark is Registered in the IPO; however, in infringement of trade name, the same need not be registered;
   
2. Trademark or trade name is reproduced, counterfeited, copied, or colorably Imitated;
   
3. The infringing mark or trade name is Used in connection with the sale, offering for sale, or advertising of any goods, business or services; or the infringing mark or trade name is applied to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used upon or in connection with such goods, business or services;
   
4. The use or application of the infringing mark or trade name is Likely to cause confusion or mistake or to deceive purchasers or others as to the goods or services themselves or as to the source or origin of such goods or services or the identity of such business; and
5. It is Without the consent of the trademark or trade name owner or the assignee thereof.

Question 607

What element is the gravamen of trademark infringement?

Answer 607

It is the likelihood of confusion that is the gravamen of infringement (Coffee Partners, Inc., v. San Francisco Coffee & Roastery, Inc., G.R. No. 169504, March 3, 2010).

Question 608

What are the types of confusion as to marks and trade names?

Answer 608

1. Confusion of Goods (Product Confusion) - Where the ordinarily prudent purchaser would be induced to purchase one product in the belief that he was purchasing the other; and

2. Confusion of Business (Source or Origin Confusion) - Where, although the goods of the parties are different, the product, the mark of which registration is applied for by one party, is such as might reasonably be assumed to originate with the registrant of an earlier product, and the public would then be deceived either into that belief or into the belief that there is some connection between the two parties, though inexistent (Skechers, USA, Inc., v. Inter Pacific Industrial Trading Corp., et al., G.R. No. 164321, March 28, 2011).

Question 609

What is the test to determine confusing similarity between marks?

Answer 609

The test to determine whether a mark is to be considered as “identical” or confusingly similar with that of another is the Dominancy Test.

Note: In trademark cases, particularly in ascertaining whether one trademark is confusingly similar to another, no set rules can be deduced because each case must be decided on its merits. Jurisprudence has developed two tests the Dominancy Test and the Holistic or Totality Test. In light of the adoption of the Dominancy Test and the abandonment of the Holistic Test, as confirmed by the provisions of the IP Code and the legislative deliberations, the Court hereby, makes it crystal clear that the use of Holistic Test in determining resemblance of marks has been abandoned.

Question 610

What is the Dominancy Test?

Answer 610

The Dominancy Test focuses on the similarity of the prevalent or dominant features of the competing trademarks that might cause confusion, mistake, and deception in the mind of the purchasing public. Duplication or imitation is notnecessary; neither is it required that the mark sought to be registered suggests an effort to imitate (Skechers, USA, Inc., v. Inter Pacific Indystrial. Trading Corp,, et ak, G.R. No. 164321, March 28) The test of dominancy is now explicitly incorporated into law in Section 155.1 of the IPC which defines infringement as the ‘colorable imitation of a registered mark or a dominant feature thereof (ABS-CBN Publishing, Inc., v. Director of the Bureau of Trademarks, G.R. No. 217916, June 20, 2018).

Question 614

What is the measure of damages in an infringement case?

Answer 614

1. The reasonable profit which the complaining party would have made, had the defendant not infringed his rights; or

2. The profit which the defendant actually made out of the infringement (IPC, Sec.
156.1).

Note: In cases where actual intent to mislead the public or to defraud the complainant is shown, in the discretion of the court, the damages may be doubled (IPC, Sec. 156.3).

Question 615

What is the idem sonans rule?

Answer 615

Under the idem sonans rule, the aural effects of the words and letters contained in the marks are taken into account in determining the issue of confusing similarity.

The idem sonans rules is applicable to the dominancy test since it relies not only on the visual but also on the aural and connotative comparisons and overall impressions between the two trademarks (Societe Produits Nestle, S.A. v. Dy, Jr., G.R. No. 172276, August 9, 2010).

Question 616

What are the remedies of the owner of a registered mark in a case of trademark infringement?

Answer 616

Regardless of whether there is actual sale of goods or services using the infringing material, the registrant may file a civil action for:

1. Damages (IPC, Sec. 156.1);
   2. The impound during the pendency of an action of the sales invoice and other documents evidencing sales (IPC, Sec. 156.2);
   3. Injunction (IPC, Sec. 156.4); or
   4. Destruction of infringing material without compensation (IPC, Sec. 157.1).

Note: Independent of the civil and administrative sanctions imposed by law, the following criminal penalty shall be imposed on any person who is found guilty of Infringement, Unfair Competition, and False Designation:

1. Imprisonment of 2 years to 5 years, and
2. Fine of P50,000 to P200,000 (IPC Sec. 170).

Question 617

What are specific limitations provided in the Code concerning an action for infringement?

Answer 617

1. Right of Prior User - Registered mark shall be without effect against any person who, in good faith, before the filing or priority date, was using the mark for purposes of his business (IPC, Sec. 159. 1);
2. Relief against Printer - Injunction against future printing against an innocent infringer who is engaged solely in the business of printing the mark (IPC, Sec. 159.2); and
3. Relief against Newspaper - Injunction against the presentation of advertising matter in future issues of the newspaper, magazine or in electronic communications in case the infringement complained of is contained in or is part of paid advertisement in such materials (IPC, Sec. 159.3).

Question 618

What is unfair competition?

Answer 618

There is unfair competition when any person employs deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result (IPC, Sec. 168.2)

Question 619

What are the elements of an action for unfair competition?

Answer 619

1. Confusing similarity in the general appearance of the goods;
2. Intent to deceive the public and defraud a competitor;

Question 620

What are the distinctions between trademark infringement and unfair competition?

Answer 620

(1) as to definition
TI: unauthorized use of a trademark
UC: passing off (or palming off) of one’s goods as those of another

(2) as to scope
TI: TI is a form of UC. TI constitutes unfair competition when there is not merely likelihood of confusion, but also actual or probable deception on the public because of the general appearance of the goods
UC: broader than TI and includes passing off goods with or without trademark infringement

(3) as to the necessity of fraudulent intent
TI: fraudulent intent is not necessary
UC: fraudulent intent is essential

(4) as to the requirement for registration
TI: prior registration of the trademark is a prerequisite to the action
UC: registration is not necessary to bring an action for unfair competition

Question 621

When may a petition to cancel a registration of a mark be filed?

Answer 621

A petition to cancel a registration of a mark may be filed by any person who believes that he is or will be damaged by the registration of a mark either:

1. Within 5 years from the date of registration of the mark; or

2. At any time, if: (GAMOF)
а. The registered mark becomes a Generic name for the goods or services or a portion thereof, for which it is registered (IPC, Sec. 151.1(b));
Note: If the registered trademark becomes the generic name for less than all of the goods or services for which it is registered, a petition to cancel the registration for only those goods pr services may be filed. (IPC, Sec. 151.1 (b)

A registered mark shall not be deemed to be the generic name of goods or services solely because such mark is also used as a name of or to identify a unique product or service. (IPC, Sec. 151.1(b)

b. The registered mark has been Abandoned (IPC, Sec. 151.1 (b));

c. The registered mark is being used by, or with the permission of, the registrant so as to Misrepresent the source of the goods or services on or in connection with which the mark is used (IPC, Sec. 151.1(b)); and

d. The registration was Obtained fraudulently or contrary to the provisions of the IPC (IPC, Sec. 151.1(b));

e. If the registered owner of the mark without legitimate reason Fails to use the mark within the Philippines, or to cause it to be used in the Philippines by virtue of a license during an uninterrupted period of 3 years or longer (IPC, Sec. 151.1 (c).

Question 622

When is non-use of trademark excused?

Answer 622

(IFCA)
1. If caused by circumstances arising Independently of the will of the owner. (IPC, Sec. 152.1)
Note: Lack of funds shall not excuse non-use of a mark (IPC, Sec. 152.1):

2. The use of a mark in a. Form different from the form in which it was registered which does not alter its distinctive character (IRC, Sec. 152.2);
3. The use of a mark in connection with one or more of the goods or services belonging to the Class In respect of which the mark is registered (IPC, Sec. 152.3); and
4. The use of a mark by a company related with the registrant or Applicant shall inure to the latter’s benefit, provided that such mark is not used in such manner as to deceive the public (IPC, Sec. 152.4).

Question 623

Is the use of mark in a form different from that which it is registered a ground for cancellation?

Answer 623

The use of the mark in a form different frem the form in which it is registered, which does not alter its distinctive character, shall not be ground for cancellation or removal of the mark and shall not diminish the protection granted to the mark (IPC, Sec. 152.2).

Question 624

What is the effect of cancellation of registration?

Answer 624

When the order or judgment of the cancellation of the registration becomes final, any right conferred by such registration upon the registrant or any person in interest of record shall terminate. (IPC, Sec. 154).

Question 625

What is a copyright?

Answer 625

It is the right over literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of creation (Kho v. CA, G.R. No. 115758, March 19, 2002).

Question 626

What is the scope of a copyright?

Answer 626

Protection extends only to the expression of the idea, not to the idea itself or to any procedure, system, method or operation, concepts, principle, discovery, or mere data (IPC, Sec. 175). [An] idea, no matter how original, cannot be protected by copyright. It is the form in which they are clothed which is protected (FUNA, Intellectual Property Law, supra at 577).

Copyright, in the strict sense of the term, is purely a statutory right. Being a mere statutory grant, the rights are limited to what the statute confers. It may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute. Accordingly, it can cover only the works falling within the statutory enumeration or description.

Note: The copyright is distinct from the property in the material object subject to it.

Consequently, the transfer, assignment or licensing of the copyright shall not itself constitute a transfer of the material object. Nor shall a transfer or assignment of the sole copy or of one or several copies of the work imply transfer, assignment, or licensing of the copyright. (IPC, Sec. 181)

Question 627

What are the requisites for the creation of a copyrightable work?

Answer 627

The following are the requisites for the creation of a copyrightable work:

1. Originality - It does not mean novelty or ingenuity; neither uniqueness nor creativity. It simply means that the work “owes its origin to the author” (Thomas Dawson, The Law of the Press, P.S. King & Son, Ltd., 1927); and

2. Expression - To be “fixed”, a work must be embodied in a medium sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration (Managing Intellectual Property in the Book Publishing Industry, A business-oriented information Booklet, WIPO, Booklet No. 1, p. 14).

Note: Works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as of their content, quality, and purpose (IPC, Sec. 172.2).

Question 628

What are the types of copyrightable works?

Answer 628

1. Original Works (IRG, Sec. 172), and
2. Derivative Works (IPC, Sec: 173).

Question 629

What are original works?

Answer 629

(BPL2-DMW-OID-PAPCO)

Original works are the literary and artistic works, which are original intellectual creations in the literary and artistic domain:

1. Books, pamphlets, articles and other writings;
2. Periodicals and newspapers;
3. Lectures, sermons, addresses, dissertations prepared for oral delivery;

4. Letters;

5. Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows;

6. Musical compositions, with or without words;
7. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art;
   
8. Original ornamental designs or models for articles of manufacture, and other works of applied art;
9. Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science;
   
10. Drawings or plastic works of a scientific or technical character;
    
11. Photographic works including works produced by a process analogous to photography; lantern slides;
12. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings;
13. Pictorial illustrations and advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific and artistic works (IPC, Sec 172.1).

Note: There is no copyright protection for works of applied art or industrial design which have aesthetic or artistic features that cannot be identified separately from the utilitarian aspects of the article (Ching v. Salinas, G.R. No. 161295, June 29, 2005).

Question 630

What is a work of applied art?

Answer 630

An artistic creation with utilitarian functions or incorporated in a useful article, whether made by hand or produce on an industrial scale (IPC, Sec, 171.10).

Question 631

What is the doctrine of conceptual separability?

Answer 631

The court must decide whether the artistic element of the article is separable from its utilitarian application. While the applied art aspect can be given copyright protection, the utilitarian part may not (FUNA, Intellectual Property Law, supra at 563).

Question 632

What is the Denicola test?

Answer 632

It is one of the tests used to apply the Doctrine of Conceptual Separability. It inquires into which aspects of the work are dictated by the functional constraints of the article, and which aspects reflect unconstrained perspective of the artist (FUNA, Intellectual Property Law, supra at 563).

Question 633

What are the derivative works?

Answer 633

Derivative works are works based upon one or more pre-existing works (17 US Code, Sec. 101). The following are derivative works that are also protected by copyright:

1. Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and
2. Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents (IPC, Sec, 173.1)

Question 634

What is the protection given to derivative works?

Answer 634

Derivative works shall be protected as new works: Provided, however, that such new work shall not affect the force of any subsisting copyright upon the original works employed or any part thereof or be construed to Imply any right to such use of the original works, or to secure or extend copyright in such original works (IPC, Sec. 173.2).

Question 635

What are works not protected by copyright?

Answer 635

(INOW)

1. Any Idea, procedure, system, method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work (IPC, Sec. 175);

2. News of the day and other miscellaneous facts having the character of mere items of press information (IPC, Sec. 175);

3. Any Official text of a legislative, administrative or legal nature, as well as any official translation thereof (IPC, Sec. 175); and
4. Any Work of the Government of the Philippines (IPC, Sec. 176.1).

Note: Copyright protection cannot be granted to libelous, seditious, immoral, or obscene works on the ground of public policy (FUNA, Intellectual Property Law, supra at 578).

Question 636

What is work of the Government of the Philippines?

Answer 636

A work of the Government of the Philippines is a work created by an officer or employee of the Philippine Government or any of its subdivisions and instrumentalities, including GOCCs as part of his regularly prescribed official duties. (IPC, Sec. 171.11)

Question 637

What two elements must be present in order to be deemed as work of the Government of the Philippines?

Answer 637

The creator must be an officer or employee of the government; and
The work was done as part of his regularly prescribed official duties. (SALAO, Essentials of Intellectual Property Law (2019), p.349)

Question 638

What are the rights granted to a copyright owner?

Answer 638

(EMD)

1. Copyright or Economic rights (IPC, Sec. 177);
2. Moral rights (IPC, Sec. 193); and
3. Right to participate in the gross proceeds of the sale or lease of the original work or Droit de suite (IPC, Sec. 200).

Copyright subsists from the moment of creation. The intellectual creator’s exercise and enjoyment of copyright for his work and the protection given by law to him is not contingent or dependent on any formality of registration (Unilever Phils, Inc. vs CA, G.R. No. 119280, August 10, 2006)

Question 639

What are the economic rights conferred to copyright owners?

Answer 639

(RDD-RD-PO) Economic rights allow the owner to derive financial reward from the use of his works by others (WIPO, Copyright and Related Rights, p. 9). Copyright or economic rights shall consist of the exclusive right to carry out, authorize or prevent the following acts:

1. Reproduction of the work or substantial portion of the work;

2. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the work;
3. The first public Distribution of the original and each copy of the work by sale or other forms of transfer of ownership;
   
4. Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a sound recording, a computer program, a compilation of data and other materials or a musicali work in graphic form, irrespective of the ownership of the original or the copy which is the subject of the rental;
   
5. Public Display of the original or a copy of the work;
   
6. Public Performance of the work; and
7. Other communication to the public of the work (IPC, Sec. 177).

Question 640

What is the right to Public Performance of a Copyright Owner?

Answer 640

Public Performance is defined as follows:

1. For work other than an audiovisual work, public performance is the recitation, playing, dancing, acting or otherwise performing the work, either directly or by means of any device or process;
   
2. For audiovisual work, the showing of its images in sequence and the making of the sounds accompanying it audible; and
   
3. For sound recording, making the recorded sounds audible at a place or at places where persons outside the normal circle of a family and that family’s closest social acquaintances are or can be present, irrespective of whether they are or can be present at the same place and at the same time, or at different places and/or at different times, and where the performance can be perceived without the need for communication within the meaning of Subsection 171.3 (IPC, Sec. 171.6).

Question 641

Is radio reception a public performance?

Answer 641

A radio reception creates a performance separate from the broadcast. This is otherwise known as the doctrine of multiple performances which provides that a radio (or television) transmission or broadcast can create multiple performances at once. It is immaterial if the broadcasting station has been licensed by the copyright owner because the reception becomes a new public performance requiring separate protection (Filipino Society of Composers, Authors and Publishers, Inc. v. Anrey, Inc., G.R. No. 233918, August 9, 2022).

Question 642

What is Communication to the Public Right of a Copyright Owner?

Answer 642

“Communication to the public” or “communicate to the public” communication to the public, including broadcasting, rebroadcasting, retransmitting by cable, broadcasting and retransmitting by satellite, and includes the making of a work available to the public by wire or wireless means in such a way that members of the public may access these works from a place and time individually chosen by them (IPC, Sec. 171.3, as amended).

In relation to performances and sound recordings, “Communication to the public of a performance or a sound recording” means the transmission to the public, by any medium, otherwise than by broadcasting, of sounds of a performance or the representations of sounds fixed in a sound recording. It includes making the sounds or representations of sounds fixed in a sound recording audible to the public (IPC, Sec. 209).

Question 643

When is there a communication to the Public?

Answer 643

For purposes of determining whether there is a “communication to the public,” it would be necessary to establish that the protected work was transmitted to a “new public,” or a public which was not taken into account by the authors of the brotected works when they authorized use through communication to the “original public” (Filipino Society of Composers, Authors and Publishers, Inc. V Anrey, nc., G.R.,No. 233918, August 9, 2022).

Note: “Communication” must be construed as referring to any transmission of the protected works, irrespective of the means used.

Question 644

Is the transmission of a musical composition (fixed in an audiovisual derivative work) by a cable television operator-over”a channel they control constitutes communication to the public?

Answer 644

When a cable television system operator transmits a musical composition fixed in an audiovisual derivative work over a channel they control and operate, the operator is making that work accessible to members of the public from a place or time individually chosen by them. This is the essence of the “communication to the public” right in the Intellectual Property Code.

Playing a musical composition, fixed in an audiovisual derivative work, over cable television to paying subscribers is making that work accessible to members of the public from a place or time individually chosen by them. This is the essence of the “communication to the public” right (Philippine Home Cable Holdings, Inc. v. FILSCAP, G.R. No. 188933, February 21, 2023).

Question 645

What is the First Sale Doctrine?

Answer 645

After the first sale of the lawfully made copy of the copyrighted work, anyone who is the owner of that copy can sell or dispose of that copy in any way without any liability for copyright infringement. The first sale of an authorized copy of the work exhausts the author’s right to control distribution of copies (IPC, Sec. 177.3).

Question 646

What are the moral rights granted to the author of a work protected by copyright?

Answer 646

(AON)

1. Right of Paternity - To require that the Authorship of the works be attributed to him, in particular, the right that his name, as far as practicable, be indicated in a prominent way on the copies, and in connection with the public use of his work;
2. To make any Alterations of his work prior to, or to withhold it from publication;
3. Right of Integrity - To Object to any distortion, mutilation or other modification of, or other derogatory action in relation to, his work which would be prejudicial to his honor or reputation; and
4. To restrain the use of his Name with respect to any work not of his own creation or in a distorted version of his work (IPC, Sec. 193).

Note: An author cannot be compelled to perform his contract to create a work or for the publication of his work already in existence. However, he may be held liable for damages for breach of such contract (IPC, Sec. 194).

Question 647

What is the term or duration of the author’s moral rights?

Answer 647

The right of an author under Section 193.1 shall last during the lifetime of the author and in perpetuity after his death while the rights under Section 193.2, 193.3, and 193.4, shall be coterminous with the economic rights (IPC, Sec. 198.1, as amended by R.A. No. 10372).

Question 648

Are the moral rights assignable?

Answer 648

Moral rights shall not be assignable or subject to license (IPC, Sec. 198).

Note: These rights are distinct from economic rights and remain with the author even after he has transferred or assigned to another other rights of copyright.”

Question 649

Are the moral rights waivable?

Answer 649

As a general rule, moral rights may be waived by a written instrument. The exception is where its effects is to permit another:

1. To use the name of the author, or the title of his work, or otherwise to make use of his reputation with respect to any version or adaptation of his work which, because of alterations therein, would substantially tend to injure the literary or artistic reputation of another author (IPC, Sec. 195.1); or
2. To use the name of the author with respect to a work he did not create.

Question 650

When is the right of an author to have his contributions in a collective work be attributed to him deemed waived?

Answer 650

When an author contributes to a collective work, his right to have his contribution attributed to him is deemed waived unless he expressly reserves it (IPC, Sec. 196).

Question 651

What are the rights of an author in terms of editing, arranging and adaptation of his work?

Answer 651

In the absence of a contrary stipulation at the time an author licenses or permits another to use his work, the necessary editing, arranging or adaptation of such work, for publication, broadcast, use in a motion picture, dramatization, or mechanical or electrical reproduction in accordance with the reasonable and customary standards or requirements of the medium in which the work is to be used, shall not be deemed to contravene the author’s rights secured by this chapter. Nor shall complete destruction of a work unconditionally transferred by the author be deemed to violate such rights (IPC, Sec. 197).

Question 652

What is Droit de Suite?

Answer 652

Droit de Suite means “art proceeds right”. That in every sale or lease of an original work of painting or sculpture or of the original manuscript of a writer or composer, subsequent to the first disposition thereof by the author, the author or his heirs shall have an inalienable right to participate in the gross proceeds of the sale or lease to the extent of 5%. This right shall exist during the lifetime of the author and for 50 years after his death (PC, Sec. 200).

Question 653

What are the works that are not covered by Droit de Suite?

Answer 653

(PE2W2) The works not covered by droit de suite are: Prints, Etchings, Engravings, Works of applied art or Works of similar kind wherein the author primarily derives gain from the proceeds of reproductions (IPC, Sec. 201).

Question 654

What are the economic rights of performers under the Law on Copyright?

Answer 654

(BF-RDRA)

1. As regards their performances:
   a. Broadcasting and other communication to the public of their performance; and
   b. Fixation of their unfixed performance (IPC, Sec. 203.1); and
2. As to their performances fixed in sound recordings or audiovisual works or fixations:
   a. Direct or indirect Reproduction
   b. First public Distribution of the original and copies through sale or rental or other forms of transfer of ownership;
   c. Commercial Rental to the public of the original and copies, even after distribution of them by, or pursuant to the authorization by the performer;
   d. Making Available to the public of their performances fixed in sound recordings, by wire or wireless means, in such a way that members of the public may access them from a place and time individually chosen by them (IPC, Sec. 203.2 to 203.5).

Question 655

What are the moral rights of performers under the Law on Copyright?

Answer 655

As regards his live aural performances or performances fixed in sound recordings or in audiovisual works or fixations:

1. The right to be identified as the performer of his performances, except, where the omission is dictated by the use of the performance; and
   
2. The right to object to any distortion, mutilation or other modification of his performance that will be prejudicial to his reputation (IPC, Sec. 204.1).

Question 656

When may the rights granted to a performer under Section 203.1 be exercised?

Answer 656

The rights granted to a performer in accordance with Subsection 203.1 shall be maintained and exercised 50 years after his death, by his heirs, and in default of heirs, the government, where protection is claimed (IPC, Sec. 204.2).

Question 657

What are the rights of producers of sound recordings?

Answer 657

(RDCP) Producers of sound recordings shall enjoy, as to their sound recordings, the right
to authorize the:

1. Direct or indirect Reproduction; the placing of these reproductions in the market and the right of rental or lending;
2. First public Distribution of the original and copies through sale or rental or other forms of transferring ownership; and
3. Commercial rental to the public of the original and copies even after distribution by them or pursuant to authorization by the producer; and
4. Making available to the Public in such a way that members of the public may access the sound recording from a place and at a time individually chosen or selected by them, as well as other transmissions of a sound recording with like effect (IPC, Sec. 208).

Question 658

What are the rights of broadcasting organizations?

Answer 658

Broadcasting organizations shall enjoy the exclusive right to carry out, authorize or prevent any of the following acts:

1. The rebroadcasting of their broadcasts;
2. The recording in any manner, including the making of films or the use of video tape, of their broadcasts for the purpose of communication to the public of television broadcasts of the same; and
3. The use of such records for fresh transmissions or for fresh recording (IPC, Sec. 211)

Question 659

What is the remedy of an author of a work if any of his moral rights are violated?

Answer 659

Violation of any of the moral rights of an author shall entitle those charged with their enforcement to the same rights and remedies available to a copyright owner. In addition, damages which may be availed of under the Civil Code may also be recovered. Any damage recovered after the creator’s death shall be held in trust for and remitted to his heirs, and in default of the heirs, shall belong to the government (IPC, Sec. 199).

Question 660

Who owns copyright to audiovisual work?

Answer 660

(PACFA)

1. Producer
2. Author of the scenario
3. Composer of the music
4. Film director
5. Author of the work so adapted

The producer shall exercise the copyright to an extent required for the exhibition of the work in any manner, except for the right to collect performing license fees for the performance of musical compositions which are incorporated into the work.

Question 661

Who owns the copyright to anonymous and pseudonymous works?

Answer 661

Publishers are deemed representatives of the author, unless:

1. The contrary appears; or
2. Pseudonyms or adopted name leaves no doubt as to the author’s identity; or author disclose his identity.

Question 662

May a copyright be transferred, assigned, or licensed?

Answer 662

Yes. The copyright may be assigned or licensed in whole or in part. Within the scope of the assignment or license, the assignee or licensee is entitled to all the rights and remedies which the assignor or licensor had with respect to the copyright. (IPC, Sec. 180)

Note: The copyright is distinct from the property in the material object subject to it.

Consequently, the transfer, assignment or licensing of the copyright shall not itself constitute a transfer of the material object. Nor shall a transfer or assignment of the sole copy or of one or several copies of the work imply transfer, assignment, or licensing of the copyright. (IPC, Sec. 181)

Question 663

What are the limitations on copyright protection?

Answer 663

1. General limitations (IPC, Sec. 184.1);
2. Fair use (IPC, Sec. 185); and
3. Other limitations on copyright (IPC, Sec. 186, 187,188,189, & 190).

Question 664

What are the general limitations on copyright?

Answer 664

(R4EG-CDJB-QI) The following are the general limitations on copyright under the law, and as such, shall NOT constitute infringement of copyright:

1. The Recitation or performance of a work, once it has been lawfully made accessible to the public, if done privately and free of charge or if made strictly for a charitable or religious institution or society;

2. The Reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works of the same nature, which are delivered in public if such use is for information purposes and has not been expressly reserved, provided that the source is clearly indicated;

3. The Reproduction and communication to the public of literary, scientific or artistic works as part of reports of current events by means of photography, cinematography or broadcasting to the extent necessary for the purpose;
   
4. The Recording made in schools, universities or educational institutions of a work included in a broadcast for their use, provided: that such recording must be deleted within a reasonable period after they were first broadcast: Provided, further, that such recording may not be made from audiovisual works which are part of the general cinema repertoire of feature films except for brief excerpts of the work;
   
5. The making of Ephemeral recordings by a broadcasting organization by means of its own facilities and for use in its own broadcast;
   
6. The use made of a work by or under the direction or control of the Government, by the National Library or by educational, scientific or professional institutions where such use is in the public interest and is compatible with fair use;
7. The public performance or the communication to the public of a work, in a place where no admission fee is charged in respect of such public performance or communication, by a club or institution for Charitable or educational purpose only, whose aim is not profit making;
   
8. Public Display of the original or a copy of the work not made by means of a film, slide, television image or otherwise on screen or by means of any other device or process: Provided, that either the work has been published, or, that the original or the copy displayed has been sold, given away or otherwise transferred to another person by the author or his successor in title;
   
9. Any use made of a work for the purpose of any Judicial proceedings or for the giving of professional advice by a legal practitioner;
10. The reproduction or distribution, on a non-profit basis, of published articles or materials in a specialized format exclusively for the use of the Blind, visually-and reading-impaired person, provided that the copyright owner and the date of the original publication shall be indicated. Provided that the source and the name of the author, if appearing in the work are mentioned;
11. The making of Quotations from a published work if they are compatible with fair use and only to the extent justified for the purpose, including quotations from newspaper articles and periodicals in the form of press summaries; and
12. The Inclusion of a work in a publication, broadcast, or other communication to the public, sound recording or film, if such inclusion is made by way of illustration for teaching purposes and is compatible with fair use (IPC, Sec. 184.1).

Note: Private reproduction of a published work in a single copy, where the reproduction is made by a natural person exclusively for research and private study, shall be permitted, without the authorization of the owner of copyright in the work (IPC, Sec. 187.1).

Question 665

What are the requisites that must be satisfied in order for the use of a copyrighted material to be considered exempt under Sec. 184.1 (i)?

Answer 665

1. The place where the performance is made does not charge any admission fee in respect of such performance or communication;

2. The performance is made by a club or institution: (a) for charitable or educational purpose only; and (b) whose aim is not profit making; and
   
3. Such other requirements that may be prescribed under the implementing rules and regulations promulgated by the Director General of the [IPO] (COSAC, Inc., v. Filipino Society of Composers, Aüthors and Publishers, Inc., G.R. No. 222537, February 28, 2023)

Question 666

Does charging an admission fee automatically remove the playing of copyrighted music from the exemption under Sec. 184.1(i)?

Answer 666

No, charging an admission fee does not automatically remove the playing of copyrighted music from this exemption But if the admission fee is “charged in respect of such performance’ then it would not be covered by the exemption. Otherwise stated, charging an admission fee for some other purpose not in connection with the playing of the work could still be exempt under this provision.

Question 667

Are all private reproduction of a published work py a natural person in accordance with Sec. 187.1 permitted?

Answer 667

The permission granted under Subsection 187.1 shall not extend to the reproduction of:

1. A work of architecture in form of building or other construction;

2. An entire book, or a substantial part thereof, or of a musical work in which graphics form by reprographic means;

3. A compilation of data and other materials;
4. A computer program except as provided in Sec. 189; and
5. Any work in cases where reproduction would unreasonably conflict with a normal exploitation of the work or would otherwise unreasonably prejudice the legitimate interests of the author (IPC, Sec. 187.2).

Question 668

What is the extent of the copyright in a work of architecture?

Answer 668

Copyright in a work of architecture shall include the right to control the erection of any building which reproduces the whole or a substantial part of the work either in its original form or in any form recognizably derived from the original: Provided, That the copyright in any such work shall not include the right to control the reconstruction or rehabilitation in the same style as the original of a building to which that copyright relates (IPC, Sec. 186).

Question 669

What is fair use?

Answer 669

Fair use has been defined as a privilege to use the copyrighted material in a reasonable manner without the consent of the copyright owner of as copying the theme or ideas rather than their expression.

Question 670

When is the fair use of a copyrighted work not considered an infringement?

Answer 670

Use of a copyrighted work is not considered an infringement when:

1. The fair use of a copyrighted work for criticism, comment, news reporting, teaching including multiple copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright (IPC, Sec. 185).
2. Decompilation or the reproduction of the code and translation of the forms of a computer program to achieve the interoperability of an independently created computer program with other programs may also constitute fair use done for the purpose of obtaining the information necessary to achieve such interoperability (IPC, Sec. 185.1).

Question 671

What are the factors to be considered in determining if there is fair use of a copyrighted work?

Answer 671

(P-NAE) In determining whether the use made of a work in any particular case is fair use, the factors to be considered shall include:

1. The Purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purposes;
2. The Nature of the copyrighted work;
3. The Amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
4. The Effect of the use upon the potential market for or value of the copyrighted work (IPC. Sec. 185.1; ABS-CBN Corporation v. Gozon, G.R. No. 195956, March 11, 2015)

Note: The fact that the work is unpublished shall not itself bar a finding of fair use (IPC, Sec. 185.2).

Question 672

What is the test used in reviewing the purpose and character of the usage of copyrighted work?

Answer 672

The “transformative test” is generally used in reviewing the purpose and character of the usage of the copyrighted work. This court must look into whether the copy of the work adds ‘new expression, meaning or message’ to transform it into something else. ‘Meta-use’ can also occur without necessarily transforming the copyrighted work used (ABS-CBN Corporation v. Gozon, G.R. No. 195956, March 11, 2015).

Question 673

What is copyright infringement?

Answer 673

Infringement of a copyright is a trespass on a private domain owned and occupied by the owner of the copyright, and, therefore, protected by law, and infringement of copyright, or piracy, which is a synonymous term in this connection, consists in the doing by any person, without the consent of the owner of the copyright, of anything the sole right to do which is conferred by statute on the owner of the copyright (Habana v. Robles, G.R. No. 131522, July 19, 1999).

Question 674

When is a person considered to have committed copyright infringement?

Answer 674

When one:

1. Directly commits an infringement;
   2. Benefits from the infringing activity of another person who commits an infringement if the person benefiting has been given notice of the infringing activity and has the right and ability to control the activities of the other person;
   3. With knowledge of infringing activity, induces, causes or materially contributes to the infringing conduct of another (IPC, Sec. 216).

Note: Damage is not an element in an infringement suit (FUNA, Intellectual Property Law, supra at 673).

Question 675

What are the elements of copyright Infringement?

Answer 675

Before copyright holders may claim for infringement, two elements must be proven:

1. They must show ownership of a valid copyright; and

2. They must demonstrate that the alleged infringers violate at least one economic right granted to copyright holders 21 under Sec. 177 of the IPC (Filipino Society of Composers, Authors and Publishers v. Ahrey, Inct, G.R. No. 233918, August 9, 2022).

Note: For the second element, it must further be shown that the exercise of the economic right was inconsistent with any of the limitations on copyright 79 and permissible unauthorized reproductions and importations. Alternatively, the defendant or respondent may prove that its exercise of the economic right falls within fair use (Philippine Home Cable Holdings, Inc. v. FILSCAP, G.R. No. 188933, Februay 21, 2023).

Question 676

Is the grant of copyright protection to a derivative work renders the use of the original work, or any part of it lawful?

Answer 676

To emphasize, copyright over an original work is unaffected even when that work is used in a derivative work. And the grant of copyright protection to the derivative work does not by itself make the use of the original work, or any part of it, lawful absent the copyright holder’s consent.

Question 677

What is the Doctrine of Multiple Performances?

Answer 677

The doctrine of multiple performances provides that a radio (or television) transmission or broadcast can create multiple performances at once. The reproduction of the radio waves into audible sound waves is also a performance, hence it is immaterial if the broadcasting station has been licensed by the copyright owner because the reception becomes a new public performance requiring separate protection (Filipino Society of Composers, Authors and Publishers v. Anrey, Inc., G.R. No. 233918, August 9, 2022).

Question 678

Is the act of playing radio broadcasts containing sound recordings using loudspeakers amounts to copyright infringement?

Answer 678

The act of playing radio broadcasts containing sound recordings through the use of loudspeakers amounts to an unauthorized communication of such copyrighted music to the public, thus, violates the public performance rights of a copyright owner.

Typically, radio stations already secured from the copyright owner (or his/her assignee) the license to broadcast the sound recording. And by the nature of broadcasting, it is necessarily implied that its reception by the public has been consented to by the copyright owners. But the author normally thinks of the license to broadcast as to “cover only the direct audience receiving the signal within the family circle.” Any further communication of the reception creates, by legal fiction, a “new public” which the author never contemplated when they authorized its use in the initial communication to the public.

Question 679

When is a person liable for the infringement of another? What are the kinds of infringement?

Answer 679

“A person can be held liable for copyright infringement based on the acts of another - if one benefits from the infringing act; if a person contributes to the infringement by inducing direct infringing acts; or infringes vicariously by profiting from direct infringement while declining to exercise a right to stop/limit it.

US case law also provides for sub-classifications of secondary liability, as follows: (a) inducement theory; (b) contributory infringement; and (c) vicarious infringement.

Under the inducement theory, when a person induces the commission of an infringing act by another party, or persuades another to commit infringement, he/she shall be liable. Next, contributory infringement happens when a person, aware of the infringing activity, induces, causes or materially contributes to the infringing act of another.

Finally, vicarious infringement has two (2) elements. (1) a defendant possesses the right and ability to supervise the infringing act; and (2) the defendant must have “an obvious and direct financial interest in the exploitation of copyrighted material.” In this mode, knowledge or lack thereof of the infringement is immaterial in the determination of vicarious liability (Cosac, Inc. v. Filipino Society of Composers, Authors and Publishers, Inc., G.R. No. 222537, February 28, 2023).

For example, an owner of a restaurant who is liable as secondary infringer for vicarious infringement when he allowed the commission of infringing acts when he permitted musical artists or bands to perform copyrighted music. The restaurant owner is liable as primary infringer when he played sound recordings as-background music without first procuring a license from the copyright owners (or assignees) of the songs and paying the fee (Id).

Question 680

What is the subconscious copying doctrine?

Answer 680

It contemplates infringement or plagiarism by copying from another work but committed subconsciously from memory rather than conscious use by deliberately copying (FUNA, Intellectual Property Law, supra at 674).

Note: A pirated copy is an infringement of the original and it is no defense that the pirate, in such cases, did not know whether or not he was infringing any copyright; he at least knew that what he was copying was not his and he copied at his peril (Habana v. Robles, G.R. No. 131522, July 19, 1999; Columbia Pictures v. CA, G.R. No. 131522, July 19, 1999).

Question 681

What are the kinds of infringement?

Answer 681

The kinds of infringement are:

1. Direct Infringement - It is an infringement by a person who, without the consent of the owner of the copyright, does anything the sole right to do which is by law conferred on the owner of the copyright (FUNA, Intellectual Property Law, supra at 676); and
2. Indirect Infringement - Dealings with works of direct infringements (FUNA, Intellectual Property, supra at 677).

Question 682

What is the De Minimis Principle?

Answer 682

De minimis means minimal things, small and trivial. Certain acts would be considered too minimal to be considered acts of infringement (FUNA, Intellectual Property Law, supra at 684).

Question 683

What are the remedies available in case of copyright infringement?

Answer 683

(IDIDOS) Any person infringing a right protected under this law shall be liable to:

1. An Injunction restraining such infringement;

2. Pay to the copyright proprietor or his assigns or heirs such actual Damages, including legal costs and other expenses, as well as the profits the infringer may have made due to such infringement,

3. Deliver under oath, for Impounding during the pendency of the action, upon such terms and conditions as the court may prescribe, sales invoices and other documents evidencing sales, all articles and their packaging alleged to infringe a copyright and implements for making them.
   
4. Deliver under oath for Destruction without any compensation all infringing copies or devices, as well as all plates, molds, or other means for making such infringing copies as the court may order;
   
5. Such Other terms and conditions, including the payment of moral and exemplary damages, which the court may deem proper, wise and equitable and the destruction of infringing copies of the work even in the event of acquittal in a criminal case (IPC, Sec. 216.1): and
6. The order of the court for Seizure and impounding of any article which may serve as evidence in the court proceedings (IPC, Sec. 2162).

Question 684

When does an action for recovery of damages by reason of infringement prescribe?

Answer 684

No damages may be recovered under this Act after the lapse of 4 years from the time the cause of action arose (IPC, Sec. 226)

Question 685

Who are the persons criminally liable for copyright infringement?

Answer 685

1. Any person infringing any right of the copyright owner or aiding or abetting such infringement (IPC, Sec. 217, 1); or

2. Any person who at the time when copyright subsists in a work has in his possession an article which he knows, or ought to know, to be an infringing copy of the work for the purpose of: Selling, letting for hire, or by way of trade offering or exposing for sale, or hire, the article;
3. Distributing the article for purpose of trade, or for any other purpose to an extent that will prejudice the rights of the copyright owner in the work, Trade exhibit of the article in public (IPC, Sec. 217.3).

Question 686

What are the administrative remedies available to an aggrieved party?

Answer 686

1. Administrative action;
2. Cease and desist order;
3. Forfeiture of paraphernalia used in committing the offense; and
4. Administrative fines (Rules and Regulations on Administrative Complaints for Violation of Laws Involving Intellectual Property Rights, Rule 12).

Question 687

Scope of DATA PRIVACY ACT OF 2000 (R.A. No. 10173)

Answer 687

SEC. 4. Scope. – This Act applies to the processing of all types of personal information and to any natural and juridical person involved in personal information processing including those personal information controllers and processors who, although not found or established in the Philippines, use equipment that are located in the Philippines, or those who maintain an office, branch or agency in the Philippines subject to the immediately succeeding paragraph: Provided, That the requirements of Section 5 are complied with.

This Act does not apply to the following:

(a) Information about any individual who is or was an officer or employee of a government institution that relates to the position or functions of the individual, including:

(1) The fact that the individual is or was an officer or employee of the government institution;

(2) The title, business address and office telephone number of the individual;

(3) The classification, salary range and responsibilities of the position held by the individual; and

(4) The name of the individual on a document prepared by the individual in the course of employment with the government;

(b) Information about an individual who is or was performing service under contract for a government institution that relates to the services performed, including the terms of the contract, and the name of the individual given in the course of the performance of those services;

(c) Information relating to any discretionary benefit of a financial nature such as the granting of a license or permit given by the government to an individual, including the name of the individual and the exact nature of the benefit;

(d) Personal information processed for journalistic, artistic, literary or research purposes;

(e) Information necessary in order to carry out the functions of public authority which includes the processing of personal data for the performance by the independent, central monetary authority and law enforcement and regulatory agencies of their constitutionally and statutorily mandated functions. Nothing in this Act shall be construed as to have amended or repealed Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act; Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act; and Republic Act No. 9510, otherwise known as the Credit Information System Act (CISA);

(f) Information necessary for banks and other financial institutions under the jurisdiction of the independent, central monetary authority or Bangko Sentral ng Pilipinas to comply with Republic Act No. 9510, and Republic Act No. 9160, as amended, otherwise known as the Anti-Money Laundering Act and other applicable laws; and

(g) Personal information originally collected from residents of foreign jurisdictions in accordance with the laws of those foreign jurisdictions, including any applicable data privacy laws, which is being processed in the Philippines.

Question 688

Personal vs. Sensitive Personal Information

Answer 688

a. Personal information processor refers to any natural or juridical person qualified to act as such under this Act to whom a personal information controller may outsource the processing of personal data pertaining to a data subject.

b. Sensitive personal information refers to personal information:
(1) About an individual’s race, ethnic origin, marital status, age, color, and religious, philosophical or political affiliations;

(2) About an individual’s health, education, genetic or sexual life of a person, or to any proceeding for any offense committed or alleged to have been committed by such person, the disposal of such proceedings, or the sentence of any court in such proceedings;

(3) Issued by government agencies peculiar to an individual which includes, but not limited to, social security numbers, previous or current health records, licenses or its denials, suspension or revocation, and tax returns; and

(4) Specifically established by an executive order or an act of Congress to be kept classified.

DATA PRIVACY ACT OF 2000 (R.A. No. 10173), Section 3

Question 689

Criteria for Lawful Processing of Personal Information

Answer 689

SEC. 12. Criteria for Lawful Processing of Personal Information. – The processing of personal information shall be permitted only if not otherwise prohibited by law, and when at least one of the following conditions exists:

(a) The data subject has given his or her consent;

(b) The processing of personal information is necessary and is related to the fulfillment of a contract with the data subject or in order to take steps at the request of the data subject prior to entering into a contract;

(c) The processing is necessary for compliance with a legal obligation to which the personal information controller is subject;

(d) The processing is necessary to protect vitally important interests of the data subject, including life and health;

(e) The processing is necessary in order to respond to national emergency, to comply with the requirements of public order and safety, or to fulfill functions of public authority which necessarily includes the processing of personal data for the fulfillment of its mandate; or

(f) The processing is necessary for the purposes of the legitimate interests pursued by the personal information controller or by a third party or parties to whom the data is disclosed, except where such interests are overridden by fundamental rights and freedoms of the data subject which require protection under the Philippine Constitution.

Question 690

The processing of sensitive personal information and privileged information shall be prohibited, except in the following cases:

Answer 690

SEC. 13. Sensitive Personal Information and Privileged Information. – The processing of sensitive personal information and privileged information shall be prohibited, except in the following cases:

(a) The data subject has given his or her consent, specific to the purpose prior to the processing, or in the case of privileged information, all parties to the exchange have given their consent prior to processing;

(b) The processing of the same is provided for by existing laws and regulations: Provided, That such regulatory enactments guarantee the protection of the sensitive personal information and the privileged information: Provided, further, That the consent of the data subjects are not required by law or regulation permitting the processing of the sensitive personal information or the privileged information;

(c) The processing is necessary to protect the life and health of the data subject or another person, and the data subject is not legally or physically able to express his or her consent prior to the processing;

(d) The processing is necessary to achieve the lawful and noncommercial objectives of public organizations and their associations: Provided, That such processing is only confined and related to the bona fide members of these organizations or their associations: Provided, further, That the sensitive personal information are not transferred to third parties: Provided, finally, That consent of the data subject was obtained prior to processing;

(e) The processing is necessary for purposes of medical treatment, is carried out by a medical practitioner or a medical treatment institution, and an adequate level of protection of personal information is ensured; or

(f) The processing concerns such personal information as is necessary for the protection of lawful rights and interests of natural or legal persons in court proceedings, or the establishment, exercise or defense of legal claims, or when provided to government or public authority.

Question 691

Rights of the Data Subject

Answer 691

SEC. 16. Rights of the Data Subject. – The data subject is entitled to:

(a) Be informed whether personal information pertaining to him or her shall be, are being or have been processed;

(b) Be furnished the information indicated hereunder before the entry of his or her personal information into the processing system of the personal information controller, or at the next practical opportunity:

(1) Description of the personal information to be entered into the system;

(2) Purposes for which they are being or are to be processed;

(3) Scope and method of the personal information processing;

(4) The recipients or classes of recipients to whom they are or may be disclosed;

(5) Methods utilized for automated access, if the same is allowed by the data subject, and the extent to which such access is authorized;

(6) The identity and contact details of the personal information controller or its representative;

(7) The period for which the information will be stored; and

(8) The existence of their rights, i.e., to access, correction, as well as the right to lodge a complaint before the Commission.

Any information supplied or declaration made to the data subject on these matters shall not be amended without prior notification of data subject: Provided, That the notification under subsection (b) shall not apply should the personal information be needed pursuant to a subpoena or when the collection and processing are for obvious purposes, including when it is necessary for the performance of or in relation to a contract or service or when necessary or desirable in the context of an employer-employee relationship, between the collector and the data subject, or when the information is being collected and processed as a result of legal obligation;

(c) Reasonable access to, upon demand, the following:

(1) Contents of his or her personal information that were processed;

(2) Sources from which personal information were obtained;

(3) Names and addresses of recipients of the personal information;

(4) Manner by which such data were processed;

(5) Reasons for the disclosure of the personal information to recipients;

(6) Information on automated processes where the data will or likely to be made as the sole basis for any decision significantly affecting or will affect the data subject;

(7) Date when his or her personal information concerning the data subject were last accessed and modified; and

(8) The designation, or name or identity and address of the personal information controller;

(d) Dispute the inaccuracy or error in the personal information and have the personal information controller correct it immediately and accordingly, unless the request is vexatious or otherwise unreasonable. If the personal information have been corrected, the personal information controller shall ensure the accessibility of both the new and the retracted information and the simultaneous receipt of the new and the retracted information by recipients thereof: Provided, That the third parties who have previously received such processed personal information shall he informed of its inaccuracy and its rectification upon reasonable request of the data subject;

(e) Suspend, withdraw or order the blocking, removal or destruction of his or her personal information from the personal information controller’s filing system upon discovery and substantial proof that the personal information are incomplete, outdated, false, unlawfully obtained, used for unauthorized purposes or are no longer necessary for the purposes for which they were collected. In this case, the personal information controller may notify third parties who have previously received such processed personal information; and

(f) Be indemnified for any damages sustained due to such inaccurate, incomplete, outdated, false, unlawfully obtained or unauthorized use of personal information.

Question 692

Which government agency shall administer and implement the provisions of the DPA?

Answer 692

National Privacy Commission (NPC) is an independent body created to administer and implement the provisions of this Act, and to monitor and ensure compliance of the country with the international stardards set for data protection (DPA, Sec. 7).

Question 693

What is privileged information?

Answer 693

It refers to any, and all forms of data which under the Rules of Court and other pertinent laws constitute privileged communication (DPA, Sec. 3(k)).

Question 694

What are the examples of privileged information?

Answer 694

1. Communication between husband and wife;

2. Communication between attorney and client;

3. Communication between physician and patient;
4. Communication between priest and penitent;
5. Public Officers and Public Interest;
   
6. Editors may not be compelled to disclose the source of published news;
   
7. Voters may not be compelled to disclose for whom they voted;
   
8. Trade secrets;
   
9. Information contained in tax census returns;
   
10. Bank deposits; and
11. Information and statements made at conciliation proceedings.

Question 695

Securities

Answer 695

Securities” are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character. It includes:

(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities;

(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of deposit for a future subscription;

(c) Fractional undivided interests in oil, gas or other mineral rights;

(d) Derivatives like option and warrants;

(e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments

(f) Proprietary or nonproprietary membership certificates in corporations; and

(g) Other instruments as may in the future be determined by the Commission.

(Sec. 3, SECURITIES REGULATION CODE (R.A. No. 8799))

Question 696

What is the primary purpose of regulating Securities in the Philippines?

Answer 696

The principal purpose of laws and regulations governing securities in the Philippines is to protect the public against nefarious practices of unscrupulous brokers and salesmen in selling securities and the imposition of worthless ventures and the sale of securities which have no basis at all. Hence, securities law provides for a system of registration of securities, registration of brökers and dealers of securities, prohibitions against manipulations and practices detrimental to the investing public and measures for the protection of investors (Il DIVINA, Commercial Law, supra at 1).

Question 697

What is the “Howey Test?”

Answer 697

(CTS-MCE2) For an investment contract to exist, thie following elements referred to as Howey Test must concur:

1. A Contract, Transaction, or Scheme;
2. An investment of Money;
   3. Investment is made in a Common enterprise.
3. Expectation of profits; and
4. Profits arising primarily from the Efforts of others.

Question 698

Kasaganahan.Com Inc (KCI) sold computer software and hosted websites without providing internet service. To make a profit, KCI devised a scheme in which, for the price of Php 2,500 a buyer could acquire from it an internet website of a 15-Mega Byte (MB) capacity. At the same time, by referring to KCI his own down-line buyers, a first-time buyer could earn commissions, interest in real estate in the Philippines and in the United States, and insurance coverage worth P50,000.00. To benefit from this scheme, a KCI buyer must enlist and sponsor at least two other buyers as his own down-lines. These second tier of buyers could in turn build up their own down-lines. For each pair of down-lines, the buyer-sponsor received a Php 5,000.00 commission. Apparently, the KCI patterned its scheme from Gaya-gaya Ventures which stopped its operations after it received a cease-and-desist order from the SEC. Disgruntled elements of GVI filed a complaint with the SEC against PCI, alleging that the latter had taken over GVI’s operations. SEC ruled that PCI’s scheme constitutes an investment contract and should have first registered such contract or securities with the SEC. Is the SEC correct?

Answer 698

No. KCI’s clients do not make such investments. They buy a product of some value to them: an Internet website of a 15-MB capacity. The client can use this website to enable people to have internet access to what he has to offer to them, say, some skin cream. The buyers of the website do not invest money in KCI that it could use for running some business that would generate profits for the investors. The price of Php 2,500 is what the buyer pays for the use of the website, a tangible asset that KCI creates, using its computer facilities and technical skills.

Question 699

What is the Registration Requirement under the SRC?

Answer 699

Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser (SRC, Sec. 8.1).

Question 700

What securities are exempted from registration requirement?

Answer 700

The requirement of registration shall not as a general rule apply to any of the following classes of securities:

1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government.

2. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content of disclosures the Commission may prescribe.

3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body.

4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue.

5. Any security issued by a bank except its own shares of stock (SRC, Sec. 9.1).

Question 701

What transactions are exempted from the registration requirement?

Answer 701

1. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy.
2. By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of this Code, to liquidate a bona fide debt, a security pledged in good faith as security for such debt.
3. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transactions of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security.
4. The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus.
5. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.
   
6. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale.
   
7. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provisions of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold.
   
8. Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other trading markets
9. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation, Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, “and only when the purpose for soliciting, giving or taking such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it dan be registered and duly incorporated, or its authorized capital increased.
10. The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.
    
11. The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period
    
12. The sale of securities to any number of the following qualified buyers:
    a. Bank;
    b. Registered Investment house;
    c. Insurance company;
    d. Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions;
    e. Investment company; or
    f. Such other person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management (SRC, Sec. 10.1).

Question 702

How may a transaction be exempted from registration requirement?

Answer 702

Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied upon on such form and at such time as the Commission by rule may prescribe and with such notice shall pay to the Commission a fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities (SRC, Sec. 10.3).

Question 703

Who is charged with the promotion and development of E-Commerce in the country?

Answer 703

The Department of Trade and Industry (DT) along with relevant government agencies shall direct and supervise the promotion and development of electronic commerce in the country (ECA, Sec. 29).

Question 704

What is an Electronic Data Message?

Answer 704

An Electronic Data Message refers to information generated, sent, received or stored by electronic, optical or similar means (ECA, Sec. 5 (c)).

Note: Text messages have been classified as “ephemeral electronic communication” under Section 1(k), Rule 2 of the Rules on Electronic Evidence (Nuez v. Cruz-Apao, A.M. No. CA-05-18-P [Formerly OCA I.P.I. No. 05-80-CA-P], April 12, 2005).

Question 705

What is the legal effect of Electronic Data Messages?

Answer 705

Information shall not be denied validity or enforceability solely on the ground that it is in the form of an electronic data message purporting to give rise to such legal effect, or that it is merely incorporated by reference in that electronic data message (ECA, Sec. 6).

Question 706

What is an Electronic Document?

Answer 706

An Electronic Document refers to information or the representation of information, data, figures, symbols or other modes of written expression, described or however represented, by which a right is established on an obligation extinguished, or by which a fact may be proved and affirmed, which is received, recorded, transmitted, stored, processed, retrieved or produced electronically (ECA, Sec. 5(1).

Note: Under the Rules on Eléctronic Evidence, the term “ejectronic document” may be used interchangeably with “electronic data message” (A.M. No. 01-7-01-SC, also known as Rules on Electronic Evidence, Rule 2, Section 1(h), [hereinafter REE]).

Question 707

Is facsimile considered an electronic data message or an electronic document?

Answer 707

A facsimile transmission is not an ‘electronic data message or an “electronic document.” In an ordinary facsimile transmission, there exists an original paper-based information or data that is scanned, sent through a phone line, and re-printed at the receiving end. Ineluctably, the law’s definition of “electronic data message,” which is interchangeable with “electronic document, could not have included facsimile

transmissions, which have an original paper-based copy as sent and a paper-based facsimile copy as received (MCC Industrial Sales Corp. v. Ssangyong Corp., G.R. No. 170633, October 17, 2007).

Note: While Congress anticipated future developments in communications and computer technology when it drafted the law, it excluded the early forms of technology, like telegraph, telex and telecopy (except computer-generated faxes, which is a newer development as compared to the ordinary fax machine to fax machine transmission), when it defined the term “electronic data message.”

Question 708

What is the legal effect of Electronic Documents?

Answer 708

Electronic documents shall have the legal effect, validity or enforceability as any other document or legal writing, and:

1. Agreement required to be in writing. Where the law requires a document to be in writing, that requirement is met by an electronic document if the said electronic document maintains its integrity and reliability and can be authenticated so as to be usable for subsequent reference, in that:
   a. The electronic document has remained complete and unaltered, apart from the addition of any endorsement and any authorized change, or any change which arises in the normal course of communication, storage and display; and

b. The electronic document is reliable in the light of the purpose for which it was generated and in the light of all relevant circumstances;

c. Electronic document meets the requirement that the document is in writing under the immediately preceding rule whether the requirement therein is in the form of an obligation or whether the law simply provides consequences for the document not being presented or retained in its original form; and

2. When Original is required. Where the law requires that a document be presented or retained in its original form (Example: Original Document Rule), that requirement is met by an electronic document if :
   a. There exist a reliable assurance as to the integrity of the document from the time when it was first generated in its final form; and

b. That document is capable of being displayed to the person to whom it is to be presented: Provided, that no provision of this Act shall apply to vary any and all requirements of existing laws on formalities required in the execution of documents for their validity (ECA, Sec. 7).

Note: The E-Commerce Act does not vary the requirements of any existing laws on the formalities required in the execution of documents for their validity. But, for evidentiary purposes, an electronic document shall be the functional equivalent of a written document under existing laws. The E-Commerce act also does.not modify any statutory rule relating to the admissibility of electronic data messages or electronic documents, except the rules relating to authentication and best evidence.

Question 709

What is an Electronic Signature?

Answer 709

An Electronic Signature refers to any distinetive mark, characteristic and/or sound in electronic form, representing the identity of a person and attached to or logically associated with the electronic data message or electronic document or any methodology or procedures employed or adopted by a person and executed of adopted by such person with the intention of authenticating or approving an electronic data message or electronic document (ECA, Sec. 5 (e)).

Question 710

What is the legal effect of Electronic Signature?

Answer 710

(MRNA)

An electronic signature on the electronic document shall be equivalent to the signature of a person on a written document if the signature is an electronic signature and proved by showing that a prescribed procedure, not alterable by the parties interested in the electronic document, existed under which:

1. A Method is used to identify the party sought to be bound and to indicate said party’s access to the electronic document necessary for his consent or approval through the electronic signature;
   
2. Said method is Reliable and appropriate for the purpose for which the electronic document was generated or communicated, in the light of all circumstances, including any relevant agreement;
   
3. It is Necessary for the party sought to be bound, in order to proceed further with the transaction, to have executed or provided the electronic signature; and
   
4. The other party is Authorized and enabled to verify the electronic signature and to make the decision to proceed with the transaction authenticated by the same (ECA, Sec. 8).

Question 711

What are the presumptions relating to Electronic Signatures?

Answer 711

In any proceedings involving an electronic signature, it shall be presumed that:

1. The electronic signature is the signature of the person to whom it correlates; and

2. The electronic signature was affixed by that person with the intention of signing or approving the electronic document unless:

a. The person relying on the electronically signed electronic document knows or has notice of defects in or unreliability of the signature; or

b. The reliance on the electronic signature is not reasonable under the circumstances (ECA, Sec. 9).

Question 712

What are the requisites to determine if the information is “original” for legal purposes?

Answer 712

Where the law requires information to be presented or retained in its original form, that requirement is met by an electronic data message or electronic document if:

1. the integrity of the information from the time when it was first generated in its final form, as an electronic data message or electronic document is shown by evidence allunde or otherwise; and

2. where it is required that information be presented, that the information is capable of being displayed to the person to whom it is to be presented.

Note: These Applies whether the requirement therein is in the form of an obligation or whether the law simply provides consequences for the information not being presented or retained in its original form (ECA, Sec. 10).

Question 713

How is the integrity of an electronic document presented as original alleged to be retained in its original form assessed?

Answer 713

1. whether the information has remained complete and unaltered, apart from the addition of any endorsement and any change which arises in the normal course of communication, storage and display; and
2. the standard of reliability required shall be assessed in the light of the purpose for which the information was generated and in the light of all the relevant circumstances.

Question 714

How are Electronic Data Messages and Electronic Documents authenticated?

Answer 714

Electronic documents, electronic data messages and electronic signatures, shall be authenticated by demonstrating, substantiating and validating a claimed identity of a user, device, or another entity in an information or communication system (ECA, Sec. 11).

The Supreme Court provided that before any private electronic document offered as authentic is received in evidence, its authenticity must be proved by any of the following means:

a. By evidence that it had been digitally signed by the person purported to have signed the same;

b. By evidence that other appropriate security procedures or devices as may be authorized by the Supreme Court or by law for authentication of electronic documents were applied to the document; or

c. By other evidence showing its integrity and reliability to the satisfaction of the Judge (REE, Rule 5, Sec. 2).

Note: The person seeking to introduce an electronic document in any legal proceeding has the burden of proving its authenticity (ECA, Sec. 11 and REE, Rule 5, Sec. 1).

Question 715

How is the integrity of the Information and Communication System established?

Answer 715

In the absence of evidence to the contrary, the integrity of the information and communication system in which an electronic data message or electronic document is recorded or stored may be established in any legal proceeding-

1. By evidence that at all material times the information and communication system or other similar device was operating in a manner that did not affect the integrity of the electronic data message or electronic document, and there are no other reasonable grounds to doubt the integrity of the information and communication system;
2. By showing that the electronic data message or electronic document was recorded or stored by a party to the proceedings who is adverse in interest to the party using it; or
3. By showing that the electronic data message or electronic document was recorded or stored in the usual and ordinary course of business by a person who is not a party to the proceedings and who did not act under the control of the party using the record (ECA, Sec.11).

Question 716

What are the rules on the Admissibility and Evidential Weight of Electronic Data Messages or Electronic Documents?

Answer 716

In any legal proceedings, nothing in the application of the rules on evidence shall deny the admissibility of an electronic data message or electronic document in evidence:

1. On the sole ground that it is in electronic form; or

2. On the ground that it is not in the standard written form, and the electronic data message or electronic document meeting, and complying with the requirements under Sections 6 or 7 hereof shall be the best evidence of the agreement and transaction contained therein.

Note: In assessing the evidential weight of an electronic data message or electronic document, the reliability of the manner in which it was generated, stored or communicated, the rellability of the manner in which its originator was identified, and other relevant factor shall be given due regard (e-COMMERCE ACT, Sec. 12).

Question 717

What is the obligation of confidentiality?

Answer 717

Except for the purposes authorized under the E-Commerce Act, any person who obtained access to any electronic key, electronic data message or electronic document, book, register, correspondence, information, or other material pursuant to any powers conferred under this Act, shall not convey to or share the same with any other person.

Question 718

Access Device

Answer 718

(a) Access Device – means any card, plate, code, account number, electronic serial number, personal identification number, or other telecommunications service, equipment, or instrumental identifier, or other means of account access that can be used to obtain money, good, services, or any other thing of value or to initiate a transfer of funds (other than a transfer originated solely by paper instrument);

(Sec. 3, ACCESS DEVICES REGISTRATION ACT (R.A. No. 8484))

Question 719

The following acts shall constitute access device fraud and are hereby declared to be unlawful:

Answer 719

Section 9. Prohibited Acts. – The following acts shall constitute access device fraud and are hereby declared to be unlawful:

(a) producing, using, trafficking in one or more counterfeit access devices;

(b) trafficking in one or more unauthorized access devices or access devices fraudulently applied for;

(c) using, with intent to defraud, an unauthorized access device;

(d) using an access device fraudulently applied for;

(e) possessing one or more counterfeit access devices or access devices fraudulently applied for;

(f) producing, trafficking in, having control or custody of, or possessing device-making or altering equipment without being in the business or employment, which lawfully deals with the manufacture, issuance, or distribution of such equipment;

(g) inducing, enticing, permitting or in any manner allowing another, for consideration or otherwise to produce, use, traffic in counterfeit access devices, unauthorized access devices or access devices fraudulently applied for;

(h) multiple imprinting on more than one transaction record, sales slip or similar document, thereby making it appear that the device holder has entered into a transaction other than those which said device holder had lawfully contracted for, or submitting, without being an affiliated merchant, an order to collect from the issuer of the access device, such extra sales slip through an affiliated merchant who connives therewith, or, under false pretenses of being an affiliated merchant, present for collection such sales slips, and similar documents;

(i) disclosing any information imprinted on the access device, such as, but not limited to, the account number or name or address of the device holder, without the latter’s authority or permission;

(j) obtaining money or anything of value through the use of an access device, with intent to defraud or with intent to gain and fleeing thereafter;

(k) having in one’s possession, without authority from the owner of the access device or the access device company, an access device, or any material, such as slips, carbon paper, or any other medium, on which the access device is written, printed, embossed, or otherwise indicated;

(l) writing or causing to be written on sales slips, approval numbers from the issuer of the access device of the fact of approval, where in fact no such approval was given, or where, if given, what is written is deliberately different from the approval actually given;

(m) making any alteration, without the access device holder’s authority, of any amount or other information written on the sales slip;

(n) effecting transaction, with one or more access devices issued to another person or persons, to receive payment or any other thing of value;

(o) without the authorization of the issuer of the access device, soliciting a person for the purpose of:

1) offering an access device; or

2) selling information regarding or an application to obtain an access device; or

(p) without the authorization of the credit card system member or its agent, causing or arranging for another person to present to the member or its agent, for payment, one or more evidence or records of transactions made by credit card.

Question 720

Y alleged that he saw X behaved suspiciously as the latter kept looking around while transacting with an ATM as if he was being watched. Shortly, X removed the card reader and the Personal Identification Number (PIN) pad cover, with an attached camera (skimming device) from the ATM and exited the booth. Y further narrated that as X stepped out of the booth, he saw the latter carrying the skimming device and on the act of putting the PIN pad cover inside his bag. Y approached and restrained X and place him under citizen’s arrest for violation of RA 8484 for allegedly having in his possession a Device Making or Altering Equipment. RTC found X guilty on the ground that the Access Device Fraud under R.A. No. 8484 is mala prohibita crime hence, lack of criminal intent and good faith are not exempting circumstances. Is the RTC correct in convicting X?

Answer 720

No, even if a violation of Sec. 9(0 oF.A. No. 8484 is a mala prohibita, it must be established that X had the volition or intent to commit the prohibited act, which is the possession of the device-making or altering equipment. Before the presumption of intent to defraud arises under R.A. No. 8484, it must first be established by the prosecution that the offender had possession, control, or custody of the illicit device under the law. Hence, even when criminal intent is not required in a mala prohibita crime, an offender under Sec. 9 t) of R.A. No. 8484 must, at the very least have the animus possidendi of the device-making or altering equipment. Indeed, while it is not necessary that the prosecution prove that the accused has an underlying evil intent to violate the law, it must be proved that the accused had the consciousness, willingness, or desire in possessing the prohibited equipment. It is not enough that the offender had physical possession of the said equipment, there must be intent on the part of the offender to possess the same (Torres v. People, G.R. No. 255262, January 18, 2023).

Question 721

X was found in possession of CB Credit Card which bears the name “Juan Dela Cruz” which he used to purchase branded shoes at F Mall. Later on, it was proven that the credit card was a counterfeit. Is he liable under R.A. No. 8484?

Answer 721

Yes, under Section 9(a) and (e) of Republic Act No. 8484, the possession and use of an access device is not illegal. Rather, what is prohibited is the possession and use of a counterfeit access device. Therefore, the corpus delicti of the crime is not merely the access device, but also any evidence that proves that it is counterfeit. Herein, the access device used by X was a proven to be a counterfeit (Cruz v. People, G.R. No. 210266, June 7, 2017).

Question 722

Alice B. fraudulently obtained from Lisa H. various documents which reflects latter’s identity. Later on, Alice applied for credit card under Lisa’s name and personal circumstances. When the credit card was delivered by a messenger, Alice presented her two identification cards bearing her photo with the Lisa’ name and signature forged therein. She then signed the acknowledgement receipt as evidence that the envelope containing the credit card referred therein was delivered. The messenger then introduced himself as an NBI agent and apprehended Alice and was later on charged with violation of Section 9(e), R.A. No. 8484 for “possessing a counterfeit access device or access device fraudulently applied for.” Alice contends that she was never in possession of the subject credit card because she was arrested immediately after signing the acknowledgement receipt. Thus, she did not yet know the contents of the envelope delivered and had no control over the subject credit card. Is Alice correct?

Answer 722

No, Alice materially held the envelope containing the credit card with the intent to possess. Contrary to Alice contention that the credit card never came into her possession because it was only delivered to her, the above narration shows that she, in fact, did an active part in acquiring possession by presenting the identification cards purportedly Showing her identity as Lisa H. Certainly, she had the intention to possess the same.

Note: R.A. 8484 does not define the word “possession”, thus the Supreme Court use the definition under Article 523 of the Civil Code that is, is, “possession is the holding of a thing or the enjoyment of a right.” The acquisition of possession involves two elements: the corpus or the material holding of the thing, and the animus possidendi or the intent to possess it. Animus possidendi is a state of mind, the presence or determination of which is largely dependent on attendant events-in each case. It may belinferred from the prior or contemporaneous acts of the accused, as well as the surrounding circumstances (Soledad v. People, G,R. No. 184274, February 23, 2011).

Question 723

The following agreements, between or among competitors, are per se prohibited:

Answer 723

(1) Restricting competition as to price, or components thereof, or other terms of trade;

(2) Fixing price at an auction or in any form of bidding including cover bidding, bid suppression, bid rotation and market allocation and other analogous practices of bid manipulation;

Sec. 14(a), PHILIPPINE COMPETITION ACT (R.A. No. 10667)

Question 724

The following agreements, between or among competitors which have the object or effect of substantially preventing, restricting or lessening competition shall be prohibited:

Answer 724

(1) Setting, Kmiting, or controlling production, markets, technical development, or investment;

(2) Dividing or sharing the market, whether by volume of sales or purchases, territory, type of goods or services, buyers or sellers or any other means;

Sec. 14(b), PHILIPPINE COMPETITION ACT (R.A. No. 10667)

Question 725

It shall be prohibited for one or more entities to abuse their dominant position by engaging in conduct that would substantially prevent, restrict or lessen competition:

Answer 725

(a) Selling goods or services below cost with the object of driving competition out of the relevant market: Provided, That in the Commission’s evaluation of this fact, it shall consider whether the entity or entities have no such object and the price established was in good faith to meet or compete with the lower price of a competitor in the same market selling the same or comparable product or service of like quality;

(b) Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an anti-competitive manner except those that develop in the market as a result of or arising from a superior product or process, business acumen, or legal rights or laws;

(c) Making a transaction subject to acceptance by the other parties of other obligations which, by their nature or according to commercial usage, have no connection with the transaction;

(d) Setting prices or other terms or conditions that discriminate unreasonably between customers or sellers of the same goods or services, where such customers or sellers are contemporaneously trading on similar terms and conditions, where the effect may be to lessen competition substantially: Provided, That the following shall be considered permissible price differentials:

(1) Socialized pricing for the less fortunate sector of the economy;

(2) Price differential which reasonably or approximately reflect differences in the cost of manufacture, sale, or delivery resulting from differing methods, technical conditions, or quantities in which the goods or services are sold or delivered to the buyers or sellers;

(3) Price differential or terms of sale offered in response to the competitive price of payments, services or changes in the facilities furnished by a competitor; and

(4) Price changes in response to changing market conditions, marketability of goods or services, or volume;

(e) Imposing restrictions on the lease or contract for sale or trade of goods or services concerning where, to whom, or in what forms goods or services may be sold or traded, such as fixing prices, giving preferential discounts or rebate upon such price, or imposing conditions not to deal with competing entities, where the object or effect of the restrictions is to prevent, restrict or lessen competition substantially: Provided, That nothing contained in this Act shall prohibit or render unlawful:

(1) Permissible franchising, licensing, exclusive merchandising or exclusive distributorship agreements such as those which give each party the right to unilaterally terminate the agreement; or

(2) Agreements protecting intellectual property rights, confidential information, or trade secrets;

(f) Making supply of particular goods or services dependent upon the purchase of other goods or services from the supplier which have no direct connection with the main goods or services to be supplied;

(g) Directly or indirectly imposing unfairly low purchase prices for the goods or services of, among others, marginalized agricultural producers, fisherfolk, micro-, small-, medium-scale enterprises, and other marginalized service providers and producers;

(h) Directly or indirectly imposing unfair purchase or selling price on their competitors, customers, suppliers or consumers, provided that prices that develop in the market as a result of or due to a superior product or process, business acumen or legal rights or laws shall not be considered unfair prices; and

(i) Limiting production, markets or technical development to the prejudice of consumers, provided that limitations that develop in the market as a result of or due to a superior product or process, business acumen or legal rights or laws shall not be a violation of this Act:

Provided, That nothing in this Act shall be construed or interpreted as a prohibition on having a dominant position in a relevant market or on acquiring, maintaining and increasing market share through legitimate means that do not substantially prevent, restrict or lessen competition:

Provided, further, That any conduct which contributes to improving production or distribution of goods or services within the relevant market, or promoting technical and economic progress while allowing consumers a fair share of the resulting benefit may not necessarily be considered an abuse of dominant position:

Provided, finally, That the foregoing shall not constrain the Commission or the relevant regulator from pursuing measures that would promote fair competition or more competition as provided in this Act.

Sec. 15, PHILIPPINE COMPETITION ACT (R.A. No. 10667)

Question 726

What are the prohibited acts under the PCA?

Answer 726

1. Anti-competitive Agreements (Sec. 14)
2. Abuse of Dominant Position (Sec. 15)
3. Prohibited Mergers and Acquisitions (Sec. 16)

Question 727

Public Utility

Answer 727

ublic Utility. - Public Utility refers to a public service that operates, manages or controls for public use any of the following:

“(1) Distribution of Electricity;

“(2) Transmission of Electricity;

“(3) Petroleum and Petroleum Products Pipeline Transmission Systems;

“(4) Water Pipeline Distribution Systems and Wastewater Pipeline Systems, including sewerage pipeline systems;

“(5) Seaports; and

“(6) Public Utility Vehicles.

“All concessionaires, joint ventures and other similar entities that wholly operate, manage or control for public use the sectors above are public utilities.

“Nothing in this Act shall be interpreted as a requirement for legislative franchise where the law does not require any. No other person shall be deemed a public utility unless otherwise subsequently provided by law.

Question 728

Critical Infrastructure

Answer 728

(e) Critical Infrastructure refers to any public service which owns, uses, or operates systems and assets, whether physical or virtual, so vital to the Republic of the Philippines that the incapacity or destruction of such systems or assets would have a detrimental impact on national security, including telecommunications and other such vital services as may be declared by the President of the Philippines;

Question 729

Which government agency shall have jurisdiction and supervision over all public services?

Answer 729

The Public Service Commission shall have jurisdiction and supervision over all public services, including public utilities, and their franchises, equipment, and other properties, and in the exercise of its authority, it shall have the necessary powers and the aid of public force (C.A. No. 146, as amended by R.A. No. 11659, otherwise known as the “Public Service Act, as Amended”, Sec. 13(a) [hereinafter PSA, as amended by R.A. No. 11659]).

Question 730

Is there a difference in the regulation of public services owned or operated by government entities or government-owned or controlled corporations from privately-owned public services?

Answer 730

Public services, including public utilities, owned or operated by government entities or government-owned or -controlled corporations shall be regulated by the Commission in the same way as privately-owned public services.

Question 731

What are the government agencies that replaced the Public Service Commission?

Answer 731

All references to the Public Service Commission shall pertain to any Administrative Agency to which the powers and duties of the Public Service Commission were transferred by subsequent laws, such as but not limited to:

1. Civil Aeronautics Board (CAB);
2. Civil Aviation Authority of the Philippines (CAAP);
3. Department of Energy (DOE);
4. Department of Environment and Natural Resources (DENR);
5. Department of Information and Communications Technology (DICT);
6. Department of Transportation (DOT);
7. Energy Regulatory Commission (ERG);
8. Land Transportation Franchising and Regulatory Board (LTFRB);
9. Land Transportation Office (LTO);
   10. Local Water Utilities Administration (LWUA);
   11. Maritime Industry, Authórity (MARINA);
10. Metropolitan Waterworks and Sewerage System (MWSS);
11. National Telecommunications-Commission (NTC);
12. National Water Resources Board (NWRB);
13. Philippine National Railways (PNR);
    16. Philippine Ports Authority (PPA); and
    17. Toll Regulatory, Board (TRB) (PSA, as amended by R.A. No. 11659, Sec. 3).

Question 732

What is public service?

Answer 732

Public service includes every person that may own, operate, manage, or control in the Philippines, for hire or compensation with general or limited clientele, whether permanent, occasional or accidental, and done for general use business purposes, any common carrier, railroad, street railway, traction railway, sub-way motor vehicle, either for freight or passenger, or both with or without fixed route and whatever may be its classification, freight or carrier service of any class, express service, steamboat, or steamship line, pontines, ferries, and water craft, engaged in the transportation of passengers or freight or both, shipyard, marine railway, marine repair shop, wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and power, water supply and power, petroleum, sewerage system, wire or wireless communications system, wire or wireless broadcasting stations and other similar public services (C.A. No. 146, as amended by R.A. No. 2677, otherwise known as the “Public Service Act”, Sec. 13(b), [hereinafter PSA]).

Question 733

What is a public utility?

Answer 733

(ETPeWSU)

Public utility refers to a public service that operates, manages or controls for public use any of the following:

1. Distribution of Electricity;
2. Transmission of Electricity;
3. Petroleum and Petroleum Products 4. Pipeline Transmission Systems;
5. Water Pipeline Distribution Systems and Wastewater Pipeline Systems, including sewerage pipeline systems;
6. Seaports; and
7. Public Utility Vehicles

Question 734

Are all public services public utilities?

Answer 734

Not all public services are public utilities. No other person shall be deemed a public utility unless otherwise subsequently provided by law (PSA, as amended by R.A. No. 11659, Sec. 13(0).

A public service which is not classified as a public utility under R.A. No. 11659 shall be considered a business affected with public interest for purposes of Sections 17 and 18 of Article XIII of the Constitution (Id., Sec. 13(e)).

Question 735

What are public utilities and are therefore subject to the requirement that at least 60% of their capital stock must be owned by Filipinos?

Answer 735

The following are public utilities and are therefore subject to the requirement that at least 60% of their capital stock must be owned by Filipinos:

1. Distribution of Electricity refers to the conveyance of electric power by a distribution utility though its distribution system as defined by Sec. 4(n) of R.A. No. 9136, otherwise known as the “Electronic Power Industry Reform Act of 2001.” as amended (PSA, as amended by R.A. No. 11659, Sec. 2(f));
   
2. Transmission of Electricity refers to the conveyance of electricity through the high voltage backbone system, as defined by Sc. 4(cc) of R.A. No. 9136, as amended (PSA, as amended by R,A. No. 11659, Sec. 2(n));
   
3. Petroleum and Petroleum Products Pipeline Transmission System refer to the operation and maintenance of pipeline transmission systems to ensure an uninterrupted and adequate, supply and transmission of petroleum and petroleum products to the public and excludes petroleum pipeline systems operated exclusively for private use, or incidental to the operations of a distinct business (PSA, as amended by RA, No. 11659, Sec. 2(1));
4. Water Pipeline Distribution Systems and Wastewater Pipeline Systems refer to the operation and maintenance of water pipeline distribution systems to ensure an uninterrupted and adequate supply and distribution of potable water for domestic and other purposes and the operation and maintenance of wastewater pipeline systems, except deludging companies and septic tanks, to ensure public health and safety, as regulated by R.A. No. 6234, entitled “An Act Creating the Metropolitan Waterworks and
   Sewerage System and Dissolving the National Waterworks and Sewerage Authority; and for Other Purposes, as amended, and P.D. No. 198, otherwise known as the “Provincial Water Utilities Act of 1973”, as amended (PSA, as amended by R.A. No. 11659,
5. Sewerage Pipeline Systems refer to the operation and sewerage pipeline systems to ensure public health and safety, as regulated by R.A. No. 6234, as amended, and P.D. No. 198, as amended (PSA, as amended by R.A. No. 11659, Sec. 2(p));
6. Public Utility Vehicles (PUVs) refer to internal combustion engine vehicles that carry passengers and/or domestic cargo for a fee, offering services to the public, namely trucks-for-hire, UV express service, public utility buses (PUBs), public utility jeepneys (PUJs), tricycles, filcabs, and taxis: Provided, that transportation vehicles accredited with and operating through transport network corporations shall not be considered as public utility vehicles.

Question 736

What is a seaport?

Answer 736

Seaport refers to a place where ships may anchor or tie up for the purpose of shelter, repair, loading or discharge of passengers or cargo, or for other such activities connected with water-borne commerce, and including all the land and water areas and the structures, equipment and facilities related to these functions, as defined by charters of relevant authorities or agencies, such as the Philippine Ports Authority, Subic Bay Metropolitan Authority, PHIVIDEC Industrial Estate Authority, Cebu Port Authority, local government units, and other similar agencies or government bodies (PSA, as amended by R.A. No. 11659, Sec. (1)).

Question 737

What are the criteria for public service to be classified as a public utility?

Answer 737

(SMMA) Upon recommendation of the NEDA, the President may recommend to Congress the classification of a public service as a public utility on the basis of the following criteria:

1. The person or juridical entity regularly Supplies and transmits and distributes to the public through a network a commodity or service of public consequence;

2. The commodity or service is a natural Monopoly that needs to be regulated when the common good so requires For this purpose, natural monopoly exists when the market demand for a commodity or service can be supplied by a single entity at a lower cost than by two or more entities;

3. The commodity or service is necessary for the Maintenance of life and occupation of the public; and
4. The commodity or service is obligated to provide Adequate service to the public on demand. (RSA, as amended by R.A: No. 11659, Sec. 13(d))

Question 738

What are the requirements in granting a Certificate of Public Convenience (and Necessity) for public service as public utility?

Answer 738

(OFP)

The following conditions must concur in the grant of certificate of public convenience (and necessity) for public services which is a public utility:

1. The grantee must be a corporation or entity 60% of which is Owned by Filipino citizens if the public service is a public utility;
2. The grantee must have sufficient Financial capability to undertake the service;
3. The service will Promote public interest and convenience in a proper and suitable manner (AQUINO & SUNDANG, Reviewer on Commercial Law, supra at 197).

Question 739

What is the effect if a public service is not classified as a public utility?

Answer 739

Public services that are not public utilities must still secure the certificate or franchise to operate from the Commission. However, it follows that a public service that is not a public utility is not subject to the constitutional provision requiring Filipino ownership of 60% of its outstanding capital stock (AQUINO & SUNDIANG, supra at 196-

197). Notwithstanding any law to the contrary, nationality requirements shall not be imposed by the relevant Administrative Agencies on any public service not classified as a public utility (PSA, as amended by R.A. No. 11659, Sec. 13).

Question 740

What are the reasons for regulation of public service?

Answer 740

The regulation of public utilities is founded upon the police power of the State and statutes prescribing rules for the control and regulation of public utilities are considered valid exercise thereof. When private property is used for a public purpose and is affected with public interest, it ceases to be juris private only and becomes subject to regulation.

The regulation is to promote the common, good. Submission to regulation may be withdrawn by the owner by discontinuing use; but as long as use of the property is continued, the same is subject to public regulation (Republic vs, Manila Electric Company, G.R. No. 141314, November 15, 2002).

Question 741

What are the Constitutional limitations imposed on public utilities under Art. XII of the Constitution?

Answer 741

(CE50-APFO-ETMC)

The limitations imposed on public utilities under Sections 1, 6, 11, 17, 18, 19, and 22, Art. XII of the Constitution are as follows,

1. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to Citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens;
2. No franchise, certificate, or authorization shall be Exclusive in character;
3. No franchise, certificate, or authorization shall be for a longer period than 50 years;
   
4. A franchise or right shall be granted only under the condition that it shall be subject to Amendment, alteration, or repeal by the Congress when the common good so requires;
   The State shall encourage equity Participation in public utilities by the general public;
   
5. The participation of Foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital;
   
6. All the executive and managing Officers of the public utility that is a corporation or association must be citizens of the Philippines;
   
7. In times of national Emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately-owed public utility or business affected with public interest;
   
8. The State may, in the interest of national welfare or defense, upon payment of just compensation, Transfer to public ownership utilities and other private enterprises to be operated by the Government;
   
9. The State shall regulate or prohibit Monopolies when the public interest so requires; and
10. Combinations in restraint of trade or unfair competition are not allowed
    TAQUINO & SUNDIANG, supra at 209-210).

Question 742

Can any person operate a public service business without a certificate of public convenience?

Answer 742

It shall be unlawful for any individual, partnership, association, corporation or joint-stock company, their lessees, trustees, or receivers appointed by any court, or any municipality, province, or other department of the Government of the Philippines, to engage in any public service business without having first secured from the Commission a certificate of public convenience or certificate of public convenience and necessity (PSA, as amended by R.A. No. 11659, Sec. 18).

Question 743

Who can operate public service business without having been granted a certificate of public convenience?

Answer 743

1. Grantees of legislative franchises expressly exempting such grantee from the requirement of securing a certificate from the Commission, and

2. Concerns at present existing expressly exempted from the jurisdiction of the Commission, either totally or in part, by the provisions of Section 13 of this Act (Id.)

Question 744

What are the unlawful acts for public service?

Answer 744

(UDMU)

1. To provide or maintain any service that is Unsafe, improper, or inadequate, or withhold or refuse any service which can reasonably be demanded and furnished, as found and determined by the Commission in a final order which shall be conclusive and shall take effect in accordance with C.A. No. 146, upon appeal or otherwise (PSA, Sec: 19/af);

2. To make or give, directly or indirectly, by itself or through its agents attorneys or brokers, or any of them, Discounts or rebates on authorized rates, or grant credit for the payment of freight charges, or any undue of unreasonable preference or advantage to any person or corporation or to any locality or to any particular description of traffic or service, or subject any particular person or corporation or locality or any particular description of traffie to any prejudice or disadvantage in any respect whatsoever, to adopt, maintain, or enforce any regulation, practice or measurement which shall be found or determined by the Commission to be unjust, unreasonable, unduly preferential or unjustly discriminatory, in a final order whieh shall be conclusive and shall take effect in accordance with the provisions of C.A. No. 146, upon appeal or otherwise (Ibid., Sec. 19[b]);

3. To refuse or neglect, when requested by the Postmaster General or his authorized representative, to carry public Mail on the regular trips of any public land transportation service, upon such terms and conditions and for a consideration in such amount as may be:
a. Agreed upon between the Postmaster General and the public service carrier or
b. Fixed by the Commission in the absence of an agreement between the Postmaster General and the carrier (PSA, as amended by R.A. No.
11659, Sec, 19(c]); and

4. To refuse or neglect, when requested by the Administrative Agency to urgently Use, deliver or render the public service for the purpose of avoiding further loss on human, material, economic, or environment during a state of calamity (PSA, as amended by R.A. No. 11659, Sec. 19(d)).

Question 745

When can the President exercise his or her power to suspend or prohibit transactions or investment in a public service?

Answer 745

In the interest of national security, the President, after review, evaluation and recommendation of the relevant government department or Administrative Agency, may, within 60 days from receipt of such recommendation, suspend or prohibit any proposed merger or acquisition transaction, or any investment in a public service that effectively results in the grant of control, whether direct or indirect, to a foreigner or a foreign corporation (PSA, as amended by R.A. No. 11659, Sec. 23).

Question 746

Up to what extent can foreign nationals own the capital of entities engaged in the operation and management of the critical infrastructure?

Answer 746

Foreign nationals shall not be allowed to own more than 50% of the capital of entities engaged in the operation and management of critical infrastructure unless the country of such foreign nationals accords reciprocity to Philippine Nationals as may be provided by foreign law, treaty, or international agreement (PSA, as amended by R.A. No. 11659, Sec. 25)

Question 747

What is taxation?

Answer 747

The term “taxation” is defined as the power by which the sovereign raises revenue to defray the necessary expenses of government. Taxation is merely a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens (51 Am. Jur. 341; 1 Cooley 72-93).

Question 748

What is the rationale of taxation?

Answer 748

It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it.

Despite the natural reluctance to surrender part of one’s hard-earned income to the taxing authorities, every person who is able must contribute his share in the running of the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power (GIR v. Algue, Ic., G.R. No. L-28896, February 17, 1988)

Question 749

What is the nature of the power of taxation?

Answer 749

1. It is an inherent attribute of sovereignty - The power of taxation is an essential and inherent attribute of sovereignity, belonging as a matter of right to every independent government, without being expressly conferred by the people (Pepsi-U/a Bottling Company of the Philippines v. Municipality of Tanauan, Leyte, G.R. No. L-31156, February 27/ 1976)/

Note: The right of the State to impose taxes exists apart from the Constitution. As an inherent power of the State, the power to tax need not be granted under the Constitution. So long as the State exists, the power to tax exists. What the Constitution provides for are merely the constitutional limitations, but the Constitution is not the source of the power to tax.

On the other hand, the taxing power of provinces, cities, municipalities, and barangays is not clothed with the inherent power of taxation unlike a sovereign state.

2. It is legislative in character - Taxation is a power that is purely legislative. Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed, and where it shall be imposed.

Note: It is inherent in nature, but the legislature has the discretion to provide for how the power can be exercised. It is a pecuniary burden payable in money. It is levied within the territorial and legal jurisdiction of a state.

Note: The State can only impose and enforce its taxes within the Philippine territory.

5. It is not political in nature - the enforcement of tax laws is continued in force during the period of enemy occupation. Such laws are deemed to be the laws of the occupied territory and not of the occupying enemy.

Note: Hence, tax laws were considered effective during the Japanese occupation.

6. It is subject to constitutional and inherent limitations

Note: Inherent limitations are those inherent to the power to tax and need not be found even under the Constitution. On the other hand. Constitutional limitations are those found under numerous provisions in the Constitution.

Question 750

How is the power to tax a “power to destroy?”

Answer 750

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who is to pay it. So potent indeed is the power that it was once opined that “the power to tax involves the power to destroy” (Marshall Doctrine) (Tridharma Marketing Corp. v. CTA, G.R. No. 215950, June 20, 2016, citing Philippine Health Care Providers, Inc. v. CIR, G.R. No: 167330 (Resolution), September 18, 2009).

Note: However, “the web of unreality spun from Marshall’s famous dictum was brushed away by one stroke of Mr. Justice Holmes’s pen. The power to tax is not the power to destroy while this Court sits.” (Holmes doctrine), so it is-in-the Philippines.

Question 751

How do we reconcile the Marshall doctrine and the Holmes doctrine?

Answer 751

Although the power to tax involves the power to destroy, it must be exercised Within the inherent and constitutional limitations of the power. An example would be where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds.

Question 752

Taxation vs. Police Power vs. Eminent Domain

Answer 752

(1) as to nature
T: power to enforce contributions to raise government funds
PP: power to make and implement laws for the general welfare
ED: power to take private property for public use with just compensation

(2) as to authority who exercises power
T: may be exercised only by the government or its political subdivisions
PP: may be exercised only by the government or its political subdivisions
ED: may be a) exercised by the government or its political subdivisions; or b) granted to public service companies or utilities

(3) as to purpose
T: to raise revenue; the property (generally in the form of money) is taken for the support of the government
PP: the use of the property is “regulated for the purpose of promoting the general welfare; it is not compensable
ED: the property is “taken” for public use; it must be compensated.

(4) as to persons affected
T: operates upon a community or class of individuals
PP: operates upon a community or class of individuals
ED: operates on an individual as the owner of a particular property

(5) as to type of property
T: property is wholesome and is devoted to public use or purpose
PP: property is noxious or intended for a noxious purpose and as such, taken and destroyed
ED: property is wholesome and is devoted to public use or purpose

(6) as to effect
T: the money contributed becomes part of the public funds
PP: there is no transfer of title, but only restraint on the exercise of property rights
ED: there is transfer of the right to property

(7) as to rights affected
T: property right only
PP: property right and liberty
ED: property right only

(8) scope
T: plenary, comprehensive, supreme
PP: general power to make and implement law
ED: merely a power to take private property for public use

(9) as to benefits received
T: indirect benefit; it is assumed that the individual receives the equivalent of the tax in the form of protection and benefits he receives from the government
PP: indirect benefit; the person affected receives indirect benefit as may arise from the maintenance of a healthy economic standard of society
ED: direct benefit; he receives the market value of the property taken from him

(10) as to amount of imposition
T: generally, there is no limit on the amount of tax that may be imposed
PP: amount imposed should not be more than sufficient to cover the cost of the license and necessary expenses
ED: no amount imposed but rather, the owner is paid the market value of the property taken

(11) in relation to the constitution
T: is subject to certain constitutional limitations, including the prohibition against impairment of the obligation of contracts
PP: relatively free from constitutional limitations; superior to the impairment of contract provision.
ED: inferior to the impairment prohibition; the government cannot expropriate private property, which under a contract it had previously bound itself to purchase from the other contracting party.

Question 753

What is the extent of the power of taxation by a State?

Answer 753

It is a settled principle that the power of taxation by a State is plenary, comprehensive, and supreme and the principal check upon its abuse rests in the responsibility of the members of the legislature to their constituents. However, there are two kinds of limitations on the power of taxation: the inherent limitations and the constitutional limitations (Planters Products, Inc. v. Fertiphil Corp., G.R. No. 166006, March 14, 2008).

Question 754

What is the difference between an inherent limitation and a constitutional limitation?

Answer 754

Inherent limitations proceed from the very nature of the taxing power itself. The power to tax has very distinct and positive limitations some of which inhere in its very nature whether declared or not declared in the Constitution. On the other hand, constitutional limitations are limitations prescribed in the Constitution. (TABAG, Reviewer, supra at 6).

Question 755

What are the inherent limitations of taxation?

Answer 755

(PINES)

Inherent limitations are those limitations which exist despite the absence of an express constitutional provision. They are as follows:

1. Taxes must be exacted for a Public purpose;

2. International comity;

3. The power to tax is inherently legislative in nature (Non-delegability of the taxing power);

4. Government entities, agencies, and instrumentalities are generally Exempt from taxation; and

5. Territoriality or Situs

Question 756

What is the effect of a violation of the inherent limitations of taxation?

Answer 756

A violation of these inherent limitations can amount to the taking of property without due process of law (Pepsi-Cola v. Municipality of Tanauan, Leyte, G.R. No. L-31156, February 27, 1976). Hence, in this sense, it can be said that any tax law contravening any limitation of taxation, in effect, will likewise be unconstitutional (VITUG & ACOSTA, Tax Law and Jurisprudence, supra at 4-5).

Question 757

When is a tax considered for “public purpose”?

Answer 757

Money raised by taxation can be spent only for public purposes and not for the advantage of private individuals. (Pascual v. Secretary of Public Works, G.R. No. L-10405, December 29, 1960). However, “Public purpose” should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice.

Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true intention is to give undue benefit and advantage to a public enterprise, the law will not satisfy the requirement of “public purpose (Planters Products, Inc. v. Fertiphil Corp., G.R. No. 166006, March 14, 2008).

Question 758

What are other concepts related to “public purpose?”

Answer 758

1. Public purpose may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over anothen (i.e., where the favored industry is video industry)

2. There is no minimum number of persons that must benefit in order for a tax to be considered as being for public purpose It is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax, and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community but, the public welfare may be ultimately benefited by their promotion (Pascual v. Secretary of Public Works and Communications, G.R. No. 4-10405, December 29, 1960)

Question 759

What is the principle of international comity?

Answer 759

A state must recognize the génerally accepted tenets of international law, among which are the principles of sovereign equality among states and of their freedom from suit without their consent that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held and activities undertaken in that capacity (VITUG & ACOSTA, Tax Law and Jurisprudence, supra at 11).

Question 760

What is the rule on non-delegability of the power to tax?

Answer 760

Taxation is a power that is purely legislative (Chamber of Real Estate and Builders’ Association, Inc. v. Romulo, G.R. No. 160756, March 9, 2010). One of the settled maxims in constitutional law is that the power conferred upon the legislature to make laws cannot be delegated by that department to any other body or authority. Where the sovereign power of the State has located the authority, there it must remain; and by the constitutional agency alone, the laws must be made until the Constitution itself is changed (Abakada Guro Party List v. Ermita, G.R. No. 168056, September 1, 2005).

Note: This is embodied in the Latin maxim potestas delegata non delegari potest, which means “what has been delegated may not be delegated” (Quezon City PTCA Federation, Inc. v. Department of Education, G.R. No. 188720, February 23, 2016).

Question 761

What are the exceptions to the rule on the non-delegability of the power to tax?

Answer 761

(LPA)
1. Delegation to Local governments (CONST. Art. X., Sec. 5);

2. Delegation to the President of tariff powers by Congress under the Flexible Tariff Clause (CONST. Art. VI, Sec. 28, Par. 2) and Emergency Powers (CONST. Art. VI, Sec. 23, Par. 2); and

3. Delegation to Administrative agencies of the power to promulgate administrative rules and regulations (i.e., to the CIR and Secretary of Finance under Sec. 244 of the NIRG)

Question 762

What is the rationale of the exemption of government entities from taxation?

Answer 762

It is a matter of public policy (61 Am, Ju: 603) The State cannot be taxed without its consent and such consent being in derogation of its sovereignty, is to be strictly construed (Gomez v. Palomar, G.R. No. L-23645, October 29, 1968). Further, properties of the National Government as well as those of the local government units (LGUs) are not subject to tax as it will result in the absurd situation of the government taking money from one pocket and putting it in another (Board of Assessment Appeals of Laguna v. CTA, G,R. No. L-18125, May 31, 1963).

Question 763

What is a government instrumentality?

Answer 763

(NEVEA)
A government instrumentality refers to any agency of the National Government, which is:

1. Not integrated within the department framework;
2. Endowed with some, if not all, corporate powers;
   3. Vested with special functions or jurisdiction by law;
   4, Administering special funds; and
3. Enjoying operational autonomy, usually through a charter.

Note: This term includes regulatory agencies, chartered institutions and government-owned or -controlled corporations (E.O. No. 292, otherwise known as the “Administrative Code of 1987”, Sec. 2 (10)).

Question 764

When a government instrumentality is vested with corporate powers, is it ipso facto considered a GOCC?

Answer 764

No. When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers. Many government instrumentalities are vested with corporate powers but they do not become stock or non-stock corporations. These government instrumentalities are sometimes loosely called government corporate entities (Manila International Airport Authority v. CA, G.R. No. 155650, July 20, 2006).

Question 765

How are government agencies taxed?

Answer 765

There is a need to distinguish first:

1. Agencies performing governmental functions are exempt from tax, unless expressly taxed.

Note: Nothing can prevent the Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom (Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996).

2. Agencies performing proprietary functions are subject to tax, unless expressly exempted therefrom (DIMAAMPAO, Tax Principles, supra at 71).

Question 766

Cite examples on when a government entity was subject to tax through express provision of the law.

Answer 766

1. Under Sec. 27 of the NIRC, all corporations, agencies, or instrumentalities owned or controlled by the Government, shall pay such rate of tax upon their taxable income except:
   a. Government Service Insurance-System (GSIS)
   b. Social Security System (SSS):
   c. Philippine Health Insurance Corporation (PHIC)
   d. Local water districts; and
   e. Home Development Mutual Fund (NIRO, (as) amended by R.A. No. 11534, otherwise known as, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, (C)).
2. Under Sec. 133(0) of the Local Government Code (LGO) government-owned and controlled corporations are subject to real property tax because the taxing power of LUs shall not extend to the levy of taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, and LGUs only it does not mention an exemption regarding GOCCs).

Question 767

Is the Metropolitan Works and Sewerage System (MWSS) a GOCC?

Answer 767

No. Pursuant to EO 596 and RA 10149, the Executive and Legislative Branches have already categorized the MWSS notas a GOCC, but as a Government Instrumentality with Corporate Powers/Government Corporate Entity. (Metropolitan Waterworks and Sewarage System v. Central Board of Assessment Appeals, G.R. No. 215955, January 13, 2021, Lopez Case).

Note: Not being a GOCC, the MWSS is exempt from payment of real property tax.

Question 768

Why are government entities generally exempt from payment of real property tax?

Answer 768

Under Section 234(a) of the Local Government Code (LGC), real property owned by the Republic of the Philippines or any of its political subdivisions are exempt from payment of real property tax. This limitation to the local government’s taxing power recognizes the basic principle that local governments cannot tax the national government.

Question 769

Is there any exception to Section 234(a) of the LGC?

Answer 769

Yes. The exception is when the beneficial use of the real property owned by the Republic of the Philippines has been granted, for consideration or otherwise, to a taxable person. Beneficial use means actual use or possession of the property. Actual use refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof.

Note: in such a case, the tax exemption of the properties ceases when the beneficial or actual use is alleged and proven to have been extended to a taxable person (who will pay for it)

Question 770

What are the recognized government instrumentalities (or government corporate entities) exempt from real property tax?

Answer 770

1. Manila International Airport Authority;
2. Mactan International Airport Authority;
3. University of the Philippines;
   4. Bangko Sentral ng Pilipinas;
4. Philippine Rice Research Institute;
5. Laguna Lake Development Authority;
6. Fisheries Development Authority;
7. Bases Conversion Development Authority;
8. Philippine Ports Authority;
   10. Cagayan de Oro Port Authority;
   11. San Fernando Port Authority;
   12. Cebu Port Authority;
   13. Philippine National Railways;
   14. Philippine Economic Zone Authority;
   15. Government Service Insurance System; and
9. Social Security Commission
10. Metropolitan Waterworks and Sewerage System

Note: The list is not exclusive. As long as the government entity has the characteristics of an instrumentality (recall: NEVEA) and is not organized as a stock or non-stock corporation, it is exempt from real property tax.

Question 771

What is the principle of territoriality or situs of taxation?

Answer 771

The power to tax can only be exercised within the territorial jurisdiction of a taxing authority. The State may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another State and therein exercised or enjoyed. It is imposed by the State on persons, property, or excises within its jurisdiction, in accordance with the principle of territoriality (MAMALATEO, Reviewer, supra at 11).

Question 772

Are there exceptions to the principle of territoriality?

Answer 772

Yes. An exception would be where privity of relationship exists between the State and the taxpayer. In this case, the State can exercise its taxing powers over the taxpayer even outside its territory (i.e., the taxation of resident citizens for income derived from sources worldwide under Sec. 23 of the NIRC). (INGLES, Reviewer, supra at 10).

Question 773

May the power of taxation be exercised within the premises of embassies and diplomatic missions of a sending state located in the host or receiving State?

Answer 773

No. Such premises is considered, by fiction of international law, as an extension of the territorial jurisdiction of the sending state, thereby granting the sending state exclusive sovereignty within its premises (MAMALATEO, Reviewer, supra at 11).

Question 774

Over what subjects and objects does a State have the power to tax?

Answer 774

The taxing power off a state does not extend beyond its territorial limits, but within such limits it may tax persons, property, income, or business. No state may tax anything outside its jurisdiction without violating the due process clayse of the Constitution (Manila Gas Corp. v. CIR, G.R. No. L-42780, January 17, 1936).

Question 775

How do we apply the situs rules of taxation?

Answer 775

First, you have to classify the kind of tax being imposed. Second, apply the rules on situs depending on the kind of tax being imposed. The classification of taxes (for purposes of situs determination) are:

1. Personal, Poll, or Capitation tax - tax of a fixed amount imposed upon an individual, whether citizens or not, residing within a specified territory without regard to their property or the occupation in which he may be engaged (i.e., basic community tax or cedula)

2. Property tax - tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable method of apportionment (i.e., real estate tax)

3. Income tax

4. Transfer taxes
   a. Estate tax
   b. Donor’s tax
5. Business tax
   a. Value-added tax
   b. Other percentage tax
   c. Local business tax

Question 776

What are the rules on situs for personal, poll, or capitation tax?

Answer 776

The residence of the taxpayer. (TABAG, Reviewer, supra at 6).

Question 777

What are the rules on situs for property taxes?

Answer 777

The place of imposition and collection of property taxes shall be determined according to the following rules:

1. Real Property - where the property is located, regardless of whether the owner is a resident or a non-resident (lex rei sitae or lex situs) (First National Bank v. Maine, 284 U.S. 312 (1932) as cited in DIMAAMPAO, Tax Principles, supra at 58);

2. Personal Property - if the personal property is:
a. Tangible Personal Property where the property is physically located although the owner resides in another jurisdiction (51 Am. Jur.);
b. Intangible Personal Property, as a generaf rule, the situs is the domicile of the owner, applying the principle of mobilia sequuntur personam (movables follow the person). Except:
i. When the propertys has acquired a business situs in another jurisdiction; or
ii. When the law provides for the situs of the subject of tax (NIRC, Sec. 104).

Question 778

What is “mobilia sequuntur personam?”

Answer 778

The maxim mobilia sequuntur personam means “movables follow the person.” According to this maxim, the situs of personal property is the domicile of the owner (ABAN, Law of Basic Taxation, supra at 59).

Note: The maxim mobila sequuntur personam has been decried as a mere “fiction of law having its origin in considerations of general convenience and public policy, and cannot be applied to limit or control the right of the state to tax property within its jurisdiction”, and must “yield to established fact of legal ownership, actual presence and control elsewhere, and cannot be applied if to do so would result in inescapable and patent injustice.” (Wells Fargo Bank and Union Trust v. CIR, G.R. No. L-46720, June 28, 1940).

Question 779

What are the rules on situs of income tax?

Answer 779

The place of imposition and collection of income tax shall be determined by considering:

1. Residence of the taxpayer (if resident or non-resident)
   2. Citizenship of the taxpayer (if Filipino or alien)
   3. Source of income (if within or without the Philippines) (NIRC, Sec. 23)

Question 780

For purposes of income tax, which types of income are to be treated as sourced within the Philippines?

Answer 780

The following items of gross income shall be treated as gross income from sources within the Philippines:

1. Interest - those derived from sources within the Philippines (residence of the debtor);
2. Dividends - the amount received from a domestic corporation or a foreign corporation with 50% or more of its gross income for the 3-year period preceding the declaration was derived from sources within the Philippines
   Note: If it is less than 50%, then only in an amount which bears the same ratio to such dividends as the gross income from sources within the Philippines bears to its gross income from all sources is treated as income within the Philippines.
3. Services - those performed within the Philippines (partly within and partly without);
4. Rentals and Royalties - those from property located or if royalties are used in the Philippines;
5. Sale of Real Property - if the real property is located in the Philippines:
6. Sale of Personal Property - if the sale was made in the Philippines (regardless where it is purchased). Gains, profits and income from the sale of personal property produced within and sold without the Philippines, or produced without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without. (NIRC, Sec. 42 (A) in relation to Sec. 42 (E)).

Note: The gain from the sale of shares in a domestic corporation shall be treated as derived entirely from sources within the Philippines, regardless of where the said shares are sold (NIRC, Sec. 42 (E))

Question 781

What are the rules on situs of transfer tax?

Answer 781

The place of imposition and collection of estate and donor’s taxes shall be determined by considering three factors, namely:

1. Residence of the transferor (if resident or non-resident)
2. Citizenship of the transferror (if Filipino or alien)
3. Location of the property (if within or without the Philippines) (NIRC, Secs. 98 and 104)

Question 782

What are the rules on situs of business tax?

Answer 782

The place of imposition and collection on VAT Shall be the place where the transaction was made, i.e., where the property is sold and consumed or where the service is performed or to be performed (Cross-border Doctrine/Destination Principle) (CIR v. American Express International, Inc., G.R. No. 152609, June 29, 2005).

Question 783

What are the constitutional limitations of the taxing power?

Answer 783

Constitutional Limitations may either be:

1. Provisions directly affecting taxation: (PUTO-SERV-JAIL)
   a. Prohibition against imprisonment for non-payment of poll tax (CONST. Art. III, Sec. 20).;
   b. Progressive system of taxation (CONST. Art. VI, Sec. 28, Par. 1);
   c. Uniformity and equality of taxation (CONST. Art. VI, Sec. 28, Par. 1):
   d. Delegated authority of the President to impose Tariff rates, import and export quotas, tonnage, and wharfage dues (Flexible Tariff Clause)
   (CONST. Art. VI, Sec, 28, Par. 2);
   e. Origin of revenue and tariff bills and appropriations (CONST. Art. VI,
   f. Prohibition on the use of tax levied for Special purpose (CONST. Art. VI, Sec. 29, Par. 3);
   g. Votes required to grant tax Exemptions (CONST. Art. Vi, Sec. 28, l Par. 4);
   h. Tax exemption of Religious, charitable, and education entities (CONST. Art. VI, Sec. 28, Par. 3);
   i. President’s Veto power (CONST. Art. VI, Sec. 27, Par. 2);
   j. Non-impairment of the Supreme Court’s Jurisdiction (CONST. Art. VI, Sec. 30);
   k. Non-Appropriation or use of public money for religious purposes (CONST. Art. VI, Sec. 29, Par. 2);
   l. Non-taxability of non-stock, non-profit educational Institutions CONST. Art. XIV, Sec. 4, Par. 3); and
   m. LGU’s power to create its own sources of revenue CONST. Art. X, Sec. 5);
2. Provisions indirectly affecting taxation: (DENR-FPJ)
   a. Due process;
   b. Equal protection;
   c. Non-impairment of obligations of contracts;
   d. Religious freedom;
   e. Freedom of speech and expression;
   f. Presidential power to grant reprieves, commutations, and pardons, and remit fines and forfeitures after conviction by final judgement; and
   g. No taking of private property for public use without Just compensation.

Question 784

What is a poll tax?

Answer 784

Poll tax (also known as “community tax”) is a tax of a fixed amount on individuals residing within a specified territory, whether citizens or not, without regard to their property or the occupation in which they may be engaged (51 Am. Jur, 660, cited in Villanueva v. City of loilo, G.R. No. L-26521, December 28: 1968).

Question 785

What is the rationale for the rule that no person shall be imprisoned for nonpayment of poll tax?

Answer 785

One cannot be imprisoned for non-payment of poll tax because payment thereof is not mandatory. While a person may not be imprisoned for nonpayment of a cedula or poll tax, he may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides (People v. Linsangan, G.R. No. 43290, December 21, 1935).

Question 786

What is a progressive system of taxation?

Answer 786

Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also lifted from Adam Smith’s Canons of Taxation, stating that the subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected (Abakada Guro Party List v. Ermita, G.R. No. 168056, September 1, 2005).

Question 787

What is the effect if a tax is not progressive in nature?

Answer 787

The tax remains valid. The Constitution does not really prohibit the imposition of indirect taxes which, like VAT, are regressive. What it simply provides is that the Congress shall evolve a progressive system of taxation. The constitutional provision has been interpreted to mean simply that direct taxes are to be preferred and as much as possible, indirect taxes should be minimized. The mandate to Congress is NOT to prescribe, but to evolve a progressive tax system (Tolentino v. Secretary of Finance, G.R. No. 115455, October 30, 1995).

Question 788

What is the Flexible Tariff Clause?

Answer 788

The Congress may, by law, authorize the President to fix, within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties and imposts, within the framework of the national development program of the government (CONST. Art. VI, Sec. 28, Par. 2).

Question 789

Which body of Congress should initiate the filing of revenue or tariff bills?

Answer 789

All appropriation, revenue or tariff bills, bills authorizing the increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments (CONST. Art. VI, Sec. 24).

Note: It is not the law, but the bill which is required to originate exclusively from the House of Representatives. A bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole (Tolentino v. Secretary of Finance, G.R. No. 115455, August 25, 1994)

Question 790

What is the required vote of Congress for the granting of tax exemptions?

Answer 790

A law granting any tax exemption shall be passed with the concurrence of a majority of all the Members of the Congress (CONST. Art. VI, Sec. 28, Par. 4). The phrase “majority of all the members of the Congress” means atleast ½ plus 1 of all the members voting separately.

Note: In granting tax exemptions an absolute majority of the members of Congress is required; while in cases of withdrawal of such tax exemption, a relative majority is sufficient (DIMAAMPAO, Tax Principes, supra at 143).

Question 791

What is the rule on exemption of religious, charitable, and educational institutions from taxation?

Answer 791

Charitable institutions, churches and parsonages 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 (CONST. Art. VI, Sec. 28, Par. 3).

Question 792

What kind of tax is covered by the exemption of religious, charitable, and educational institutions?

Answer 792

The exemption is only from the payment of taxes assessed on such properties enumerated as property taxes, as contra-distinguished from excise taxes (Lladoc v. CIR, G.R. No. L-19201, June 16, 1965).

Question 793

What is the test of exemption from property tax of the religious, charitable, and educational institutions?

Answer 793

The test of exemption is the use of the property and not ownership (Abra Valley College, Inc. v. Aquino, G.R. No. 39086, June 15, 1988). The properties must be actually, directly, and exclusively used for religious, charitable, or educational purposes (Lladoc v. CIR, G.R. No. L-19201, June 16, 1965).

Question 794

What is the extent of the veto power of the President in relation to taxation?

Answer 794

The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object (CONST. Art. VI, Sec. 27, Par. 2).

Note: The item or items vetoed shall be returned to the Lower House of Congress together with the objections of the President. If after a reconsideration, 2/3 of all the members of such House shall agree to pass the bill, it shall be sent, together with the objection, to the other House by which it shall likewise be reconsidered, and if approved by 2/3 of all the Members of that House, it shall become a law (DIMAAMPAO, Tax Principles, supra at 122).

Question 795

What is the jurisdiction of the Supreme Court in tax-cases?

Answer 795

The Supreme Court shall have the power to review, revise, reverse, modity, or affirm on appeal or certiorari judgments or orders of lower courts in all cases involving:

1. The legality of any tax, impost, assessment, or toll; and
2. The legality of any penalty imposed in relation therefo (CONST. Art. VIII, Sec. 5, Par. 2(b))

Question 796

Must revenues be earned from educational activities to be exempt from tax?

Answer 796

No. A simple reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues and income must have also been earned from educational activities or activities related to the purposes of an educational institution. The phrase “all revenues” is unqualified by any reference to the source of revenues. Thus, so long as the revenues and income are used actually. directly, and exclusively for educational purposes, then said revenues and income shall be exempt from taxes and duties (La Sallian Educational Innovators Foundation, Inc. v. GIR, G.R. No. 202792, February 27, 2019)

Question 797

What is the nature of the LGU’s power to tax?

Answer 797

The power to tax is primarily vested in the Congress. However, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy.-The GC provides for the exercise by the LGUs of their power to tax, the scope thereof or its limitations, and the exemptions from taxation. Section 133 of the LGC prescribes the common limitations on the taxing powers of LGUs (Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996).

Question 798

When may the due process clause be invoked against the taxing power?

Answer 798

The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown as amounting to the confiscation of property, which would be a clear abuse of power. It then becomes the duty of the Supreme Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. It has also been held that where the assailed tax measure is beyond the jurisdiction of the State, or is not for a public purpose, or in case a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds (Sison, Jr. v. Ancheta, G.R. No. L-59431, July 25, 1984).

Question 799

Is the conduct of prior public hearings required for the validity of tax laws?

Answer 799

No. While the Sanggunians are required to conduct public hearings prior to the enactment of tax ordinances and revenue measures (LC, Secs. 186 and 187), the National Legislature, on the other hand, has the discretion whether or not they would conduct public hearings before the enactment of tax laws (SABABAN, Taxation Law Review, supra at 9).

Question 800

When may the non-impairment clause not be invoked?

Answer 800

The non-impairment clause is not applicable to tax exemptions granted by franchises or licenses. Specifically, it does not apply to:

1. Public utility franchisees - Under Section 11, Art. XII of the Constitution, the legislature can impair a grantee’s tranchise since a franchise or right is subject to amendment, alteration, or repeal by the Congress when public interest so requires (Cagayan Electric Power & Light Co., Ino, v. CIR, G.R. No. 60126, September 25, 1985); and
2. Licensees - The licensee takes his license subject to such conditions as the grantor sees fit to impose, including its revocation at pleasure. A license can thus be revoked at any time since it does not confer an absolute right (Republic v. Caguia, G.R. No. 168584, October: 15,2007)

Question 801

How has the constitutional limitations on religious freedom been applied to taxation by the courts?

Answer 801

In applying the constitutional limitation that no, law shall be made respecting an establishment of religion or prohibifing the free exereise thereof (non-establishment clause); and that the free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed (free exercise clause) (CONST. Art. III, Sec. 5), the Court has ruled:

1. A municipal license tax on sale of bibles and religious articles by a non-stock, non-profit missionary organization at minimal profit constitutes curtailment of religious freedom and worship which is guaranteed by the Constitution (American Bible Society v. City of Manila, G.R. No. L-9637, April 30, 1957);
2. The VAT registration requirement does not curtail religious freedom because the registration fee is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration (Tolentino v. Secretary of Finance, G.R. No. 115455, August 25, 1994).

Question 802

What are taxes?

Answer 802

Taxes are enforced proportional contributions from persons and properties, exacted by the State by virtue of its sovereignty for the support of government and for all public needs. Based on this definition, taxation has three elements, namely:

1. It is an enforced proportional contribution from persons and properties;
2. It is imposed by the State by virtue of its sovereignty; and
3. It is levied for the support of the government (Republic v. COCOFED, G.R. Nos. 147062-64, December 14, 2001).

Question 803

What are the requisites of a valid tax?

Answer 803

(JAPUL)

1. Either the person or property taxed must be within the Jurisdiction of the taxing authority (Reagan v. CIR, G.R. No. L-26379, December 27, 1969);
2. The Assessment and collection of certain kinds of taxes must guarantee against injustice to individuals, especially by providing notice and opportunity for hearing (compliance with due process) (VITUG & ACOSTA, Tax Law and Jurisprudence, supra at 12);
3. It should be for a Rublic purpose (Pascial v. Secretary of Public Works and Communications G.R. No. L-10405, December 29, 1960);
4. It should be Uniform and equitable (CONST. At. VI, Sec. 28, Par. 1); and
5. The tax must not impinge on the inherent and constitutional Limitations on the power of taxation (Basco v. Philippine Amusemehts and Gaming Corp., G.R No. 91649, May 14, 1991):

Question 804

What are the characteristics of taxes?

Answer 804

(SLFP6)

1. It is levied by, the State which has jurisdiction over the person or property;
2. It is levied by the Law-making (legislative) body of the state (ABAN, Law of Basic Taxation, supra at 2).
3. It is a Forced charge, imposition, or contribution; it operates in invitum (by force), and is in no way dependent upon the will or contractual assent, express or implied, of the person taxed (Panay Electric Co., Inc., v. Collector of Internal Revenue, G.R. No. L-10574, May 28, 1958);
4. It is generally Payable in money:
5. It is Proportionate in character (ABAN, Law of Basic Taxation, supra at 2);
6. It is levied on Persons and property;
7. It is levied for Public purpose/s;
8. It is Paid at regular periods or intervals; and
9. It is Personal to the taxpayer (Id. at 3).

Question 805

Explain the sound tax system.

Answer 805

(FAT) The following principles have been suggested in order to make a sound tax system, but not necessarily to make the tax law valid:

1. Fiscal Adequacy - sources of government revenue must be sufficient to meet government expenditures and other public needs;
2. Administrative Feasibility - the tax law should be capable of convenient, just, and effective administration, as well as easy compliance by the taxpayer;
3. Theoretical Justice - the tax burden should be proportionate to the taxpayer’s ability to pay. Taxation must be uniform and equitable (CONST. Art. VI, Sec. 28, Par. 1).

Question 806

What is the effect if the principles of a sound tax system are not complied with?

Answer 806

A tax law will retain its validity even if it is not in consonance with the principles of fiscal adequacy and administrative feasibility because the Constitution does not expressly require so. These principles are only designed to make our tax system sound. However, if a tax law runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable (DIMAAMPAO, Tax Principles, supra at 36).

Question 807

Tax vs. Debt

Answer 807

(1) as to basis
Tax: based on law
Debt: based on contract or judgment

(2) as to effect of non-payment
Tax: taxpayer may be imprisoned for his failure to pay the tax (except poll tax)
Debt: no imprisonment for failure to pay debt

(3) as to mode of payment
Tax: generally payable in money
Debt: payable in money, property, or services

(4) as to assignability
Tax: not assignable
Debt: assignable

(5) as to interest
Tax: does not draw interest unless delinquent
Debt: draws interest if stipulated or delayed

(6) as to authority
Tax: imposed by public authority
Debt: imposed by private individuals

(7) as to prescription
Tax: determined by NIRC
Debt: determined by Civil Code

Question 808

Tax vs. Toll fee

Answer 808

(1) as to definition
Tax: enforced proportional contribution from persons and property
Toll fee: a consideration which is paid for the use of a property which is of a public nature

(2) as to basis
Tax: a demand of sovereignty
Toll fee: a demand of proprietorship

(3) as to amount
Tax: determined by the legislature
Toll fee: depends upon the cost of construction or maintenance of the public improvement used

(4) as to authority
Tax: may be imposed only by the government
Toll fee: may be imposed by the government or private individuals or entities

Question 809

Tax vs. License Fee

Answer 809

(1) as to purpose
Tax: imposed for revenue purposes
License fee: imposed for regulatory purposes

(2) as to basis
Tax: imposed under the power of taxation
License fee: imposed under the police power of the state

(3) as to amount
Tax: no limit
License fee: limited to the cost of the following: a) issuance of license; and b) inspection and surveillance, except for non-useful occupation

(4) as to time of payment
Tax: normally paid after the start of business operations
License fee: normally paid before commencement of the business operations

(5) as to effect of non-payment
Tax: does not make the business illegal
License fee: makes the business illegal

(6) as to nature
Tax: taxes, being the lifeblood of the State, cannot be surrendered except for lawful consideration
License fee: license fee may be with or without consideration

Question 810

What are the kinds of taxes?

Answer 810

1. As to Subject Matter or Object

a. Personal, Capitation, or Poll Tax - a tax of a fixed amount imposed upon all persons of a certain class within the jurisdiction of the taxing power without regard to the amount of their property, or the occupations or businesses in which they may be engaged (e.g., community tax).

b. Property Tax - a tax imposed on all properties or all properties of a certain class within the jurisdiction of the taxing power (e.g., real property tax).

c. Excise or Privilege Tax - a charge imposed upon the performance of an act, the enjoyment of a privilege, or engaging in an occupation, profession, or business (e.g., donor’s tax) (ABAN, Law of Basic Taxation, supra at 23-24).

2. As to who bears the Burden or Incidence a. Direct tax - one which is demanded from the very person intended to be the payor, although it may ultimately be shifted to another (e.g., income tax)

b. Indirect tax - a tax which is demanded from one person with the expectation and intention that he shall indemnify himself at the expense of another (e.g., VAT) (Maceda v. Macaraig, G.R. No. 88291, May 31, 1991).

3. As to Determination of Amount or Tax Rates

a. Specific tax - a tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement; it requires no valuation other than a listing or classification of the objects to be taxed (e.g., taxes on distilled spirits, wines, and fermented liquors).

b. Ad Valorem tax - a tax of a fixed portion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined (e.g., rea property tax, customs duties).

c. Mixed tax - a tax having both the characteristics of specific tax and ad valorem tax (ABAN, Law. of Basic Taxation, supra at 27).

4. As to Purpose

a. General or Fiscal - a tax imposed for the general or ordinary purposes of the government, or to raise revenue for governmental needs (e.g., income tax);

b. Special, Regulatory, or Sumptuary - a tax imposed for a special purpose, to achieve some social or economic ends irrespective of whether revenue is actually raised or not (ABAN, Law of Basic Taxation, supra at 26-27).

5. As to Scope or Authority Imposing the tax a. National (Internal Revenue Taxes) a tax levied by the National Government, through Congress, and administered by the BIR or the Bureau of Customs (BOCK

b. Local or Municipal (Real Property Tax, Municipal Tax) - a tax levied by the local government, through their respective Sanggunians, and administered by the local executive government through the local treasurer

6. As to Rate

a. Progressive tax - one where the tax rate increases as the tax base or bracket increases.

b. Regressive tax - one where the tax rate decreases as the tax base increases (e.g., VAT).

7. Proportionate tax - one where the tax rate is based on a fixed percentage of the amount of the property, receipts, or other bases to be taxed (id. at 27-28).

Question 811

What are the different theories of taxation?

Answer 811

1. Lifeblood Theory - The “lifeblood theory” considers taxes as the lifeblood of the nation through which government agencies continue to operate and with which the State effects its functions for the welfare of its constituents (CIR v. CA, G.R. No. 106611, July 21, 1994). Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself (CIR v. Algue, Inc., G.R. No. L-28896, February 17, 1988).
2. Necessity Theory - The “necessity theory” considers taxation as a power emanating from necessity. It is a necessary burden to preserve the State’s sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the citizenry and those which come within the State’s territory, and facilities and protection which a government is supposed to provide. Without taxes, the government cannot fulfill its mandate of promoting the general welfare and well-being of the people (CIR v. Bank of the Philippine Islands, G.R: No, 134062, April 17, 2007).
   
3. Benefits-Protection Theory or Doctrine of Symbiotic Relationship - Under the “benefits-protection theory”, taxation arises because of the reciprocal relation of protection and support between the State and the taxpayers. The State gives protection and for it to continue giving protection, it’must be supported by taxpayers in the form of taxes. Such enjoyment also extends to those members of a State who do not pay taxes because they are not able to do so (ABAN, supra at 7).

Question 812

What are the exceptions to the strict construction of tax exemptions?

Answer 812

(SPEG-L)

1. When the Statute granting exemption provides for liberal construction thereof (DIMAAMPAO, Tax Principles, supra at 144);

2. In case of Special taxes relating to special cases and affecting only special classes of persons;
3. if exemptions refer to Public property (DIMAAMPAO, Tax Principles, supra at 145);
4. In cases of exemptions granted to traditional persons who are Exempt, such as religious, charitable, and educational institutions (ABAN, Law of Basic Taxation, supra at 119);
5. In cases of exemptions in favor of the Government, its political subdivisions, or instrumentalities (Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991); or
6. if the taxpayer falls within the purview of exemption by clear Legislative intent (CIR v. Arnoldus Carpentry Shop, G.R. No. 71122, March 25, 1988).

Question 813

What is the doctrine of imprescriptibility of taxes?

Answer 813

The doctrine of imprescriptibility of taxes is a well-settled doctrine both in this jurisdiction as well as in that of the United States, that, unless expressly provided by law, the statutes of limitation do not run against the State, and that this principle is applicable to actions brought for the collection of taxes (Estate of Juan De La Viña v. Government of the Philippine Islands, G.R. No. 42669, January 29, 1938). The law of prescription, being a remedial measure, should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer (Republic v. Ablaza, G.R. No. L-14519, July 26, 1960).

Question 814

What is double taxation?

Answer 814

Double taxation is defined as taxing the same person twice by the same jurisdiction for the same thing (Victorias Milling v. Municipality of Victoria, Negros Occidental, G.R. No. L-21183, September 27, 1968).

Question 815

Is double taxation unconstitutional?

Answer 815

No. There is no constitutional prohibition against double taxation in the Philippines.

It is something not favored, but is permissible, provided that some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform (Villanueva v. City of Iloilo, G.R. No. L-26521, December 28, 1968).

Question 816

What are the two kinds of double taxation?

Answer 816

1. Direct double taxation (strict sense); and

2. Indirect double taxation (broad sense) (INGLES, Reviewer, supra at 21).

Question 817

What constitutes direct double taxation?

Answer 817

1. The same property must be taxed twice when it should be taxed but once; and

2. Both taxes must be imposed:
a. On the same property or subject matter;
b. For the same purpose;
c. By the same State, government, or taxing authority;
d. Within the same jurisdiction or taxing district;
e. During the same taxing period, and
f. They must be the same kind or character of lax (Villanueva v. City of lloilo, G.R-No. L-26521, December 28, 1968)

Question 818

What constitutes indirect double taxation?

Answer 818

It extends to all cases in which there is a burden of two or more pecuniary impositions. It is usually allowed as long as there is no violation of the equal protection and uniformity clauses of the Constitution.

Question 819

What are the types of indirect double taxation?

Answer 819

1. International Juridical Double Taxation - the imposition of comparable taxes in two or more states of the same matter and for identical periods (CIR v. SC Johnson & Son, Inc., G.R. No. 127105, June 25, 1999)

2. Local Double Taxation - happens when an LGU will impose a tax that is already imposed by the National Government or by another LGU that has territorial jurisdiction over such LGU (RECALDE, supra at 65).

Question 820

What is international juridical double taxation?

Answer 820

International juridical double taxation is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. This double taxation usually takes place when a person is a resident of the first contracting State and derives income from or owns capital in the other contracting State and both States impose taxes on such income and capital.

Question 821

What are the methods by which a tax treaty eliminates double taxation?

Answer 821

1. First Method: It sets out the respective rights to tax of the State of source and of the State of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting States; however, for other items of income or capital, both States are given the right to tax, although the amount of tax that may be imposed by the State of source is limited

2. Second Method: The State of source is given a full or limited right to tax together with the State of residence. In this case, the treaties make it incumbent upon the State of residence to allow relief in order to avoid double taxation. There are two methods of relief under the second method. These are:
a. Exemption Method - The income or capital which is taxable in the State of source or situs is exempted in the State of residence;
b. Credit Method - Although the income or capital which is taxed in the State of source is still taxable in the State of residence, the tax paid in the former is credited against the tax levied in the latter.

Question 822

What are the modes of eliminating double taxation?

Answer 822

(CREDT)

1. Tax Credits - an amount subtracted from an individual’s or entity’s tax liability to arrive at the total tax liability; a tax credit reduces the tax due, including whenever applicable, the income tax that is determined after applying the corresponding tax rates to taxable income (CIR v. Central Luzon Drug Corp., G.R. No. 159647, April 15, 2005);

2. Reduction of the Philippine Income Tax Rate - the tax rate applicable to dividends received by a nonresident foreign corporation (NRFC) within the Philippines is imposed a lower rate of 15%, on the condition that the country in which the NRFC is domiciled shall allow a credit against the tax due from the NRFC, which taxes are deemed to have been paid in the Philippines (NIRC, Sec. 28 (B)(5)(b); CIR v. Procter & Gamble PHL Manufacturing Corp., G.R. No. 66838, December 2, 1991);

3. Tax Exemptions - an immunity or privilege; it is freedom from a charge or burden to which others are subjected (Philippine Long Distance Telephone Co. v. City of Bacolod, G.R. No. 149179, July 15, 2005);
4. Tax Deductions - an amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due (CIR v. Central Luzon Drug Corp., G.R. No. 159647, April 15, 2005); and
   
5. Tax Treaties - agreement between two countries specifying what items of income will be taxed by the authorities of the country where the income is earned (Air Canada v. CIR, G.R. No. 169507, January 11, 2016).

Question 823

What are the forms of escape from taxation?

Answer 823

(SAvE-CTEx)

The “doctrine of escape from taxation” permits the taxpayer to minimize (if not to escape) payment of tax by lawful means. The forms of escape from taxation are the following:

1. Shifting of tax burden;
2. Tax Avoidance;
   3. Tax Evasion;
   4. Capitalization;
   5. Transformation; and
3. Tax Exemption (VALENCIA & ROXAS, Income Taxation, p. 32).

Question 824

What is the concept of shifting the tax burden?

Answer 824

It is the transfer of the tax burden to another, the imposition of tax is transferred from the statutory taxpayer to another without violating the law (e.g., VAT) (Id. at 34).

Question 825

To what kind of taxes does shifting apply?

Answer 825

Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into either direct tax or indirect tax. It is upon indirect taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered (CIR v. Philippine Long Distance Telephone Co., G R. No: 140230, December 15, 2005).

Question 826

What is tax avoidance?

Answer 826

Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arm’s length (CIR v. The Estate of Benigno Toda, Jr., G.R. No. 147188, September 14, 2004).

Question 827

What is tax evasion?

Answer 827

Tax evasion is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

Question 828

What is a tax exemption?

Answer 828

Tax exemption is the grant of immunity, express or implied (or contractual), to particular persons or corporations or to persons or corporations of a particular class from a tax which persons or corporations generally within the same State or taxing district are obliged to pay (Philippine Long Distance Co. v. City of Bacolod, G.R. No. 149179, July 15, 2005). It is freedom from a charge or burden to which others are subjected (Greenfield v. Meer, G.R. No. 156, September 27, 1946).

Question 829

Tax Amnesty vs. Tax exemption

Answer 829

(1) as to nature
TA: operates as a general pardon. It is an absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate
TE: freedom, immunity, or privilege from the burden of taxation to which others are subjected

(2) as to scope
TA: it is immunity from all criminal and civil liabilities arising from non-payment of taxes
TE: tax exemption is immunity from civil liability only

(3) as to application
TA: applies to past tax periods, hence of retroactive application
TE: has prospective application

Question 830

What are the kinds of tax exemptions?

Answer 830

1. As to Basis
   a. Constitutional Exemptions - immunities from taxation which originate from the Constitution; or
   b. Statutory Exemptions those which emanate from legislation.
2. As to Form
   a. Express - when exemptions are expressly granted by the Constitution, statutes, treaties, ordinances, franchises, or contracts;
   b. Implied - whenever particular persons, properties, or excises are deemed exempt as they fall outside the scope of the taxing provision itself (DE LEON, The Fundamentals of Taxation, p. 62); or
   c. Contractual - exemptions in consideration of a contractual agreement with the government (VITUG & ACOSTA, Tax Law and Jurisprudence, supta at 35).
3. As to Extent
   а. Total Exemption - Connotes absolute immunity; or
   b. Partial Exemption - One where collection of a part of the tax is dispensed with (ABAN, Law of Basic Taxation, supra at 17).

Question 831

What is the general rule on the revocation of tax exemptions?

Answer 831

A grant of exemption is an act of liberality which could be taken back by the government. Since taxation is the rule and exemption is the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority (Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996).

Question 832

When are tax exemptions irrevocable?

Answer 832

Tax exemptions are irrevocable when:

1. Where the exemption was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and is thus covered by the non-impairment clause of the Constitution (Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996).
2. Where the tax exemption is granted by the Constitution, its revocation may be effected through constitutional amendment only (Meralco v. Province of Laguna, G.R. No. 131358, May 5, 1999).
3. Where the tax exemption is in the form of a special law and not by a general law, the special and local statute applicable to the particular case is not repealed by the later statute which is general in its terms, provisions, and application even if the terms of the general act are broad enough to include the cases in the special law, unless there is manifest intent to repeal or alter the special law (Province of Misamis Oriental v. Cagayan Electric Power & Light Co., Inc., G.R. No. L-45355, January 12, 1990).

Question 833

When does compensation or set-off take place?

Answer 833

Compensation or set-off takes place when two persons, in their own right, are creditors and debtors of each other (CIVIL CODE, Art. 1278).

Question 834

What is the general rule on the compensation or set-off of taxes?

Answer 834

As a general rule, no set-off is admissible against the demands for taxes levied for general or local governmental purposes since a tax liability is a legal and not a contractual obligation. Taxes cannot be subject to compensation because the government and the taxpayer are not creditors and debtors of each other (Philex Mining Corp. v. CIR, G.R. No. 125704, August 28, 1998).

Question 835

When may taxes be subject to offsetting?

Answer 835

As exceptions to the general rule, taxes may be subject to compensation or set-off in the following:

1. When the determination of the taxpayer’s liability is intertwined with the resolution of the claim for tax refund of erroneously or illegally collected taxes under Section 229 of/the NIRC/CIR v. Toledo Power Company, G.R. No. 196415, December 02, 2015); or

2. Where both claims of the government and the taxpayer against each other have already become due, demandable, and fully liquidated (Domingo v. Garlitos, G.R. No. L-18994, June 29, 1963)

Question 836

What is meant by compromise?

Answer 836

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced (CIVIL CODE, Art. 2028).

Question 837

Distinguish compromise from abatement.

Answer 837

Compromise involves a reduction of the taxpayer’s liability, while abatement of tax means that the entire tax liability of the taxpayer is cancelled (ABAN, Law of Basic Taxation, supra at 235).

Question 838

When is compromise allowed in taxation?

Answer 838

Compromises are allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering into it is duly authorized to do so (VITUG & ACOSTA, Tax Law and Jurisprudence, supra at 48).

Question 839

What is tax amnesty?

Answer 839

Tax amnesty refers to the absolute waiver by a sovereign of its right to collect taxes and its power to impose penalties on persons or entities guilty of violating a tax law. Simply put, it partakes of an absolute relinquishment by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority (Bureau of Internal Revenue v. Samuel Cagang, G.R. No. 230104, March 16, 2022).

Question 840

What are the purposes of tax amnesty?

Answer 840

1. To grant a general reprieve to tax evaders who wish to come clean by giving
2. To give a government a chance to collect uncollected tax from tax evaders them an opportunity to straighten out their records. (ld.); and without having to go through the tedious process of a tax case (Bañas, Jr. v. Court of Appeals, G.R. No. 102967, February 10, 2000).

Question 841

What are the powers and duties of the Bureau of Internal Revenue?

Answer 841

(AFEGiR)

The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance and its powers and duties shall comprehend:

1. The Assessment and collection of all national internal revenue taxes, fees, and charges;
2. The enforcement of all Forfeitures, penalties, and fines connected therewith;
3. The Execution of judgments in all cases decided in its or by the Court of Tax Appeals and the ordinary courts;
   4. Give effect to and administer the supervisory and police powers conferred to it by the Tax Code or other laws (NIRC, Sec 2); and
   5. Recommend to the Secretary of Finance all the needful rules and regulations for the effective enforcement of the provisions of the NIRC (NIRC, Sec. 244).

Question 842

What are the powers of the Commissioner of Internal Revenue (CIR)?

Answer 842

(IDOMS)

1. To Interpret tax laws and to Decide cases (NIRC, Sec. 4);
2. To Obtain information, and to summon, examine, and take testimony of persons (NIRC, Séc. 5);
3. To Make assessments and prescribe additional requirements for tax administration and enforcement; and
4. To Suspend the business operations of a taxpayer (NIRE, Sec. 115).

Question 843

What are BIR Rulings?

Answer 843

BIR rulings are administrative opinions issued by the CIR interpretative of a provision of a tax law (ABAN, Law of Basic Taxation, supra at 149).

Question 844

What cases are within the power of the CIR to decide?

Answer 844

(DROP) The CIR shall have the power to decide:

1. Disputed assessments;
2. Refunds of internal revenue taxes, fees or other charges;
3. Penalties imposed in relation thereto; or
4. Other matters arising under-the NIRC or other laws or portions thereof administered by the Bureau of Internal Revenue (NIRC, Sec. 4, Par 2).

Note: Decisions of the CIR are subject to the exclusive appellate jurisdiction of the CTA (NIRC, Sec. 4).

Question 845

May an ordinary asset be converted into a capital asset and vice versa?

Answer 845

Yes.

a) From an Ordinary asset to a Capital asset - Generally, property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond the taxpayer’s control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of the property change its character previously established as a business property. However, properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two years prior to the consummation of the taxable transactions involving the properties.

b) From a Capital asset to an Ordinary asset - Property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tends to show that the activity was in furtherance of or in the court os the taxpayer’s trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable. However, if the inherited property is substantially improved or very actively sold or both, it may be treated as held primarily for sale to customers in the ordinary course of the heir’s business.

Question 846

How is a gain from dealings in property computed?

Answer 846

The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted bases for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received (NIRC, Sec. 40 (A)).

Question 847

What is the basis of determining the gain or loss from sale or exchange of property?

Answer 847

If the property is acquired:

1. By Purchase - basis is the cost of the property;
2. By Inheritance - basis is the fair market price or value as of the date of acquisition;
3. By Gift - the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift, the basis shall be such fair market value for the purpose of determining loss;
4. For less than an adequate consideration in money or money’s worth - the basis is the amount paid by the transferee for the property (NIRC, Sec. 40 (B));

5. Through tax-free exchange transactions:
a. Shares of stock received by transferor - original basis of the property to be transferred less the money received and fair market value of the other property received, plus the amount treated as dividend of the shareholder and the amount of any gain that was recognized on the exchange;
b. Property transferred in the hands of the transferee - same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer (R.M.C. No. 19-2022).

Question 848

What are the types of gains or losses from dealings in property?

Answer 848

Gains or losses from dealings in property may be ordinary or capital (NIRC, Sec. 22 (Z) and Sec. 39 (A)(2)).

Question 849

When are capital gains subject to capital gains tax (CGT) instead of regular tax?

Answer 849

CGT is assessed on the gains arising from the following transactions:

1. Sale, barter, exchange, or other disposition of shares of stock in a domestic corporation NOT traded in the stock exchange; and

Note: Net gains from the sale of shares of stock in a foreign corporation are subject to regular tax.

2. Sale, exchange, or other disposition of real property (NIRC, Sec. 24 (C) and (D), Sec. 27 (D)(2) and (5), and Sec. 28 (A)(7)(c) and (B)(5)(c)).

Question 850

What are the rates of CGT imposed on taxpayers?

Answer 850

(1) individuals, estates, and trusts
a. On sale of shares in domestic corporations NOT traded in the stock exchange - 15% of net capital gain
b. On sale of real property - 6% of gross selling price or FMV, whichever is higher

(2) domestic corporations
a. On sale of shares in domestic corporations NOT traded in the stock exchange - 15% of net capital gain
b. On sale of real property - 6% of gross selling price or FMV, whichever is higher

(3) resident foreign corporations
a. On sale of shares in domestic corporations NOT traded in the stock exchange - 15% of net capital gain
b. On sale of real property - no provision for capital gains for sale of realty. Hence, subject to regular corporate income tax rate.

(4) nonresident foreign corporations
a. On sale of shares in domestic corporations NOT traded in the stock exchange - 15% of net capital gain
b. On sale of real property - no provision for capital gains for sale of realty. Hence, subject to regular corporate income tax rate.

Question 851

What is “net capital gain” ?

Answer 851

The term “net capital gain” means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges (NIRC, Sec. 39 (A) (2)).

Question 852

What is the concept of presumed gain?

Answer 852

Every person shall be conclusively presumed to have realized capital gains from every sale or exchange or other disposition of real property classified as capital asset and shall be subject to the final capital gains tax (R.R. No. 13-85, Sec. 2). Thus, the 6% CGT on real property is imposed on the basis of its selling price or fair market value, regardless of the existence of gain.

Question 853

Who are not liable to pay CGT on the sale of shares in domestic corporations not traded in the stock exchange?

Answer 853

The CGT shall not apply to the following:

1. Dealers in securities;
   2. Investor in shares of stock in a mutual fund company, as defined in Section 22 (BB) of the Tax Code, as amended, and Sec. 2(s) of these Regulations, in connection with the gains realized by said investor upon redemption of said shares of stock in a mutual fund company; and
2. All other persons, whether natural or juridical, who are specifically exempt from national internal revenue taxes under existing investment incentives and other special laws (R.R. No. 06-08, Sec. 4).

Question 854

When is a sale of real property exempt from CGT?

Answer 854

(N-PUN-10) CGT shall not be imposed when the following conditions are met:

1. Sale is made by Natural persons;
2. What is sold or disposed is their Principal residence;
3. The proceeds of the sale is fully Utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition;

Note: If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax

4. The Commissioner is duly Notified by the taxpayer within thirty (30) days from the date of sale or disposition of his intention to avail of the tax exemption; and
5. The exemption is availed of only once every 10 years (NIRC, Sec. 24 (D)(2)).

Question 855

What is the tax consequence of sales of shares of stock listed and traded through the local stock exchange?

Answer 855

Sales of shares of stock listed and traced through the local stock exchange is subject to the stock transaction tax at the rate of 6/10 of 1% (0.6%) of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed. Any gain derived therefrom shall be exempt from CGT and regular individual or corporate tax (NIRC, Sec. 127).

Note: All capital gains offer than those arsing from sates of Shares of stock and real property are subject to regular tax.

Question 856

What are the rules on holding period?

Answer 856

In the case of an individual taxpayer, only the foltowing percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income:

1. 100% - if the capital asset. has been held for not more than 12 months (short term capital gain); and
2. 50% - if the capital asset has been held for more than 12 months (long term capital gain).

Note: In case of a corporation, regardless of the holding period, 100% of the capital gain or loss is recognized because the rule on holding period does not apply (NIRC, Sec. 39)

Question 857

What is the “loss limitation rule”?

Answer 857

As a rule, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges (NIRC, Sec. 39 (C)).

Question 858

Who are excepted from the loss limitation rule?

Answer 858

If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate, or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the loss limitation rule and shall not be included in determining the applicability of such limitation to other losses.

Question 859

What is the “net capital loss carry-over rule?”

Answer 859

(NCLCO)

If an individual taxpayer sustains in any taxable year a net capital loss, such loss shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months (100% deductible). However, the amount carried over shall not be in excess of the net income in the year the loss was incurred (NIRC, Sec. 39 (D)).

Note: This is an exception to the general rule that losses shall be deducted from the gross income in the same taxable year in which the losses were incurred (CIR v. PAL, G.R. No. 179259, September 25, 2013).

Question 860

Are all the special rules on capital gains/losses applied in determining net capital gains from the sale of shares in domestic corporations not traded in the stock exchange subject to CGT?

Answer 860

No, only the loss limitation rule is applied. For sale, barter, exchange, or other forms of disposition of shares of stock subject to the 15% CGT on the net capital gain during the taxable year, the capital losses realized from this type of transaction during the taxable year are deductible only to the extent of capital gains from the same type of transaction during the same period. If the transferor of the shares is an individual, the rule on holding period and capital loss carty-over will not apply, notwithstanding the provisions of Section 39 of the Tax Code as amended (R.R. No. 06-08, Sec. 7 (c.4)).

Question 861

Define passive income.

Answer 861

Passive income are items of income earned with very minimal involvement from the taxpayer and are generally irregular in timing and amount (BANGGAWAN, Income Taxation, supra at 136).

Question 862

What is the tax treatment of passive income?

Answer 862

Passive income may be:

1. Subject to final tax; or
2. Subject to regular tax.

Question 863

What are the sources of passive income subject to final tax?

Answer 863

The following are the sources of passive income subject to final tax:

1. Interest;
2. Dividends;
3. Royalties; and
4. Prizes, awards, and winnings.

Note: They are not added to other income in the determination of ordinary income tax liability (R.R. No. 02-98, Sec, 2.57.1).

Question 864

What are the interest income subject to final tax?

Answer 864

1. Interest from any peso bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements;
2. Interest income from a depository bank under the Expanded Foreign Currency Deposit system; and
3. Interest income derived from long-term deposit or investment which was pre-terminated by the holder before the 5th year (R.R. No. 02-98, as amended by R.R. No. 11-18, Sec. 2.57.1).

Question 865

What are the requisites for interest income to be exempt from income tax?

Answer 865

(IRN-NFB-5-DETT)

Interest income from long term deposit (LTD) or investment shall be exempt from tax, subject to the following conditions:

1. The depositor or investor is an Individual citizen (resident or non-resident) or Resident alien or Non-resident alien engaged in trade or business in the Philippines and not a corporation;
2. The LTD or investments certificates should be under the Name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank;
3. The LTD or investments must be in the Form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BSP;
   
4. The LTD or investments must be issued by Banks only and not by other financial institutions;
   
5. The LTD or investments must have a maturity period of not less than 5 years;
6. The LTD or investments must be in Denominations of P10,000 and other denominations as may be prescribed by the BSP;
7. Only the Interest income from LTD or investments certificates are covered by the income tax Exemption;
8. Income tax Exemption does not cover any other income such as gains from Trading or foreign exchange gain; and
9. The LTD or investments should not be Terminated by the investor before the 5th year, otherwise it shall be subjected to the graduated rates of 5%, 12%, or 20% on interest income earnings (R.M.C. No. 18-11)

Question 866

What are dividends?

Answer 866

It refers to any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or other property (NIRC, Sec. 73 (A)).

Question 867

When is dividend income subject to tax?

Answer 867

Dividend income is taxable at the time of their declaration by the corporation, and not at the time of actual payment of dividends, since dividend income is taxable, whether actually or constructively received (MAMALATEO, Income Tax, supra at 213).

Question 868

What are the kinds of dividends?

Answer 868

1. Cash dividends;
2. Property dividends;
3. Stock dividends; and
4. Liquidating dividends. (INGLES, Reviewer, supra at 138).

Question 869

Are all kinds of dividends subject to tax?

Answer 869

No. Cash and Property Dividends are faxable. For liquidating dividends, when a corporation distributes all its properties or assets in complete liquidation, the gain realized from this is taxable.

Question 870

What dividends are not subject to tax?

Answer 870

Stock dividends are not subject to tax since it represents the transfer of surplus to capital account (NIRC, Sec. 73 (B)).

Question 871

Can shares be declared as dividends?

Answer 871

Yes. The shares declared as dividends may be either:

a. From the unissued shares of the company declaring the dividends; or

b. Treasury shares of the company declaring the dividends.

Note: If the shares come from the unissued shares, it is a stock dividend since the unissued shares are actually the capital stock of the corporation divided into “shares” (R.A. No. 11232, Sec. 62). However, if the shares come from the treasury shares, it is a property dividend. (SEC-OGG Opinion 12-06 dated 20 April 2012).

Question 872

Why are stock dividends not subject to tax?

Answer 872

A stock dividend, when declared, is merely a certificate of stock which evidences the interest of the stockholder in the increased capital of the corporation. The ownership of the property represented by a stock dividend is still in the corporation and not in the holder of such stock, certainly such stock cannot be regarded as income to the stockholder (Fisher v. Trinidad, G.R. No. 17518, October 30, 1922).

Question 873

When may stock dividends be taxed?

Answer 873

If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits (NIRC, Sec. 73 (B)). Also, stock dividends constitutes income if it gives the shareholder an interest different from that which his former stock holdings represented (R.R. No. 02-40, Sec. 252).

Question 874

If a company pays dividends in the form of stocks of another corporation, is it considered a stock dividend?

Answer 874

No. It is considered a property dividend. (INGLES, Reviewer, supra at 138).

Question 875

What are treasury shares?

Answer 875

Treasury shares are shares that have been earlier issued and are regarded as property acquired and currently owned by the corporation and not by any of its stockholders. (SEC-OGC Opinion 12-06 dated 20 April 2012).

Question 876

If a company pays dividends in the form of its own treasury shares, is it considered a stock dividend?

Answer 876

No. It is considered a property dividend (Id).

Note: For declaring treasury shares as property dividends, however, the corporation can only do so if the amount of the retained earnings previously used to support their acquisition has not been subsequently impaired by losses. Consequently, such amount of retained earnings cannot be declared and distributed as dividends until said shares are reissued or retired. On the other hand, if there are retained earnings arising from the business of the corporation other than the amount equivalent to the cost of treasury shares, treasury shares, being, property of the corporation, may be distributed as property dividends (ld).

Question 877

Explain the concept of declaring treasury shares as property dividends.

Answer 877

Treasury shares are regarded as property owned by the corporation and cannot be distributed as property dividends among the stockholders in the absence of unrestricted retained earnings other than the amount equivalent to the cost of treasury shares (Id.)

Question 878

What is the tax treatment of “liquidating” dividends?

Answer 878

Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be (NIRC, Sec. 73 (A), Par. 2).

Question 879

What are the rules on the taxation of dividends?

Answer 879

Dividends shall be taxed as follows:

a. Domestic corporations
- individuals subject to final tax
- corporations exempt (except as to NRFC)

b. Foreign corporations
- individuals subject to regular tax
- corporations subject to regular tax

Note: The inclusion of dividends received from a foreign corporation in the gross income of the taxpayer subject to regular tax depends on the type of taxpayer and situs of the dividend (i.e., except as to RC and DC, such dividends shall be included in gross income only if sourced within the Philippines).

Question 880

Define royalty income.

Answer 880

It is the payment for the use and exhaustion of property such as earnings from copyrights, patents, trademarks, formulas, and natural resources under lease. It covers both payments made:

1. Under a license; and
2. Compensation which a person would be obliged to pay for fraudulently copying or infringing the right (Model Tax Convention on income and on Capital (2017), Art. 12, par. 2).

Question 881

What are the rules on the taxation of royalty income?

Answer 881

Royalties of a passive nature such as royalties of claim owners or landowners of mining properties, royalties of inventors from companies that manufacture and sell their invention, and royalty from licensing agreements that transfers the use of trademark or technology are subject to final tax. When royalties accrue from an undertaking where the taxpayer has active involvement, it is an- active income subject to the regular income tax (BANGGAWAN, Income Taxation, supra at 147).

Question 882

Define rental income.

Answer 882

It refers to the amount or compensation paid for the use or enjoyment of a thing or a right and implies a fixed sum or property amounting to affixed sum to be paid at a stated time for the use of the property (MAMALATEO, Income Tax, supra at 231).

Question 883

What is the tax treatment of advance rental and security deposit paid by the lessee?

Answer 883

Prepaid or advance rental is taxable income to the lessor in the year received, if so received under a claim,of right and without restriction as to its use, and regardless of method of accounting employed. Security deposit applied to the rental of the terminal month or period of contract must be recognized as income at the time it is applied (CASASOLA, National Internal Revenue Code (2013), p. 221-222), [hereinafter 2 CASASOLA, NIRC].

Note: If the security deposit. is to ensure contract compliance (security deposit with acceleration clause), it is not income to the lessor until the lessee violates any provision of the contract (Id.).

Question 884

What is the tax treatment of leasehold improvements made by the lessee?

Answer 884

When the lessee erected or built permanent improvements in the leased property which will become the property of the lessor upon the expiration of the lease contract, the value of the improvements should be reported as income of the lessor (R.R. No. 02-40, Sec. 49).

Question 885

What is an “annuity”?

Answer 885

It refers to the periodic installment payments of income or pension by insurance companies during the life of a person or for a guaranteed fixed period of time, whichever is longer, in consideration of capital paid by him. It is paid annually, monthly, or periodically, computed upon the amount paid yearly, but not necessarily for life (Peralta v. Auditor General, G.R. No. L-8480, March 29, 1957).

Question 886

How are annuities generally treated for tax purposes?

Answer 886

The portion of the proceeds representing return of premiums paid is not taxable (return of capital), while that portion that represents interest or amounts in excess of premiums paid (return on capital) are taxable. Where the total premium returns exceed the aggregate premiums paid, the excess shall be included in the gross income (R.R. No. 02-40, Sec. 62).

Question 887

What are the instances where life insurance proceeds are included in the gross income of the recipient?

Answer 887

In the following instances, the proceeds from life insurance policies shall form part of the gross income of the recipient:

1. Where the life insurance policy is used to secure money obligation;
2. Where the life insurance policy was transferred for a valuable consideration;
3. The recipient of the insurance proceeds is a business partner of the deceased and the insurance was taken to compensate the partner-beneficiary for any loss in income that may result as the death of the insured partner;
   
4. Where the recipient of the insurance proceeds is the partnership in which the insured is a partner and the insurance was taken to compensate the partnership for any loss in income that may result from the dissolution of the partnership caused by the death of the insured partner; and
   
5. Where the recipient of the life insurance proceeds is a corporation in which the insured was an employee or officer (R:R.No: 02-40, Sec. 62).

Question 888

What insurance proceeds are excluded from gross income?

Answer 888

1. Amount received by the insured as return of premiums;
   
2. Proceeds of life insurance policies; and
3. Amounts received through accident or health insurance or under Workmen’s Compensation Acts (NIRC, Sec. 32 (B)(1), (2), and (4)

Question 889

What are the conditions for exclusion from gross income of life insurance proceeds?

Answer 889

The proceeds of life insurance policies must be:

1. Paid by reason of the death of the insured;
2. To his heirs or beneficiaries; and
3. Whether in a single sum or otherwise (NIRC, Sec. 32 (B)(1)).

Note: Payments for reasons other than death are subject to tax to the extent of the excess of the premiums paid. If there are any policy loans (borrowings made on the policy), these are to be considered as advances deductible from the life insurance proceeds received upon death (DOMONDON, National Taxation, p. 191), [hereinafter DOMONDON, Taxation].

Question 890

What should be the designation of the beneficiary in order for the exclusion of life insurance proceeds to apply?

Answer 890

The designation of the beneficiary is not essential for purposes of exclusion of life insurance proceeds from the gross income of the recipient. The concept of revocability or irrevocability of designation of the beneficiary is material only in determining whether the insurance proceeds are to form part of the gross estate of the decedent or not (DOMONDON, Taxation, supra at 191).

Question 891

What is the rationale for the exclusion of life insurance proceeds?

Answer 891

They partake more of indemnity or compensation rather than gain to the recipient. Life insurance proceeds serve the same purpose as non-taxable inheritance (Id. at 192).

Question 892

What is the tax treatment of interests paid on life insurance proceeds?

Answer 892

If the amount of life insurance proceeds is held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in the gross income (NIRC, Sec. 32 (B)(1)).

Question 893

What receipts under Accident or Health Insurance, or under Workmen’s Compensation Acts are excluded from gross income?

Answer 893

Those received as:

1. Compensation for personal injuries or sickness; and
   2. Amount of any damages received, whether by suit or agreement, on account of such injuries or sickness (NIRC, Sec. 32 (B)(4)).

Question 894

Distinguish prizes from winnings.

Answer 894

Prizes refers to those obtained as a result of effort; while winnings are products of chance or luck.

Question 895

What prizes are excluded from gross income?

Answer 895

1. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:
   a. The recipient was selected without any action on his part to enter the contest or proceeding; and
   b. The recipient is not required to render substantial future services as a condition to receiving the prize or award; and
2. All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations (NIRC, Sec. 32 (B)(7)(d-e)).

Question 896

What is a pension?

Answer 896

It refers to the amount of money recelved in lamp sum or on staggered basis, in consideration of services rendered, given after an individual reaches the age of retirement (Peralta v. Auditor General, G.R. No. L-8480, March 29, 1957).

Question 897

What is the tax treatment of pensions?

Answer 897

Pensions, retirement benefits, and gratuities are generally taxable to the extent of the amount received, except if there is a BIR approved pension plan and the requisites for exemption have been met (NIRC, Sec. 32 (B)(6)).

Question 898

What are the retirement benefits, pensions, gratuities, etc. that are excluded from gross income?

Answer 898

1. Retirement benefits received under R.A. No. 4917;

2. Retirement benefits received under R.A. No. 7641;

3. Terminal Leave Benefits;
4. Separation pay due to death, sickness or other disability or any other cause beyond the control of the employee or the official (e.g., retrenchment);
5. Foreign social security, retirement gratuities, pensions, etc.;
6. Benefits due to residents under laws of the United States administered by the United States Veterans Administration;
7. SSS benefits received in accordance with R.A. No. 8282; and
8. GSIS benefits received under R.A. 8291 (NIRC, Sec. 32 (B)(7)).

Question 899

What are the conditions in order that separation pay may be excluded from gross income?

Answer 899

Separation pay shall be excluded from gross income provided that the amount received by the official, employee, or by his heirs from the employer was in consequence of separation of such official or employee from the service of the employer:

1. Because of death, sickness, or other physical disability; or
2. For any cause beyond the control of such official or employee (NIRC, Sec. 32 (B) 6) (b)).

Question 900

When are tax refunds taxable?

Answer 900

Tax refunds are taxable if the taxes paid were claimed as deduction. It shall be included as part of gross income in the year of the receipt to the extent of the income tax benefit of said deduction (NIRC, Sec. 34 (C)(1)).

Question 901

What are the rules on the taxability of damages?

Answer 901

Damages may or may not be considered taxable income depending on the nature of damages. Compensation for loss of income and exemplary damages are taxable.

Moral damages, reimbursement for hospital bills, return of capital are not taxable (DE LEON, The National Internal Revenue Code Annotated (2015), p. 3), [hereinafter 1 DE LEON, NIRC Annotated].

Question 902

Why is compensation received from expropriation of property taxable?

Answer 902

The compensation or income derived from the expropriation of property located in the Philippines is an income from sources within the Philippines and subject to the taxing jurisdiction of the place. The acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being justly compensated, is embraced within the meaning of the term “sale” or “disposition of property” (Gutierrez v. CTA, G.R. Nos. L-9738 & L-9771, May 31, 1957).

Question 903

What are “exclusions?”

Answer 903

Exclusions from gross income are those items of income exempted by statute or by fundamental law. Such tax-free income should not be included in the income tax return unless information regarding it is specifically called for (R.R. No. 02-40, Sec. 61).

Question 904

Who may avail of exclusions?

Answer 904

All kinds of taxpayers, whether citizens or aliens, and whether residents or nonresidents may avail of the exclusions.

Question 905

Why is return of capital not taxable?

Answer 905

The tax imposed by law is upon income. Income, in the broad sense, means all the wealth which flows to the taxpayer other than a mere return of capital (R.R. No. 02-40, Sec. 36). Hence, the cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income (R.R. No. 02-40, Sec. 65).

Question 906

How are exclusions construed?

Answer 906

Exclusion is also an immunity or privilege which frees a taxpayer from a charge to which others are subjected. Consequently, the rule that tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions (Philippine Long Distance Telephone Co. v. City of Bacolod, G.R. No. 149179, July 15, 2005).

Question 907

What are the exclusions under the Constitution?

Answer 907

The Constitution exempts all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes from taxes and duties (CONST., Article VI, Sec. 28(3)).

Question 908

What are the exclusions from gross income under the NIRC?

Answer 908

(PPG-CTR-FPS13-GBRS)

1. Proceeds of life insurance policies;

2. Amounts received by insured as return of Premium paid;

3. Value of property acquired by Gift, bequest, devise, or descent;

4. Compensation for injuries or sickness;
5. Income exempt under the tax Treaty;
6. Retirement benefits, pensions, gratuities, etc.; and
7. Miscellaneous items:
   a. Income derived by Foreign government;
   b. Income derived by the government or its Political subdivisions;
   c. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement;
   d. Prizes and awards in Sports competition;
   e. 13th month pay and other benefits (NIRC, Sec. 32, par. (B))
   f. GSIS, SSS, Medicare, and other contributions;
   g. Gains from the sale of Bonds, debentures, or other certificate of indebtedness;
   h. Gains from Redemption of shares in mutual fund; and
   i. Income derived from the Sale of gold pursuant to R.A. No. 7076

Question 909

What gratuitous transfers may be excluded from gross income?

Answer 909

The value of property acquired by gift, bequest, or devise is excluded from gross income. The income from said property, however, is included as part of gross income and is subject to tax (NIRC, Sec. 32 (B)(3))

Question 910

When is a gift, bequest, devise or descent excluded from, gross income?

Answer 910

When a person gives a thing or right to another and it is not a legally demandable obligation, then it is treated as a gift and excluded from gross income. However, if there is a legally demandable obligation to give, such as for services rendered by one to the donor or due to his merits, the amount received is taxable income to the recipient (Gift Tax Test).

Question 911

What is the reason for the exclusion of gratuities from gross income?

Answer 911

The consideration is based on pure liberality and is already subject to donor’s tax (gift) or estate tax (bequest or devise) as the case may be. Moreover, there is no income (Id. at 206).

Question 912

What is a tax treaty?

Answer 912

A tax treaty is an agreement entered into between sovereign States for purposes of eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents or nationals.

Question 913

What is the reason for the grant of exclusions through tax treaties?

Answer 913

Tax treaties are entered into “to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions.” CIR v. S.C. Johnson and Son, Inc. further clarifies that “tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies.

Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate” (Deutsche Bank AG Manila Branch v. CIR, G.R. No. 188550, August 19, 2013).

Question 914

Define deductions.

Answer 914

Deductions are items or amounts authorized by law to be subtracted from the pertinent items of gross income to arrive at taxable income (NIRC, Sec. 34).

Question 915

How are deductions construed?

Answer 915

Since a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed against the taxpayer (CIR v. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007).

Question 916

On what type of income is a deduction NOT allowed?

Answer 916

No deductions are allowed on compensation income arising from personal services rendered under an employer-employee relationship (NIRC, Sec. 34).

Question 917

What are the ordinary and necessary expenses allowable as deduction under the NIRC?

Answer 917

Sec. 34 (A)(1) of the NIRC provides the following ordinary and necessary trade, business or professional expenses:

1. Reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered including the grossed-up monetary value (GMV) of fringe benefit;
   
2. Reasonable allowance for travel or transportation expenses (here and abroad);
   
3. Reasonable allowance for rentals and/or other payments for the continued use or possession of property; and
   
4. Reasonable allowance for entertainment, amusement and recreation expenses.
5. An additional deduction from taxable income of one-half of the value of labor training expenses incurred for skills development of enterprise-based trainees enrolled in public senior high schools, public higher education institutions, or public technical and vocational institutions and duly covered by an apprenticeship agreement under Presidential Decree No. 442, Series of 1974, or the “Labor Code of the Philippines”, as amended, shall be granted to enterprises: Provided, further, that for the additional deduction for enterprise-based training of students from public educational institutions, the enterprise shall secure proper certification from the DepEd, TESDA, or CHED: Provided, finally, That such deduction shall not exceed ten percent (10%) of direct labor wage.

Question 918

What are the requisites for deductibility of taxes?

Answer 918

The taxes must be incurred within the taxable year;
The taxes are incurred in connection with the taxpayer’s profession, trade, or business. (TABAG, Reviewer, supra at 384)

Question 919

What are the requisites for deductibility of losses?

Answer 919

(TA-CDC2-N) In order for loss to be deductible from gross income, such loss must be:

1. That of the Taxpayer - loss is personal and not transferable to another;
2. Actually sustained and charged off during the taxable year;
3. Evidenced by a Closed and completed transaction;
4. Not claimed as a Deduction for estate tax purposes (for individuals);
5. Not Compensated for by insurance or other forms of indemnity;
6. Connected with the taxpayer’s trade, business, or profession or incurred in any transaction entered into for profit though not connected with his trade, business, or profession; and
7. Notice of loss must be filed with the BIR (i.e. within forty-five (45) days from the date of occurrence or discovery of the casualty or robbery, theft, or embezzlement) (RR No. 12-77, Sec 4(b)).

Question 920

What happens if the loss is compensated by insurance or otherwise?

Answer 920

If the loss is compensated by insurance or otherwise, the loss is postponed to a subsequent year in which it appears that no compensation at all can be had, or there is a remaining net loss (or there is no full compensation) (Plaridel Surety & Insurance Co. v. Collector of Internal Revenue, G.R. No. L- 24520, December 11, 1967).

Question 921

What is meant by “net operating loss”?

Answer 921

Net operating loss is the excess of allowable deductions over gross income of the business in a taxable year (NIRC, Sec 34 (D)(3)).

Question 922

What is the rule on “Net Operating Loss Carry-over (NOLCO)”?

Answer 922

By NOLCO, the net operating loss of the bushess or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss (NIRO, Sec. 34 (D) (3)).

Question 923

Who are entitled to deduct NOLCO from gross income?

Answer 923

The following taxpayers may deduct NOLCO from their gross income:

1. Individuals (including estates and trusts) engaged in trade or business or in the exercise of his profession;
   
2. Domestic corporations and resident foreign corporations subject to the normal income tax; and
   
3. Special corporations subject to preferential tax rates on their taxable income e.g., private educational institutions, hospitals, and regional operating headquarters) (R.R. No. 14-01, Sec. 4).

Question 924

What are the requisites for deductibility of NOLCO?

Answer 924

(NOCES)

1. The taxpayer sustained Net operating loss for any taxable year immediately preceding the current taxable year;
2. It has not been previously Offset as deduction from gross income;
3. It has been Carried over as a deduction from gross income, for the next three consecutive taxable years immediately following the year of such loss;
   
4. The taxpayer was not Exempt from income tax in the year the loss was incurred; and
5. There has been no Substantial change in the ownership of the business or enterprise.

Question 925

In what period is donation allowed as deduction?

Answer 925

Donation is recognized as a deduction only when it was actually paid or made, not in the year the deed of donation was perfected. The deductibility of donation is not governed by the ordinary rules on deductibility of the expense. Donation must be BOTH perfected and consummated before it can be allowed as a deduction (Philippine Stock Exchange v. Commissioner of Internal Revenue, CTA Case No. 5995, October 15, 2002).

Question 926

Are there any other additional deductions provided for under special laws?

Answer 926

Yes.

1. Under R.A. No. 9257 or the Expanded Senior Citizens Act, there is a deduction from gross income of private establishments for 20% sales discounts granted to senior citizens on the sale of goods and/or services (R.A No. 9257, Sec. 4; Commissioner of Internal Revenue v. Central Luzon Drug Corporation G.R. No. 159610, June 12, 2008). There is also an additional deduction from gross income of private establishments for 15% of the total amount paid as compensation to senior citizens actually employed by the taxpayer for at least 6 months (R.R. No. 04-06, Sec. 9).
2. Under R.A. No. 7277 or the Magna Carta for Disabled Persons, private entities that employ disabled persons who meet the required skills or qualifications, either as regular employee, apprentice or learner, shall be entitled to an additional deduction from their gross income, equivalent to twenty-five percent (25%) of the total amount paid as salaries and wages to disabled persons (R.A. No. 7277, Sec 8 (A)).

Question 927

What items are not deductible in computing taxable income?

Answer 927

(PIRP-LENZL)

1. Personal, living, or family expenses;
2. Amount paid out for new buildings or for permanent Improvements, or betterment made to increase the value of any property or estate (capital expenditures);
3. Amount expended in Restoring property or in making good the exhaustion thereof for which an allowance has been made (major repairs);
4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy (NIRC, Sec. 36 (A));
5. Losses from sales or exchanges of property between related parties (NIRC, Sec. 36 (B))
6. Expenses which constitute bribes, kickbacks, and other similar payments;
7. Non-deductible interest (NIRC, Sec. 34 (B)(2));
8. Non-deductible taxes (NIRG, Sec. 34 (C)(1)); and
9. Losses from wash sales of stock or securities (NIRC, Sec. 38).

Question 928

Exclusions vs. Deductions vs. Tax Credit

Answer 928

(1) as to nature
Exclusions: items of income but exempted
Deductions: amounts allowed by law to reduce the gross income to taxable income
Tax Credit: an amount subtracted from an individual’s or entity’s tax liability to arrive at the total tax liability

(2) as to effect
Exclusions: decreases gross income
Deductions: reduces taxable income
Tax Credit: reduces taxpayer’s liability

(3) as to inclusion in the ITR
Exclusions: excluded
Deductions: included
Tax credit: included

Question 929

What are the classifications of individual taxpayers?

Answer 929

1. Citizens:
   a. Resident citizens (RC); or
   b. Nonresident citizens (NRC);
2. Aliens:
   a. Resident Aliens (RA); or
   b. Nonresident aliens;
   i. Nonresident aliens engaged in trade or business in the Philippines (NRA-ETB); or
   ii. Nonresident aliens not engaged in trade or business in the Philippines (NRA-NETB); or
3. Special class of individual employees.

Question 930

Who is a resident citizen?

Answer 930

A resident citizen is a Filipino citizen residing in the Philippines (BANGGAWAN, Income Taxation, supra at 71).

Question 931

Who is a nonresident citizen?

Answer 931

1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein;
   
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis;
   
3. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year; or

Note: The phrase “most of the time” which is fused in determining when a citizen’s physical presence abroad, will qualify him as non-resident, shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year (R.R. No. 01-79, Sec. 2(c)).

4. A citizen who has been previously considered as hop-resident citizen and who arrives in the. Philippines at any time during the taxable year to reside permanently in the Philippies shall likewise be, treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines (NIRC, Sec, 22 (E)).

Notes:
1. The intention of the taxpayer regarding the nature of his stay within or outside the Philippines shall determine his appropriate residence classification. The taxpayer shall submit to the CIR documentary proof such as visas, work contracts, and other documents indicating such intention.

2. In default of such documentary proof, the length of stay of the taxpayer is considered. Citizens staying abroad for a period of at least 183 days are considered non-residents.

3. In other words, if the taxpayer stays in the Philippines for at least 183 days, he shall be considered a resident citizen; if he stays in the Philippines for less than 183 days, he shall be considered a nonresident citizen (R.R. No. 01-79, Sec. 2(c)).

Question 932

Who are the Filipino employees considered as nonresidents?

Answer 932

1. A permanent employee - one who leaves the Philippines to reside abroad on a more or less permanent basis, whether or not his stay abroad is less than 183 days; and

2. A contractual employee - one who leaves the Philippines on account of a contract of employment which is renewed from time to time within or during the taxable year under such circumstances as to require him to be physically present abroad most of the time during the taxable year, which means staying abroad for not less than 183 days during the taxable year (R.R. No. 01-79).

Question 933

Who is a resident alien?

Answer 933

A resident alien is an individual whose residence is within the Philippines and who is not a citizen thereof (NIRC, Sec. 22 (F)). An alien may be considered a resident of the Philippines for income tax purposes if:

1. He is actually present in the Philippines and is not a mere transient or sojourner;
2. He lives in the Philippines and has no definite intention as to his stay; or
3. He comes to the Philippines for a definite purpose of such a nature that an extended stay may be necessary for its accomplishment and to that end, the alien makes his home temporarily in the Philippines (R.R. No. 02-40, Sec. 5).

Question 934

When may an alien lose his Philippine residence?

Answer 934

An alien who has acquired residence in the Philippines retains his status as a resident alien until he abandons the same AND actually departs from the Philippines.

Mere intention to change his residence is not enough (R.R. No. 02-40, Sec. 6).

Question 935

How are citizens and residents classified according to their source of income?

Answer 935

1. Compensation income earners individuals whose source of income is purely derived from an employer-employee relationship;
2. Self-employed individuals sole proprietors or independent contractors who report income earned from self employment. He/she controls who he/she works for, how the work is done and when it is done. It includes those hired under a contract of service orjob order, and protessionals whose income is derived purely from the practice of profession and NOT under an employer- employee relationship; or
3. Mixed Income earners - individuals earning compensation income from employment, and income from business, practice of profession and/or other sources aside from. employment (B.R. No. 08-18 Sec. 2 (b)(i) and (n)).

Question 936

What income taxes may be imposed on individuals?

Answer 936

1. Regular income tax based on the graduated tax rates;

2. Optional 8% income tax;
Note: this is only available for purely self-employed and/or professionals (SEP) or mixed income earners (those who are both SEPs and Compensation earners) whose income as an SEP is at most P3,000,000 (TABAG, Reviewer, supra at 61).

3. Final withholding tax on passive income; and
4. Capital gains tax
   a. For shares of stock of a domestic corporation NOT traded in a stock exchange
   b. For sale of real property located in the Philippines which are classified as capital assets (NIRC, Sec. 24 and 25).

Question 937

How is the income of pure compensation earners taxed?

Answer 937

Individuals earning purely compensation income shall be taxed based on the graduated tax rates (0%-35%). Taxable income for compensation earners is the gross compensation income less non-taxable income/benefits such as but not limited to the thirteenth (13th) month pay and other benefits, de minimis benefits, and employee’s share in the SSS, GSIS, PHIC, Pag-ibig contributions, and union dues (R.R. No. 08-18, Sec. 3(B)).

Note: The taxable income for pure compensation earners is their gross compensation income since they have no other source of income. They also cannot avail of any kind of deductions (itemized deductions or OSD). (NIRC, Sec. 34).

Question 938

How is the income of self-employed individuals (SEPs) taxed?

Answer 938

1. For purely self-employed individuals and/or professionals whose gross sales/receipts and other non-operating income exceeds the VAT threshold of P3 Million, use the graduated tax rates;

Note: The taxable income for SEPs is computed as either (a) Gross Income less allowable deductions; or (b) Gross Sales less 40% OSD, at the option of the taxpayer.

2. For purely self-employed-individuals and/or professionals whose gross sales/receipts and other non-operating income is at most the VAT threshold of P3 Million, the tax shall be, at the taxpayer’s option, either:
   a. Income tax based on the graduated income tax rates for individuals; or
   b. 8% income tax on gross sales or gross receipts in excess of P250,000 in lie of the graduated income tax rates and the percentage tax (NIRC, Sed. 24(A)).

Question 939

How does a self-employed individual elect how his income will be taxed?

Answer 939

Unless the taxpayer signifies the intention to elect the 8% Income tax rate in the 1st Quarter Percentage and/or IR, or on the initial quarter return of the taxable year after the commencement of a new business/practice of profession, the taxpayer shall be considered as having availed of the graduated rates. Such election shall be irrevocable, and no amendment of option shall be made for the said taxable year (R.R. No. 08-18, Sec. 3(C)).

Question 940

How is the income of mixed income earners taxed?

Answer 940

1. For income from compensation at the graduated income tax rates for individuals; and
2. For income from business or practice of profession:
   a. If gross sales/receipts is at most the VAT threshold of P3 Million - 8% income tax on gross sales/receipts and other non-operating income OR graduated income tax rates on taxable income, at the taxpayer’s option;
   b. If gross sales/receipts and other non-operating income exceeds the VAT threshold of P3 Million - at the graduated income tax rates for individuals (NIRC, Sec. 24(A)(2)(b)).

Question 941

Why is there no P250,000 exemption on the income from business or practice of profession of mixed income earners?

Answer 941

The said P250,000 is not applicable to mixed income earners since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. Under the said graduated rates, the excess of the P250,000 over the actual taxable compensation income is not deductible against the taxable income from business/practice of profession under the 8% income tax rate option (R.R. No. 08-18).

Question 942

Who may not avail of the option to be taxed at 8% income tax rate?

Answer 942

(3-VOP)

1. A self-employed individual or mixed income earner whose gross sales/receipts and other non-operating income exceeds the VAT threshold of P3 Million;
2. A VAT-registered taxpayer, regardless of the amount of gross sales/receipts;
3. A taxpayer who is subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those subject under Section 116 of the same Title; and
4. Partners of a General Professional Partnership (GPP) by virtue of their distributive share from the GPP which is already net of cost and expenses (R.R. No. 08-18, Sec. 3 (C) and (D)).

Question 943

What is the tax liability of members of General Professional Partnerships (GPP)?

Answer 943

Persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership (NIRC, Sec. 26).

Note: The share of a partner in the distributable net income of a taxable partnership (not a GPP) is taxable as dividends and is subject to FWT.

Question 944

How is the distributive share of each partner computed?

Answer 944

For purposes of computing the distributive share of the partners, the net income of the GPP shall be compüted in the same manner as a corporation (NIRC, Sec. 26). As such, a GP may claim either the itemized deductions allowed under Section 34 of the Tax Code or in lieu thereof, it gan opt to avail of the Optional Standard Deduction (OSD) allowed to corporations in claiming the deductions in an amount hot exceeding 40% of its gross income. Once availed, the individual partner is: not allowed to claim further deduction from his distributive share and not allowed to avail of the 8% income tax rate option since share from GPP is already net of cost and expenses.

Question 945

Who is a nonresident alien?

Answer 945

A non-resident alien is an individual whose residence is not within the Philippines and who is not a citizen thereof (NIRC, Sec. 22 (G)). A non-resident alien individual may be:

1. Engaged in trade or business (ETB) in the Philippines - if his aggregate period of stay in the Philippines exceeds 180 days during any calendar year; or
2. Not engaged in trade or business (NETB) - if his aggregate period of stay in the Philippines does not exceed 180 days for each calendar year (NIRC, Sec. 25(A)(1).

Question 946

How are NRA-ETBs taxed?

Answer 946

A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines (NIRC, Sec. 25 (A)(1)).

Question 947

How are NRA-NETBs taxed?

Answer 947

All income from sources within the Philippines received by the NRA-NETB shall be subject to a FWT of 25% of such income (NIRC, Sec. 25 (B)). Thus, they are not entitled to claim allowable deductions from their income.

Question 948

How is an individual’s regular income tax determined?

Answer 948

See p. 82 table

Question 949

Who are the individual taxpayers exempt from income tax?

Answer 949

1. Minimum wage earners (NIRC, Sec. 24, par. (A)(2), as amended by R.A. No. 9504); and

Note: Senior citizens are not exempt from the payment of income taxes unless they are minimum wage earners (R.A. No. 9994, Sec. 4 (b)).

2. Those exempted under international agreements.

Question 950

Who is a minimum wage earner (MWE)?

Answer 950

A minimum wage earner refers to a worker in the private sector who is paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he is assigned (NIRC, Sec. 22 (HH)). He is exempt from income tax. The exemption also covers the holiday pay, overtime pay, night shift differential pay, and hazard pay earned by an MWE.

Question 951

Who are the individual taxpayers required to file income tax returns?

Answer 951

1. Every Filipino citizen residing in the Philippines;
2. Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines;
3. Every alien residing in the Philippines, on income derived from sources within the Philippines; and
4. Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines (NIRC, Sec. 51(A)(1)).

Question 952

Who are the individual taxpayers not required to file income tax returns?

Answer 952

(PSFM)

1. An individual earning Purely compensation income whose taxable income does not exceed P250,000;

2. An individual with respect to pure compensation income derived from such sources within the Philippines, the income tax on which has been correctly withheld by his employer, provided that such individual has only one employer for the taxable year (Substituted filing);

3. An individual whose sole income has been subjected to Final withholding tax; and

4. A minimum wage earner or an individual who is exempt from income tax pursuant to the provisions of the NIRC and other laws, general or special.

Question 953

How should the income tax returns of married individuals be filed?

Answer 953

Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one retum, each spouse may file a separate return of income but the returns so filed shall be consolidated by the BIR for purposes of verification for the taxable year (NIRC, Sec. 51(D)).

Question 954

What is substituted filing?

Answer 954

Under substituted filing, the employer’s annual withholding tax return (BIR Form 1604-CF) is considered as the “substitute” income tax return (ITR) of the employee inasmuch as the information provided in his income tax return (BIR Form 1700) would exactly be the same information contained in the employer’s annual return (BIR Form No. 1604-CF) (R.M.C. No. 0,1-03).

Question 955

Under what conditions will the substituted filing apply?

Answer 955

(POW)

1. The employee receives Purely compensation income, regardless of amount,
2. The employee received the income from only One employer in the Philippines
3. The income tax of which has been Withheld correctly by the said employer (tax for the calendar year, due equals tax withheld). (NIRC, Sec. 51 (A).

Question 956

Who are the individual taxpayers not qualified for substituted filing?

Answer 956

1. Individuals deriving compensation from 2 or more employers concurrently or successively at any time during the taxable year,
2. Employees deriving compensation income, regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly resulting to collectible or refundable return;
3. Individuals deriving other non-business, non-professional-related income in addition to compensation income not otherwise subject to a final tax;
4. Individuals receiving purely compensation income from a single employer, although the income tax of which has been correctly withheld, but whose spouse falls under 1, 2 or 3; and
5. Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income, or compensation income and other non-business, non-professional-related income

Question 957

What is the penal liability for failure to file a return, supply correct and accurate information, pay tax withhold and remit tax, and refund excess taxes withheld on compensation?

Answer 957

Any person required under the NIRC or by rules and regulations promulgated thereunder to pay any tax make a return, keep any record, or supply correct the accurate information, who willfully fails to pay such tax, make such return, keep such record, or supply correct and accurate information, or withhold or remit taxes withheld or refund excess taxes withheld on compensation, at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than P10,000 and suffer imprisonment of not less than 1 year but not more than 10 years (NIRC, Sec. 255).

Question 958

What is the penal liability for attempting to make it appear that a taxpayer filed a return?

Answer 958

Any person who attempts to make it appear for any reason that he or another has in fact filed a return or statement, or actually files a return or statement and subsequently withdraws the same return or statement after securing the official receiving seal or stamp of receipt of internal revenue office wherein the same was actually filed shall, upon conviction therefore, be punished by a fine of not less than P10,000 but not more than P20,000 and suffer imprisonment of not less than 1 year but not more than 3 years. (NIRC, Sec. 255).

Question 959

What are considered corporations for tax purposes?

Answer 959

(OPJJAI)

1. One person corporations,
2. Partnerships, no matter how created or organized
3. Joint-stock companies;
4. Joint accounts;
5. Associations; or
6. Insurance companies: (NIRC, Sec. 22(B)

The term does not include:
1. General professional partnerships (GPP);
2. Joint venture or consortium formed for the purpose of undertaking construction projects; and
3. Joint venture or consortium for the purpose of engaging in petroleum, coal, geothermal, and other energy operations pursuant to a service contract with the government (NIRC, Sec. 22(B) as amended by R.A. No. 11534).

Note: For purposes of income tax, partnerships (except GPPs) are to be treated the same way as corporations.

Question 960

What is a One Person Corporation (OPC)?

Answer 960

An OPC is a corporation with a single stockholder: Provided, that only a natural person, trust, or an estate may form a One Person Corporation. (R.A. No. 11232, Sec. 116)

Question 961

What is a partnership?

Answer 961

By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves (CIVIL CODE, Art. 1767).

Question 962

What is a general professional partnership (GPP)?

Answer 962

A GPP is a partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. (NIRC, Sec. 22(B).

Question 963

What is a “joint venture”?

Answer 963

A joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise; generally, all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses (Kilosbayan, Inc. v. Guingona, Jr., G.R. No. 113375, May 5, 1994).

Question 964

How are joint ventures taxed?

Answer 964

Joint ventures are generally taxed as corporations. The term corporation includes partnerships, no matter how created or organized. This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations (Evangelista v. Collector of Internal Revenue, G.R. No. L-9996, October 15, 1957).

Note: In general, a joint venture or consortium is taxable as a corporation unless if refers to those 2 described above. (TABAG, Reviewer, supra at 173).

Question 965

How are corporations classified for tax purposes?

Answer 965

1. Domestic corporation - a corporation created or organized in the Philippines or under its laws
2. Resident foreign corporation - a foreign corporation engaged in trade or business within the Philippines;
3. Non-resident foreign corporation a foreign: corporation not engaged in trade or business within the Philippines (NIRC, Sec, 22(1)); or
4. Special corporations - a domestic or foreign corporation subject to special tax rules or preferential tax rates (BANGGAWAN, INCOME TAXATION, supra at 75).

Question 967

What type of income taxes may be imposed on a resident foreign corporation (RFC)?

Answer 967

Resident foreign corporations may be subject to the following income taxes:

1. Normal or regular corporate income tax (NCIT/RCIT) (NIRC, Sec. 28 (A)(1), Par. 1);
2. Minimum corporate income tax (MCIT) (NIRC, Sec. 28 (A)(2));
3. Final income tax on passive income (NIRC, Sec. 28 (A)(6)(a) and (b) as amended by R.A. No. 11534);
4. Capital gains tax (NIRC, Sec. 28 (A)(6)(c) as amended by R.A. No. 11534); or
5. Branch Profit Remittance Tax (NIRC, Sec. 28 (A)(4) as amended by R.A. No. 11534).

(Discussions under “domestic corporations” on NCIT and MCIT are applicable to RFC, except that an RFC is taxable only with respect to income from sources within the Philippines).

Question 967

What types of income taxes may be imposed on domestic corporations?

Answer 967

Domestic corporations may be subject to the following income taxes:

1. Normal or regular corporate income tax
2. Minimum corporate income tax
3. Final income tax on passive income; or
4. Capital gains tax

Note: Improperly accumulated earnings tax (IAET) under Sec. 29 of the NIRC is repealed by the CREATE Law.

Question 967

How is NCIT computed?

Answer 967

NCIT is computed 25% of the taxable income derived during each taxable year from all sources within and without the Philippines by a domestic corporation (NIRC, Sec. 27(A) as amended, Par. 1).

Note: Corporations with net taxable income not exceeding P5 Million and with total assets not exceeding P100 Million, excluding land on which the particular business entity’s office, plant, and equipment are situated during the taxable year for which the tax is imposed, shall be taxed at 20% (NIRC, Sec. 27(A) as amended, Par. 2).

Question 968

On what type of income tax is a domestic corporation generally liable?

Answer 968

Unless otherwise provided under the NIRC, a domestic corporation shall be liable to the NCIT (NIRC, Sec. 27(A), Par. 1).

Question 969

How are nonresident foreign corporations (NRECs) taxed?

Answer 969

Except as otherwise provided in the NIRC, NRFCs shall pay a final tax of 25% of its gross income received during the taxable year from all sources within the Philippines (NIRC as amended, Sec. 28 (B)(1)).

Question 970

Are interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other income received by NFRCs subject to a separate final tax?

Answer 970

No. NRCs are subject to a final tax at 25% on all income derived from sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains.

Question 971

How are GPPs taxed?

Answer 971

A GPP shall not be subject to income tax. Persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership (NIRC, Sec. 26).

Note: Under the Tax Code on income taxation, the GPP is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners (Tan v. Del Rosario, Jr., G.R. Nos. 109289 & 109446, October 3, 1994).

Question 972

What is the tax liability of members of General Professional Partnerships (GPP)?

Answer 972

Persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities: Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership (NIRC, Sec. 26)

Question 973

How is the distributive share of each partner computed?

Answer 973

For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation. As such, a GPP may claim either the itemized deductions allowed undep Section 34 of the Tax Code or in lieu thereof, it can opt to avail of the Optional Standard Deduction (OSD) allowed to corporations in claiming the deductions in an amount not exceeding forty percent (40%) of its gross income. Once availed, the individual partner is not allowed to claim further deduction from his distributive share and not allowed to avail of the 8% income tax rate option since share from GPP is already net of cost and expenses (R.R. No. 08-18, Sec. 8).

Question 974

Summary of difference in taxability of ordinary partnerships and GPPS

Answer 974

(1) How to compute taxable income
Ordinary partnership & GPP, same as an ordinary corporation.
Note: For GPP, we compute the taxable income not for the purpose of applying the tax rate to it, but rather, to determine the amount to which each partner’s distributive share will be based on

(2) Tax Rate
Ordinary partnership: same as an ordinary corporation
GPP: not subject to income tax
Note: Instead, the income tax will fall upon the individual partners of the GPP on the basis of their distributive shares

Question 975

May a “proprietary non-profit hospital” qualify for income tax exemption as a charitable institution or social welfare organization under Section 30 (E) and (G) of the NIRC?

Answer 975

Yes, provided the requirements for the exemption to apply are complied with. The Court has ruled that Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable ihcome of two specific institutions, namely, proprietary non-profit educational institutions and proprietary nonprofit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B), instead of the ordinary 25% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Thus, for an institution to be completely exempt from income tax, Section 30 (E) and (G) of the NIRC requires said institution to operate exclusively for charitable or social welfare purpose. But in case an exempt institution under Section 30 (E) or (G) of the said Code earns income from its for profit activities, it will not lose its tax exemption.

However, its income from for-profit activities will be subject to income tax at the preferential 10% rate pursuant to Section 27(B) thereof (CIR v. St. Luke’s Medical Center, Inc., G.R. No. 203514, February 13, 2017).

Question 976

How are GOCCs, agencies, or instrumentalities taxed?

Answer 976

In general, all corporations, agencies, or instrumentalities owned or controlled by the Government shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business, industry, or activity (NIRC, Sec. 27(C)).

Question 977

What GOCCs, agencies, or instrumentalities are exempt from tax?

Answer 977

1. Government Service Insurance System (GSIS);
2. Social Security System (SSS);
3. Home Development Mutual Fund;
4. Philippine Health Insurance Corporation (PHIC); and
5. Local water districts

Question 978

What are the special RFCs subject to preferential income tax rates?

Answer 978

1. International carriers; and
2. Regional or area headquarters and regional operating headquarter (RAHQs/ROHQs) (NIRC, Sec. 28 (A)(3)(4) and (6))

Question 979

Enumerate the corporations exempt from income tax under the NIRC.

Answer 979

(LMB-CNB-CNG-FF)

1. Labor, agricultural, or horticultural organization. not-organized principally for profit;
   
2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profits
   
3. A Beneficiary society, order, or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents;
4. Cemetery company owned and operated exclusively for the benefit of its members;
   
5. Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer, or any specific person;
   
6. Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder, or individual;
7. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
   
8. A Nonstock and nonprofit educational institution;
9. Government educational institution;
   
10. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
11. Farmers’, fruit growers’, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them (NIRC, Sec. 30).

Question 980

What is the limitation on the tax exemption granted to corporations under Section 30 of the NIRC?

Answer 980

Income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to income tax (NIRC, Sec. 30).

Question 981

Does the limit on the tax exemption granted to entities under Section 30 of the NIRC apply to non-stock, non-profit educational institutions?

Answer 981

No. The last paragraph of Sec. 30 of the. NIRC is without force and effect with respect to non-stock, non-profit educational institutions, provided, that the non-stock, non-profit educational institutions prove that its assets and revenues are used actually, directly and exclusively for educational purposes. The tax-exemption constitutionally granted to non-stock, non-profit educational institutions is not subject to limitations imposed by law. The tax exemption granted by the Constitution to non-stock, non-profit educational institutions is conditioned only on the actual, direct and exclusive use of their assets, revenues and income for educational purposes. To avail of the exemption, the taxpayer must factually prove that. it used/actually, directly and exclusively for educational purposes the revenues or income sought to be exempted (CIR v. De La Salle University, G.R. No. 196596, November 9, 2016).

Question 982

What are the tax-exempt corporations under special laws?

Answer 982

1. Barangay Micro Business Enterprises (BMBEs) - exempt on income arising from the operations of the enterprise (R.A. No. 9178, otherwise known as “BMBE’s Act of 2002”, Sec, 7);

Note: BMBEs are business entities or enterprises engaged in the production, processing, or manufacturing of products or commodities, including agro-processing, trading and services, whose total assets including those arising from loans but exclusive of the land on which the particular business entity’s office, plant, and equipment are situated, are not more than P3 million (R.A. No. 9178, Sec. 3 (a)).

2. Tourism Enterprise Zone Operators - when granted an “income tax holiday” (R.A. No. 9593, otherwise known as “The Tourism Act of 2000”, Sec. 86);
3. Foster Child Agencies (R.A. No. 10165, otherwise known as “Foster Care Act of 2012”, Sec. 23);
   
4. Homeowners’ Associations - exempt on association dues and income derived from rentals of their facilities (R.A. No. 9904, otherwise known as “Magna Carta for Homeowners and Homeowners’ Associations”, Sec. 18); and
   
5. The following cooperatives:
   a. Duly registered cooperatives which do not transact any business with non-members or the general public;
   b. Cooperatives transacting business with both members and nonmembers shall not be subjected to tax on their transactions with members; and
   c. Cooperatives with accumulated reserves and undivided net savings of not more than ®10 Million (R.A. No. 9520, otherwise known as “Philippine Cooperative Code of 2008”, Art. 60 and 61).

Question 983

What is a withholding tax system?

Answer 983

The withholding tax system is a procedure through which taxes (including income taxes) are collected (Chamber of Real Estate and Builders’ Association, Inc. v. Romulo, G.R. No. 160756, March 9, 2010). In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer - he is the person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer (CIR v. Court of Appeals, G.R. No. 108576, January 20, 1999).

Question 984

What is the purpose of a withholding tax system?

Answer 984

The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns; and third, to improve the government’s cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies. (Chamber of Real Estate and Builders’ Association, Ing v. Romulo, G.R. No. 160756, March 9, 2010).

Question 985

What are the kinds of withholding taxes?There are two kinds of withholding taxes:

Answer 985

1. Final Withholding Tax (FWT); and
2. Creditable Withholding Tax (CWT)

Question 986

What is a final withholding tax (FWT)?

Answer 986

Under the FWT system, the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income (R.R. No. 02-98, Sec. 2.57 (A)).

Question 987

Who is liable to pay the FWT?

Answer 987

The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income (R.R. No. 02-98, Sec. 2.57 (A)).

Question 988

What is a creditable withholding tax (CWT)?

Answer 988

Under the CWT system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income (R.R. No. 02-98, Sec. 2.57(B)).

Question 989

Who are required to withhold CWT?

Answer 989

1. In general, any juridical person, whether or not engaged in trade or business;

2. An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; and

3. All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments (R.R. No. 02-98, Sec. 2.57.3)

Question 990

May an entity who is exempt from income tax still be mandated to withhold tax on payments it made to entities which are taxable on their income?

Answer 990

Yes. One may be exempt from the obligation to pay income tax but may still be liable for withholding the tax on income payments made to taxable entities. The withholding tax system embraces not only private individuals, organizations and corporations, but also covers organizations exempt from income tax, including the Government of the Philippines, its agencies, instrumentalities, and political subdivisions. (CIR v. COMELEC, G.R. No 244155, May 11, 2021, Lopez Case).

Question 991

For payments given by an exempt entity to a taxable entity, is the former required to withhold from it?

Answer 991

Yes. The exempt entity’s exemption from taxes and Import duties on the lease of election voting machines under Section 12 of RA No. 8436, as amended, is distinct from its liability as a withholding agent for the government.

Note: This is because the withholding tax system is only a method of collecting income tax. It is therefore immaterial whether the withholding agent is an exempt entity or not. Unless the income recipient is exempt from income tax, the payor (withholding agent) is generally required to deduct and withhold EWT on income payments made. The withholding tax system covers private individuals, organizations, corporations, and even those exempt from income lax. (i.e., agencies, instrumentalities, and political subdivisions of the Republic of the Philippines)

Question 992

What income payments are exempt from CWT?

Answer 992

The withholding of CWT shall not apply to income payments made to the following:

1. National government and its instrumentalities, including provincial, city or municipal governments; and
2. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special

Question 993

Income tax vs. Withholding tax

Answer 993

(1) definition
IT: a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a person’s income, emoluments, profits and the like
WT: a method of collecting income tax in advance. It is not an internal revenue or local tax
NOTE: the withholding tax system is only a method of collecting tax. The withholding agent, although the payor of the tax, is not the payee thereof.

(2) basis of liability
IT: a personal tax liability by the statutory taxpayer
WT: duty of the withholding agent to withhold the taxes on the payment it gave to the payee

(3) as to who is the taxpayer (payee of the tax)
IT: the person who earned the income (statutory taxpayer)
WT: the person who earned the income (statutory taxpayer)

(4) as to who pays (payor of the tax)
IT: the person who earned the income
WT: the withholding entity (i.e., COMELEC) who acts no more than an agent of the government for the collection of the tax in order to ensure its payment

(5) as to liability for non-payment
IT: liable for non-payment of the income tax attributable to the individual or entity
WT: liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government

(6) consequence for non-payment
IT: assessment by the BIR; criminal action in case of tax evasion
WT: the expenses attributable to the income payment which was not subject to withholding may be disallowed as deductions (i.e., itemized deductions) from gross income.

Question 994

What is the duty of a corporation regarding the filing of its final adjustment return?

Answer 994

Under Section 76 of the NIRC, every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. (NIRC, Sec: 76)

Question 995

What happens it the sum of the quarterly tax payments made during the said taxable year is not equal to the tôtal tax due on the entire taxable income of that year?

Answer 995

The corporation shall either:

1. Pay the balance of tax still due; or
2. Carry-over the excess credit; or
3. Be credited or refunded with the excess amount paid, as the case may be.

Note: The taxpayer shall pay the balance still due when the quarterly tax payments made is less than the total tax due. On the other hand, the taxpayer may either carryover the excess credit or be refunded the excess amount paid if the quarterly tax payments made is more than the total tax due, at the taxpayer’s option.

Question 996

When the taxpayer opts to carry-over and applies the said excess quarterly income taxes paid against the income tax due for the taxable quarters of the succeeding taxable years, can it be revoked by him?

Answer 996

No. Such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

Note: As an exception to this rule, in case the taxpayer cannot carry over the excess income tax credit due to dissolution or cessation of business, the taxpayer shall file an application for refund of any unutilized excess income tax credit, and the Bureau of Internal Revenue shall decide on the application and refund the excess taxes within two (2) years from the date of the dissolution or cessation of business.

Question 997

What are transfer taxes?

Answer 997

Transfer taxes are taxes imposed upon the gratuitous disposition of private properties or rights. (TABAG, Reviewer, supra at 439).

Question 998

What is a gratuitous transfer?

Answer 998

A gratuitous transfer is one that neither imposes a burden nor requires consideration from the transferee or recipient. The transfer of ownership is free because of the absence of financial consideration. Hence, gratuitous transfers are essentially donations.

Question 999

What is the object of taxation of transfer taxes?

Answer 999

The object is the privilege to transfer property gratuitously, and not a tax on the property or the person donating.

Question 1000

What are the kinds of gratuitous transfers?

Answer 1000

1. Donation mortis causa - the effectiyity of the transfer / donation takes effect upon the death of the donor;
2. Donation inter vivos - the effectivity of the transfer / donation takes effect during the lifetime of the donor and donee.

Question 1001

Are the 2 kinds of gratuitous transfers subject to the same tax?

Answer 1001

No. For a donation mortis causa, its subject to estate tax. On the other hand, for a donation inter vivos, it is subject to donor’s tax.

Question 1002

What is “estate tax?”

Answer 1002

“Estate tax” is the tax on the right to transmit property at death; and on certain transfers by the decedent during his lifetime which are made by the law equivalent of testamentary dispositions (INGLES, Reviewer, supra at 271).

Question 1003

What is the nature of estate tax?

Answer 1003

1. A transfer tax imposed upon the gratuitous disposition of private property; and
2. A privilege or excise tax, not a property tax because their imposition does not rest upon general ownership but rather, they are imposed on the act of passing ownership or property (DOMONDON, Taxation, supra at 396).

Question 1004

What are the purposes or objects of estate tax?

Answer 1004

(ARP-TC)

1. To generate Additional revenue for the government;
2. To Reduce concentration of wealth;
3. To Provide for equal distribution of wealth;
4. It is the most appropriate method for Taxing the privilege which the decedent enjoys of controlling the disposition at death of property accumulated during the lifetime of the decedent; and
5. It is the only method of Collecting the share which is properly due to the State as a partner in the accumulation of property which was made possible on account of the protection given by the State (Report of the Tax Commission on National Internal Revenue Laws, Vol. 1, pp. 55-57).

Question 1005

What law governs the imposition of estate tax?

Answer 1005

Estate taxation is governed by the statute in force at the time of the death of the decedent (R.R. No. 12-18, Sec. 3).

Question 1006

When does the estate tax accrue?

Answer 1006

The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death (R.R. No. 12-18, Sec. 3).

Question 1007

What is the rate of estate tax?

Answer 1007

The net estate of every decedent, whether resident or non-resident of the Philippines, as determined in accordance with the NIRC, shall be subject to an estate tax at the rate of six percent (6%) (R.R. No. 12-18, Sec. 2).

Note: This tax rate shall govern the estates of decedents who died on or after January 1, 2018, the effectivity date of the TRAIN Law (R.R. No. 12-18, Sec. 3). For the estates of decedents who died prior to January 1, 2018, the graduated schedule with a rate of 5-20% under the Tax Reform Act of 1997 shall apply.

Question 1008

What is “net estate?”

Answer 1008

“Net estate” refers to the value of the gross estate less the deductions and exemptions allowed under Sections 86 and 87 of the NIRC (R.R, No. 12-18, Sec. 6).

Question 1009

How are decedents classified for estate tax purposes?

Answer 1009

1. Resident or citizen decedents; and
2. Nonresident alien decedents, (NIRC, Sec. 85).

Question 1010

What is “residence” for estate fax purposes?

Answer 1010

For estate tax purposes, the term “residence” is synonymous with the term “domicile”. The two terms may be used interchangeably without distinction (Collector of Internal Revenue v. de Lara, G.R. Nos. L-9456 & 1-9481, January 6, 1958).

Question 1011

What comprises the “gross estate” of a decedent?

Answer 1011

1. For residents and citizens - all properties, real or personal, tangible or intangible, wherever situated;
2. For nonresident aliens - only properties situated in the Philippines provided. that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Section 104 of the NIRC (R.R. No. 12-18, Sec. 4).

Question 1012

How is the “rule of reciprocity” applied in estate taxation?

Answer 1012

Under the “rule of reciprocity”, no estate tax shall be collected in respect of intangible personal property of a nonresident alien decedent:

1. If the country of which the decedent was a citizen and resident at the time of his death did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or
2. If the laws of the foreign country of which the decedent was a citizen and resident at the time of his death allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country (NIRC, Sec. 104).

Question 1013

What items should be included in gross estate?

Answer 1013

(ITR-GP-PI)

1. Decedent’s Interest;
2. Transfer in contemplation of death;
3. Revocable transfer;
4. Property passing under a General Power of Appointment;
5. Proceeds of life insurance;
6. Prior interests; and
7. Transfers for Insufficient consideration

Question 1014

What is meant by “decedent’s interest?”

Answer 1014

Gross estate includes any interest or right in the nature of property, but less than title, having value or capable of having value (e.g, dividends declared but paid after death, partnership profits, right of usufruct, etc.) (INGLES, Reviewer, supra at 259).

Question 1015

What is a “transfer in contemplation of death?”

Answer 1015

A “transfer in contemplation of death” is a transfer motivated by the thought of death, although death may not be imminent.

Question 1016

What are instances of transfers in contemplation of death?

Answer 1016

1. Transfers, by trust or otherwise, in contemplation of intended to take effect (in possession or enjoyment) at or after death;
2. Transfers, by trust or otherwise, under which the decedent has retained for his life (or for any period which does not in fact end before his death the possession or enjoyment of, or the right to the income from the property, or the right to designate the person who shall possess or enjoy the property or the income therefrom.

Question 1017

What is a “revocable transfer?”

Answer 1017

A revocable transfer is a transfer of property by the decedent, by trust or otherwise, where the enjoyment thereof was subject, at the date of his death, to any change through the exercise of power by the decedent alone, or in conjunction with any other person to alter, amend, revoke, or terminate or where any such power is relinquished in contemplation of the decedent’s death (NIRC, Sec. 85 (C)(1)).

Note: It is sufficient that the decedent had the power to revoke, though he did not exercise the power to revoke.

Question 1018

What conditions do not affect the existence of the decedent’s power to alter, amend, or revoke a transfer?

Answer 1018

The power of the decedent to alter, amend, or revoke shall be considered to exist on the date of his death, even though:

1. The exercise of the power is subject to a precedent giving of notice; or
2. The alteration, amendment, or revocation takes effect only on the expiration of a stated period after the exercise of the power (NIRC, Sec. 85 (C)(2)).

Question 1019

When do proceeds of life insurance form part of the gross estate of the decedent?

Answer 1019

Proceeds of life insurance shall form part of the gross estate when:

1. The insurance policy is taken out by the decedent upon his own life; and
2. The proceeds are receivable by:
   a. Estate of the deceased, his executor, or administrator, whether as revocable or irrevocable beneficiary; or
   b. Any beneficiary designated in the policy of insurance as revocable beneficiary (NIRC, Sec. 85 (E)).

Note: Under the Insurance Code of the Philippines, a designation of beneficiary is generally revocable, unless stated expressly in the policy that the designation is irrevocable. In such cases, the proceeds are not considered as part of the decedent’s estate (INGLES, Reviewer, supra at 264).

Question 1020

What are the exclusions from the gross estate?

Answer 1020

(ELTO-IGAW)

1. The capital (Exclusive property) of the surviving spouse (NIRC, Sec. 85 (H));
2. Proceeds of Life insurance where the beneficiary is other than the estate, executor or administrator and the designation is irrevocable (NIRC, Sec. 85)
3. Transfers by way of bona fide sales (NIRC, Sec. 85 (B));
4. Property Outside the Philippines of nonresident alien decedent;
5. Intangible property of nonresident alien decedent provided there is reciprocity (NIRC, Sec. 104);
6. GSIS proceeds/benefits (R.A. No. 8282);
7. Accruals from SSS (R.A. No. 8282); and
8. War damage payments (P.D. No. 69).

Question 1021

What is “donor’s tax?”

Answer 1021

“Donor’s tax” is an excise tax imposed on the privilege to transfer property by way of gift inter vivos by any person, resident or nonresident, based on a pure act of liberality without any or less than adequate consideration and without any legal compulsion to give (DOMONDON, Taxation, supra at 156).

Note: Although the law used the term “act,” the law considers donation as a “contract” as shown by the fact that it requires acceptance, and that the rules on obligations and contracts apply to it as a suppletory law. (TABAG, Reviewer, supra at 515).

Question 1022

What is the nature of donor’s tax?

Answer 1022

Donor’s tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos (Lladoc v. Commissioner of Internal Revenue, G.R. No. L-19201, June 16, 1965).

Question 1023

What are the purposes of donor’s tax?

Answer 1023

1. It supplements the estate tax by preventing the avoidance of the latter through the device of donating the property during the lifetime of the deceased (donor); and
2. It also prevents the avoidance of income taxes. Without the donor’s tax, the donor may escape the progressive rates of income taxation through the simple expedient of splitting his income among numerous donees (DE LEON, NIRC Annotated, supra at 800).

Question 1024

What transfers are subject to donor’s tax?

Answer 1024

The donor’s tax is imposed on donations inter vivos or those made between living persons to take effect during the lifetime of the donor (CIVIL CODE, Arts. 729). The tax shall apply whether the transfer is in trust of otherwise, whether the gift is direct or indirect, and whether the property iS real or personal, tangible or intangible (NIRC, Sec. 98).

Question 1025

When is donor’s tax applied?

Answer 1025

The donor’s tax shall not apply unless and untilithere is a completed gift (R.R. No. 12-18, Sec 12).

Question 1026

When is a donation completed?

Answer 1026

The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the donee; it is completed by the delivery, either actually or constructively, of the donated property to the done (R.R. No. 12118, Sec. 12).

Question 1027

What is the rate of donor’s tax?

Answer 1027

As amended by the TRAIN Law, donor’s tax for each calendar year shall be six percent (6% computed on the basis of the total gifts in excess of Two Hundred Fifty Thousand Pesos (P250,000) exempt gift made during the calendar year (R.R. No. 12-18, Sec. 11 (1.1)).

Note: Donations shall be subject to the donor’s tax rate applicable when the donations are made. Only donations made on or after January 1, 2018 shall be subject to the donor’s tax rate provided under the TRAIN Law. Donations made before January 1, 2018 shall be subject to the donor’s tax computed on the basis of the old rates (R.R. No. 12-18, Sec. 14).

Question 1028

When is transfer of property by gift perfected?

Answer 1028

From the moment the donor knows of the acceptance by the donee.

Question 1029

What other transfers are considered as donations?

Answer 1029

1. Sale, exchange or transfer of property for insufficient consideration (NIRC,
   Sec. 100);
2. Condonation or remission of debt (R.R. No. 02-40, Sec. 50); and
3. Renunciation of inheritance (R.R. No. 12-18, Sec. 12)

Question 1030

When may a sale, exchange, or transfer of property be considered a donation?

Answer 1030

(PLI)

A sale, exchange or transfer of property shall be construed as a donation when:

1. Property transferred is real or personal property, except real property subject to capital gains tax;
2. Transfer is for Less than an adequate and full consideration in money or money’s worth; and
3. Transfer is Inter vivos (NIRC, Sec. 100).

Question 1031

What is the amount of taxable donation in transfers for insufficient consideration?

Answer 1031

Where property, other than real property referred to in Section 24D), is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift. (NIRC, Sec. 100).

Question 1032

What is the exception to the rule that transfer for less than adequate and full consideration is deemed a donation?

Answer 1032

A sale, exchange, or other transfer of property made in the ordinary course of business, that is, a transaction which is bona fidesat arms length, and free from any donative intent, will, be considered as made for an adequate and full consideration in money or money’s worth (NIRC, Sec. 100)

Question 1033

What are the implications if the real property sold was a capital asset as against an ordinary asset?

Answer 1033

The implications are:

1. If it were classified as a capital asset, it will be taxed 6% of the FMV (the base is either the consideration or-the FMV, whichever is higher).
2. If it were classified as an ordinary asset, it will be taxed twice. First, it will be taxed for income tax purposes. Second, it will be taxed for donor’s tax (for the amount representing the difference between the FMV and the selling price, the latter being lower than the former). In this case, donor’s tax will be attracted unwittingly. (INGLES, Reviewer, supra at 312).

Question 1034

When is a condonation or remission of debt considered a donation?

Answer 1034

If a creditor merely desires to benefit the debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor (R.R. No. 02- 40, Sec. 50).

Question 1035

What renunciations of inheritance are considered as donations?

Answer 1035

Generally, a renunciation of inheritance by an heir is not imputed as a donation.

However, in the following cases, a renunciation of inheritance is considered as a donation:

1. Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any other person/s; and
2. Renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate (R.R. No. 12-18, Sec. 12)

Question 1036

What properties are considered situated in the Philippines?

Answer 1036

The following properties are considered as situated in the Philippines:

1. Real, intangible and tangible personal properties, or mixed located in the Philippines;
2. Franchise which must be exercised in the Philippines;
3. Shares, obligations or bonds issued by any corporation or partnership, organized in the Philippines in accordance with its laws;
4. Shares, obligations or bonds issued by any foreign corporation, 85% of the business of which is located in the Philippines;
5. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; and
6. Shares or rights in any partnership, business or industry established in the Philippines (NIRC, Sec. 104).

Question 1037

How is the “rule of reciprocity” applied in donor’s taxation?

Answer 1037

Under the “rule of reciprocity”, no donor’s tax shall be collected in respect of intangible personal property of a nonresident alien donor:

1. if the country of which the donor was a citizen and resident at the time of his donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or
2. If the laws of the foreign country of which the donor was a citizen and resident at the time of his donation allows a similar exemption from transfer taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country (NIRC, Sec. 104).

Question 1038

What gifts are exempt from donor’s tax?

Answer 1038

(GNAS)

1. Gifts made to or for use of the National Government or any entity created by any of its agencies which is not conducted for profit;
2. Gifts in favor of an educational institution, charitable, religious, cultural, social welfare corporation, instifution, accredited Non-government organization, trust, philanthropic organization, or research institution or organization (NIRC, Sec. 101 (A));
3. Athlete’s Prizes and Awards (R.A. No. 7549); and
4. Donations to entities exempted under Special Law (INGLES, Reviewer, supra at 304).

Question 1039

What are the conditions for the exemption of donations to the above entities to apply?

Answer 1039

(NAN)

1. The donee is an accredited Non-stock, non-profit corporation/NGO institution (qualified done institution);
2. Not more than 30% of the donation/gift shall be used for Administrative purposes; and
3. For every donation worth at least Fifty Thousand Pesos (P50,000), a Notice of donation is given to the Revenue District Office which has jurisdiction over his place of business within thirty (30) days after receipt of the qualified donee institution’s duly issued Certificate of Donation, which shall be attached to the said Notice of Donation (R.R. No, 12-18, Sec. 150).

Question 1040

What are the requisites in order that the donation given to athletes as prize or award may be exempted from donor’s tax?

Answer 1040

The donation must be a prize or award given to athletes:

1. In local and international sports tournaments and competitions;
2. Held in the Philippines or abroad; and
3. Sanctioned by their respective national sports associations (R.A. No. 7549, Sec. 1)

Question 1041

When are donations for election campaign purposes exempt from donor’s tax?

Answer 1041

Any contribution, in gash or in kind, to any candidate, political party, or coalition of parties for campaign purposes shall,be governed by the Election Code. Hence, if the donation has complied with the requisites under the Election Code, the donation is exempt from donor’s tax (NIRC, Sec. 99 (C))

Question 1042

Why are donations to homeowner’s associations subject to donor’s tax?

Answer 1042

Gifts, donations, and other contributions received by homeowners’ associations are subject to the payment of donor’s tax pursuant to Section 98 and 99 of the Tax Code, as amended. Endowment or gifts received by such associations are not exempt from donor’s tax considering that gifts to associations are not qualified for exemption under Section 101 (A)(2) of the Tax Code (R.M.C. No. 53-13, Part II).

Question 1043

When should donor’s tax be filed and paid?

Answer 1043

The return of the donor shall be filed within thirty (30) days after the date the gift is made and the tax due thereon shall be paid at the time of filing (NIRC, Sec. 103 (B)).

Question 1044

What is value-added tax (VAT)?

Answer 1044

VAT is a tax on consumption levied on the sale, barter, exchange, or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines (R.R. No. 16-05, Sec. 4.105-2).

Question 1045

What are the characteristics of VAT?

Answer 1045

1. It is a tax imposed on the value added to goods, properties, or services of a taxpayer;
2. It is a transparent form of sales tax imposed on the taxable sale, barter, or exchange of goods, properties, or services;
3. It is a broad-based tax on consumption imposed on all stages of taxable sale but the tax burden rests with the final consumer who consumes the goods, properties, or services;
4. It is an indirect tax;
5. It is computed through “tax credit method” or “invoice method” wherein the input tax shifted by the sellers to the buyer is credited against the buyer’s output taxes when he in turn sells the taxable goods, properties, or services
6. it follows the “destination principle/cross-border doctrine”

Question 1046

Who are the persons liable for VAT?

Answer 1046

Any person who, in the course of his trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT (NIRC, Sec., 105).

Question 1047

When is a person characterized as a taxable person for VAT purposes?

Answer 1047

Generally, a person is characterized as a taxable person for VAT purposes, if:

1. He undertakes taxable transactions in goods, properties, or services consumed or destined for consumption within the Philippines;
2. Such transactions are entered into in the course ofthis trade or business; and
3. The amount of his gross sales or receipts is over the threshold fixed by law or regulation

Question 1048

What is meant by the phrase “In the course of his trade or business” (rule of regularity)?

Answer 1048

“in the course of his trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition-of its net income and whether or not it sells exclusively to members or their guests), or government entity.

Question 1049

What transactions are subject to VAT even if not made in the course of trade or business?

Answer 1049

As exceptions to the rule of regularity, the following transactions shall be subject to VAT although not made in the course of trade or business:

1. Services rendered in the Philippines by non-resident foreign persons shall be considered as being rendered in the course of trade or business (NIRC, Sec. 105); and
2. Importation of goods (NIRC, Sec. 105). There shall be levied, assessed and collected on every importation of goods a VAT equivalent to 12% (NIRC, Sec. 107 (A)).

Question 1050

When is VAT imposed?

Answer 1050

VAT is imposed whenever there Is:

1. Sale of goods or properties (NIRC, Sec. 106);
2. Importation of goods (NIRC, Sec. 107); and
3. Sale of services and use or lease of properties (NIRC, Sec. 108)

Question 1051

How is VAT computed?

Answer 1051

VAT is computed by multiplying the VAT rate of 12% to the appropriate tax base for the particular transaction.

Question 1052

Summary of VAT Rate and Bases

Answer 1052

a. For sale of goods
- 12 %
- Tax base if gross selling price or gross value in money of the goods or properties sold, bartered or exchanged (NIRC, Sec. 106(A))

b. For importation of goods
- 12%
- Tax base is the total value used by the Bureau of Customs (BOC) in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such as postage, commission, and similar charges, prior to the release of goods from customs custody; or
- In case the valuation used by the BOC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods imported are subject to excise tax, the excise tax shall form part of the tax base.

c. For sale of service
- 12%
- Tax base is gross receipts derived from the sale or exchange of services, including the use or lease of properties.

Question 1053

What are the allowable deductions from the gross selling price?

Answer 1053

The following shall be allowed as deduction from gross selling price:

1. Discounts determined and granted at the time of the sale, which are expressly indicated in the invoice, the amount thereof forming part of the gross sales duly recorded in the books of accounts; and
2. Sales returns and allowances for which proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales (R.R. No. 16-05, Sec. 4.106-9; NIRC, Sec. 106 (D)).

Question 1054

When is VAT imposed on importation of goods?

Answer 1054

VAT is imposed on goods brought into the Philippines, whether for use in business or not (R.R. No. 16-05, Sec. 4.107.1 (a)).

Question 1055

Who pays for the tax on importation of goods?

Answer 1055

The VAT on importation shall be paid by the importer prior to the release of such goods from customs custody (R.R. No. 16-05, Sec. 4.407,1 (b)).

Question 1056

Who is an importer?

Answer 1056

The importer is any person who brings goods into the Philippines, whether or not made in the course of trade or business. It includes non-exempt persons or entities who acquire tax-free imported goods from exempt persons, entities or agencies (R.R. No. 16-05, Sec. 4.107.1 (b)).

Question 1057

What is the tax base of VAT on importation?

Answer 1057

1. The total value used by the Bureau of Customs (BOC)in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such as postage, commission, and simitar charges, prior to the release of goods from customs custody; or
2. In case the valuation used by the BOd in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods imported are subject to excise tax, the excise tax shall form part of the tax base (R.R. No. 16-05, Sec. 4.107-1(a)).

Question 1058

What is meant by sale or exchange of services?

Answer 1058

The phrase “sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee, remuneration, or consideration (NIRC, Sec. 108 (A)).

Question 1059

What is meant by “service”?

Answer 1059

“Service” has been defined as “the art of doing something useful for a person or company for a fee” or “useful labor” or work rendered or to be rendered to another for a fee (CIR v. American Express Int., Inc., G.R. No. 152609, June 29, 2005).

Question 1060

When is the lease of properties subject to VAT?

Answer 1060

The lease of properties shall be subject to VAT irrespective of the place where the contract of lease or licensing agreement was executed, if the property is leased or used in the Philippines (NIRC, Sec. 108).

Question 1061

What is the tax base of the VAT on sale of service and use or lease of properties?

Answer 1061

There shall be levied, assessed and collected, a VAT equivalent to 12% of the gross receipts derived from the sale or exchange of services, including the use or lease of properties (NIRC, Sec. 108).

Question 1062

What is meant by “gross receipts?”

Answer 1062

It refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding VAT (NIRC, Sec. 108; R.R. No. 16-05, Sec. 4.108-4).

Question 1063

What is the concept of “impact” and “incidence” of taxation in relation to indirect taxation?

Answer 1063

In indirect taxation, there is a need to distinguish between the liability for the tax (impact) and the burden of the tax (incidence). The amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden (incidence)in adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services, is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof ultimately bears the burden of the tax.

Question 1063

Who shall pay for the VAT on Importation of goods by tax exempt persons?

Answer 1063

In the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof (NIRC, Sec. 107 (B)).

Question 1064

What transactions are deemed as sale?

Answer 1064

TDCR

1. Transfer, use, or consumption-not/in the course of business of goods or properties originally intended for sale or for use in the course of business:
2. Distribution or transfer to:
   a. Shareholders or investors as share in the profits of the VAT-registered person; or
   b. Creditors In payment of debt:
3. Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned; and
4. Retirement from or cessation of business: with respect to inventories of taxable goods existing as of such retirement or cessation (NIRC, Sec. 106 (B); R.R. No. 16-05, Sec. 4106-7).

Question 1065

When are “transactions deemed as sale” subject to VAT?

Answer 1065

Before considering whether the transaction is deemed sale, it must first be determined whether the sale was in the ordinary course of trade or business. Even if the transaction was “deemed sale if/it was not done in the ordinary course of trade or business, still the transaction is not subject lo VAT (CIR v. Magsaysay Lines, Inc., G.R. No. 146984, July 28, 2006).

Question 1066

What is the tax base of VAT on transactions deemed sale?

Answer 1066

For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of the time of the occurrence of the transactions enumerated. However, in retirement or cessation of business, the tax base shall be the acquisition cost or the current market price of the goods or properties, whichever is lower. In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market value shall be the tax base (R.R. No. 16-05, Sec. 4.106-7).

Question 1067

What is the nature of a “zero-rated sale”?

Answer 1067

A zero-rated sale of goods or properties and service by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in any output tax.

However, the input tax on purchases of goods, properties, or services related to such zero-rated sale shall be available as tax credit or refund (R.R. No. 16-05, Sec. 4.106-5 and 4.108-5)

Question 1068

What is the rationale for zero rating?

Answer 1068

The Philippine VAT Law adheres to the “cross border doctrine” of the VAT system, which basically means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the Philippine taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT. Conversely, those goods destined for use or consumption and services to be rendered within the Philippines shall be subject to the 12% VAT (R.M.C. No. 50-07, Sec. 2, Par. 4).

Question 1069

When is 0% VAT imposed on the sales of VAT-registered persons?

Answer 1069

1. Export sales (automatically zero-rated sale);
2. Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate (effectively zero-rated sale) (NIRC, Sec. 106 (A)(2) (b); R.M.C No. 05-7, Sec. 3);
3. Sales to offshore gaming licensees subject to gaming tax under Sec. 125-A of the NIRC;
4. Sale of raw materials, inventories, supplies, equipment, packaging materials and goods to a Registered Export Enterprise (REE) to be used directly and exclusively in its registered project or activity for a maximum period of 17 years from the date of registration, unless otherwise extended under the Strategic Investment Priority Plan (SIPP) (NIRC, Sec. 294 (E) and Sec. 295 (D) as amended by R.A: No. 11534; TABAG, Reviewer, supra at 567).

Question 1070

Distinguish “automatically zero-rated sales” from “effectively zero-rated sales.”

Answer 1070

Although both are taxable, and similar in effect, zero-rated transactions differ from effectively zero-rated transactions as to thel source. Zero-rated transactions generally refer to the export sale of goods and supply of services. Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate (CIR v. Seagate Technology (Philippines), G.R. No. 153866, February 11, 2005).

Question 1071

What are the instances of zero-rated export sales?

Answer 1071

(SR-REI) The following are considered as zero-rated export sales:

1. The sale and actual Shipment of goods from the Philippines to a foreign country irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the BSP;
2. The sale of goods, supplies, equipment and fuel to persons engaged in International shipping or international air transport operations: Provided, That the goods, supplies, equipment, and fuel shall be used exclusively for international shipping or air transport operations (NIRC, Sec. 106 (A)(2)).

Note: The following, which are previously considered as zero-rated sales of goods under Section 106 (A)(2)(a) of the NIRC, are now subject to 12% VAT due to the amendments of TRAIN Law and satisfaction of the requirements under the said section:

3. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;
4. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production; and
5. Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws (R.R. No. 9-2021, Sec. 2, June 9, 2021).

Question 1072

What is meant by “considered export sales under Executive Order No. 226”?

Answer 1072

1. The Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer; or
2. The net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same (R.R. No. 16-05, as amended by R.R. No. 13-18, Sec. 4.106-5, Par. 2)

Question 1073

What are the instances of zero-rated sale of services?

Answer 1073

1. Services other than those mentioned in Sec. 108(B)(1) rendered to a person engaged in business conducted Outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;
2. Services rendered to persons or entities whose exemption under Special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0% rate;
3. Services rendered to persons engaged exclusively in International shipping or air transport operations, including leases of property for use thereof; Provided, that these services shall be exclusively for international shipping or air transport operations;
4. Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country; and
5. Sale of power or fuel generated through Renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels. The sale of power or fuel is the one being subject to 0% and not the sale of services related to the maintenance or operation of the plants generating said power.
6. Services rendered to offshore gaming licensees subject to gaming tax under Section 125-A of this Code by service providers, including accredited service providers as defined in Section 27 (G) of this Code (NIRC, Sec. 108 (B)(9)).

Note: The following, which are previously considered as zero-rated sales of services under Section 108(B) of the NIRC, are now subject to 12% VAT due to the amendments of TRAIN Law and satisfaction of the requirements under the said section:

7. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; and
8. Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of total annual production (R.R. No. 9-21, Sec. 2).

Question 1074

How do we treat sales to PEZA-registered enterprises?

Answer 1074

Sales made to PEZA-registered enterprises qualify for zero-rating pursuant to the cross-border doctrine. (CIR v. Filminera Resources Corporation, G.R. No. 236325, September 16, 2020, Lopez Case).

Note: The ECOZONE is treated as a separate customs territory such that the buyer is treated as an importer and is imposed the corresponding import taxes and customs duties on his purchase of products from within the ECOZONE.

Question 1075

What are VAT exempt transactions?

Answer 1075

“VAT-exempt transactions” refer to the sale of goods, or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases.

Question 1076

What are the tax consequences of VAT-Exempt Transactions?

Answer 1076

1. Seller is exempt from VAT;
2. Seller cannot separately bilk output tax to his customers;
3. Seller is not entitled to input tax credit (R.R. No. 16-05, Sec. 4.109-1 (A)); and
4. Seller shall be liable to VAT if he issues VAT invoice or receipt, but without the benefit of input tax credit (R.R. No. 16-05, Sec. 4.113-4 (A))

Question 1077

Distinguish a “zero-rated sale transaction” from a “VAT-exempt transaction.”

Answer 1077

(1) as to taxability of transaction
Zero-rated (exempt with credit): transaction is taxable for VAT purposes but shall not result to output tax
VAT-Exempt (exempt without credit): transaction is not subject to VAT

(2) as to credit of related input tax
Zero-rated (exempt with credit): input tax on purchase of goods, properties or services, related to the zero-rated sale shall be available as tax credit or refund
VAT-Exempt (exempt without credit): input tax on the VAT-exempt sale is NOT allowed as tax credit
NOTE: instead, the unutilized Input VAT of the taxpayer, shall be treated as an expense.

Question 1078

What transactions are exempt from VAT?

Answer 1078

(AF-P’-GM-E2-RIC-GNE-R?-PTP-FB-STAG-MO)

1. Sale or importation of Agricultural and marine food products in their original state, livestock, and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state; (NIRC, Sec. 109 (A))
2. Sale or importation of Fertilizers; seeds, seedlings, and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets) (NIRC, Sec. 109 (B));
3. Importation of Personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines (NIRC, Sec. 109 (C));
4. Importation of Professional instruments and Implements, tools of trade, occupation or employment, wearing apparel, domestic animals, and personal and household effects belonging to persons coming to settle in the Philippines or Filipinos or their families and descendants who are now residents or citizens of other countries, such parties hereinafter referred to as overseas Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons importing said items, for their own use and not for barter or sale, accompanying such persons, or arriving within a reasonable time; Provided, That the Bureau, of Customs may, upon the production of satisfactory evidence that such persons are actually coming to settle in the Philippines and that the goods are brought from their former place of abode, exempt such goods from payment of duties and taxes; Provided, further, That vehicles, vessels, aircrafts, machineries and other similar goods for use in manufacture, shall not fall within this classification and shall therefore be subject to duties, taxes and other charges (NIRC, Sec. 109 (D)).
5. Services subject to Percentage tax (NIRC, Sec 109 (E));
6. Services by agricultural contract Growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; “Agricultural contract growers” refers to a person/entity producing for others poultry, livestock, or other agricultural and marine food products in their original state (NIRC, Sec. 109(F); R.R. No. 16-05, Sec. 4.109-1, Par. (B)(1)).
7. Medical, dental, hospital and veterinary services except those rendered by professionals. Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT
8. Educational services rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions; “Educational services” shall refer to academic, technical or vocational education provided by private educational institutions duly accredited by the DepED, the CHED and TESDA, and those rendered by government educational institutions and it does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or the TESDA;
9. Services rendered by individuals pursuant to an Employer-employee relationship
10. Services rendered by Regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;
11. Transactions which are exempt under International agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529
12. Sales by agricultural Cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used. directly and exclusively in the production and/or processing of their produce. Sale by agricultural cooperatives to non-members can only be exempted from VAT. if the producer of the agricultural products sold is the cooperative itself. It is to be reiterated however, that sale or importation of agricultural food products in their original state is exempt from VAT irrespective of the sellen and buyer thereof
13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority (NIRC, Sec. 109)
14. Sales by Non agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed P15,000 and regardless of the aggregate, capital and net surplus ratably distributed among the members, Importation, oy non-agricultural, non-electric, and non-credit cooperatives of machineries and equipment, including spare parts thereof to be used by them are subject to VAT
15. Export sales by persons who are-not-VAT-registered (NIRC, Sec. 109 (0));

Note: Export sales by VAT-registered persons are zero-rated.

16. Sale of Real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at P2,500,000 and below, house and lot, and other residential dwellings valued at P4,200,000 and below: Provided, That beginning January 1, 2024 and every three years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the Philippine Statistics Authority (PSA)
17. Lease of a Residential unit with a monthly rental not exceeding P15,000
18. Sale, importation, Printing, or publication of books,and any newspaper, magazine, journal, review bulletin, or any such educational reading material covered by the UNESCO Agreement on the Importation of Educational, Scientific, and Cultural Materials, including the digital or electric format thereof: Provided, That the materials enumerated herein are not devoted principally to the publication of paid advertisements (NIRC, Sec. 109 (R));
19. Transport of passengers by international carriers (NIRC, Sec 109 (S));

Note: Transport of passengers by international carriers originating from the Philippines to another country are VAT exempt. Transport of cargoes, baggage, or mails by international carriers from the Philippines to another country are subject to 3% percentage tax. Transport of passengers, excess baggage, cargoes or mails by domestic sea or air carriers with international operation are subject to zero-rated VAT (BANGGAWAN, Business and Transfer Tax, supra at 158-159).

20. Sale, importation or lease of Passenger or cargo vessels and aircraft, including engine, equipment, and spare parts thereof for domestic or international transport operations (NIRC, Sec. 109 (T));
21. Importation of Fuel, goods and supplies by persons engaged in international shipping or air transport operations: Provided, That the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port, or vice versa, without docking of stopping at any other port in the Philippines unless the docking or stopping at any other Philippine port is for the purpose of unloading passengers and/or cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad (NIRC, Sec. 109 (U); R.R. No. 04-07, Sec. 14, Par. (v));
22. Services of Bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries such as money changers and pawnshops, subject to percentage tax under Secs. 121 and 122 respectively of the Tax Code are included (NIRE, Sed, 109 (V); R.R. No. 04-07, Sec. 14, Par. (w),
23. Sale or lease of goods and services to Senior citizens and persons with disability, as provided under Republic Act Nos. 9994 and 10754, respectively;
24. Transfer of property pursuant to Section 40(c)(2) of the NIRC, as amended (tax-free exchanges) (NIRC, Sec 109 (X));
25. Association dues, membership fees, and other assessments and charges collected by homeowners associations and condominium corporations established under RA No. 9904 (Magna Carta for Homeowners and Homeowners’ Association) and Republic Act No. 4726 (The Condominium Act), respectively (NIRC, Sec 109 (Y); R.R. No. 13-18, Sec. 4, 109-1, Par. (y));
    Reason: Association dues are not intended for profit, but for the maintenance of the condominium project. The collection of association dues, membership fees, and other charges is purely for the benefit of the condominium owners. The condominium corporation cannot be said to be engaged in trade or business when collecting association dues, membership fees, and other assessments/charges (Delos Santos v. CIR, G.R. No. 222548, June 22, 2022).
26. Sale of Gold to the Bangko Sentral ng Pilipinas (BSP) (NIRC, Sec 109 (Z));
27. Sale or importation of prescription drugs and Medicines for:
    a. Diabetes, high cholesterol, and hypertension beginning January 1, 2020; and
    b. Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021.
28. The exemption from VAT under this subsection shall only apply to the sale or importation by the manufacturers, distributors, wholesalers and retailer of drugs and medicines included in the “list of approved drugs and medicines” issued by the Department of Health (DOH) for this purpose (NIRC, Sec. 109 (AA); R.R. No. 04-21, Sec. 2);
29. Sale or importation of the following beginning January 1, 2021 to December 31, 2023;
    a. Capital equipment, its spare parts and raw materials, necessary for the production of personal protective equipment components such as coveralls, gown, surgical cap, surgical mask, N-95 mask, scrub suits, goggles and face shield, double or surgical gloves, dedicated shoes, and shoe covers, for COVID-19 prevention;
    b. All drugs, vaccines, and medical devices specifically prescribed and directly used for the treatment of COVID-19; and
    c. Drugs for the treatment of COVID-19 approved by the Food and Drug Administration (FDA) for use in clinical trials, including raw materials directly necessary for the production of such drugs (NIRC, Sec. 109 (BB); R.R. No. 04-21, Sec. 2, Par (bb));
30. Sale or lease of goods or properties or the performance of services Other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P3 Million (NIRC, Sec. 109 (CC)).

Note: Any person who is exempt under this Section and who is not a VAT-registered person shall pay a 3% tax on his gross quarterly sales or receipts; Provided, That cooperatives are exempt from this 3%: From July 1, 2020 to June 30, 2023, the tax rate shall be 1% (NIRC, Sec. 116).

Question 1079

What is output tax?

Answer 1079

The term “output tax” means the VAT due on the sale or lease of taxable goods or properties or services by, any person registered or required to register for VAT (NIRC, Sec. 110 (A)(3)).

Question 1080

How is output tax determined?

Answer 1080

1. In a sale of goods or properties, the output tax is computed by multiplying the gross selling price by the regular rate of VAT;
2. In a sale of services, the output tax is computed by multiplying the gross receipts by the regular rate of VAT;
3. In all cases where the basis for computing the output tax is either the gross selling price or the gross receipts, but the amount of VAT is erroneously billed in the invoice, the total invoice amount shall be presumed to be comprised of the gross selling price/gross receipts plus the correct amount of VAT. Hence, the output tax shall be computed by multiplying the total invoice amount by a fraction using the rate of VAT as numerator and 100% plus rate of VAT as the denominator (R.R. No. 16-05, Sec. 4.110-6).

Question 1081

What is input tax?

Answer 1081

The term “input tax” means the VAT due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 111 of the Tax Code (NIRC, Sec. 110 (A) (3)).

Question 1082

What are the sources of Input tax?

Answer 1082

(GRSD-TPT) The Input tax evidenced by a VAT Involce or Official Receipt Issued in accordance with Sec. 113 of the Tax Code on the following transactions shall be creditable against the output tax:

1. Purchase or importation of Goods
   a. For sale;
   b. For conversion into or intended to form part of a finished product for sale, including packaging materials;
   c. For use as supplies in the course of business;
   d. For use as materials supplied in the sale of service; or
   e. For use in trade or business for which deduction for depreciation or amortization is allowed under the Tax Code;
2. Purchase of Real properties for which a VAT has actually been paid;
3. Purchase of Services in which VAT has actually been paid;
4. Transactions Deemed sale under Sec. 106 (B) of the Tax Code;
5. Transitional input tax on beginning inventories;
6. Presumptive input tax; and
7. Transitional input tax credits allowed under the transitory and other provisions of these Regulations (R.R. Nor 16-05, Sec. 4.110-1).

Question 1083

What is “transitional input tax” credit?

Answer 1083

“Transitional input tax” credit is an input tax credit allowed to a person who:

1. Became liable to VAT (exceeds the minimum turnover of P3 Million in any 12-month period);
2. Elects to be a VAT registered (even if the turnover does not exceed P3 Million); or
3. Is already a VAT-registered person and also deals in goods or properties, the sale of which is exempt, but it becomes a taxable transaction under a new or amendatory law

Question 1084

What amount is allowed as transitional input tax credit?

Answer 1084

The allowed transitional input tax credit is whichever is higher between:

1. 2% of the value of the beginning inventory of goods, materials, and supplies;
2. The actual VAT paid on such goods, materials, and supplies (NIRC, Sec. 111 (A)).

Question 1085

What is “presumptive input tax” credit?

Answer 1085

“Presumptive input tax” credit is an input tax credit allowed to persons or firms engaged in the:

1. Processing of sardines, mäckerel, and milk; and
   Note: The term ‘processing’ shall mean pasteurization, canning, and activities which, through physical or chemical process, alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition.
2. Manufacturing of refined sugar, cooking oil, and packed noodle-based instant meals (NIRC, Sec. 111 (B)).

Question 1086

What amount is allowed as presumptive input tax credit?

Answer 1086

VAT-registered persons are entitled to presumptive Input tax credit equivalent to 4% of the gross value in money of their purchases of primary agricultural food products which are used as inputs in their production (NIRC, Sec. 111 (8)).

Question 1087

Who may avail of input tax credit?

Answer 1087

The input tax credit on importation of goods or local purchase of goods, properties or services by a VAT-registered person shall be creditable:

1. To the importer upon payment of VAT prior to the release of goods from customs custody;
2. To the purchaser of the domestic goods or properties upon consummation of the sale; or
3. To the purchaser of services or the lessee or licensee upon payment of compensation, rental, royalty or fee (R.R. No. 16-05, Sec. 4.110-2).

Question 1088

How is the total creditable input tax computed?

Answer 1088

The amount of input taxes creditable during a month or quarter shall be determined by adding:

1. Excess input tax carried over from the preceding month or quarter; and
2. Input tax creditable to a VAT-registered person during the taxable month or quarter;

Reduced by:

1. Amount of claim for refund or tax credit for VAT; and
2. Other adjustments, such as purchase returns or allowances and input tax attributable to exempt’sale (Sec. 110 (C)).

Question 1089

How is VAT payable determined?

Answer 1089

There shall be allowed as a deduction from the output tax the amount of input tax deductible to arrive at VAT payable on the monthly VAT declaration and the quarterly VAT returns:

1. If, at the end of any taxable quarter, the output tax exceeds the input tax, the excess shall be paid by the VAT registered person; and
2. If the input tax, inclusive of input tax carried over from the previous quarter, exceeds the output tax, the excess input tax shall be carried over to the succeeding quarter or quarters (R.R. No. 16-05, Sec. 4.110-7)

Question 1090

Who may claim for refund or apply for the issuance of tax credit certificate (ТСС)?

Answer 1090

1. A VAT-registered person, with respect to input tax attributable to sales of goods, properties or services which are zero-rated or effectively zero-rated; and
2. A VAT-registered person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Sec. 106 (C) of the Tax Code (NIRC, Secs. 112 (A) and (B)).

Question 1091

What are the requisites for a claim for refund or tax credit of unutilized input VAT on zero-rated or effectively zero-rated sales?

Answer 1091

(VZI-Not2A-BaP-2)

A claim for refund or tax credit for unutilized input VAT on zero-rated or effectively zero-rated sales may be allowed only if the following requisites concur:

1. The taxpayer is VAT-registered;
2. The taxpayer is engaged in Zero-rated or effectively zero-rated sales;
3. The Input taxes are due or paid;
4. The input taxes are Not transitional input taxes;
5. The input taxes have Not been applied against output taxes during and in the succeeding quarters;
6. The input taxes claimed are Attributable to zero-rated or effectively zero-rated sales;
7. For zero-rated sales under Sections 106 (A)(2)(a)(1) and (3); and 108 (B) (1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas;
8. Where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be Proportionately allocated on the basis of sales volume; and
9. The claim is filed within 2 years after the close of the taxable quarter when such sales were made (Luzor Hydro Corp. v. CIR, G.R. No. 188260, November 13, 2013).

Question 1092

May the court deny the request for a refund of untilized input Value-Added Tax (VAT) from zero-rated sales on the basis. that the taxpayer does not have “excess” input VAT from the output VAT?

Answer 1092

No. There is nothing in the law and rules that mandate the taxpayer to deduct the input tax attributable to zero-rated sales from the output tax from regular twelve percent (12%) VAT-able sales first and only the “excess” may be refunded or issued a tax credit certificate. The taxpayer only needs to prove non application or non-charging of the input VAT subject of the claim, among the other requisites under Sec. 112(A) of the NIRC.

Question 1093

For a claim for refund of unutilized input VAT attributable to zero-rated sales, can the CTA declare to first deduct the said amount to zero-rated sales from the output tax derived from the regular twelve percent (12%) VAT-able sales and from there, use the resultant amount as the basis in computing the allowable amount for refund?

Answer 1093

No. The lawmakers had contemplated the input tax attributable to zero-rated sales as an amount that will be refunded or credited and not offset against the output tax. The courts had opportunity to discuss this in the case of Chevron v. CIR to wit:

1. Neither the CTA nor any court can condition the refund of input taxes allocable to zero-rated sales on the existence of “excess” creditable input taxes, which includes the input taxes carried over from the previous periods, from the output taxes. These procedures find no basis in law and jurisprudence.
2. Section 112 (A) of the Tax Code merely requires that the input tax claimed for refund or the issuance of tax credit certificate has not been applied against the output tax.
3. Nowhere in Section 112 (A) does it require that the taxpayer must first offset its input tax with any output tax before its claim for refund may prosper. Notably, the word “excess” does not even appear in this section. The taxpayer only needs to prove non-application or non-charging of the input VAT subject of the claim.
4. There is nothing in the law and rules that mandate the taxpayer to deduct the input tax attributable to zero-rated sales from the output tax from regular twelve percent (12%) VAT-able sales first and only the “excess” may be refunded or issued a tax credit certificate.
5. Congress referred to “any input tax” in the proviso of Section 110 (B), which could mean one, some, or all input tax from zero-rated sales. Had the legislature intended the charging of the input tax attributable to zero-rated sales against the output tax as a preliminary step to the refund or issuance of a tax credit certificate, it would have used the phrase “excess input tax” in the provision.
6. During the September 7, 1993 hearing of the House of Representatives, it was clarified that when the taxpayer is engaged in both regular and zero-rated transactions, the ratable portion allocable to zero-rated sales is “immediately refundable” or creditable.

Note: To call the refundable input tax in Section 110 (B), in relation to Section 112 (A), “excess” input tax is a misnomer since what is being applied for a refund or tax credit is the unutilized or unused input VAT from zero-rated sales. As a matter of fact, there is no “excess” input tax attributable to zero-rated sales as there is no related output tax from which the input tax may be charged against. For context, in zero-rated transactions, the tax rate is set at zero percent. Consequently, the seller charges zero output tax.

Question 1094

When may a VAT-registered person whose registration has been cancelled claim for refund or apply for the issuance of TCC?

Answer 1094

A VAT-registered person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Sec. 106 (C) of the Tax Code may apply for the issuance of tax credit certificate for any unused input tax which he may use in payment of his other internal revenue taxes. He shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized (R.R. No. 16-05, as amended by R.R. No. 13-18, Sec. 4.112-1 (b)).

Question 1095

What is considered as the “date of cancellation” of business registration?

Answer 1095

The date of cancellation being referred hereto is the date of issuance of tax clearance by the BIR, after full settlement of all tax liabilities relative to cessation of business or change of status of the concerned taxpayer. The filing of the claim shall be made only after completion of the mandatory audit.of all internal revenue tax liabilities covering the immediately preceding year and the short perfed return and the issuance of the applicable tax clearance/s by the appropriate BIR Office which has jurisdiction over the taxpayer (R.R. No. 16-05, as amended by R.R. No. 13-18, Sec. 4.112-1 (b)).

Question 1096

When should the application for the issuance of TCC or refund be made?

Answer 1096

The written application for the issuance of a TCC or refund must be filed with the BIR:

1. For VAT-registered person with zero-rated and effectively zero-rated sale - within 2 years after the close of the taxable quarter when the sales were made;
2. For VAT-registered person whose registration has been cancelled - within 2 years from the date of cancellation (R.R. No. 16-05, as amended by R.R. No. 13-18, Sec. 4.112-1 (a)).

Question 1097

Where should the claim for refund or TCC be filed?

Answer 1097

The claim must be filed with the appropriate BIR Office-Large Taxpayers Service (LTS) or RDO having jurisdiction over the principal place of business of the taxpayer.

Claims for input tax refund of direct exporters shall be exclusively filed with the VAT Credit Audit Division (VCAD) (R.R. No. 16-05, as amended by R.R. No. 13-18, Sec. 4.112-1 (C)).

Question 1098

What is the period within which the BIR should decide on the application refund or TCC?

Answer 1098

The Commissioner shall grant a TCC or refund for creditable input taxes within 90 days from the date of submission of the official receipts or invoices and other documents in support of the application filed. Should the Commissioner find that the grant of refund is not proper, the Commissioner must state in writing the legal and factual basis for the denial (NIRC as amended, Sec. 112 (C)).

Note: All claims for refund/tax credit certificate filed prior to January 1, 2018 will be governed by the 120-day processing period (R.R. No. 16-05, as amended by R.R. No. 13-18, Sec. 4.112-1 (d)).

Question 1099

What is the effect of BIR’s failure to act upon the claim for refund within 90 days?

Answer 1099

In the event that the 90-day period has lapsed without having the refund released to the taxpayer-claimant, the VAT refund claim may still continue to be processed administratively provided that the BIR official, agent, or employee who was found to have deliberately caused the delay in the processing of the VAT refund claim may be subjected to penalties imposed under Section 269 of the Tax Code, as amended (R.R. No. 16-05, as amended by R.R. No. 26-18, Sec. 4.112-1 (d)).

Note: The TRAIN law hotably deleted the option of appeal to the CTA within 30 days after the expiration of the 120-day (now 90-day) period within which the BIR is to act on the application and instead imposed a penalty on the erring official, agent, or employee.

Question 1100

What is the remedy of the taxpayer in case of denial of refund by the BIR?

Answer 1100

In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within 30 days from the receipt of the decision denying, the claim, appeal the decision with the CTA judicial claim) (NIRC, Sec. 112 (C)).

Question 1101

Can a taxpayer simultaneously file a claim for tax credit or refund with the CIR and the CTA?

Answer 1101

No. In CIR v. Aichi Forging Company of Asia, the Court delineated the applicability of the 2-year prescriptive period mentioned in Section 112(A) of the NIRC solely to administrative claims for input VAT tax credit or refund. The 2-year period refers to applications for refund/credit filed-with the CIR and not to appeals made to the CTA. Also, both subsections (A) and (C) of Section 112 speak of different periods within which different claims ought to be made. There is nothing in the said Section which sanctions the simultaneous filing of administrative and judicial claims, and the filing of the judicial claim prior to the action of the CIR or the lapse of the 90-day period within which the CIR is required to act on the administrative claim (Energy Development Corp. v. CIR, G.R. No. 203367, March 17, 2021).

Question 1102

Are there exemptions from the mandatory period within which the CIR will grant a refund or tax credit?

Answer 1102

Yes, there are two recognized exceptions to the mandatory and jurisdictional nature of the period:

1. If the CIR, through a specific ruling, misleads a particular taxpayer to prematurely file a judicial claim with the CTA, such specific ruling is applicable only to the particular taxpayer; and
2. If the CIR issued a general interpretative rule in accordance with Section 425 of the Tax Code which misleads all the taxpayers into prematurely filing judicial claims with the CTA.

Note: BIR Ruling No. DA-489-03 falls under the second exception, stating that a taxpayer-claimant may seek judicial relief with the CTA by filing a petition for review without waiting for the 120-day [now 90-day] period to lapse. Thus, judicial claims filed during the window period from December 10, 2003 to October 6, 2010, need not wait for the exhaustion of the 120-day [now 90-day] period (Hedcor Sibulan, Inc. v. CIR, G.R. No. 202093, September 15, 2021).

Question 1103

What is the effect of the taxpayer’s failure to comply with the period of filing the judicial claim?

Answer 1103

Failure to comply with the period of filing the judicial claim bars the taxpayer’s claim for tax refund or credit (CIR v. San Roque Power Corporation, G.R. No. 187485, February 12, 2013).

Question 1104

When is the claim for refund considered to be filed?

Answer 1104

The claim/application is considered to have been filed only upon submission of the official receipts or invoices and other documents in support of the application as prescribed under pertinent revenue issuances (R.R. No. 16-05, as amended by R.R. No. 13-18, Sec. 4.106-5 and 4.108-5).

Question 1105

Who are liable to register for VAT?

Answer 1105

1. Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, or engages in the sale or exchange of services, if:
   a. His gross sales or receipts for the past 12 months, other than those that are exempt under Section 109(A) to (BB), have exceeded P3 Million; or
   b. There are reasonable grounds to believe that his gross sales or receipts for the next 12 months, other than those that are exempt under Section 109(A) to (BB), will exceed P3 Million (NIRC, Sec. 236 (G)(1)); and
2. Franchise grantees of radio and television broadcasting, whose gross annual receipt for the preceding calendar year exceeded P10 Million, shall register within 30 days from the end of the calendar year (R.R. 16-05, Sec. 9.236-1(b)).

Question 1106

What is the effect if a person liable to register for VAT fails to register?

Answer 1106

Every person who becomes liable to be registered for VAT but fails to register shall be liable to pay VAT as if he were a VAT-registered person, but without the benefit of input tax credits for the period in which he was not properly registered (R.R. 16-05, Sec. 9.236-1 (b)).

Question 1107

What is the “optional registration” for VAT of exempt person?

Answer 1107

Any person who is not required to register for VAT may elect to register for VAT by registering with the Revenue District Office that has jurisdiction over the head office of that person and paying the annual registration fee (NIRC, Sec. 236 (H)(1)).

Question 1108

When may a person who availed of optional VAT registration cancel the same?

Answer 1108

Any person who elects to register under the optional VAT registration shall not be allowed to cancel his registration for the next three (3) years (NIRC, Sec. 236(H)(1))

However, for franchise grantees, of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed P10 Million, once the option is exercised, it shall be irrevocable (NIRC, Sec. 119).

Question 1109

Who are not allowed to avail of the optional VAT registration?

Answer 1109

Individual citizens and individual resident aliens who are qualified and elect to be taxed at 8% tax on gross sales or receipts shall not be allowed to avail of optional VAT registration (NIRC, See: 236(H)(2)).

Question 1110

What are the remedies available to the Government under the NIRC, as amended?

Answer 1110

ADMINISTRATIVE REMEDIES
1. Assessment; and
2. Collection
a. Enforcement of a tax lien
b. Distraint of personal property and garnishment of bank deposits
c. Levy of real property
d. Compromise and abatement
e. Penalties and fines
f. Non-availability of injunction to restrain collection of tax
g. Forfeiture; and
h. Suspension

JUDICIAL REMEDIES
1. Civil action
2. Criminal action

Question 1111

What are the powers and duties of the BIR with respect to internal revenue taxes?

Answer 1111

The BIR’s powers and dúties shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the CTA and the ordinary courts (NIRC, Sec. 2)

Question 1112

How does the BIR exercise its power to make assessments?

Answer 1112

After a return has been filed by the taxpayer, the CIR or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax, notwithstanding any law. requiring the prior authorization of any government agency or instrumentality, Provided, however, That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer (NIRC, Sec. 6 (A)).

Question 1113

What is the procedural due process requirement in the issuance of a deficiency tax assessment by the BIR?

Answer 1113

Due process is satisfied when the following modes of procedure are followed in the issuance of a deficiency tax assessment:

1. Issuance and proper service to the subject taxpayer of a Letter of Authority (LOA);
2. Tax Audit or Investigation;
3. Issuance and proper service to the subject taxpayer of a Notice of Discrepancy (NOD);

Note: Under RR No. 22-2020, if a taxpayer is found to be liable for deficiency tax or taxes in the course of an investigation, the taxpayer shall be informed through a Notice of Discrepancy. With this, Notice of Discrepancy is now prepared instead of Notice of Informal Conference.

4. Issuance and proper service to the subject taxpayer of Preliminary Assessment Notice (PAN);
   
5. Issuance and proper service to the subject taxpayer of Formal Letter of Demand/ Final Assessment Notice (FLD/FAN); and
   
6. Administrative Action/Inaction on Disputed Assessment (RR No. 12-99, as amended by RR No. 18-13, R.R. No. 7-18, and R.R. No. 22-20).

Question 1114

What is an assessment?

Answer 1114

In the context in which it is used in the NIRC, an assessment is a written notice and demand made by the BIR-on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed (Adamson Vi CA, G.R. Nos. 120935 & 124557, May 21, 2009).

Question 1115

What are the kinds of assessments?

Answer 1115

1. Self-Assessment - the tax is assessed by the taxpayer himself, refiected in the return fed by him, and paid on the day of filing of the return (pay-as-you-file system (ABAN, Law of Basic Taxation, p. 176)
2. Deficiency Assessment - made by the tax assessor whereby the correct amount of the tax is determined after an examination or investigation is conducted. This assessment is made for the following reasons:
   a. The amount ascertained, exceeds that which is shown as the tax by the taxpayer in his return;
   b. No amount of tax is, shown in the return or
   c. The taxpayer die not file any return at all (NIRC, Sec. 56 (B)):
3. Illegal and Void Assessment Han/assessment wherein the tax assessor has no power to act at all (Victorias Milling Co., Inc. v. CTA, G.R. No. L-24213, March 13, 1968);
   
4. Erroneous Assessment - one wherein the assessor has the power to assess but errs in the exercise of such power (ABAN, supra at 176);
   
5. Disputed Assessment - takes place when a taxpayer questions an assessment and asks the Collector to reconsider or cancel the same because he believes that he is not liable therefor (St. Stephen’s Association and St. Stephen’s Chinese Girls School. v. CIR, G.R. No. L-11238, August 21, 1958); or
6. Jeopardy Assessment - tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to:
   a. Comply with audit and investigation requirements to present his books of accounts and/or pertinent records; or
   b. Substantiate all or any of the deductions, exemptions, or credits claimed in his return (R.R No. 30-02, Sec. 3(1)(a)).

Question 1116

What are the contents of a deficiency assessment?

Answer 1116

1. A computation of the amount of tax that must be paid by the taxpayer;
2. A demand to pay the tax within a specified period (CIR v. Pascor Realty and Development Corporation, G.R. No. 128315, June 19, 1999).

Note: The Final Assessment Notice (FAN) must indicate the definite amount of tax to be paid and the due date for the payment. Otherwise, it is not a valid demand and is therefore an invalid assessment. (CIR v. Fitness by Design, Inc., G.R. No. 215957, November 9, 2016).

Question 1117

What are instances which do not constitute an assessment from the BIR?

Answer 1117

1. A written communication by a revenue officer of tax liability of the taxpayer (Adamson v. CA, G.R. No. 120935, May 21, 2009);
2. The advice of tax deficiency and preliminary five-day letter given by the CIR to an employee of the taxpayer (Samar-l Electric Cooperative, Inc., v. CIR, G.R. No. 193100, December 10, 2014) and
3. The Revenue Officers’ Affidavit-Report (CIR v. Pascor Realty and Development Corporation, G.R. No: 128315, June 29, 1999)

Question 1118

What are the essential requisites of a valid assessment (FLD/FAN)?

Answer 1118

(WCD-FacLOS)

1. The assessment must be in Writing and signed by the Commissioner or his duly authorized representative (NIC, Sec. 228, Par. 2);
2. It must contain not only a Computation of tax liabilities, but also a Demand for payment within a definite due date;
3. It must state the Factual and legal bases of the assessment on which it is based (NIRC, Sec, 228, Par: 2):
4. It must be issued on account of or covered by a validly issued Letter of Authority (CIR v. Sony, Philippines, Inc., G.R. No. 178697, November 17, 2010);

Note: Identifying the name of the Revenue Officer (RO) who will be conducting the audit is a jurisdictional requirement of a valid assessment. Otherwise, taxpayers would be in a situation where they cannot verify the existence of the authority of the RO to conduct the examination and assessment. Due process requires that taxpayers must have the right to know that the revenue officers are duly authorized to conduct the examination and assessment (CIR v. McDonald’s Philippine Realty Corp., G.R. No. 242670, May 10, 2021). Without the LOA, an assessment or examination is a nullity. Due process requires that revenue officers secure a LOA before examining and assessing a taxpayer. (Medicard Philippines v. CIR, G.R. No. 222743, April 5, 2017).

5. It must be issued within the Original prescriptive period prescribed by law or within the extended prescriptive period as validly agreed between the BIR and the taxpayer (NIRC, Secs. 203 & 222); and
6. It must be Served on and received by the taxpayer (CIR v. Pascor Realty & Development Corp., G.R. No. 128315, June 29, 1999).

Question 1119

What is the nature of the CIR’s power to make assessments?

Answer 1119

Assessment is discretionary on the part of the CIR. Mandamus will not lie to compel him to assess tax if after investigation, he finds no ground to assess (MERALCO Securities Co. v. Savellano, G.R. Nos. L-36181 & L-36747, October 23, 1992).

However, the CIR may be compelled to assess by mandamus if in the exercise of his discretion, there is evidence of arbitrariness and grave abuse of discretion as to go beyond the statutory authority.

Question 1120

What is tax delinquency?

Answer 1120

Tax delinquency refers to the state of a person upon whom the personal obligation to pay the tax has been fixed by lawful assessment and who thereafter fails to pay the tax within the time limited by law (U.S. v. Abejo, G.R. No. L-12362, August 29, 1917).

Question 1121

What is tax deficiency?

Answer 1121

1. The amount by which the tax imposed exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or

2. If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax (NIRC, Sec. 56 (B)).

Question 1122

Distinguish tax delinquency from tax deficiency.

Answer 1122

(1) as to when it occurs
Tax Delinquency: when taxpayer fails to pay the amount of the tax due on any return required to be filed (i.e., the taxpayer filed a return but did not pay the entire amount written in the return; or When the taxpayer fails to pay the deficiency tax on the date appearing in the demand of the CIR
Tax Deficiency: when the amount by which the tax imposed by law as determined by the CIR or his authorized representative exceeds the amount of tax in the taxpayer’s return; or If there is no amount of tax in his return or if no return is made, then the amount by which the tax as determined by the CIR or his authorized representative exceeds the amounts previously assessed or collected without assessment as deficiency

(2) as to collection
Tax delinquency: can be collected administratively via distraint or levy or by judicial action
Tax Deficiency: must be assessed prior to collection as the deficiency has to be determined first

Question 1123

What is the general rule on prescription for assessment of taxes?

Answer 1123

As a general rule, internal revenue taxes shall be assessed within 3 years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the 3-year period shall be counted from the day the return was filed. For purposes of Section 203, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day (NIRC, Sec. 203).

Note: In other words, the assessment must be made within 3 years from the date of actual filing of the return or the last day for filing the return, whichever is later (INGLES, Reviewer, supra at 418).

Question 1124

What is the effect of filing a “wrong” return on the prescriptive period to assess?

Answer 1124

If the taxpayer files a wrong return, it is as though he filed no return at all. In situations like this, the 10-year prescriptive period will apply (Butuan Sawmill, Inc. v. CA, G.R. No. L-20601, February 28, 1966).

Question 1125

What happens if the day on which the assessment is due to prescribe is a Saturday?

Answer 1125

If the date on which assessment is due to prescribe falls on a Saturday, the following day being a Sunday, it is understood that the Government has until the next succeeding business day or Monday within which to assess the tax (CIR v. Western Pacific Corp., G.R. No, L-18804, May 27, 1965).

Question 1126

What is the effect if an assessment is made beyond the prescribed period?

Answer 1126

Assessments made beyond the prescribed period would not be binding on the taxpayer (Tupaz v. Ulep, G.R. No. 127777, October 1, 1999).

Question 1127

What are the exceptions to the general rule on prescription for assessment of taxes?

Answer 1127

FFW

In the following cases, the general prescriptive period of 3 years does not apply:

1. In the case of a False or fraudulent return with intent to evade tax or of Failure to file a return, 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 10 years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof; and
2. If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon.

Question 1128

What is the nature of the waiver of the Statute of Limitations?

Answer 1128

A waiver of the statute of limitations is a derogation of a taxpayer’s right to security against prolonged and unscrupulous investigations. Thus, it must be carefully and strictly construed. Hence, both the assessment and collection “should be made in accordance with law as any arbitrariness will negate the very reason for government itself (La Flor Dela Isabela Inc. v. CIR, G.R. No. 202105, April 28, 2021).

Question 1129

What are the requisites for a valid waiver of the Statute of Limitations?

Answer 1129

(WEx-SES)

The following requisites must concur.

1. The waiver must be in Writing;.

2. It must be Executed before the expiration of the period to assess or to collect taxes. The date of execution shall be specifically indicated in the waiver;

3. It must be Signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials;

4. The Expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription should be indicated and

5. Except for waiver of collection of taxes which shall indicate the particular taxes assessed, the waiver need net Specify the particular taxes to be assessed nor the amount thereof, and it may simply state “all internal revenue taxes (R.M.O.
No. 14-16).

Note: R.M.O. No. 14-16, issued on April 4, 2016, revised the guidelines relative to the execution of the Waiver of Statute of Limitations. Thus, the waiver no longer needs to:

1. Conform to the form prescribed under R.M.O. No. 20-90 or RDAO No. 05-01;
   2. Be notarized; or
   3. Indicate the date of acceptance by the BIR of such waiver.

Question 1130

What is the effect of a defective or invalid waiver of the Statute of Limitations?

Answer 1130

Defective and invalid waivers of Statute of Limitations do not extend the CIR’s period to issue assessments. Thus, the right of the government to assess or collect the alleged deficiency taxes is already barred by prescription. Assessments issued by the BIR beyond the three-year prescriptive period are considered void and of no legal effect (CIR v. Systems Technology Institute, G.R. No. 220835, July 26, 2017).

Question 1131

Can a taxpayer belatedly question the defect on the waivers, on the ground that the alleged defects caused by the BIR outnumber the one caused by the taxpayer?

Answer 1131

No. If a waiver suffers from defects on account of both parties, the waiver’s validity in relation to the timeliness of the CIR’s subsequent issuance of a tax assessment is not determined by a mere plurality of the defects committed between the BIR and the taxpayer. The taxpayer’s contributory fault or negligence, coupled with estoppel, will render effective an otherwise flawed waiver, regardless of the physical number of mistakes attributable to a party (Asian Transmission Corp. v. CIR (Resolution), G.R. No. 230861, February 14, 2022).

Question 1132

When may a waiver be rendered valid despite not being in conformity with the requisites for its validity?

Answer 1132

Where the CIR and the taxpayer are in pari delicto, to uphold the validity of the waivers would be consistent with the public policy embodied in the principle that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need (CIR v. Next Mobile, Inc., G.R. No. 212825, December 7, 2015).

Question 1133

What is the effect if the waiver is defective due to BIR’s fault?

Answer 1133

The waiver is void. When the defect to the waiver is because the BIR did not follow its own rules on waiver, the waiver has no effect and do not extend the 3-year prescriptive period under the NIRC (CIR v. Philippine Daily Inquirer, Inc., G.R. No. 213943, March 22, 2017).

Question 1134

Will the waiver bar the taxpayer from invoking the prescription?

Answer 1134

No. A waiver of the statute of limitation, whether on assessment or collection, should not be construed as a waiver of the right to Invoke the defense of prescription but, rather, an agreement between the taxpayer and the BIR to extend the period to a date certain, within which the later could still assess or collect taxes due (CIR v. The Stanley Works Sales (PHL) no., G.R. No. 187589, December 3, 2014).

Question 1135

What are the differences among false return, fraudulent return, and non-filing of return?

Answer 1135

(1) as to nature
False Return: implies deviation from the truth usually due to mistake, carelessness, or ignorance
Fraudulent Return: implies intentional or deceitful entry with intent to evade the taxes due
Non-filing: omission to file the return

(2) as to prescriptive period
False return: 10 years from the discovery of the falsity
Fraudulent return: 10 years from the discovery of fraud
Non-filing: 10 years from the discovery of the omission

(3) as to applicability of surcharge penalty
False return: not subject to 50% surcharge penalty
Fraudulent return: subject to 50% surcharge penalty
Non-filing: subject to 25% surcharge penalty; but if due to willful neglect, subject to 50% surcharge penalty.

Question 1136

When is the Statute of Limitations suspended?

Answer 1136

(Pre-Ad-WO)

The running of the Statute of Limitations provided in Sections 203 and 222 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection in respect of any deficiency shall be suspended in the following instances:

1. For the period during which the Commissioner is Prohibited from making the assessment or beginning distrainf or levy or a proceeding in court and for 60 days thereafter;
   When the taxpayer requests for a Reinvestigation which is granted by the Commissioner;
   
2. When the taxpayer cannot be located in the Address given by him in the return filed upon which a tax is being assessed or coliected Provided, That, if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended;
   
3. When the Warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and
4. When the taxpayer is Out of the Philippines (NIRC, Sec. 223).

Note: The grounds for suspension, of the Statute of Limitations for collection of taxes are the same as the grounds for suspension thereof in an assessment.

Question 1137

What is tax collection?

Answer 1137

It is the means, process, and method of implementing the tax law for the purpose of satisfying the tax obligation. It is the actual effort in obtaining payment of the tax (1 DOMONDON, Bar Q&A Taxation, p. 190).

Question 1138

What are the remedies available to the government for the collection of delinquent taxes?

Answer 1138

The Government has the following civil remedies for the collection of internal revenue taxes, fees, or charges, and any increment thereto resulting from delinquency:

1. Administrative Remedies:
   a. Tax lien (NIRC, Sec. 219);
   b. Distraint and levy (NIRC, Sec. 205);
   c. Forfeiture of real property (NIRC, Sec. 224);
   d. Further distraint and levy (NIRC, Sec. 217); and
   e. Suspension of business operations (NIRC, Sec. 115).
2. Judicial Remedies
   a. Civil; and
   b. Criminal (NIRC, Sec. 205).

Note: The remedy for enforcement of statutory penalties of all sorts shall be by criminal or civil action (NIRC, Sec. 221).

Question 1139

Is assessment necessary before collection?

Answer 1139

A valid assessment should precede the enforcement of collection remedies (NIRC, Sec. 203). Tax collection must be preceded by a valig assessment to allow the taxpayer to protest the assessment, present their case and adduce supporting evidence. Without complying with taxpayer of the government’s claim, there can be no deprivation of property, because no effective protest can be made (GIR v. Unioll Corp., G.R. No. 204405, August 04, 2021).

Question 1140

What are the instances when a proceeding in court for the collection of tax may commence even without prior assessment?

Answer 1140

1. No assessment issued within the 3-year period
2. When the unpaid tax is a tax due per return as in case of a self-assessed income tax under the pay-as-you-file system
3. False or fraudulent return with intent to evade tax; or
4. Failure to file return (NIRC, Sec. 222 (a)).

Note: A warrant of distraint and/or levy without issuance of a FAN is void (Golden Harvest Global Corp. v. CIR, CTA Case No. 7503, September 18, 2009).

Question 1141

When does assessed tax become collectible?

Answer 1141

It becomes collectible when the assessment becomes final and executory. (R.R. No. 12-99, Sec. 3.1.1, as amended by R.R. No. 18-13, supra).

Question 1142

When does the assessment become final and executory?

Answer 1142

It becomes final and executory upon:

1. Failure to protest FLD/FAN within the prescribed period;
2. Failure to appeal FDDA within the prescribed period; or
3. Failure to appeal an adverse decision of the court within the prescribed period (Id.)

Question 1143

What is a tax lien?

Answer 1143

Tax lien is a legal claim or charge on property, real or personal, established by law as security in default of the payment of taxes (Hong Kong and Shanghai Banking Corp. v. Rafferty, G.R. No. L-13188, November 15, 1918).

Question 1144

What is the nature of a tax lien?

Answer 1144

When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand (issuance of FLD/FAN), the amount so demanded shall be a lien in favor of the government from the time the assessment was made by the Commissioner until paid with interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to taxpayer (NIRC, Sec. 219)

Question 1145

Which is superior - a tax lien annotated on a title or a prior annotation of a notice of levy on execution?

Answer 1145

A prior annotation of a notice of levy on execution is superior. A tax lien annotated on a title is not superior. Prior registration of a lien creates a preference as the act of registration is the operative act that conveys and affects the land, even against subsequent judgment creditors. Sec. 219 of the NIRC provides that a tax lien is enforceable against all property and rights to property belonging to the taxpayer, and retroacts to the time when the tax assessment was made. However, the tax lien shall not be valid against any judgment creditor until notice of such lien is filed with the Register of Deeds of the city, or province, where the taxpayer’s properties are located. In other words, it is only after the notice of tax lien is annotated on the pertinent title that a judgment creditor’s rights can be affected and the tax lien may be considered to retroact to the date of assessment. (BIR v. Tico Insurance, G.R. No. 204226, April 8, 2022).

Question 1146

Which is superior - a tax lien or a claim based on a judgment?

Answer 1146

The rule is settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. Execution sales affect the rights of the judgment debtor only, and the purchaser in an auction sale acquires only such rights as the judgment debtor has at the time of sale. It is also well-settled that the sheriff is not authorized to attach or levy on property not belonging to the judgment debtor (CIR v. NLRC, G.R. No. 74965, November 9, 1994).

Question 1147

When shall lien be valid against any mortgagee, purchase or judgment creditor?

Answer 1147

The lien shall be valid against any mortgagee, purchaser or judgment creditor only when notice of such lien shall be filed by the CIR in the office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located (NIRC, Sec. 219).

Question 1148

What is distraint?

Answer 1148

Distraint is a remedy whereby the collection of delinquent taxes is enforced on the goods, chattels, or effects and other personal property of whatever character of the taxpayer (NIRC, Sec. 205(a)).

Question 1149

What are the kinds of distraint?

Answer 1149

1. Actual Distraint - resorted to when there is actual delinquency in tax payment (NIRC. Sec. 207(a)); and

2. Constructive Distraint - a preventive remedy which aims at forestalling a possible dissipation of the taxpayer’s assets when delinquency sets in (NIRC, Sec. 206).

Question 1150

What is garnishment?

Answer 1150

Garnishment refers to a warning to a person in whose hands the effects of another are attached, not to pay the money or deliver the property or allow withdrawal of deposits of the defendant in his hands (MAMALATEO, Reviewer, p. 696).

By the process of garnishment, the plaintiff virtually sues the garnishee for a debt due to defendant. The debtor stranger becomes a forced intervenor (Director of Bureau of Commerce and Industry v. Pedro Concepcion, G.R. No. L-9031, May 22, 1922). In other words, through the service of the writ of garnishment, the garnishee becomes a “virtual party” to, or a “forced intervenor” in, the case and the trial court thereby acquires jurisdiction to bind him to compliance with all orders and processes of the trial court with a view to the complete satisfaction of the judgment of the court (Bank of the Philippine Islands v. Carlito Lee, 6.R. No. 190144, August 1, 2012)

Question 1151

May the State distrain (garnish) bank accounts for the satisfaction of tax delinquencies?

Answer 1151

Yes. Bank accounts may be distrained notwithstanding ‘the Bank Secrecy Act (R.A. No. 1405) which prohibits Inquiry into bank accounts, since in the case of distraint, no inquiry is made, The BIR simply seizes so much of the deposit as is sufficient to discharge the obligation without having to know how much the, deposits are, or where the money or any part of it came from.

Question 1152

What is the right of preemption?

Answer 1152

If at any time prior to the consummation of the sale, all proper charges are paid to the officer conducting the sale, the distrained properties shall be restored to the owner (NIRC, Sec. 210).

Question 1153

What is levy?

Answer 1153

Levy involves the seizure by the government of real property to enforce payment of taxes followed by the public sale of such property, if the taxpayer fails to pay the taxes voluntarily (NIRC, Sec, 207(B)).

Question 1154

How may the taxpayer redeem the property sold on levy?

Answer 1154

The real property may be redeemed by the delinquent taxpayer or anyone for him, within 1 year from the date of the sale, by paying to the Revenue District Officer the amount of:

1.Public Taxes;
2.Penalties;
3.Interests thereon from the time of the delinquency to the date of sale; and
4.Interest on purchase price at 15% per annum from the date of purchase to the date of redemption (NIRC, Sec. 214).

Question 1155

When is a Final Deed of Sale issued to the purchaser in a sale on levy?

Answer 1155

The Final Deed of Sale shall be given to the purchaser only after the failure of the taxpayer to redeem the property after the expiration of redemption period (NIRC, Sec. 202).

Question 1156

What is the remedy of the Government when there is still tax delinquency after initial distraint or levy?

Answer 1156

Distraint and levy may be repeated, if necessary, until the full amount of the tax delinquency due, including all expenses, is collected from the taxpayer (NIRC, Sec. 217). Further, distraint and levy is necessary because a clever taxpayer may be able to conceal most of the valuable part of his property from the revenue officers to escape payment of his tax liability by sacrificing an insignificant portion of his holdings (Castro v. Collector of Internal Revenue, G.R. No. L-12174, April 26, 1962).

Question 1157

What is forfeiture?

Answer 1157

The incurring of a liability to pay a definite sum of money as the consequence of violating the provisions of some statute or refusal to comply with some requirement of law (Black’s Law Dictionary, 4th Edition, p. 778).

Question 1158

How is forfeiture enforced by the Government?

Answer 1158

Forfeiture is enforced:

1.In case of personal property - by seizure and sale, or destruction of specific forfeited property; and
2.In case of real property - by judgment of condemnation and sale in a legal action or proceeding, civil or criminal, as the case may require (NIRC, Sec. 224).

Question 1159

Distinguish “seizure” and “forfeiture”?

Answer 1159

In seizure for the enforcement of tax lien, the residue, after deducting the tax liability and expenses, will go to the taxpayer (Bank of the Philippine Islands v. Trinidad, G.R. No. 16014, October 4, 1941) while in forfeiture, all the proceeds of the sale will go to the coffers of the government (U.S v. Surla, G.R. No. 6536, September 2, 1911).

Question 1160

What are the prescriptive periods and corresponding methods of collection of taxes allowed to the government?

Answer 1160

The prescriptive periods and corresponding methods of collection of taxes allowed to the government are as follows:

1. In case of internal revenue taxes assessed within the 3-year period under Section 203 - Within another 3-year period by distraint, levy or court proceeding (CIR v. CTA, G.R. No. 258947, March 29, 2022, citing CIR v. United Salvage and Towage (Phils.), Inc., G.R. No. 197515, July 2, 2014).
   2.In case of false or fraudulent returns with intent to evade the tax or failure to file a return:

a.Within 5 years from assessment by distraint, levy or by a proceeding in court (NIRC, Sec. 222(c)); or
b.Within 10 years from discovery of the falsity, fraud or omission, if without assessment, by a proceeding in court (NIRC, Sec. 222(a)).

3. In the case of internal revenue taxes assessed within the extended period in a duly executed Waiver of Statute of Limitations - Within the period agreed upon in writing before the expiration of the 5-year period by distraint, levy or by a proceeding in court. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon (NIRC, Sec. 222 (d)).

Note: The administrative remedies of distraint and levy are available only when the collection is preceded by a valid assessment.

Question 1161

Maligaya Corporation is a company organized under Philippine laws and is engaged in the
construction business, while Althea Inc. is a company based in Atlanta and organized under the laws
of Georgia, USA. Althea is engaged in the construction of buildings. It wants to sell two excavators and
one bulldozer that it has been using for five years now, and so Althea conducted a private bidding
online in which Maligaya won. After Maligaya paid 50 percent of the bid price, the construction
equipment were delivered by Althea. In spite of repeated demands for the payment of the balance,
Maligaya failed to pay forcing Althea to file a collection suit in the Philippines. Maligaya admitted its
failure to pay the balance, but asked the court to dismiss the case on the ground that Althea does not
have the capacity to sue in Philippine courts for its failure to obtain a license to do business in the
Philippines. Meanwhile, Althea claims that it is not doing business in the country and therefore, does
not need to get a license to conduct business, and that it is suing on an isolated transaction. If you were
the judge, will you dismiss the action? Explain.

Answer 1161

If I were the judge, I would not dismiss the action.
The Corporation Code requires foreign corporations transacting business in the Philippines to
get a license to conduct business before they can be permitted to maintain or intervene in any
action, suit, or proceeding in any court or administrative agency in the Philippines.
In this case, however, Althea is not doing business in the Philippines but is instead, engaged in
an isolated transaction, and therefore does not need to secure a license before it can sue in
Philippine courts. The act of entering into a contract with Maligaya does not constitute doing
business in the Philippines but is instead an isolated transaction since Althea was not performing
an act that is in progressive pursuit of its business purpose. And even if Althea was doing
business without a license, Maligaya is already estopped from challenging Althea’s legal
capacity to sue when it entered into a contract with it and already benefitted from the contract.

Question 1162

CHG is a corporation organized under Philippine laws and is engaged in the business of selling paper
copiers. Mario owns 20 percent share in CHG and is the president of the company entrusted with the
management and funds of CHG. Despite CHG being the leading paper copier distributor in the country,
it was suffering from huge losses. The other members of the board later learned that Mario organized
two companies to siphon the assets, funds, goodwill, equipment, and resources of CHG. Mario was
ousted as president and director, and CHG filed a suit for damages against him and the companies
that he organized, further for the reconveyance of its properties. What is the doctrine of corporation
opportunity and will the suit for damages prosper based on this doctrine? Explain.

Answer 1162

Yes, Mario can be held liable for damages for violating his fiduciary duties and acquiring a business opportunity which should belong to the corporation.

Section 33 of the Revised Corporation Code is the relevant provision on the corporate
opportunity doctrine which provides that “where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation thereby obtaining profits
to the prejudice of such corporation, he must account to the latter for all such profits by refunding
the same, unless his act has been ratified by a vote of stockholders owning or representing at
least 2/3 of the outstanding capital stock. This provision shall be applicable, notwithstanding the
fact that the director risked his own funds in the venture.”
Here, Mario, being a corporate officer and director, took a business opportunity available to the
corporation for his own and violated his duty of loyalty to the corporation, serving two masters at
the same time. There being nothing in the facts to show that the stockholders ratified his act, he
should be held liable to pay damages to CHG.

Question 1163

Grilla Restobar is owned and operated by RMN Corporation, which allows its waiters to sing to its
customers on Friday nights. Included in the regular repertoire of the waiters are OPM songs of singer
and composer Juan dela Cruz. Upon learning that Grilla Restobar’s waiters are singing his songs
regularly without asking for his permission and paying royalties, Juan demanded that RMN pay him the
corresponding fees, since he owns the copyright to the said songs. When RMN continued to refuse
paying, Juan filed a complaint for copyright infringement with the Quezon City Regional Trial Court. In
its answer, RMN said that it is not guilty of copyright infringement, since it has no control over the songs
that its waiters are going to sing and even if it had control, there was no copyright infringement, since
the waiters were not being paid extra to sing and the customers were not being asked to pay additional
for listening to the songs. Is RMN liable for copyright infringement? Explain your answer. (

Answer 1163

Yes, RMV has committed copyright infringement as a secondary infringer.
As held by the Supreme Court in the case of COSAC v. Filscap, the owner of a restaurant that
permits a band to perform copyrighted music without obtaining the required license and paying
the corresponding fees is committing copyright infringement as a secondary infringer under the
concept of vicarious infringement when it allowed the commission of infringing acts. Under the
Intellectual Property Code, one of the exclusive rights of a copyright owner is the right of public
performance of the copyrighted work and if someone publicly performs a copyrighted work
without the consent of the copyright owner, then copyright infringement is committed.
Here, the playing of the music is not done privately, the establishment is not a charitable or
religious institution, and the aim is to boost profits by improving customer experience and
therefore commercial in nature. Since RMV’s act does not fall under the limitation to copyright
and the fair use doctrine, the act of playing copyrighted music without the owner’s consent
constitutes copyright infringement.

Question 1164

Ann and Susan formed a partnership for the operation of a Japanese restaurant. They brainstormed
over what name they should call the restaurant and Ann suggested that they name it Kyoto’s Best since
Ann was inspired to open a Japanese restaurant after her recent trip to Kyoto in Japan. A few months
before the soft opening of Kyoto’s Best, Ann left for Japan. Upon coming back, she was surprised to learn that Susan had filed an application for trademark registration for Kyoto’s Best under her name.
The Bureau of Trademarks approved the application. Ann filed an action with the Bureau of Legal
Affairs of the Intellectual Property Office to have the registration cancelled on the ground that she was
the one who came up with the name. Susan, on the other hand, insists that as the one to first file an
application, she had a better right to own the trademark. Is Susan correct? Rule on the cancellation
petition.

Answer 1164

The registration of the trademark “Kyoto’s Best” in the name of Susan should be cancelled on
the ground that the registration was obtained in bad faith.
As held by the Supreme Court in the case of Zulueta vs Cyma Greek Taverna, the first-to-file
rule in trademark registration should not be interpreted to mean that the first application to be
filed should in all cases be the application that is granted. Where the first application is
unregistrable, it will not obtain priority right. Registrations resulting from applications which are
tainted with bad faith or fraud are void as initio. Bad faith means copying and using somebody’s
else’s trademark while fraud may be committed by making false claims on origin, ownership,
and use of the mark in question in the application.
Here, Susan’s application was made in bad faith. Susan was aware that it was Ann who
conceptualized the mark. One of the grounds for cancellation of trademark registration is when
the registration was obtained in bad faith. Therefore, the registration should be cancelled

Question 1165

Rio is the registered owner of a Mitsubishi Montero. Wanting to save on expenses, Rio secured a
compulsory motor vehicle liability (CTPL) insurance coverage for her vehicle covering the period June
1, 2023 to May 31, 2024. On September 2023, while driving the vehicle, Rio hit another car whose
driver Juanito was injured as a result. The damage to Juanito’s car was estimated at P50,000, while
Juanito’s medical expenses as a result of the accident amounted to another P30,000. Rio was also
injured and her medical expenses amounted to P40,000. How much can Rio recover from the insurance
company and why? Can Juanito directly file a claim with Rio’s insurer? Explain.

Answer 1165

Rio can only claim P30,000 from her insurance company. CTPL only covers bodily injuries or
death caused to third parties in an accident arising from the use of the insured motor vehicle. It
does not pay for expenses incurred as a result of damage to one’s own vehicle, or to a thirdparty vehicle and property, or to injury to the insured, or to a passenger, unless the vehicle is a
public utility vehicle.
Meanwhile, Juanito can directly file a claim with Rio’s insurer for the P30,000 in medical
expenses resulting from the accident. In a case decided by the Supreme Court, it was held that
where the insurance contract provides for indemnity against liability to third persons, the liability
of the insurer is direct and such third persons can directly sue the insurer.

Question 1166

Mr. Debtor is both a depositor and borrower of YDL Bank. Due to YDL Bank’s inability to continue in
business without involving losses to its depositors and creditors, the Bangko Sentral ng Pilipinas
ordered the closure of YDL Bank and appointed Mr. Takeover as receiver. During receivership, Mr.
Takeover stopped paying interests on deposits, which accrued during the period that YDL Bank is nonoperational. Because of this, Mr. Debtor refuses to pay interests on his loan to YDL Bank, arguing that
since the bank stopped paying interest on his deposits, then he also shouldn’t be obliged to pay interest
on his loan. Is the argument of Mr. Debtor correct?

Answer 1166

No. The argument of Mr. Debtor is incorrect.
Under the law, closed banks cannot be held liable to pay interest on deposits which accrued
during the period when the bank is actually closed and non-operational.
On the other hand, the borrower or debtor of the closed bank is obligated to pay interest even
after the bank is closed. The receivership of a closed bank is an extraneous circumstance and
has no effect on a borrower’s obligation.
(See Sec. 30, New Central Bank Act; Sec. 13e of RA 3591 as amended by Sec. 26 of RA 10846)

Question 1167

Mr. Bargani was an executive of Pharmalie that was involved in the overpriced sale of equipment
needed by the Department of Health (DOH) for the pandemic. The Senate Blue Ribbon Committee
conducted an investigation and found that DOH bought said equipment from Pharmalie for P2 billion
pesos, when they could have purchased it elsewhere for only P500 million pesos. The Committee
believed that the sale was grossly disadvantageous to the government and in violation of the Anti-Graft
& Corrupt Practices Act. The Committee then issued subpoenas against the banks where Pharmalie
maintained its deposits, with a directive to produce bank records of Mr. Bargani and Pharmalie, so that
it may establish the money trail and conclude its investigation. Was the Senate Blue Ribbon Committee
correct in issuing the subpoena against the banks?

Answer 1167

No, the Senate Blue Ribbon Committee erred in issuing the subpoena.
Under the Law on Secrecy of Bank Deposits, the Senate Blue Ribbon Committee is not among
those authorized to issue the subpoena or to examine, inquire or look into bank deposits.
Those authorized to look into bank deposits depending on the circumstances are limited to the
Court of Appeals, Ombudsman, Commissioner of Internal Revenue, Anti-Money Laundering
Council, Bangko Sentral ng Pilipinas, Philippine Deposit Insurance Corporation, Commission on
Audit, and the Philippine Commission on Good Government, among others.

Question 1168

Atty. Goodman is Mr. Walter’s lawyer in a criminal case for estafa before the Regional Trial Court of
Manila. After one of their hearings, Mr. Walter gave Atty. Goodman P10 million pesos for safekeeping,
which Mr. Walter admitted in confidence, was part of the proceeds of his swindling activities. Atty.
Goodman’s wife found out about this and reported it to the Anti-Money Laundering Council (AMLC). The AMLC demanded Atty. Goodman to disclose the details of his transaction with Mr. Walter, but he
refuses. Can Atty. Goodman validly refuse to report his transaction with Mr. Walter?

Answer 1168

Yes, Atty. Goodman can validly refuse to report the transaction.
Under the Anti-Money Laundering Act (Sec. 7, RA 10365), lawyers acting as independent legal
professionals are not required to report covered or suspicious transactions if the relevant
information was obtained in circumstances where they are subject to legal professional privilege.
In this case, Atty. Goodman received the money from Mr. Walter as his legal counsel in the
estafa case, and is therefore, not required to report the same to the AMLC.

Question 1169

On April 18, 2023, at around 9:00 p.m., Anthony Cruz (Cruz) allegedly purchased a pair of Ferragamo
shoes worth US$363.00 from Duty Free Philippines Fiesta Mall. Ana Margarita Lim (Lim), the cashier
on duty, facilitated the sales transaction. Cruz paid for the purchase using a Citibank Visa credit card
bearing the name “Gerry Santos,” with credit card number 1234 1234 1234 1234. When Lim asked for
Cruz’s Duty Free shopping card, Cruz presented a shopping card with the name of “Rodolfo Garcia.”
Lim asked for another identification card, and Cruz gave her a driver’s license bearing the name “Gerry
Santos.” Lim proceeded to the mall’s Electronic Section to swipe the credit card for approval. The card
was approved, but she noticed that the last four (4) digits of the card were not properly embossed and
its validity date started in November 2023. She called Citibank to verify the credit card. Upon
verification, Citibank informed Lim that the credit card was counterfeit and that the real “Gerry Santos”
was the Head of Citibank’s Fraud Risk Management Division. Lim was advised to transfer the matter
to the Security Department. If Cruz is to be charged with violation/s of law, what charge/s would be
most appropriate to file?

Answer 1169

Cruz is to be charged with violation of Sections 9(a) and 9(e) of Republic Act No. 8484, otherwise
known as the Access Devices Regulation Act of 1998.
Under the law, the following acts shall constitute access device fraud and are declared to be
unlawful: (i) producing, using, trafficking in one or more counterfeit access devices; and (ii)
possessing one or more counterfeit access devices or access devices fraudulently applied for.
Here, petitioner was found in possession of Citibank Visa credit card number 1234 1234 1234
1234, which bore the name “Gerry Santos.” He used the same credit card to purchase
Ferragamo shoes worth US$363.00 at Duty Free Philippines Fiesta Mall. The Citibank Visa
credit card was later proven to be a counterfeit access device.
(See Cruz v. People, G.R. No. 210266, June 7, 2017, 810 Phil 801-821)

Question 1170

Best Harvest hired Ivana Lin to transport 430 bags of soya beans worth PhP230,000.00 from
Fortune Integrated Port Services, Inc. (Fortune) in Port Area, Manila to Great Feeds in Camarin,
Novaliches, Quezon City. That same day, the bags of soya beans were loaded into Lin’s hauling truck.

Her employee, Raimund Buendia, then delivered the goods to Great Feeds. At Great Feeds, however,
the shipment was rejected. Upon learning of the rejection, Best Harvest instructed Buendia to deliver
and unload the soya beans at its warehouse in Malabon. Yet, the truck and its shipment never reached
Best Harvest’s warehouse. Thereafter, Lin reported her missing truck to the Western Police District
Anti-Carnapping Unit and the National Bureau of Investigation (NBI). After some time getting leads, the
NBI informed Lin that her missing truck had been found in Cavite. However, the truck had been
cannibalized and had no cargo in it. Lin filed a Complaint against Buendia and Sergio Andal, whom she
accused of conspiring with each other to steal the shipment entrusted to her. An Information for theft
was filed against Andal, while Buendia was charged with qualified theft. However, it was only Andal,
who was found guilty and sentenced to prison. Subsequently, Best Harvest, through counsel, sent Lin
a letter demanding full payment for the missing bags of soya beans. Unsuccessful, Best Harvest sent
her another demand letter. Still, Lin refused to pay for the missing shipment or settle the matter with
Best Harvest. Thus, Best Harvest filed a Complaint against Lin. Is Lin liable, as a common carrier, for
the loss of the soya beans?

Answer 1170

Yes, Ivana Lin is liable, as a common carrier, for the loss of the soya beans.
Article 1734 of the Civil Code holds a common carrier fully responsible for the goods entrusted
to him or her, unless there is enough evidence to show that the loss, destruction, or deterioration
of the goods falls under any of the enumerated exceptions therein.
In this case, none of the exceptions contained in Article 1734 caused the loss of the soya beans.
More so, Lin cannot invoke the defense of theft, for it was not shown that the same was attended
by grave or irresistible threat, violence, or force. Instead, the loss of the soya beans was brought
about by Lin’s failure to exercise extraordinary diligence, when she neglected vetting her driver
or providing security for the cargo and failing to take out insurance on the shipment’s value.
Thus, liability is with Lin for the loss of the goods, which were consigned to her, as a common
carrier.
(See Annie Tan v. Great Harvest Enterprises, Inc., G.R. No. 220400 March 20, 2019)

Question 1171

Don Sotero, an accomplished businessman, owns a 600 sq. m. residential lot and a portion of which
was expropriated by the government for the sum of Php 500,000 representing the estimated amount
equivalent to the assessed value thereof. Prior to the said expropriation, it was found out that Don
Sotero inadvertently failed to pay his income taxes and is now being assessed for a total deficiency of
Php 250,000. Don Sotero contends that his income tax deficiency of Php 250,000 has been
extinguished by legal compensation as the government owed him Php 500,000 when a portion of his
lot was expropriated. Is the contention of Don Sotero tenable? Explain.

Answer 1171

No, the contention of Don Sotero is untenable.
As a rule, taxes cannot be the subject of set-off or compensation since taxes are of distinct kind,
essence and nature than ordinary obligations. Legal compensation requires that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other
and that the two debts be due.
Here, Don Sotero and the government are not mutually creditors and debtors of each other, and
a claim for taxes is not such a debt, demand, contract, or judgment that is allowed to be set-off.
Accordingly, Don Sotero is liable to pay the deficiency income tax.
(See Francia vs IAC, GR No. 67649, 28 June 1988)

Question 1172

Magical Kingdom Corporation (MKC), a domestic corporation engaged in the buy and sell of used
cooking oils, is currently operating at a loss due to the economic global recession. To somehow lessen
the impact of its financial losses over the years and despite the unstable prices of the real estate, MKC
sold its parcel of land not used in business at a loss. Since the sale of the land resulted in a loss position,
and as advised by its consultant, MKC believes and contends that it is not liable to pay the 6% capital
gains tax. Is the contention of MKC tenable? Explain.

Answer 1172

No, the contention of MKC is untenable.
As a general rule, the income tax law imposes tax only when there is actual income, gain or
profit. However, as an exception, under Section 27(D)(5) of the Tax Code, as amended, a 6%
capital gains tax is imposed on the gain presumed to have been realized on the sale, exchange
or disposition of lands and/or buildings which are not actually used in business of a corporation
and are treated as capital assets, based on the gross selling price or the fair market value at the
time of sale, whichever is higher, of such lands and/or buildings.
Here, MKC sold a parcel of land not used in business and is classified as a capital asset since
it is not among the exclusions enumerated under Section 39(A)(1) of the Tax Code, as amended.
Accordingly, MKC is liable to pay the 6% capital gains tax imposed on the income presumed to
have been realized from the sale.
(See Section 27 (D)(5), Tax Code, as amended)

Question 1173

Lou Tang, a Korean citizen, during her visits in the Philippines bought shares of stocks from
Wakanda Company, a domestic corporation. As a successful businesswoman, she frequently travels
across the globe until one time, and fate would have it, she met her better half in Canada and finally
decided to settle therein. While they were enjoying their vacation in Maldives, and due to over
excitement, Lou Tang had a cardiac arrest which led to her untimely death. Incidentally, the laws of
Korea allow exemption from transfer taxes with respect to intangible personal properties by citizens of
the Philippines in Korea. Is Lou Tang, a non-resident alien decedent, entitled to the rule on reciprocity
and therefore exempt from Philippine estate tax? Explain.

Answer 1173

No. The reciprocity rule cannot be applied and therefore the shares of stocks are included in the
gross estate of Lou Tang subject to the Philippine estate tax.

The reciprocity rule applies only to a non-resident alien decedent, who must be a citizen and
resident of a foreign country that does not impose estate tax or grants exemption thereto, and
applies only on his intangible personal properties located in the Philippines.
Here, at the time of death, Lou Tang is a citizen of Korea but a resident of Canada, another
foreign country.
(See Section 104, Tax Code, as amended; Section 4, RR 12-2018)

Question 1174

Mr. Boombastic, a model by profession, has various investments including, among others, a parcel
of land which he bought for Php 2,000,000 two (2) years ago. During the high school batch reunion,
Mr. Walastic asked around and disclosed that he is looking for a land where he could put up his
residential building as he is now planning to finally settle in the Philippines. Days after, being a longtime friend, Mr. Boombastic surprisingly sold his land to Mr. Walastic for PhP2,500,000, while the
prevailing fair market value of the land at that time was Php 3,000,000. When Mr. Boombastic went to
the Bureau of Internal Revenue (BIR) for the computation of his tax liability covering the sale, the BIR
imposed an additional donor’s tax on the ground that the sale is a transfer for less than adequate and
full consideration, there being a “deemed gift”, considering that the fair market value is higher than or
exceeded the agreed selling price. Is the BIR correct in the imposition of the donor’s tax? Explain. (5
points)

Answer 1174

No, BIR is incorrect. The sale is not subject to the imposition of the donor’s tax.
Pursuant to Section 100 of the Tax Code, as amended, the rule on “deemed gift” does not apply
to real properties classified as capital assets subject to capital gains tax under Section 25(D)(1)
of the same Code.
Here, the subject-matter of the sale is a parcel of land classified as a capital asset as it is not
among the exclusions enumerated under Section 39(A)(1) of the Tax Code, as amended.
(See Section 100, Tax Code, as amended; Section 11(5), RR 2-2003)

Question 1175

Lucky Shining Corporation (LSC), a VAT-registered taxpayer engaged in the manufacture and sale
of heavy-duty and top-calibre laptops, recently plans to declare and distribute dividends to its
shareholders. As a sort of an indirect advertisement, the Management, for the first time, decided to just
distribute the excess manufactured laptops to its shareholders instead of the usual cash dividends
hoping that these shareholders would eventually market LSC’s products to their acquaintances based
on their wonderful and superb experience with the gadgets. Subsequently, LSC received a Letter of
Authority (LOA) from the Bureau of Internal Revenue (BIR) and one of the audit findings is the
deficiency VAT liability pertaining to the aforesaid dividend distribution, to which LSC protested on the
ground that the distribution was not done in the course of trade or business. Is the assessment of the
BIR proper? Explain. (

Answer 1175

Yes, the assessment of the BIR is proper. Accordingly, the distribution to shareholders of share
in the profits of LSC in the form of property dividends is subject to VAT.
Section 4.106-7 of RR No. 16-2005 provides that property dividends which constitute stocks in
trade or properties primarily held for sale or lease declared out of retained earnings and
distributed by the VAT-registered company to its shareholders shall be subject to VAT based on
the zonal value or fair market value at the time of distribution, whichever is applicable.
Here, LSC is a VAT-registered company that distributes its properties primarily held for sale as
dividends to its shareholders.
(See Section 106(B), Tax Code, as amended; Section 4.106-7, RR No. 16-2005)

Question 1176

The Civil Service Commission (CSC) contracted the services of A1 Builders, Inc. (A1), a VATregistered taxpayer, for the construction of the former’s satellite office in General Santos City. Following
the completion of the project, CSC paid in full its obligation to A1 under the contract but failed to withhold
the corresponding 5% withholding VAT. For such omission, the Commissioner of Internal Revenue
(CIR) assessed CSC for deficiency withholding tax. CSC protested the assessment but was denied.
Consequently, CSC appealed to the Court of Tax Appeals (CTA). The CIR moved to dismiss the appeal
on the ground of prematurity reasoning that CSC should have brought the matter first to the Secretary
of Justice who has primary jurisdiction to settle intra-governmental disputes, including tax assessments.
Is the motion to dismiss tenable? Explain.

Answer 1176

No, the motion to dismiss is untenable.
The procedure of settling or adjudicating disputes between offices under the executive branch
of the government before the Secretary of Justice does not apply to constitutional commissions.
The present case involves a constitutional office, the CSC, which is not under the executive
department; hence, the CSC is not required to go through the procedure prescribed in the law
(P.D. No. 242 and E.O. No. 292).
(See CIR v. COMELEC and COMELEC v. CIR, G.R. Nos. 244155 and 247508, May 11. 2021)

Question 1177

National Power Corporation (NPC) is a government-owned and controlled corporation (GOCC)
which owns and operates a hydro-electric power plant in Norzagaray, Bulacan. The Municipality of
Norzagaray assessed NPC for Real Property Tax (RPT) on the: (1) main dam, and (2) spillways, taintor
gates, and diversion canals which are used for flood mitigation and/or prevention, and as safeguards
and preventive measures to protect the integrity of the dam. Excluded from the assessment were the
water turbines, water pumps, generators, transformers, and transmitters. NPC claimed exemption on
the ground that the assessed properties have some usage in the generation/transmission of electric
power. Did the Municipality of Norzagaray properly impose RPT upon NPC’s properties? Explain. (5
points)

Answer 1177

Yes, the Municipality of Norzagaray properly imposed RPT upon NPC’s properties.
To successfully claim exemption, the claimant must prove that the machineries and equipment
are actually, directly, and exclusively used by the GOCC in the generation and transmission of
electric power.
Unlike the water turbines, water pumps, generators, transformers, and transmitters, the
assessed properties are not actually, directly, and exclusively used by NPC for power generation
and transmission of electricity. They may have some usage in the hydro-electric power plant
operation but not exclusively.
(See Section 234(c), Local Government Code; NPC v. Provincial Government of Bulacan, G.R.
No. 207140, January 30, 2023)

Question 1178

A city enacted an ordinance that imposes a Mayor’s Permit Fee of Php500.00 on every electric and
telecommunication pole or post erected within the city. The measure was seen as a safeguard against
the hazard to traffic and safety to the public posed by such poles or posts. A taxpayer filed a suit before
the Regional Trial Court to question the validity of the ordinance. The taxpayer anchored his claim upon
the ground that the fee amounted to a tax on income and, thus, prohibited by law. Will the suit prosper
based on the ground raised in the action?

Answer 1178

No. The ground relied upon is improper to support the action to invalidate the ordinance.
The common limitations on the taxing powers of local government units prescribed by the Local
Government Code, such as the prohibition to levy and impose income tax, find relevance only
when the imposition in question is an exercise of taxing powers.
In the given case, the Mayor’s Permit Fee partakes of the nature of a regulatory fee or one
imposed in the exercise of police powers, not of taxing powers.
(See Section 133, Local Government Code; City of Cagayan de Oro v. CEPALCO, G.R. No.
224825, October 17, 2018)

Question 1179

On January 31, 2019, ABC Corporation received from the Commissioner of Internal Revenue (CIR)
a Final Assessment Notice (FAN) or Formal Letter of Demand (FLD). ABC Corporation failed to file a
protest within the 30-day period provided by law. Subsequently, ABC Corporation received from the
CIR a warrant of distraint and/or notice of levy on December 20, 2023. ABC Corporation moved for a
reconsideration which was denied by the CIR. Consequently, ABC Corporation filed a Petition for
Review before the Court of Tax Appeals (CTA) Division arguing, among others, that the right of the CIR
to collect taxes had already prescribed. The CIR moved to dismiss the petition on the ground that ABC
Corporation’s failure to file a valid protest to the FAN/FLD rendered the assessment against it already
final, executory, and demandable; hence, the assessments are not subject to judicial scrutiny, as it is already beyond the CTA Division’s jurisdiction. If you were to rule on the motion of the CIR, how would
you decide? Explain.

Answer 1179

I would deny the motion.
The CTA was conferred with the jurisdiction to decide not only cases on disputed assessments
and refunds of internal revenue taxes, but also “other matters” arising under the NIRC.
In this case, the issue of prescription of the CIR’s right to collect taxes is covered by the term
“other matters” over which the CTA Division has appellate jurisdiction. To be sure, the validity of
the assessment itself is a separate and distinct issue from the issue of whether the right of the
CIR to collect the validly assessed tax has prescribed.
(See Section 7(a)(1), R.A. No. 9282; CIR v. CTA and QL Development, Inc., G.R. No. 258947,
March 29, 2022)

Question 1180

Juan Lopez is a business manager of a major law office in Makati. Aside from basic salaries, Juan
is entitled to a monthly rental allowance of Php40,000.00 and rice subsidy of Php10,000.00 per quarter.
Upon the special request of Juan, the law office is not withholding any tax on the allowances. The BIR,
however, assessed the law office for deficiency withholding tax on the theory that the payments to Juan
are subject to income tax. In protesting against the assessment, must the law office pay first before its
protest may be entertained by the BIR? Explain

Answer 1180

No.
In this jurisdiction, compliance with the “payment under protest” requirement is mandatory
relative to the assessment of local taxes, specifically real property tax (RPT). It does not apply
to national internal revenue taxes.
Inasmuch as the assessment in the given problem involves a deficiency income tax, the taxpayer
need not comply with the administrative procedure of payment under protest in order that its
protest may be taken cognizance of by the BIR.
(See Section 228, NIRC; see also NPC v. Provincial Government of Bulacan, G.R. No. 207140,
January 30, 2023)