2016 TAXATION BAR QUESTION with suggested answer

QUESTION ON LOCAL TAX

1. The City of Maharlika passed an ordinance imposing a tax on any sale or transfer of real
property located within the city at a rate of fifty percent (50%) of one percent (1%) of
the total consideration of the transaction. Jose sold a parcel of land in the city, which he
inherited from his deceased parents, and refused to pay the aforesaid tax. He instead filed
a case asking that the ordinance be declared null and void since the tax it imposed can
only be collected by the national government, as in fact he was paid the Bureau of Internal
Revenue (BIR) the required Capital Gain Tax. If you were the city legal officer of Maharlika
what defenses would you raise to sustain the validity of the ordinance?

ANSWER:

The Ordinance passed by the City Council of Maharlika imposing a Transfer Tax on the sale,
or any other mode of transferring ownership at the rate of 50% of 1% of the total
consideration involved in the acquisition of the property cannot be declared null and void as
Petitioned by Jose with his contention that he already paid the Capital Gain Tax. Said City
Ordinance is a Taxing Power granted to the Provincial, Municipality or Cities, pursuant to
Section 135 of the Local Government Code of 1991 (LGC).

Transfer Tax paid in the Bureau of Internal Revenue (BIR) can be either donors or estate
taxes which is far different with the Transfer tax imposed by the Local Government, hence,
there is no reason to be confuse. Also, the transfer tax paid to the provincial or city assessors
office, its evidence of payment or the official receipt is required by the Register of Deeds of
the province concerned before registering any deed. This is also required by the provincial
assessor before cancelling an old tax declaration and issuing a new one in its place. The
payment of the transfer tax is the responsibility of the seller, donor, transferor, executor or
and administrator. As to the rate of tax imposed it is also compliant to Section 151 of the LGC.

Therefore, Jose has no reason not to pay nor to question the transfer tax imposed on him
and seek declaration of which to be null and void.
Question 2 on local tax

Philippine National Railways (PNR) operates the rail transport of passengers and goods by
providing train stations and freight customer facilities from Tutuban, Manila to the Bicol
Province. As the operator of the railroad transit, PNR administers the land, improvements and
equipment within its main station in Tutuban, Manila.

Invoking Section 193 of the Local Government Code (LGC) expressly withdrawing the tax
exemption privileges of government-owned and controlled corporations upon the effectivity
of the Code in 1992, the City Government of Manila issued Final Notices of Real Estate Tax
Deficiency in the amount of P624,000,000.00 for the taxable years 2006 to 2010. On the other
hand, PNR, seeking refuge under the principle that the government cannot tax itself, insisted
that the PNR lands and buildings are owned by the Republic.

Is the PNR exempt from real property tax? Explain your answer. (5%)

Answer:

Yes, PNR is exempt from real property tax. PNR is a corporation created to serve as the
instrumentality of the Government of the Philippines in providing a nationwide railroad and
transport system, and under Section 133 (o) of the Local Government Code, PNR as a
government instrumentality as such it is not taxable because it is not subject to taxes, fees
or charges of any kind by local governments pursuant to the Local Government Code the only
exception is when PNR leases its real property to a taxable person as provided in Section
234(a) of the Local Government Code, in which case the specific real property leased becomes
subject to real estate tax. Thus, only portions of the PNR Lands and Buildings leased to taxable
persons like private parties are subject to real estate tax by the City of Manila.

Section 193 does not apply with PNR since its charter is not listed as Government owned and
controlled corporation.

Question no. 3 on Local tax

The Philippine-British Association, Inc. (Association) is a non-stock, non-profit organization

which owns the St. Michael's Hospital (Hospital). Sec. 216 in relation to Sec. 215 of the LGC
classifies all lands, buildings and other improvements thereon actually, directly, and
exclusively used for hospitals as "special." A special classification prescribes a lower
assessment than a commercial classification.

Within the premises of the Hospital, the Association constructed the St. Michael's Medical Arts
Center (Center) which will house medical practitioners who will lease the spaces therein for
their clinics at prescribed rental rates. The doctors who treat the patients confined in the
Hospital are accredited by the Association.

The City Assessor classified the Center as "commercial" instead of "special" on the ground
that the Hospital owner gets income from the lease of its spaces to doctors who also entertain
out-patients. Is the City Assessor correct in classifying the Center as "commercial?" Explain.
(5%)
Answer:

Real Property shall be classified for purposes of assessment as provided by Sec.215 of the
Local Government Code. In the same code, Sec. 216 All lands, buildings, and other
improvements thereon actually, directly and exclusively used for hospitals, cultural, or
scientific purposes, and those owned and used by local water districts, and government-
owned or controlled corporations rendering essential public services in the supply and
distribution of water and/or generation and transmission of electric power shall be classified
as special. However, in Section 217 it is provided that Real property shall be classified, valued
and assessed on the basis of actual use regardless if where located, whoever owns it, and
who ever uses it.

St. Michael's Medical Arts Center (Center) which will house medical practitioners who will lease
the spaces therein for their clinics at prescribed rental rates and the doctors who treat the
patients confined in the Hospital are accredited by the Association, was classified by the City
Assessor as Commercial instead of Special because the Hospital owner gets income from
the lease of its spaces to doctors who also entertain out-patients.

The City Assessor on the foregoing arguments, classified it as commercial, however, in the
case of City Assessor of Cebu vs. Association of Benevola de Cebu, the court ruled that Center
the importance of CHHMAC in the operation of CHH cannot be over-emphasized nor disputed.
Clearly, it plays a key role and provides critical support to hospital operations. Charging rentals
for the offices used by its accredited physicians cannot be equated to a commercial venture.
Finally, respondents charge of rentals for the offices and clinics its accredited physicians
occupy cannot be equated to a commercial venture, which is mainly for profit.

Respondents explanation on this point is well taken. First, CHHMAC is only for its consultants
or accredited doctors and medical specialists. Second, the charging of rentals is a practical
necessity: (1) to recoup the investment cost of the building, (2) to cover the rentals for the
lot CHHMAC is built on, and (3) to maintain the CHHMAC building and its facilities. Third, as
correctly pointed out by respondent, it pays the proper taxes for its rental income. And, fourth,
if there is indeed any net income from the lease income of CHHMAC, such does not inure to
any private or individual person as it will be used for respondents other charitable projects.

The Supreme Court affirmed the decision of CA that CHHMAC building should be classified as
special and not commercial and should be accorded the 10% special assessment for it is not
operated primarily for profit but as an integral part of CHH and CHHMAC operations being
devoted for the benefit of the CHHs patients.

In the instant case being similarly situated the City Assessor is incorrect for classifying the
Center as commercial instead of special on the proper application of Sec. 216 in relation to
Section 215 of the Local Government Code.