Notes on Commercial Law Mock Bar –BAR Review Institute

I. Corporation Law & Corporate Governance

1. Dividend Declaration:
   • Revised Corporation Code (Republic Act No. 11232):
     • Section 42 (Power to declare dividends): States that the board of directors may declare dividends out of the unrestricted retained earnings.
     • Section 43 (Power to retain surplus profits): Allows the board to retain surplus profits for legitimate corporate purposes (e.g., expansion, financing projects), but limits accumulation to 100% of paid-in capital without reasonable cause.
   • Relevant Jurisprudence: Generally upholds the business judgment rule, giving the board discretion unless discretion is abused or if accumulation is unreasonable.

Revised Corporation Code (Republic Act No. 11232)

Section 42. Power to declare dividends.

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 stock to all stockholders based on outstanding stock held by them: Provided, That any cash dividend declared by the board of directors shall not be more than the amount of the unrestricted retained earnings of the corporation for the immediately preceding calendar year: Provided, further, That stock dividends may be declared only with the concurrence of a majority of the outstanding capital stock at a regular or special meeting duly called for the purpose: Provided, finally, That no stock dividend shall be issued without the approval of the Securities and Exchange Commission after a public hearing thereon.

Section 43. Power to retain surplus profits.

Nothing in this Code shall prevent the board of directors from retaining surplus profits in excess of one hundred percent (100%) of the paid-in capital stock, if such retention is necessary for legitimate corporate purposes, such as, but not limited to:

(a) to finance expansion programs; (b) to provide adequate working capital; or (c) to retire corporate debt.

2. PCC Merger Notification:
   • Philippine Competition Act (Republic Act No. 10667):
     • Section 17 (Compulsory Notification): Requires parties to a merger or acquisition to notify the PCC if the value of the transaction exceeds certain thresholds.
     • Section 19 (Review of Mergers and Acquisitions): Grants the PCC the power to review proposed mergers and acquisitions.
   • PCC Memorandum Circulars/Rules: Detail the specific thresholds and notification procedures.
3. Director Qualification & SEC Jurisdiction:
   • Revised Corporation Code (Republic Act No. 11232):
     • Section 22 (Qualifications of a Director or Trustee): Requires that a director “must own at least one (1) share of the capital stock of the corporation of which he is a director…”.
     • Section 23 (Election of Directors or Trustees): Further details director elections.
   • Batas Pambansa Blg. 129 (The Judiciary Reorganization Act of 1980), as amended:
     • Section 5.2 of the Securities Regulation Code (Republic Act No. 8799): Transferred SEC’s quasi-judicial powers over intra-corporate disputes to the Regional Trial Courts (RTCs).
   • Relevant Jurisprudence: Confirms that property qualifications in by-laws beyond mere share ownership may be invalid if not authorized by law.
4. Digital Signatures in Board Resolutions:
   • Electronic Commerce Act (Republic Act No. 8792):
     • Section 6 (Legal Recognition of Electronic Data Messages and Electronic Documents): States that information shall not be denied validity or enforceability solely on the ground that it is in the form of an electronic data message or electronic document.
     • Section 8 (Legal Recognition of Electronic Signatures): Grants legal effect to electronic signatures.
   • Revised Corporation Code (Republic Act No. 11232):
     • Section 25 (Corporate Officers): Outlines roles of corporate officers.
     • Section 52 (Meetings of Directors or Trustees): Governs the conduct of board meetings, including quorum and voting requirements.
5. Corporate Nationality for Land Ownership:
   • 1987 Philippine Constitution:
     • Article XII, Section 2 (National Economy and Patrimony): Restricts the disposition or utilization of lands of the public domain and other natural resources to citizens of the Philippines or to corporations or associations at least sixty per centum (60%) of whose capital is owned by such citizens.
   • Revised Corporation Code (Republic Act No. 11232):
     • Section 14 (Contents of the Articles of Incorporation): Requires the nationality of the corporation to be stated.
   • Relevant Jurisprudence: The “Grandfather Rule” (Gamboa v. Teves, Roy III v. Herbosa) is applied to determine ultimate Filipino ownership, especially in cases of multi-tiered corporate structures, ensuring the 60% Filipino ownership in nationalized activities applies to both voting control and the total outstanding capital stock.

Roy III v. Herbosa

Petitioner Jose M. Roy III challenged SEC-MC No. 8, arguing that it did not fully conform to the Gamboa Decision and Resolution, and that the 60-40 rule should apply uniformly to every class of shares.

Issues: While the case involved several procedural issues (e.g., locus standi, hierarchy of courts), the core substantive issue was whether SEC-MC No. 8 properly implemented the Gamboa ruling by requiring the 60% Filipino ownership to apply to both voting shares and the total outstanding shares of stock.

Ruling: The Supreme Court, in its Resolution dated April 18, 2017 (denying the Motion for Reconsideration of its November 22, 2016 Decision), upheld the validity of SEC-MC No. 8. The Court ruled that the SEC did not commit grave abuse of discretion in issuing the circular.

The Court clarified the interpretation of “capital” as follows:

• The 60% Filipino ownership requirement applies to both:
  • The total number of outstanding shares of stock entitled to vote in the election of directors (which ensures Filipino control over corporate actions and decisions).
  • The total number of outstanding shares of stock, whether or not entitled to vote in the election of directors (which ensures full beneficial ownership by Filipinos).
• The Court emphasized that mere legal title is insufficient to meet the 60% Filipino-owned “capital” requirement. Full beneficial ownership of 60% of the outstanding capital stock, coupled with 60% of the voting rights, must rest in the hands of Filipino nationals. This uniform application ensures effective Filipino control of public utilities, as mandated by the Constitution.
• The Court rejected the petitioner’s argument that the 60% Filipino equity requirement must be applied to each class of shares, finding this inconsistent with the Gamboa rulings and impractical.

Key Principle (Doctrine): The Roy III v. Herbosa case solidified the interpretation of “capital” under Section 11, Article XII of the Constitution to mean both controlling interest (60% of voting shares) and beneficial ownership (60% of total outstanding capital stock, whether voting or non-voting). This “two-pronged test” (or combined control and beneficial ownership test) ensures that Filipinos maintain paramount control and derive substantial economic benefits from public utility corporations, preventing circumvention of the constitutional mandate.

6. Liquidation and Shareholder Rights:
   • Revised Corporation Code (Republic Act No. 11232):
     • Title XIII (Dissolution and Liquidation): Governs the winding up of corporate affairs.
     • Section 39 (Power to extend or shorten corporate term): (Potentially relevant if the liquidation is related to term expiration).
     • Section 41 (Sale or other disposition of assets): Requires shareholder approval for the sale or disposition of all or substantially all corporate assets.
     • Title IX (Merger and Consolidation): Governs corporate mergers, which trigger specific shareholder voting and appraisal rights.
     • Section 80 (Appraisal Right): Grants dissenting shareholders the right to demand payment for their shares in cases of certain fundamental corporate changes like mergers or sale of all assets.
   • Financial Rehabilitation and Insolvency Act (Republic Act No. 10142): Governs corporate liquidation proceedings.
   • Securities Regulation Code (Republic Act No. 8799):
     • Rule 19 (Tender Offer Rule): May be triggered if an acquisition of shares results in the acquirer gaining a significant percentage of shares (e.g., 35% or 50% threshold in a public company), requiring a tender offer to other shareholders.

II. Taxation Law (Income Tax)

7. Individual Income Tax (Sources & Types):
   • National Internal Revenue Code (NIRC) of 1997, as amended (Republic Act No. 8424, as amended by TRAIN Law RA 10963, and CREATE Law RA 11534):
     • Section 23: Classification of taxpayers (citizen, resident alien, non-resident alien).
     • Section 24: Rates of income tax on individual citizens and resident aliens (graduated rates for compensation income).
     • Section 25: Rates of tax on non-resident alien individuals.
     • Section 27(D)(1): Final tax on passive income (e.g., 10% FWT on dividends received by citizens/residents from domestic corporations).
     • Section 32: Gross income definition.
     • Section 39(B): Capital gains from sale of shares of stock (for unlisted shares, 15% CGT on net capital gain under TRAIN Law).
8. Corporate Income Tax (Sources & Rates):
   • National Internal Revenue Code (NIRC) of 1997, as amended (Republic Act No. 8424, as amended by TRAIN Law RA 10963, and CREATE Law RA 11534):
     • Section 27 (Tax on Domestic Corporations): Imposes income tax on taxable income from all sources. (Currently 25% generally, 20% for certain small corporations under CREATE Law).
     • Section 27(D)(4): Exempts inter-corporate dividends received by a domestic corporation from another domestic corporation.
     • Section 32: Definition of gross income (includes all income from whatever source derived).
9. Tax Exemption for Educational Institutions:
   • 1987 Philippine Constitution:
     • Article XIV, Section 4(3): “All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.”
   • National Internal Revenue Code (NIRC) of 1997, as amended:
     • Section 30: Lists non-taxable corporations, including non-stock, non-profit educational institutions.
   • Relevant Jurisprudence: Interprets “used actually, directly, and exclusively for educational purposes” to include income from incidental activities (like canteens or bookstores) if the income is used for educational purposes.
10. Source of Income (Non-Resident Foreign Corporation):
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 28(B)(1): Imposes tax on gross income derived from sources within the Philippines for non-resident foreign corporations.
      • Section 42: Defines “income from sources within the Philippines” (includes compensation for labor or personal service performed in the Philippines, rentals/royalties from property in the Philippines, interest from sources within the Philippines, etc.).
    • Relevant Jurisprudence: Defines source of income for services based on where the service is performed.
11. Capital Gains Tax (Tax-Free Exchange):
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 24(D)(1): Imposes capital gains tax on the sale of real property considered as a capital asset (6% of selling price or fair market value, whichever is higher).
      • Section 40(C)(2) (Exchange of Property): Provides for non-recognition of gain or loss in specific exchanges, including the transfer of property to a corporation in exchange for stock resulting in control (at least 51% ownership) by the transferor(s).
12. Amended Income Tax Return (Deduction Method):
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 34(A)(1) (Deductions; Optional Standard Deduction): States that the choice of Optional Standard Deduction (OSD) or Itemized Deductions, once made in the return, is irrevocable for the taxable year for which the return is made.
      • Section 6(A) (Power of the Commissioner to make assessments and prescribe additional requirements): Grants the CIR power to assess.
      • Section 229 (Recovery of tax erroneously or illegally collected): Allows for refunds.
13. Tax Assessment Finality (PAN/FAN):
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 228 (Protesting of Assessment): Outlines the process for protesting assessments, including the 30-day period to file a protest against a Final Assessment Notice (FAN).
      • Revenue Regulations No. 12-99, as amended: Details the assessment process, including the issuance of a Preliminary Assessment Notice (PAN) and its effect. A PAN is merely an initial notice; failure to reply does not make the assessment final. The FAN is the formal assessment that requires a protest within the prescribed period to prevent it from becoming final and executory.
14. Scope of LOA / One Audit Policy:
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 6(A): Grants the CIR the power to examine books and records.
      • Section 235 (Prescription of Period for Assessment and Collection of Taxes): Refers to the periods of limitation for assessment.
    • Revenue Memorandum Order (RMO) No. 10-2013 (One-Audit Policy): Generally limits BIR examination of a taxpayer’s books of accounts and other accounting records to once a taxable year.
    • Exceptions to One-Audit Policy (as provided in RMOs and jurisprudence): Allows for a second examination in cases of fraud, tax evasion, mistake, or at the taxpayer’s request, or other exceptional circumstances.
    • Relevant Jurisprudence: Stresses that a Letter of Authority (LOA) is indispensable for a valid audit and cannot be substituted by internal memoranda; new or reassigned revenue officers require a new or amended LOA.

III. Taxation Law (Value-Added Tax – VAT)

12. VAT on Services vs. Goods:
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 106 (Value-Added Tax on Sale of Goods or Properties): Imposes VAT on gross selling price; accrual method applies.
      • Section 108 (Value-Added Tax on Sale of Services and Use or Lease of Properties): Imposes VAT on gross receipts; cash basis generally applies.
13. VAT Zero-Rated Sales:
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 108(B)(2): Specifies services rendered to persons or entities doing business outside the Philippines (paid for in acceptable foreign currency and accounted for in accordance with BSP rules) as zero-rated sales.
    • Revenue Regulations: Provide detailed rules on VAT zero-rating.
14. VAT on Interest Income:
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 108 (Value-Added Tax on Sale of Services and Use or Lease of Properties): Covers VAT on financial services.
      • Section 109(1)(P): Exempts services rendered by persons subject to percentage tax under Title V of the NIRC, which includes banks and non-bank financial intermediaries performing quasi-banking functions (subject to Gross Receipts Tax).
    • Relevant Jurisprudence/BIR Rulings: Clarify that interest income from lending activities is VATable if the lender is considered a “lending investor” or habitually engaged in the lending of money.
15. VAT & DST on Real Estate Sale:
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 106(A)(1)(a) (Sale of Real Properties): Imposes 12% VAT on real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.
      • Section 109(1)(P) (VAT Exempt Transactions): Provides thresholds for the sale of residential lots and residential dwellings (condominium units included in residential dwellings) below which the sale is VAT-exempt (e.g., ₱3,199,200.00 as of 2024 for residential dwellings).
      • Section 196 (Documentary Stamp Tax on Sales, Conveyances and Donations of Real Property): Imposes DST on the transfer of real property.
    • Revenue Regulations: Provide implementing rules, including valuation for VAT (gross selling price, or zonal value if higher) and DST (higher of consideration or zonal value).
16. VAT Refund Claim (Period & Remedies):
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 112 (Refunds or Tax Credits of Input Tax): Outlines the process for claiming refunds or tax credits for excess input VAT attributable to zero-rated or effectively zero-rated sales.
      • Section 112(C) (Period for Claiming Refund of Input Tax): States the prescriptive period for filing an administrative claim (2 years from the close of the taxable quarter) and the period for the CIR to act (e.g., 90 days from the submission of complete documents under TRAIN Law/CREATE Law, or 120 days prior to TRAIN Law).
      • Section 229 (Recovery of tax erroneously or illegally collected): Governs judicial claims for refund.
    • Relevant Jurisprudence: Emphasizes the mandatory nature of the CIR’s period to decide and the subsequent 30-day period to appeal to the CTA (e.g., CIR v. San Roque Power Corp.).

CIR v. San Roque Power Corp.

Issue: Whether San Roque was entitled to the tax refund, specifically addressing if its judicial claim was prematurely filed due to non-compliance with the 120-day waiting period.

Ruling: The Supreme Court denied San Roque’s petition for a tax refund.

The Court held that compliance with the 120-day waiting period is mandatory and jurisdictional under Section 112(D) of the 1997 Tax Code (RA 8424). Failure to comply with this period renders the petition void. This violates the doctrine of exhaustion of administrative remedies and renders the petition premature and without a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition. An act executed against the provisions of mandatory or prohibitory laws is void, unless the law itself authorizes its validity. Therefore, San Roque’s petition with the CTA was deemed a “mere scrap of paper”.

The “Window Period” Exception: It is crucial to note that while the San Roque ruling firmly established the mandatory nature of the 120-day period, subsequent decisions (often referred to collectively as San Roque itself or in relation to CIR v. Aichi Forging Company of Asia, Inc. and other cases) recognized a specific “window period” exception. This exception covered judicial claims filed prematurely between December 10, 2003 (the date of issuance of BIR Ruling No. DA-489-03, which erroneously stated that taxpayers need not wait for the 120-day period) and October 6, 2010 (the date of promulgation of the Aichi decision, which explicitly declared BIR Ruling No. DA-489-03 as invalid). Taxpayers who filed judicial claims during this specific window were excused from the strict 120-day waiting period due to their reliance in good faith on the erroneous BIR ruling.

Key Principle: The CIR v. San Roque Power Corp. case reinforces the principle that taxpayers must strictly comply with the procedural requirements for tax refund claims, specifically the mandatory 120-day waiting period for the CIR to act on an administrative claim before a judicial appeal can be filed with the CTA. Non-compliance is jurisdictional and results in the dismissal of the judicial claim. The “window period” is a specific, time-bound exception to this strict rule.

IV. Taxation Law (General Principles)

18. Extraordinary Prescription in Taxation:
    • National Internal Revenue Code (NIRC) of 1997, as amended:
      • Section 203 (Period of limitation upon assessment and collection): General 3-year period for assessment.
      • Section 222 (Exceptions as to period of limitation of assessment and collection):
        • Section 222(A): Provides for a 10-year period for assessment from the discovery of the falsity, fraud, or omission in cases where a false or fraudulent return is filed or no return is filed.
        • Section 222(B): Provides for the effect of a waiver of the statute of limitations.
    • Relevant Jurisprudence: Clarifies what constitutes fraud or falsity sufficient to trigger the extraordinary 10-year prescriptive period.