Taxation Part 2, Digests

A.

General Principles

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CONCEPT, NATURE AND CHARACTERISTICS OF TAXATION AND TAXES CIR v. Cebu Portland Cement Co. • The Court of Tax Appeals ordered the Commission of Internal Revenue (CIR) to refund to Cebu Portland Cement Co. about P350k+, w/c represented overpayments of ad valorem taxes on cement produced and sold by it.

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CIR opposed the ruling, claiming that it had a right to apply the overpayment to another tax liability of Cebu Portland – sales tax on a manufactured product (the cement). CIR said that cement is a manufactured and NOT a mineral product and therefore NOT exempt from sales taxes. (mineral = exempt; manufactured = not exempt) On the other hand, Cebu Portland said that it is exempt from sales tax under the Tax Code because cement is a mineral product and NOT a manufactured product. Court of Tax Appeals held that the alleged sales tax liability of Cebu Portland was still being questioned and therefore could not be set-off against the refund. A petition for review was filed by CIR. I: W/n CIR must refund the overpayment of the ad valorem tax R: NO. CIR has the right to apply the overpayment to Cebu Portland’s sales tax deficiency. The sales tax was properly imposed upon the company for the reason that cement has always been considered a manufactured product and NOT a mineral product. (CIR v Republic Cement) o Cement was never considered a mineral product w/in the meaning of the Tax Code, despite it being composed of 80% mineral, because cement is a PRODUCT of the manufacturing process. o Reliance cannot be made on Cebu Portland v CIR saying that cement = mineral because this case has been overruled. The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the urgency of the need to collect taxes as “the lifeblood of the government.” If the payment of taxes could be postponed by simply questioning their validity, the government would be paralyzed. Thus, the Tax Code provides that no court shall have authority to grant an injunction or restrain the collection of taxes, except when in the opinion of the Court of Tax Appeals, the collection by the BIR or the Bureau of Customs may jeopardize the interest of the Government and/or the taxpayer. o In such a case, the Court, at any stage of the proceeding may suspend the collection and require the taxpayer to either:

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deposit the amount claimed OR file a surety bond for not more than double the amount with the Court.

MONTERO - Tax 1 Digests | Y. Sanchez 2A 2012

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The exception does not apply in this case. In fact, there is all the more reason to enforce the rule given that even after crediting of the refund against the tax deficiency, a balance of more than P4 million was still due from the company. To require the Commissioner to actually refund to the company the amount of the judgment debt, which he will later have the right to distrain for payment of its sales tax liability is an idle ritual.

Commissioner of Internal Revenue v. Algue • The Phil. Sugar Estate Development Company (PSEDC) appointed Algue, Inc., a family corporation, as its agent, authorizing it to sell its land, factories, and oil manufacturing process. • Pursuant to this authority, five members of the family corporation formed the Vegetable Oil Investment Corp. and induced other persons to invest in it. • The newly formed corporation then purchased the PSEDC properties. For this sale, PSEDC gave Algue, Inc. a commission of P125,000. • From this amount, Algue Inc. paid the five family members P75,000 as promotional fees. • Algue, Inc. declared this P75,000 as a deduction from its income tax as a legitimate business expense. • The CIR questioned the deduction, claiming that it was not an ordinary, reasonable, or necessary expense and was merely an attempt to evade payment of taxes. • I: W/n the P75,000 is tax-deductible as a legitimate business expense of Algue, Inc. • R: Yes, the P75,000 promotional fee is tax-deductible. • Sec. 30 of the Tax Code provides that ordinary and necessary expenses incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered are taxdeductible. • However, the burden in proving the validity of a claimed deduction belongs to the taxpayer. In this case, the burden has been satisfactorily discharged by the taxpayer Algue, Inc. • Algue, Inc. was able to prove that the promotional fees were not fictitious and were in fact paid periodically to the five family members. Moreover, the amount of the promotional fees was reasonable, considering that the five payees actually performed a service for Algue, Inc. by making the sale of the properties of PSEDC possible. • As a result of this sale, Algue, Inc. earned a net commission of P50,000. • 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.

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Hence, despite the natural reluctance to surrender part of one’s hardearned income, every person who is able to must contribute his share in running the government. The government, for its part, is expected to respond in the form of BENEFITS for general welfare. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary exaction by those in the seat of power.

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However, it should also be exercised reasonably and in accordance with the prescribed procedure. If it is not, the taxpayer has a right to complain to the courts.

C.N. Hodges v. Municipal Board of Iloilo • The Municipal Board of Iloilo enacted Ordinance No. 33 pursuant to the Local Autonomy Act w/c: o required persons, firms, assocs and corps to pay a sales tax of 1/2 of 1% of the selling price of any motor vehicle AND o prohibited the registration of the sale of the motor vehicle unless the tax had been paid • Hodges, who was engaged in the buying and selling of second-hand motors, questioned the validity of the tax for having been enacted in excess of authority. • I: W/n the tax is valid. • R: YES, the tax is valid. • The Local Autonomy Act gives municipal boards the authority to enact ordinances for the collection of taxes on any person engages in any occupation or business. • However, the LAA prohibits chartered cities, such as Iloilo from imposing a tax on the registration of motor vehicles. Thus, the lower court ruled that to require payment of sales tax before registration is tantamount to imposing a tax for the registration of motor vehicles. • HOWEVER, the SC disagreed with this, saying that the tax imposed was merely a coercive measure to make the enforcement of the contemplated sales tax more effective. • Taxes are imposed for the SUPPORT of the government in return for the general advantage and protection which the government affords to taxpayers and their property.

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Taxes are the lifeblood of the government. The power to tax includes the power to devise ways and means to accomplish tax collection in the most effective manner. Otherwise, gov may falter / fail. Thus, the ordinance is a VALID exercise of the power of taxation granted to Iloilo City by the LAA.

CLASSIFICATIONS AND DISTINCTIONS Association of Customs Brokers Inc. v. Municipal Board

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The Municipal Board of Manila passed an ordinance levying a property tax on all motor vehicles operating within the City of Manila. The ordinance provided that the rate of the tax would be 1% ad valorem per annum, and that the proceeds of the tax shall accrue to the Streets and Bridges Funds of the City, w/c will be used for the repair, maintenance, and improvement of its streets and bridges. The Charter of Manila gives the municipal board the power to tax motor vehicles, but this is limited by the Motor Vehicles Law, which disallows the imposition of fees on motor vehicles, EXCEPT property taxes imposed by a municipal corp.


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THUS, the law allows the City of Manila to impose a property tax on motor vehicles operating within its limits. However, the Association of Customs Brokers contended that the ordinance is void because it actually imposes a license tax in the guise of a property tax. I: W/n ordinance is valid R: No, it is void. 1) It imposes a license tax, which the municipal corporation may not impose, although it is made to appear as a property tax/ As a rule, an ad valorem tax is a property tax. However, if the tax is really imposed upon the performance of an act, enjoyment of a privilege, or the engaging in an occupation, it will be considered an EXCISE, even if its amount is determined in proportion to the value of the property used in connection with the occupation, privilege, or act which is taxed. In this case, the tax is fixed ad valorem. BUT, the purpose is to raise funds for the repair, maintenance, and improvement of the streets and bridges in the city. Thus, it is actually a license fee under the guise of an ad valorem tax to circumvent the prohibition imposed by the Motor Vehicles Law. The reason for the prohibition is that under the Motor Vehicles Law, municipal corporations already get proceeds for the purpose of repairing and maintaining their streets and bridges. The prohibition aims at preventing a duplication in the imposition of fees for the same purpose. 2) The ordinance infringes on the rule of uniformity of taxation because it exacts the tax upon ALL motor vehicles operating within the City of Manila, without distinguishing between those for hire and for private use, those registered in and those registered outside but occasionally come to Manila. The ordinance imposes the tax only on those vehicles registered in Manila, even if those vehicles which are registered outside the city but which use its streets also contribute equally to the deterioration of the roads and bridges.

Esso Standard Eastern Inc. v. CIR • ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. • The Commissioner on Internal Revenue (CIR) disallowed the claim on the ground that the expenses should be capitalized and might be written off as a loss only when a “dry hole” should result. • Hence, ESSO filed an amended return where it asked for the refund of P323,270 by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary and necessary expenses in the same return amount representing margin fees it had paid to the Central Bank on its profit remittances to its New York Office. • I: W/n the margin fees are taxes OR necessary expenses which are deductible from its gross income • R: No, they are neither taxes nor necessary expenses.

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1) Margin fees are NOT taxes because they are NOT imposed as a revenue measure but as a police measure whose proceeds are applied to strengthen the country’s international reserves. Thus, the fee was imposed by the State in the exercise of its POLICE POWER and NOT taxation power. 2) Neither are they necessary and ordinary business expenses. An expense is considered NECESSARY where the expenditure is helpful in the development of the taxpayer’s business. It is ORDINARY when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The expenditure being ordinary and necessary is determined based on its nature – the extent and permanency of the work accomplished by the expenditure. In this case, ESSO was unable to show that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. It merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires; which is erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations.

Progressive Development Corp. v. QC • The City Council of QC passed an ordinance known as the Market Code of QC, which imposed a 5% supervision fee on gross receipts on rentals or lease of privately-owned market spaces in QC. • In case of failure of the owners of the market spaces to pay the tax for three consecutive months, the City shall revoke the permit of the privately-owned market to operate. • Progressive Development Corp, owner and operator of Farmer’s Market, filed a petition for prohibition against QC on the ground that the tax imposed by the Market Code was in reality a tax on income, which the municipal corporation was prohibited by law to impose. • I: W/n the supervision fee is an income tax or a license fee. • R: It is a license fee.

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A LICENSE FEE is imposed in the exercise of the police power primarily for purposes of regulation, while TAX is imposed under the taxing power primarily for purposes of raising revenues. If the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally, revenue is also obtained does not make the imposition a tax. To be considered a license fee, the imposition must relate to an occupation or activity that so engages the public interest in health, morals, safety, and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation but also its incidental consequences. In this case, the Farmers’ Market is a privately-owned market established for the rendition of service to the general public. It


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warrants close supervision and control by the City for the protection of the health of the public by insuring the maintenance of sanitary conditions, prevention of fraud upon the buying public, etc. Since the purpose of the ordinance is primarily regulation and not revenue generation, the tax is a license fee. The use of the gross amount of stall rentals as basis for determining the collectible amount of license tax does not, by itself, convert the license tax into a prohibited tax on income. Such basis actually has a reasonable relationship to the probable costs of regulation and supervision of Progressive’s kind of business, since ordinarily, the higher the amount of rentals, the higher the volume of items sold. The higher the volume of goods sold, the greater the extent and frequency of supervision and inspection may be required in the interest of the buying public.

PAL v. Edu • Under a legislative franchise, Philippine Airlines is exempt from all taxes except for the payment of 2% of its gross revenue to the National Government. • On the strength of an opinion of the Secretary of Justice, PAL was determined not to have been paying motor vehicle registration fees since 1956. • Eventually, the Land Transportation Commissioner required all tax exempt entities, including PAL, to pay motor vehicle registration fees. • PAL protested. • I: W/n PAL is exempt from the payment of motor vehicle registration fees • R: YES, PAL is exempt. • The motor vehicle registration fee is a tax, to which PAL is exempt. • Taxes are for revenue, while fees are exactions for purposes of regulation and inspection. Thus, fees are limited in amount to what is necessary to cover the cost of the services rendered in that connection. • It is the OBJECT of the charge, and NOT the name, that determines whether a charge is a tax or a fee. • In this case, the money collected under the Motor Vehicle Law is not intended for the expenditures of the Motor Vehicle Office but for the construction and maintenance of public roads, streets and bridges. • Thus, since the said fees are collected NOT for the regulating motor vehicles on public highways but for providing REVENUE for the gov in order to construct public highways, they are TAXES, not merely fees. • PAL is exempt from paying such fees, except for the period between 27 June 1968 to 9 April 1979, where its tax exeption in the franchise was repealed. Villegas v. Hiu Chiong Tsai Pao Ho • The Municipal Board of Manila passed an ordinance prohibiting an alien from being employed or engaging in any position or occupation or business enumerated therein, whether permanent, temporary, or casual, without first securing an employment permit from the Mayor and paying the P50 permit fee.

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Hiu Chiong filed an action to restrain the enforcement of the ordinance and to have it declared null and void for being discriminatory and violative of the rule on uniformity in taxation. The Mayor argued that the ordinance cannot be declared null and void on the ground that it violates the rule on uniformity of taxation because this rule applies only to purely tax or revenue measures and not to regulatory measures, such as the ordinance. I: W/n the ordinance is valid. R: NO, the ordinance is void. The first part of the ordinance requiring an alien to secure an employment permit is regulatory in character because it involves the exercise of discretion on the part of the Mayor in approving or disapproving the applications. However, the second part which requires the payment of P50 as employee’s fee is not regulatory but a revenue measure. There is no logic or justification in exacting P50 from aliens who have been cleared for employment. The obvious purpose of the ordinance is to raise money under the guise of regulation. The P50 fee is unreasonable not only because it is excessive but because it fails to consider valid substantial differences in situation among individual aliens who are required to pay it. The same amount is being collected from every employed alien, whether he is casual or permanent, part time or full time, or whether he is a lowly employee or a highly paid executive.

Compania General de Tabacos v. City of Manila • Tabacalera paid for its liquor license and also paid sales tax on its sale of general merchandise, including liquor. • It claimed that it made an overpayment and demanded a refund of the sales tax paid on the ground that since it already paid the license fees, it was no longer bound to pay the sales tax on the liquor. • I: W/n Tabacalera is liable for sales tax on the liquor despite already having paid for its liquor license. • R: YES, Tabacalera is liable. • Generally, the term “tax” applies to all kinds of exactions which become public funds. Legally, however, a license fee is a legal concept quite distinct from tax. o Taxes are for raising revenues while license fees are imposed in the exercise of police power for purposes of regulation. • Under on ordinance, Tabacalera must pay license fees in order to continue enjoying the privilege of selling liquor, considering that the sale of intoxicating liquor is potentially harmful to public health and morals, and must be subject to State regulation. • Under another ordinance, Tabacalera is liable for sales tax on sales of general merchandise, including liquor. • Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article, without it being in violation of the rule against double taxation.

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The City Council of Basilan enacted an ordinance imposing an anchorage fee on foreign vessels, which anchor within its territorial waters. The anchorage fee was ½ centavo per ton of the vessel for every 24 hours or part thereof, provided that the maximum charge shall not exceed P75 per day. American Mail Lines, et al questioned the validity of the ordinance on the ground that the City of Basilan had no authority to collect anchorage fees from foreign vessels. The City of Basilan argued that the ordinance was a valid exercise of the city’s police power and that the fees were for purely regulatory purposes. It claimed that since the City of Basilan was an island with mountainous coasts and fringed by coves, bays and islets, there was a need for funds to suppress possible smuggling activities. I: W/n the ordinance was valid R: NO, the ordinance is void. The Charter of the City of Basilan gives the Council the authority to fix the charges to be paid by all watercraft landing at or using public wharves, docks, levees, or landing places. The anchorage fees are not included in this power, as shown by the need of the Council to enact the amendatory ordinance. Contrary to the claim of the Council, the anchorage fees are not being charged for regulatory purposes. They are actually intended for revenue purposes. The power to regulate as an exercise of police power does NOT include the power to impose fees for revenue purposes. Fees for purely regulatory purposes may only be of sufficient amount to include: o expenses of issuing the license AND o cost of the necessary inspection / police surveillance, o taking into account INCIDENTAL expenses In this case, the fees were based on the tonnage of the vessels. This basis of fixing the fees has no reasonable relation to the cost of issuing permits and the cost of inspection or surveillance. Also, the fee imposed on foreign vessels – ½ centavo per ton for the first 24 hours, and which shall not exceed P75 per day – exceeded even the harbor fee imposed by the National Government, which was only P50. Lastly, the city’s own contention that the ordinance was enacted in the exercise of taxation power makes it obvious that the fees were not merely regulatory. THUS, the fees were intended for revenue purpose and NOT for regulatory purposes.

Osmeña v. Orbos

American Mail Lines v. City of Basilan


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Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund (OPSF), which was designed to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from: o exchange rate adjustments AND o increases in the world market prices of crude oil A portion of the OPSF was taken from collections of ad valorem taxes levied on oil companies. Subsequently, by virtue of an EO, the OPSF was reclassified into a trust liability account and ordered released from the NATIONAL TREASURY to the MINISTRY of Energy. Said EO also authorized the investment of the fund in government securities, with the earnings accruing to the fund. Aquino then amended PD 1956 by promulgating EO 137, w/c expanded the grounds for reimbursement to oil companies for possible COST UNDERRECOVERY inccured resulting from the reduction of domestic prices on petroleum products. The said cost underrecovery was left to the determination of the Ministry of Finance. Osmena then questioned the creation of the trust fund, saying that it violates the Constitution. • This is because the money collected pursuant to PD 1956 is a special fund, and under the Constitution, if a special tax is collected for a specific purpose, the revenue generated from it shall be treated as a SPECIAL FUND to be used only for the indicated purpose. It must not be channeled to another government objective. I: W/n the creation of the trust fund is violative of the Constitution R: NO, creation of the trust fund was valid. In order for the funds to fall under the prohibition, it must be shown that they were collected as TAXES – as a form of revenue While the funds collected may be referred to as taxes, they are exacted in the exercise of the POLICE POWER of the State . The main objective was NOT revenue but to stabilize the price of oil and petroleum. The OPSF is actually a SPECIAL FUND, as seen from the special treatment given to it by EO 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. These measures thus comply with the constitutional description of a "special fund." What is here involved is not so much the power of taxation as police power. For a valid delegation of power, it is essential that the law delegating the power must be: o 1) complete in itself -- must set forth the policy to be executed by the delegate o 2) it must fix a standard — limits of whichare sufficiently determinate or determinable — to which the delegate must conform. Such was fulfilled in this case.

Republic v. Bacolod-Murcia Milling Co.


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The Philippine Sugar Institute (Philsugin), a semi-public corporation, was created for the purpose of conducting research to advance the country’s sugar industry. To carry out these objectives, the charter of Philsugin authorized the levy of 10 cents / picul of sugar for 5 years to be collected from sugar cane planters in the country. The proceeds of this levy would go to a special fund to be used exclusively by Philsugin. Philsugin then purchased the Insular Sugar Refinery using money from this special fund. Several years later, Insular Sugar Refinery had accumulated tremendous losses. 3 sugar centrals refused to continue paying their contributions to the fund, given that the purchase of the Insular Sugar Refinery by Philsugin was NOT authorized by its charter, and its continued operation was inimical to their interests. They also contended that their obligation to pay their contributions subsisted ONLY to the EXTENT that they were benefited by the contributions, since the levy was merely a special assessment and not a tax. I: W/n the levy was a special assessment or a revenue measure R: It was NEITHER! The levy for the Philsugin Fund is not so much an exercise of the power of taxation nor the imposition of a special assessment, but the exercise of the POLICE POWER for the general welfare of the entire country. It is therefore an exercise of a sovereign power, which no private citizen may lawfully resist. In Lutz v. Araneta, Court held that since sugar production is one of the leading industries of our nation, its development redounds greatly to the general welfare. Thus, the Legislature found it in the interest of the general welfare to stabilize the sugar industry through the power of taxation. Moreover, the charter of Philsugin authorizes it to conduct research in the sugar industry in order to find ways to reduce the cost of production and achieve greater efficiency in the industry. This provision justifies the acquisition of the refinery, since there is no better way to carry out this research than to actually operate a refinery. Even if the operations of the refinery suffered from losses, Philsugin’s experience of running the refinery is a GAIN to the industry. Hence, the sugar centrals were still benefited by the acquisition. TAX vs. SPECIAL ASSESSMENT:

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because it would impair government functions. This would not hold true in the case of a refusal to comply with a special assessment. Victorias Milling v. Municipality of Victorias • The municipal council of Victorias enacted Ordinance 1 w/c required sugar centrals operating w/in the municipality to pay an annual municipal license tax. • Based on the ordinance, Victorias Milling was assessed 40K (imposed on sugar centrals) and another 40K (imposed on sugar refineries). • Thus, Victorias Milling filed a suit to declare the ordinance void since it: o a) exceeds the amount fixed in Provincial Circular 12-A issued by the Finance Dept o b) is discriminatory, as it singles out VM, w/c is the only operator of a sugar central and a sugar refinery within the jurisdiction of defendant municipality o c) constitutes double taxation o d) the national government has preempted the field of taxation with respect to sugar centrals or refineries • The lower court held that the exaction was invalid because the municipality CANNOT impose a tax for revenue in the guise of a police measure. The amounts set forth in the ordinance also exceeded the cost of licensing, regulating, and surveillance. • I: W/n the ordinance was valid. • R: The ordinance was valid. • The ordinance was promulgated not in the exercise of the municipality's regulatory power but as a REVENUE measure, authorized by Commonwealth Act 472. • Under this, a municipality is authorized to impose three kinds of licenses: o 1) license for regulation of useful occupations / enterprises o 2) license for restriction/ regulation of non-useful occupations or enterprises o 3) license for revenue • The first 2 fall w/in police power, while the 3rd is for revenue purposes. • The license fee in this case falls under #3 and is valid. • Generally speaking, it is NOT a license fee, but rests on taxing power, w/c must be expressly conferred by statute upon the municipality.

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There is no double taxation because the company is being taxed for the same object: One tax is on sugar centrals and the other is on sugar refineries. It just so happens that the company is both. [Also, the tax was imposed based on capacity of the sugar centrals to produce, so it was really a license on the occupation or business of sugar centrals and sugar refineries and not on the sugar itself; hence there was no identity of object of taxation].


• There is no discrimination despite the fact that the company is the only sugar producing entity in the municipality. Victorias Milling is not named in the ordinance and should another corporation decide to produce sugar in the area, it will be taxed accordingly. • GR: If not for police inspection, supervision, regulation = it is a revenue measure! Lutz v. Araneta • Commonwealth Act 567 or the Sugar Adjustment Act, was promulgated in 1940 in response to the imminent threat to the sugar industry by the imposition of export taxes upon sugar as provided in the Tydings-McDuffie Act, and the eventual loss of its preferential position in the US market. • In order to stabilize the sugar industry to prepare for the loss, CA 567 provided for an INCREASE in the existing tax on the manufacture of sugar (on a graduated basis), the proceeds of which would accrue to the Sugar Adjustment and Stabilization Fund (a special fund in the Phil Treasury). • Walter Lutz, in his capacity as administrator of the Estate of Antonio Ledesma, wanted to recover from the Collector of Internal Revenue the amount paid by the estate as taxes, alleging that the tax imposed by CA 567 is unconstitutional, being levied for the aid and support of the sugar industry exclusively, which is NOT a public purpose. • I: W/n the tax is unconstitutional because it is not devoted to a public purpose. • R: The tax is valid! • The defect in the argument of Lutz is his assumption that the tax provided for in CA 567 is a pure exercise of the taxing power.

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In reality, the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. Thus, it is primarily an exercise of police power. • Sugar production is one of the great industries of our nation. Sugar: o Occupies the leading position among export products o Gives employment to thousands of laborers o Is an impt source of foreign exchange • Thus, its development redounds to GEN. WELFARE and the legislature may determine within reasonable bounds what is necessary for its protection and promotion. Taxation may be made the implement of the State’s police power.

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It is inherent in the power to tax that a state be free to select the subjects of taxation, so the argument that the tax to be levied burdens sugar producers themselves does not hold water. • It does not matter that the funds raised under the Sugar Stabilization Act should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected;

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legislature is not req’d by the Consti to adhere to the policy of “all or none.” • Lastly, the taxation does not constitute expenditure of tax money for private purposes, since the funds will be used to increase sugar production, solve problems and improve working conditions in sugar mills.

PCGG v Cojuangco • After the EDSA Revolution, Pres Aquino issued EOs 1, 2 and 14: o EO 1 created the Presidential Commission on Good Government (PCGG) to assist the President in the recovery of ill-gotten wealth accumulated by former Pres Marcos and his family. o EO 2 states that the ill-gotten wealth is in the form of properties located in the the Phils and other countries. o EO 14 empowered PCGG w/ assistance of the SolGen and other gov agencies, to file and prosecute cases under EOs 1 and 2. • Pursuant to these laws, the PCGG issued and implemented numerous sequestrations, freeze orders and provisional takeovers of properties of allegedly ill-gotten companies. • Among the properties sequestered were shares of stock in the UCPB (United Coconut Planters Bank), the so-called CIIF Companies (Coconut Industry Investment Fund companies) and Cojuangco, Jr. • Sandiganbayan then issued a resolution lifting the sequestration of the UCPB shares on the ground that respondents COCOFED and the CIIF Companies were NOT been impleaded by the PCGG as partiesdefendants. • PCGG challenged the said resolution. • Meanwhile, Sandiganbayan ordered the holding of elections for the UCPB Board of Directors. It also allowed the sequestered shares to be voted by their registered owners. • Thus, respondents COCOFED, Cojuangco, etc, as registered owners, were allowed to exercise their right to vote their shares of stock in UCPB at the Stockholder’s Meeting, and exercise their stockholders’ rights. • Republic of the Phils then contended that the Sandiganbayan committed GAD in enjoining the PCGG from voting the sequestered shares of stock in the UCPB, despite the fact that: o the sequestration shares were purchased with coconut levy funds, which were PUBLIC in character, AND o A previous resolution allowed the PCGG to vote the sequestered shares • I: W/n the coconut levy funds partake of the nature of taxes, and if the answer is in the affirmative, w/n they constitute public funds • R: The coconut levy funds partake of the nature of taxes w/c constitute public funds • Generally, the right to vote sequestered shares of stock registered in the names of private individuals / entitles alleged to have been


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acquired with ill-gotten wealth shall be exercised by the REGISTRED OWNERS. HOWEVER, the PCGG may be granted such voting right provided it can show: o prima facie evidence that the shares are indeed ill-gotten o there is imminent danger of dissipation of the assets, necessitating their continued sequestration and voting by the government until a final decision on their ownership is promulgated by the proper court In this case, coconut levy funds partake of the nature of taxes which, in general, 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, a tax has 3 elements, namely that it is:

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an enforced proportional contribution from persons and properties

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imposed by the State by virtue of its sovereignty levied for the support of the government.

Taxation is done not merely to raise revenues to support the government, but also to provide means for the rehabilitation and the stabilization of a threatened industry affected by public interest, as to be within the police power of the State. The court in its earlier pronouncements stressed that the coconut levy funds are not only affected with public interest but are also prima facie, PUBLIC FUNDS -- money raised by operation of law to support the gov in the discharge of its obligations. Consequently, the government should be allowed to continue voting since the shares were purchased w/ coconut levy funds, w/c are public in character and affected w/ public interest.

Commissioner on Internal Revenue v PLDT • PDLT paid the BIR about P164k+ for equipment and spare parts it imported for its business. The amount included compensating, advance sales and other internal revenue taxes. PLDT also paid VAT. • As a franchise holder, PLDT was entitled to a tax exemption privilege under RA7082 (grant of franchise), which provided that the grantee should pay a franchise tax equivalent to 3% of all gross receipts, and that the said percentage shall be in LIEU of all taxes on the franchise/ its earnings.

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PLDT wrote to the BIR requesting confirmation of its exemption privilege, and BIR confirmed this, saying that PLDT was liable for the

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3% franchise tax and exempt from VAT on its importation of equipment. PLDT filed a claim for tax refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been paying erroneously from October, 1992- December, 1994. CTA granted the petition (although ruling that a portion from OctDec16, 1992 had already prescribed and was beyond the 2-yr period allowed by law for refunds), ordering CIR to REFUND or to ISSUE in favor of petitioner a Tax Credit Certificate in the reduced amount of about P223k+ representing erroneously paid VAT and other taxes (compensating, advance sales, importation) from 1992 to 1994. Judge Saga dissented, saying who clarified that the “in lieu of” provision of Sec12 refers only to DIRECT taxes and not to indirect taxes such as VAT, compensating tax, and advance sales tax. BIR moved for reconsideration and the same was denied. CA also dismissed its appeal. I: W/n PLDT is exempt from payment of VAT other taxes by virtue of the provision in its franchise that the 3% franchise tax on its gross receipts shall be in lieu of all taxes on its franchise / earnings R: NO, PLDT is not exempt from VAT and other taxes Court has always ruled that TAXATION is the RULE, and exemption is the exception. Thus, statutes granting tax exemptions must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The burden of justfying exemption is imposed on the one who claims a refund. The clause “in lieu of all taxes” in Sec 12 of RA 7082 is immediately followed by the limiting or qualifying clause “on this franchise or earnings thereof”, suggesting that the exemption is limited to taxes imposed DIRECTLY on PLDT since taxes pertaining to PLDT’s franchise or earnings are its direct liability. Thus, indirect taxes, not being taxes on PLDT’s franchise or earnings, are OUTSIDE the purview of the “in lieu” provision. The 10% VAT on importation of goods partakes of an excise tax levied on the privilege of importing articles. It is NOT a tax on the franchise of a business enterprise, but is imposed on all taxpayers who import goods whether or not the goods will eventually be sold, bartered, exchanged or utilized for personal consumption. The VAT on importation replaces the advance sales tax payable by regular importers who import articles for sale or as raw materials in the manufacture of finished articles for sale. Direct taxes - impositions for which a taxpayer is directly liable on the transaction or business he is engaged in Indirect taxes - those where the liability for the payment of the tax falls on one person but the burden 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 o In this case, advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for sale or of raw materials to be processed into merchandise can shift the tax / lay the “economic burden of the tax” on the


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purchaser, by subsequently adding the tax to the selling price of the imported article or finished product Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles, whether in the course of business or not. (Purpose: to place, for tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis with those who buy directly from foreign countries)

Planters Products Inc v Fertiphil • Marcos issued LOI 1465, imposing a capital recovery component of Php10.00 per bag of fertilizer. The levy was to continue until adequate capital was raised to make PPI financially viable • Fertiphil remitted to the Fertilizer and Pesticide Authority (FPA), which then remitted said amount to Far East Bank and Trust Company, the depository bank of PPI. P6k+ was remitted from 1985 to 1986. • After EDSA, Fertiphil demanded from PPI a refund of the amount it remitted; PPI refused. • Fertiphil filed a complaint for collection and damages, questioning the constitutionality of LOI 1465. • They claimed it was unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process • FPA on the other hand said that the issuance of LOI 1465 was a valid exercise of police power of the state in insuring the fertilizer industry, and that Fertiphil did not sustain any damage because the burden imposed by the levy fell on the ultimate consumer, not the seller • I: 1. W/m the issuance of LOI 1465 was an exercise of the police power of the state - NO • 2. W/n the levy was for a public purpose - NO • R: • 1. The imposition of the levy was a exercise of the taxation power of the state. • While it is true that the power to tax can be used as an implement of police power, the primary purpose of the levy was revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. • In this case, the imposition of Php10 per bag is too excessive to serve a mere regulatory purpose. • Even if it was an exercise of the police power of the state, the LOI would still be invalid as it did not comply with the test of “lawful subjects” and “lawful means” -- specifically, that the interest of the public, generally, requires its exercise, and that the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. • 2. LOI 1465 is not for a public purpose. • The purpose for the issuance of LOI 1465 was to support a private company: o First, it is expressly provided that the levy be imposed to benefit a private company – PPI.

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Second, the levy was conditional and dependent on PPI becoming financially viable. Third, the levies were directly remitted and deposited in FEBTC, the bank of PPI, which used said remittances to pay of PPI’s debts.

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LIMITATIONS ON THE POWER OF TAXATION Pascual v Secretary of Public Works Congress passed an RA appropriating P85K for the construction of Pasig feeder road terminals. The Provincial Governor of Rizal filed an action for declaratory relief and injunction, claiming that at the time of the passage and approval of the Act, these feeder roads had not yet been constructed and were not connected to any government property or main highway. The feeder roads were actually within the Antonio Subdivision, which was owned by Jose Zulueta, a member of the Senate of the Philippines. Zulueta, before the passage of the Act, had offered to donate the property to the municipality of Pasig, but the deed of donation was executed only several months after the RA was passed. Hence, Congress appropriated public funds for the construction of feeder roads that were, at the time the law was passed, private property. ISSUE: Whether the appropriation is valid. HELD: The appropriation is invalid. The taxing power must be exercised for public purposes only and not for the advantage of private individuals. The right of the legislature to appropriate public funds is correlative with its right to tax. As the Constitution prohibits taxation except for a public purpose, so also no appropriation of state funds can be made other than for a public purpose. The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote the public interests as opposed to the furtherance of the advantage of individuals, although such advantage to individuals might incidentally serve the public. Even if subsequently, Zulueta executed the deed of donation in favor of the municipality, making the roads public property, the appropriation is still invalid. The validity of the statute depends upon the powers of Congress at the time of its passage, not upon events occurring after. At the time the bill was passed, the road was still private property. Therefore, the appropriation sought a private purpose and was null and void. The subsequent donation could not have cured this nullity. Osmena v Orbos • Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund (OPSF), which was designed to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from: o exchange rate adjustments AND o increases in the world market prices of crude oil • A portion of the OPSF was taken from collections of ad valorem taxes levied on oil companies. • Subsequently, by virtue of an EO, the OPSF was reclassified into a trust liability account and ordered released from the NATIONAL TREASURY to


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the MINISTRY of Energy. Said EO also authorized the investment of the fund in government securities, with the earnings accruing to the fund. Aquino then amended PD 1956 by promulgating EO 137, w/c expanded the grounds for reimbursement to oil companies for possible COST UNDERRECOVERY inccured resulting from the reduction of domestic prices on petroleum products. The said cost underrecovery was left to the determination of the Ministry of Finance. Osmena then questioned the creation of the trust fund, saying that it violates the Constitution. This is because the money collected pursuant to PD 1956 is a special fund, and under the Constitution, if a special tax is collected for a specific purpose, the revenue generated from it shall be treated as a SPECIAL FUND to be used only for the indicated purpose. It must not be channeled to another government objective. I: W/n the creation of the trust fund is violative of the Constitution R: NO, creation of the trust fund was valid. 1. For the funds to fall under the prohibition, it must be shown that they were collected as TAXES – as a form of revenue While the funds collected may be referred to as taxes, they are exacted in the exercise of the POLICE POWER of the State . The main objective was NOT revenue but to stabilize the price of oil and petroleum. The OPSF is actually a SPECIAL FUND, as seen from the special treatment given to it by EO 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. These measures thus comply with the constitutional description of a "special fund." 2. Also, there was no undue delegation of taxation power because the law provides a sufficient standard by which the authority must be exercised. For a valid delegation of power, it is essential that the law delegating the power must be: o 1) complete in itself -- must set forth the policy to be executed by the delegate o 2) it must fix a standard — limits of which are sufficiently determinate or determinable — to which the delegate must conform. In this case, there was a sufficient standard, which is the general policy of the law to protect the consumer by stabilizing and subsidizing petroleum prices.

Pepsi-Cola v Municipality of Tanauan • This case involved 2 Municipal Ordinances and the Local Autonomy Act (RA 2264): o The Local Autonomy Act (RA 2264) grants municipalities the authority to impose municipal taxes or fees upon persons engaged in any occupation or business within their jurisdictions, provided that they were not allowed to impose percentage tax on sales and on items already subject to specific tax under the NIRC

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Municipal Ordinance No. 23 of Tanauan, Leyte imposes on soft drink producers and manufacturers a tax of 1/16 of a centavo for every bottle of soft drink corked.

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Municipal Ordinance No. 27 imposes on soft drinks produced or manufactured a tax of 1 centavo on each gallon of volume capacity. • Pepsi filed an action to declare the Local Autonomy Act and the two ordinances void. It claimed that RA 2264 is an undue delegation of power. • I: W/n RA 2264 constitutes an undue delegation of power - NO • 2. Whether MOs 23 and 27 are valid – YES! • R: • 1. RA 2264 is not an undue delegation of power. • The power of taxation may be delegated to local governments in respect of matters of local concern. • This is not to say though that the constitutional injunction against deprivation of property without due process of law may be passed over under the guise of the taxing power, except when the taking of property is in the lawful exercise of the taxing power, as when: o the tax is for a public purpose; o the rule on uniformity of taxation is observed; o either the person or property taxed is within the jurisdiction of the o government levying the tax; and o in the assessment and collection of certain kinds of taxes, notice and opportunity for hearing are provided. • The delegation of the taxing power to the municipal corporation cannot be assailed either on the ground of double taxation. Double taxation is prohibited only when the taxpayer is taxed twice for the same benefit by the same entity for the same purpose, not where one tax is imposed by the State and the other by a municipality. • 2. The MOs are valid. • MO No. 27 is not a tax on sales but on the produce, since it is based on volume capacity. • Neither is it a specific tax because soft drinks do not fall within the enumeration of items subject to specific tax. The rate of the tax is also reasonable and cannot be said to be unfair or oppressive. • Municipalities are empowered to impose, not only municipal license taxes upon persons engaged in any business or occupation, but also to levy for public purposes, just and uniform taxes. SSS v City of Bacolod • The SSS had an office building in Bacolod City. It failed to pay realty taxes for three consecutive years. The City levied upon the property and forfeited it in its favor. • SSS protested the forfeiture on the ground that the SSS, being a government owned and controlled corporation, is exempt from payment of real estate taxes.


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The CFI ruled that SSS is NOT covered by the exemption, saying that the exemption only applies to properties owned by government agencies and instrumentalities performing governmental/ sovereign functions. It excluded from the coverage of the exemption those performing proprietary functions, such as the SSS. It relied on the case of NACOCO v. Bacani in which the Court held that government agencies performing proprietary functions are NOT exempt from paying legal fees. I: W/n a GOCC performing proprietary functions like the SSS, is exempt from paying realty taxes. R: Yes. The SSS is exempt from paying realty taxes. The Charter of the City of Bacolod provides that lands and buildings owned by the government are exempt from realty taxes. The application of the NACOCO v. Bacani case is incorrect, since that case was referring to legal fees and NOT to realty taxes. For purposes of exemptions in the payment of realty taxes, the distinction between government agencies performing constituent and ministrant function is not important. What is decisive is merely that the properties possessed by the SSS are in fact owned by the government of the Philippines. As such, they are exempt from realty taxes. To make such a distinction would have the effect of taking money from one pocket and putting it in another pocket. It would not serve the main purpose of taxation and would even tend to defeat it, because of the paperwork, time, and expenses that it would entail. When public property is involved, exemption is the rule and taxation, the exception

Manila Int’l Airport Authority v City of P’que • As operator of the NAIA, the Manila Intl Aiport (MIAA) administers the land, improvements and equipment within the NAIA complex. • The MIAA charter transferred to the MIAA approximately 600 hectares of land, including runways and buildings. The charter also provided that no portion of the land transferred to the MIAA shall be disposed of through sale or any other mode unless approved by the President. • The Office of the Government Corporate Counsel was of the opinion that the local government code withdrew the exemption from real estate tax granted to MIAA. • MIAA paid some of the real estate taxes due but was also held delinquent. • The City of Paranaque threatened to sell the Airport lands should MIAA fail to pay the real estate delinquency. • MIAA filed a petition for injunction but CA dismissed this.

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MIAA. A day before the scheduled public auction, the MIAA filed a motion for an issuance of a TRO before the SC which the SC granted immediately. However the respondents received the TRO 3 hours after the conclusion of the public auction, so the SC issued a resolution confirming nunc pro tunc (now for then) the TRO. I: W/n the Airport lands and buildings of MIAA are exempt from real estate taxes under existing laws Held: YES, it is. 1. A GOCC is NOT exempt from real estate tax. However, MIAA is NOT a GOCC. A GOCC must be organized as a stock or non-stock corporation. MIAA is not organized as a stock or non-stock corporation. MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. It is like any other gov instrumentality, but is NOT vested w/ corporate powers. A government instrumentality like MIAA falls under the LGC w/c states that local govs CANNOT tax the national government, w/c delegates the power to tax to local govs. The power of local govs to tax is subject to Congress limitations. 2. Airport lands and buildings of MIAA are property of public dominion, devoted to public use, and are owned by the State (Art 420 Civ Code— roads, ports… owned by state). Thus, they are outside the commerce of man and CANNOT be the subject of sale. Unless the President issues a proclamation withdrawing the Airport lands and Buildings from public use, these properties remain properties of public dominion and are inalienable. MIAA is merely holding title to the Airport lands and buildings in TRUST for the Republic. This is made clearer by the fact that only the President can sign such deed of conveyance involving said property. The transfer of the said property to the MIAA was meant to implement a reorganization. The MIAA charter transferred Airport lands and buildings to MIAA without the Republic receiving any cash. The purpose was to reorganize a division in the Bureau of Air Transportation into a separate and autonomous body. The Republic remains the beneficial owner of the lands and buildings. LGC exempts from real estate tax any real property owned by the Republic of the Philippines. It also states that real property owned by the Republic loses its tax exemption ONLY if the beneficial use thereof has been granted, to a taxable person. MIAA is not a taxable person. HOWEVER, portions of the lands and buildings that MIAA leases to private entities are NOT exempt from real estate tax.

Sea-Land Services Inc. v. CA: International Comity • Sea-Land, an American shipping company, entered into a contract with the US Government for the transport of military household goods and effects of US military personnel assigned to the Subic Naval Base. • The BIR collected 1.5% income tax on the income derived by Sea-Land, which Sea-Land paid.

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Later, Sea-Land asked for a refund, claiming that it had paid the tax by mistake. It invoked the tax exemption provided in the RP-US Military Bases Agreement, which exempts from tax any profit derived by a US national under a contract with the US government in connection with the construction, maintenance, operation, and defense of the bases. Sea-Land filed a petition for review with the CTA to judicially pursue its claim for refund and to stop the running of the 2-year prescriptive period. CTA’s & CA denied refund. I: W/N Sea-Land falls within the coverage of the tax exemption. NO R: The transport or shipment of household goods and effects of USmilitary personnel is not included in the term construction, maintenance, operation, and defense of the bases. Neither can the activity be interpreted as directly related to the defense and security of the Philippine territories. It is therefore not covered by the exemption. “Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception.” The law “does not look with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.” The avowed purpose of tax exemption “is some public benefit or interest, which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption.” The hauling or transport of household goods and personal effects of U. S. military personnel would not directly contribute to the defense and security of the Philippines.

CIR v. Mitsubishi Metal Corp.: International Comity


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Atlas Consolidated Mining entered into a Loan and Sales Contract with Mitsubishi. Under the Contract, Mitsubishi would lend Atlas $20M for the installation of a new concentrator for copper production, and in turn, Atlas would sell to Mitsubishi all the copper concentrates produced from the machine for the next 15 years. Thereafter, Mitsubishi applied for a loan with Eximbank of Japan and other consortium of Japanese banks so that it could comply with its obligations under the contract. The total amount of both loans was $20M. Approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as loanto Atlas and as consideration for importing copper concentrates from Atlas. Atlas made interest payments in favor of Mitsubishi totaling P13M. The corresponding 15% tax on the interest in the amount of P1.9M was withheld and remitted to the Government. Subsequently, Mitsubishi and Atlas filed a claim for tax credit, requesting that the P1.9M be applied against their existing tax liabilities on the ground that the interest earned by Mitsubishi on the loan was exempt from tax. The NIRC provides that income received from loans in the Philippines extended by financing institutions owned, controlled, or financed by foreign governments are exempt from tax. Mitsubishi and Atlas claim that the interest earned from the loan falls under the above exemption because Mitsubishi was merely acting as an agent of Eximbank, which is a financing institution owned, controlled, and financed by the Japanese Government. They allege that Mitsubishi was merely the conduit between Atlas and Eximbank, and that the ultimate creditor was really Eximbank. I: W/N the interest income from loans extended to Atlas by Mitsubishi is excluded from gross income taxation and therefore excluded from withholding tax. NO R: Mitsubishi was not a mere agent of Eximbank. It entered into the agreement with Atlas in its own independent capacity. The transaction between Mitsubishi and Atlas on the one hand, and between Mitsubishi and Eximbank on the other, were separate and distinct. Thus, the interest income of the loan paid by Atlas to Mitsubishi is entirely different from the interest income paid by Mitsubishi to Eximbank. What was subject of the withholding tax is not the interest income paid by Mitsubishi to Eximbank but the interest income earned by Mitsubishi from the loan to Atlas. Since the transaction was between Mitsubishi and Atlas, the exemption that would have been applicable to Eximbank, does not apply. The interest is therefore not exempt from tax. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas, but this only proves the justification for the loan as represented by Mitsubishi which is a standard banking practice for evaluating the prospects of due repayment. “Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.


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31st Infantry Post Exchange v. Posadas: International Comity

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The 31st Infantry Post Exchange was an agency under the control of the US Army, operating in the Philippines. The Exchange bought goods, such as soap and toiletries, and resold them to officers, soldiers, and civilian employees of the US Army and their families. The proceeds derived from the sales were then used for the betterment of the condition of the personnel of the Army. In the course of its business, the Exchange purchased goods from merchants in the Philippines. The Collector of Internal Revenue collected from these merchants taxes at the rate of 1.5% of the gross value sold by them to the Exchange. The Exchange filed an action for prohibition against the CIR for him to desist from collecting the taxes from the merchants. The Exchange claims that the taxes imposed on the merchants were driving up the prices of goods sold to it by the merchants. The Exchange claims that the merchants should be exempt from taxes since the revenue law provides that no specific tax shall be collected on any goods sold and delivered directly to the US Army of Navy for their actual use or issue. I: W/N the merchants selling goods to the Exchange are exempt from sales tax. NO R: The tax exemption covers those goods that are sold directly to the US Army or Navy for their actual use or issue. In this case, the goods are sold to the Exchange for resale to individuals belonging to the Army or Navy, and not to the Army or Navy itself. Hence, they do not fall within the exemption. The rule is that without Congressional consent, no Federal agency or instrumentality can be taxed by state authority. However, only those agencies through which the Federal Government immediately and directly exercises its sovereign powers are immune from the taxing power of the states. The reason upon which the rule rests must be the guiding principle to control its operation. The limitations upon the taxing power of the state

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must receive a practical construction which does not seriously impair the taxing power of the Government imposing the tax. The effect of the tax upon the functions of the Government and the nature of the governmental agency determine finally the extent of the exemption. In this case, the tax laid upon Philippine merchants who sell to the Exchange does not interfere with the supremacy of the US Government or with the operations of its instrumentality the US Army, to such an extent or in such a manner as to render the tax illegal. The tax does not deprive the Army of the power to serve the Government or hinder the efficient exercise of its power.

CIR v. Marubeni Corporation • Marubeni was a Japanese corporation engaged in the import and export, trading, and construction business. It completed two contracts in 1984, the income from which it did not declare. • One of the contracts was with NDC in connection with the construction of a wharf/port complex in Leyte. The other contract was with the Philippine Phosphate Fertilizer Corp (Philfos) for the construction of an ammonia storage complex also in Leyte. • The CIR then made an assessment on Marubeni's deficiency taxes. It found that the NDC and Philpos contracts were made on a “turn-key” basis (a job in which the contractor agrees to complete the work of building and installation to the point of readiness or occupancy; in other words, the products are brought to the client complete and ready for use) amounting to about P960M+. • The two contracts were divided into two parts – the offshore portion and the onshore portion. All materials and equipment in the contract under the offshore portion were manufactured and completed in Japan. After manufacture, these were transported to Leyte and installed to the pier with the use of bolts. • CIR found that Marubeni was liable for contractor's tax on the offshore portion. • Marubeni filed a petition with the CTA, arguing that the income derived from the offshore portion should be exempt from tax since it was derived outside of the Philippine jurisdiction.

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Japan. They were merely shipped to Leyte and assembled there. While the construction and installation work were completed within the Philippines, some pieces of equipment and supplies were completely designed and engineered in Japan. Since these services were rendered outside the taxing jurisdiction of the Philippines, they are therefore not subject to the contractor’s tax.

Reagan v. CIR: Territorial Jurisdiction • Reagan, an American citizen and an employee Bendix Aviation Corporation, which provides technical assistance to the US Air Force, was assigned at Clark Air Base. He imported a tax-free 1960 Cadillac car. • After a few months, he asked his Base Commander at the Clark Air Base for a permit to sell the car which was granted provided that the sale should be made to a member of the US Armed Forces or a US citizen employed in the US military base in the Philippines. He then sold the car to • , Jr. who was a member of the US Marine Corps in Cavite. Johnson, Jr. then sold the car to Meneses. • The CIR assessed him and he paid the income tax on the amount realized from the sale. After paying the income tax, he sought a refund from CIR claiming that he is exempt. While the action was pending, he filed the case with the CTA seeking the recovery of what he paid plus the legal rate of interest. • Reagan is imputing that the Clark Air Force is foreign soil or territory and thus is beyond the government’s jurisdictional power to tax. His ground is based upon an obiter dictum in a 1962 decision

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I: W/N the sale is exempt from income tax. NO R: The sale is not exempt from income tax because it took place within Philippine territory thus within the government’s jurisdictional power to tax. Clark Air Force Base is not a foreign soil or territory for purpose of income tax legislation. There is nothing in the Military Bases Agreement that lends support to such assertion. It has not become foreign soil or territory. The Philippine’s jurisdictional rights therein, certainly not excluding the power to tax, have been preserved. The Phils being independent and sovereign, its authority may be exercised over its entire domain. There is no portion thereof that is beyond its power. Its laws govern therein, and everyone to whom it applies must submit to its terms. The ground occupied by an embassy is not in fact the territory of the foreign State to which the premises belong through possession or ownership. The lawfulness or unlawfulness of acts there committed is determined by the territorial sovereign. A state is not precluded from allowing another power to participate in the exercise of jurisdictional right over certain portions of its territory.

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If it does so, it does not follow that such areas become impressed w/ alien character. They retain their status as native soil. They are still subject to its authority. Itts jurisdiction may be diminished, but it does not disappear. So it is with the bases under lease to the American armed forces by virtue of the Military Bases Agreement of 1947. They are not and cannot be foreign territory. Tiu v. CA: Equal Protection of the Laws • Congress passed RA 7227 which created the Subic Special Economic Zone, granting tax and duty incentives (tax and duty-free importations of raw materials, capital and equipment) to businesses and residents within the area encompassed by the zone. • The law provides that no local and national taxes shall be imposed within the zone. In lieu of taxes, 3% of the gross income of enterprises operating within the zone shall be remitted to the National Government, 1% to the local government units, and 1% to a development fund to be utilized for the development of municipalities outside Olangapo and Subic. • Pres. Ramos later issued an EO specifying a “secured area” area within the zone in which the privileges were operative. o EO97

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4. must apply equally to all members of the same class. In this case, the purpose of the law is to accelerate the conversion of military reservations into productive areas (economic or industrial areas) . Thus, the lands covered under the Military Bases Agreement are its object. To achieve purpose, Congress deemed it necessary to extend economic incentives to attract and encourage investors. It was thus reasonable for the President to have delimited the application of some incentives to the confines of the former Subic military base, since it is this specific area which the government intends to transform and develop into a self-sustaining industrial and economic zone, particularly for the use of big foreign and local investors to use as operational bases for their businesses and industries. These big investors possess the capital necessary to spur economic growth and generate employment opportunities. There are substantial differences between the big investors who are being lured to establish and operate their industries in the so-called “secured area” and the present business operators outside the area.

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John Hay Peoples Alternative Coalition v. Lim • RA No. 7227 created the Bases Conversion and Development Authority (BCDA), which also created the Subic Special Economic Zone (Subic SEZ). Aside from granting incentives to Subic SEZ, RA 7227 also granted the President is an express authority to create other SEZs in the areas covered respectively by the Clark military reservation, the Wallace Air Station in San Fernando, La Union, and Camp John Hay through executive proclamations. • BCDA entered into a MOA and Escrow Agreement with TUNTEX and ASIAWORLD, private corporations under the laws of the British Virgin Islands, preparatory to the formation of a joint venture for the development of Poro Point La Union and Camp John Hay as premier tourist destinations and recreation centers. • BCDA, TUNTEX and ASIAWORLD executed a JVA to put up the Baguio International Development and Management Corporation which would lease areas within Camp John Hay and Poro Point for the attainment of the tourist and recreation spots in La Union and Camp John Hay.

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President Ramos issued Proclamation No. 420 which established a SEZ on a portion of Camp John Hay. 2nd sentence of Section 3 of said Proclamation provided for national and local tax exemption within and graned other economic incentives to the John Hay Special Economic Zone. “Section 3: Investment Climate in John Hay Special Economic Zone.Pursuant to Section 5(m) and Section 15 of RA No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies, rules, and regulations governing the zone, including investment incentives, in consultation with pertinent government departments. Among others, the zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted.” Petitioners filed this case to enjoin the respondents from implementing Proc. 420. is unconstitutional on grounds of: o For being illegal and invalid in so far as it grants tax exemptions thus amounting to unconstitutional exercise of by the President of power granted only to legislature o Limits powers and interferes with the autonomy of the city o Violates rule that all taxes should be uniform and equitable I: W/N Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other economic incentives to the John Hay Special Economic Zone. NO, 2 nd sentence, Section 3 of said proclamation is unconstitutional. W/N Proclamation No. 420 is constitutional for limiting or interfering with the local autonomy of Baguio City. YES R: The 2nd Sentence of SECTION 3 of Proclamation No. 420 is hereby declared NULL and VOID and is accordingly declared of no legal force and effect. Public respondents are hereby enjoined from implementing the aforesaid void provision. Proclamation No. 420, without the invalidated portion, remains valid and effective. Under Section 12 of RA No. 7227 it is clear that ONLY THE SUBIC SEZ which was granted by Congress with tax exemption, investment incentives and the like. THERE IS NO EXPRESS EXTENSION OF THE SAID PROVISION IN PRESIDENTIAL PROCLAMATION No. 420. (Section 12 kept mentioning Subic Special Economic Zone, specifically…) Also found in the deliberations of the Senate, a confirmation of the exclusivity of the tax and investment privileges to Subic SEZ. “Senator Angara: The Gentleman is absolutely correct. Mr. President. SO WE MUST CONFINE THESE POLICIES ONLY TO SUBIC.” It is the legislature, unless limited by a provision of the state constitution that has full power to exempt any person, corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than the Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass


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ordinances on exemption only from local taxes. The challenged grant of tax exemption must have concurrence of a majority of all members of Congress. In same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon. Tax exemption cannot be implied as it must be categorically and un mistakably expressed – if it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to Subic SEZ, it would have so expressly provided in RA 7227. BCDA, under R.A 7227, is expressly entrusted with broad rights of ownership and administration over Camp John Hay, as the governing agency of the John Hay SEZ.

COCONUT OIL REFINERS ASSOCIATION INC. V. BCDA • RA 7227 was enacted providing for the sound and balanced conversion of the Clark and Subic military reservations and their extensions into alternative productive uses in the form of special economic zones. • President Ramos issued EO 80 which declared that Clark (CSEZ) shall have all the applicable incentives granted to the Subic Special Economic and Free Port Zone (SSEZ) under RA 7227. • Petitioners claim that the said E.O as well as RA 7227 are replete with constitutional infirmities and must be declared invalid and void. • Petitioner assail: o EO 80 and BCDA Board Resolution: allowing the tax and dutyfree sale at retail of consumer goods imported via clark for consumption outside CSEZ. o EO 97, EO 97-A: granting $100 monthly and $200 yearly taxfree shopping privileges to SSEZ residents living outside secured area of SSEZ and to Filipinos aged 15 and over residing outside SSEZ • Petitioners argue that the Executive Department, by allowing thru questioned issuances the setting up of tax and duty free shops and the removal of consumer ggoods and items from the zones without payment of correspondning duties and taxes arbitrarily provided additional exemptions to the limitations imposed by RA 7227.

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I: (other issues: equal protection clause, preferential use of Filipino labor, prohibition against unfair competition) W/N assailed issuances amounts to violation of the rule on separation of powers being executive legislation. R: Petitioners claim that the wording of RA 7227 clearly limits the grant of tax incentives to the importation of raw materials and capital equipment only, hence they claim that assailed issuances constitute executive legislation for invalidly granting tax incentives in importation of consumer goods. The court however said that to limit the tax-free importation privilege of enterprises to those located inside the special zone only to raw materials clearly runs counter to the intention of the legislature to create a free port where “free flow of goods or capital within, into and out of the zones” is insured. The records of the Senate containing the discussion of the concept of SEZ in Sec 12a RA 7227 show the legislative intent that consumer goods entering the SSEZ which satisfy the needs of the zone and are

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consumed there are not subject to duties and taxes in accordance with Philippine laws. According to Senator Guingona: The SEZ could embrace the needs of tourism, servicing, financing and other investment aspects. However with regard to the executive order issued by President Ramos concerning Clark as being a SEZ (and thus enjoy tax exemptions and incentives) the court declared that such was an invalid exercise of executive legislation. As was decided in the case of Camp John Jay, wherein the court held that John Hay was not granted any tax exemption as it was not anywhere stated in the law. As in this case, RA 7227 expressly provides for the grant of incentives to the SSEZ it fails to make any similar grant however to the other economic zones including Clark. Tax and duty free incentives being in the nature of tax exemptions the basis thereof should be categorically and unmistakably expressed from the language of the statute.

Province of Abra v Hernando • The Roman Catholic Bishop of Bangued wanted to be exempted from payment of real estate tax. • He filed an action for declaratory relief in the CFI of Abra. • The CFI rendered a summary judgment granting the exemption. • The Province of Abra filed an action for certiorari against the CFI on the ground that it granted the action for declaratory relief filed by the Roman Catholic Bishop without allowing the Province to answer and without hearing, in violation of its right to due process. • It also alleged that the judge (Hernando) failed to abide PD No. 464 which states that, “No court shall entertain any suit ASSAILING the validity of tax until the taxpayer pays under protest the tax assessed against him.. nor shall any court declare any portion of the tax assessed INVALID except if the taxpayer shall pay the just amount of tax determined by the court.” • I: W/n the judgment of the court granting the exemption to the Roman Catholic Bishop of Bangued is valid • R: NO, it is invalid

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In order to exempt religious institutions from the payment of real estate taxes, the property must be used exclusively, actually, and directly for religious purposes. Thus, To be exempted from realty tax, there must be proof of ACTUAL and DIRECT use of the property for religious or charitable purposes. In this case, the right of the Province of Abra to procedural due process was violated by the summary judgment granting the exemption. Instead of accepting the bare allegation of the bishop that the property was being used exclusively, directly, and actually for public purposes, the judge should have first required proof of these allegations.

(*VAT: a tax levied on the sale, barter or exchange of goods and properties AS WELL AS as on the sale or exchange of services; or SIMPLY tax on spending / consumption):

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• Tolentino v. Sec. of Finance Several parties filed complaints in the SC questioning the legality of Expanded VAT law (RA 7716), which sought to widen the tax base of the existing VAT system


1) The Philippine Press Institute contends that by removing VAT exemption from the press while maintaining those granted to others, the EVAT Law discriminates against the press and violates the freedom of the press. R: Since the law granted the press a privilege, the law could take back the privilege anytime WITHOUT offense to the Constitution. The State, by granting exemptions, does NOT forever waive the exercise of its sovereign prerogative. In withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have already been subject. The case of Grosjean v. American Press Co. cited by the PPI is different because in that case, the tax was found to be discriminatory because it was imposed only on newspapers whose weekly circulation was over P20k. These papers were critical of a certain senator who controlled the state legislature. The censorial motivation of the law was thus evident. HOWEVER, in this case, the motivation was not to censor but merely to raise revenues. What the legislature cannot impose upon the press is a license tax, which is mainly for regulation AND is unconstitutional because it lays PRIOR RESTRAINT on the exercise of a right. In this case, the VAT is not a license tax because it is not a tax on the exercise of a privilege or of a constitutional right. It is imposed on the sale of goods purely for revenue purposes. 2) Philippine Bible Society claims that the imposition of VAT on the sales of its bibles INFRINGES on religious freedom because the tax INCREASES the price of the bibles, while REDUCING the volume of sales. It also claims exemption from the registration fee of P1k. R: The resulting burden on the exercise of religious freedom is so INCIDENTAL as to make it difficult to differentiate it from any other economic imposition that might make the right to disseminate religious doctrines costly. To follow PBS’ argument of increasing the tax on the sale of vestments would be to lay an impermissible burden on the right of the preacher to make a sermon. The registration fee is really just to pay for the expenses of registration and enforcement of the provisions of the law. Even if PBS is excused from paying taxes on those bibles that it distributes for free, it still has to pay the registration fee since it also engages in the sale of bibles. 3. CREBA claims that the law: a) impairs the obligations of contracts because the application of the tax to existing contracts of the sale of real property by installment would result in substantial increases in monthly amortizations, which the buyer did not anticipate at the time he entered into the contract.

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b) violates equal protection since the law exempts low-cost housing from VAT but NOT middle-class housing. c) Being an indirect, regressive tax, VAT violates the constitutional mandate to provide a progressive system of taxation. R: a) VAT does NOT violate the non-impairment clause because the obligation of contracts CANNOT defeat the authority of the government to tax by virtue of its sovereignty. b) Neither did it violate EPC because there was a substantial distinction between the homeless poor and the middle class. The middle class can afford to rent houses while the homeless poor cannot. c) As to it being a regressive tax, the Constitution does not prohibit regressive taxes. What it simply provides is that Congress shall evolve a progressive system of taxation, which means that direct taxes are to be preferred and indirect taxes minimized. VAT provides exemptions in favor of basic goods utilized by the lower income brackets and its burden actually falls more on those goods that consumers from the higher income bracket buy. Therefore, the tax is not repugnant to the Constitution.

ABAKADA v Ermita • R.A. 9337 / the EVAT Law was enacted in May 2005. This law:

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1) authorized the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12% effective January 1, 2006, if two conditions are satisfied: o VAT collection as a percentage of GDP of the previous year exceeds 2 4/5 % o National government deficit as a percentage of GDP of the previous year exceeds 1 ½% o maintaining the rate of 10% until the conditions above took place It also inserted a provision imposing a 70% limit on the amount of input tax to be credited against the output tax. Petitions were thus filed assailing the constitutionality of the law: o ABAKADA argued that Congress abandoned its exclusive authority to fix taxes by giving the President the authority upon the Finance Sec’s recommendation to raise VAT to 12% o Sen. Pimentel and Rep. Escudero argued that the law was an undue delegation of legislative powers and a violation of due process o Pilipinas Shell dealers argued that the VAT reform was arbitrary, oppressive and confiscatory. On the other hand, respondents countered that the law was complete, that it left no discretion to the President, and that it merely charged the President with carrying out the rate increase once any of the 2 conditions arise. I: W/n RA 9337 is constitutional R: YES, it is valid and constitutional.


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1) Law was NOT an undue delegation of legislative power Congress didn’t delegate the power to tax but the mere implementation of the law – the ascertainment of facts contingent on conditions already provided. In this case, the legislature made the operation of the 12% rate contingent upon 2 specified conditions. Thus, no discretion would be exercised by the President, and he would only exercise the ministerial duty of imposing the 12% rate. Moreover, the President can’t alter or modify / nullify / set aside the findings of fact of the Secretary of Finance, who will ascertain the said conditions because the SoF will not act as alter ego of President but AGENT of the legislative department. 2) The 12% increase does NOT impose an unfair and unnecessary additional tax burden. Because of the country’s gloomy states of economic affairs, it is necessary to raise revenue to meet government expenditures. 3) The 70% limitation on input tax does NOT violate due process and EPC Input tax is NOT a property right but a STATUTORY privilege, w/c may be regulated. Besides, the unutilized input tax may be credited in the subsequent periods or even refunded, so it is NOT completely lost. Neither does it violate EPC w/ regard to the 5% creditable withholding tax imposed on payments made by the government for TAXABLE TRANSACTIONS. This is because it is applied equally to members of the same class. Taxable transactions with the government are subject to a uniform 5% rate, in contrast to its different rates prior to amendment. It is clear that Congress intended to treat differently taxable transactions with the government. 4) The law is consistent w/ Uniformity and Equitability of Taxation Uniformity of taxation means that all taxable articles/property of the SAME CLASS be taxed at the SAME RATE. In this case, the tax law is uniform as it provides for a standard rate of 10% / 12% on all goods and services. It does NOT even make any distinction as to the type of industry / trade that will bear the 70% limitation on the creditable input tax, 5year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. The law is also equitable because it is equipped with a threshold margin—the 10/12% VATE rate will not apply to the sale of goods w/ gross annual sales at P1.5 or below. Small corner sari-sari stores are consequently exempt from its application. 5) Even if VAT is regressive, it is still constitutional. The constitution does NOT prohibit the imposition of indirect taxes / a regressive system of taxation. It simply provides that Congress shall EVOLVE a progressive system of taxation, meaning direct taxes must be preferred to indirect taxes.

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In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions.

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Misamis Oriental Association of Coco Traders v. Dept. of Finance Secretary • The NIRC exempts from VAT the sale of agricultural non-food products in their original state if the sale is made by the primary producer or owner of the land from which the same are produced. • The sale made by any other person / entity, like a trader or dealer, is NOT exempt from the tax. • A revenue memorandum circular was issued, reclassifying COPRA into an agricultural non-food product. • Misamis Oriental, w/c was engaged in the buying and selling of copra, claimed that the memorandum circular was discriminatory and violative of the equal protection clause because while coconut farmers and copra producers are exempt, TRADERS and DEALERS are NOT, although both sell copra in its original state. • I: W/n there was a violation of equal protection. • R: NO, it was not violative of EPC • The Constitution does not forbid the differential treatment of persons so long as there is a REASONABLE basis for classifying them differently.

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In this case, there is a material or substantial difference between coconut farmers and copra producers, on the one hand, and copra traders and dealers, on the other. The farmers/ producers PRODUCE and SELL copra, while traders and dealers merely SELL copra. The Constitution does not forbid the differential treatment of persons so long as there is a reasonable basis for classifying them differently.

CIR v. CA • Fortune Tobacco Corp. is engaged in the manufacture of different brands of cigarettes. • The Philippine Patent Office issued to the corporation certificates of trademark registration over “Champion,” “Hope,” and “More” cigarettes. • Initially, the CIR classified the brands as FOREIGN BRANDS since they were listed in the World Tobacco Directory as belonging to foreign companies. • However, Fortune Tobacco changed the names as follows: o “Hope” to “Hope Luxury” o “More” to “Premium More” • THUS, they were removed them from the foreign brand category. • A certification was presented to show that “Champion” was an original Fortune Tobacco brand. • The three brands were therefore taxed ad valorem as local brands. • Subsequently, RA 7654 was passed amending the NIRC provisions on cigarettes. The said law imposed a 55% tax on locally manufactured cigarettes bearing a FOREIGN brand and 45% tax on cigarettes bearing a LOCAL brand.


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After the enactment of RA 7654 but BEFORE its effectivity, the BIR issued a circular reclassifying the three brands as foreign brands. Pursuant to RA 7654, the CIR assessed Fortune Tobacco for ad valorem tax deficiency amounting to P9.5M. Fortune filed a petition for review with the CTA. The CTA upheld the stand of Fortune, stating that at the time of the enactment of RA 7654, the three brands were still classified as local brands and could thus NOT be assessed the 55% tax, but only the 45% tax. This was affirmed by the CA I: W/n the 55% tax classification as foreign brands was valid R: NO, it was NOT valid. They are local brands. 1) The BIR circular violated due process. The BIR may issue rules in the exercise of its quasi-legislative powers, but these rules must be merely interpretative in nature. It cannot go beyond providing for the means that can facilitate the implementation of the law. In this case, the circular issued by the BIR imposing the 55% tax rate did not simply interpret the law BUT legislated under its quasilegislative authority. Thus, the requirements of notice, hearing, and publication should not have been then ignored. 2) The circular infringed on uniformity of taxation. The Constitution requires taxation to be uniform and equitable. Uniformity requires that all taxable articles or kinds of property of the same class must be taxed at the same rate, and the tax must operate with the same force and effect in every place where the subject may be found. In this case, other cigarettes bearing foreign brands were NOT included within the scope of the circular. According to Commissioner Chato, the reason for leaving out the other brands was because there was not enough time to include them. Thus, the circular was hastily promulgated, in violation of the rule on uniformity of taxation.

CIR v. Lingayen Gulf Electric Power Co. Inc • Lingayen Gulf, an electric power plant operator, was the grantee of a municipal franchise to supply electricity in Pangasinan. It was subject to a 2% franchise tax under the municipal franchise. • The CIR assessed Lingayen a deficiency franchise tax, computed at 5%, based on the rate prescribed by the NIRC, instead of the lower rates as provided in the municipal franchises. • Lingayen requested for a reinvestigation given that instead of incurring a deficiency liability, it made an overpayment of the franchise tax. • This was denied by the CIR so Lingayen appealed to the CTA. • In the meantime, RA 3843 was passed granting Lingayen a legislative franchise to supply electric current to the public, subject to 2% franchise tax. • The CIR claimed that the law was unconstitutional for being violative of the uniformity and equality of taxation clause of the Constitution since

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other similar franchises were subject to a 5% franchise tax imposed by the Tax Code. CTA dismissed CIR’s claim and ruled that the provisions of RA 3843 should apply. I: W/n RA 3843 violates the rule on uniformity and equality of taxation R: No. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. Uniformity means that all property belonging to the same class shall be taxed alike. The Legislature has the inherent power not only to select the subjects of taxation but to grant exemptions. TAX EXEMPTIONS have never been deemed violative of the equal protection clause. In this case, although Lingayen’s municipal franchises were obtained under Act No. 667 of the Philippine Commission, these original franchises have been replaced by a new legislative franchise, RA 3843. Lingayen’s power plant falls within the class of power plants created by Act No. 3636, as amended by C.A. No. 132 and RA 3843. RA 3843 merely transferred the petitioner's power plant from that class provided for in Act No. 667, until the approval of RA 3843. Thus, the law merely transferred Lingayen’s power plant from its former class to which it belonged. All power plants belonging to this particular class were subject to the same 2% tax and therefore, the rule on uniformity was not violated.

Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas v. Tan • • •

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President Aquino issued EO 273, adopting the value-added tax (VAT). Four petitions contended that EO 273 is unconstitutional on the grounds that the President had no authority to issue it; that it is oppressive, discriminatory, unjust, and regressive. I: W/n the EO 273, adopting VAT, is valid. R: The EO is valid. Under the Provisional and 1987 Constitutions, the President is vested with legislative powers until a legislature under a new Constitution is convened. In this case, the EO was enacted 2 days before Congress convened. Therefore, the EO was still within the President’s power to issue. EO 273 is not oppressive, discriminatory, unjust, or regressive. It satisfies all the requirements of a valid tax in that it is uniform and equitable. A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found. In this case, the tax is applied similarly on all goods and services sold to the public, which are not exempt, at the constant rate of 0% or 10%. The tax is also equitable because it is imposed ONLY on sales of goods or services by persons engaged in business with an aggregate gross annual sales exceeding 200K.


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Thus, small corner sari-sari stores, sales of marine and farm products and basic food and necessities are not covered by VAT. Customs brokers contend that the EO is also discriminatory because it exempts from VAT services performed in the exercise of one’s profession except customs brokers. The distinction is based on material differences in that the activities of customs brokers partake more of a business rather than a profession.

Sison v. Ancheta • BP 135 amended Section 21 of the National Internal Revenue Code. • The amendment provided a different schedule of tax rates for compensation income and net income. • It provided that: o The tax base for those earning compensation income at fixed rates would be GROSS INCOME, o The tax base for the income of businesses and professionals would be NET INCOME • Sison, as taxpayer, challenged the validity of the amendment on the ground that he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession as compared to those which are imposed upon fixed income or salaried individual taxpayers. • He claims that it amounts to class legislation, in violation of EPC, due process and the rule on uniformity in taxation. • I: W/n it is violative of EPC, dp and the rule on uniformity in taxation • R: NO!

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1) Due process clause may only be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. (ie. When it amounts to confiscation of property / not used for a public purpose) 2) As for EPC, the Constitution does not require things which are different be treated the same. It is inherent in the power to tax that a state be free to select the subjects of taxation and 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation. *Thus, there was no violation of due process or EPC. 3) There was also no violation of uniformity. Uniformity does NOT call for perfect equality. It merely means that all taxable articles / property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. In this case, there is a discernible basis of classification, which is the SUSCEPTIBILITY of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers

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are not entitled to make deductions for income tax purposes because they are in the same situation more or less.

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On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification for the law to adopt gross system of income taxation to compensation income, while continuing the system of net income taxation as regards the professional and business income.

Villegas v. Hiu Chiong Tsai Pao Ho • The Municipal Board of Manila passed an ordinance prohibiting an alien from being employed or engaging in any position or occupation or business enumerated therein, whether permanent, temporary, or casual, without first securing an employment permit from the Mayor and paying the P50 permit fee. • Hiu Chiong filed an action to restrain the enforcement of the ordinance and to have it declared null and void for being discriminatory and violative of the rule on uniformity in taxation. • The Mayor argued that the ordinance cannot be declared null and void on the ground that it violates the rule on uniformity of taxation


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because this rule applies only to purely tax or revenue measures and not to regulatory measures, such as the ordinance. I: W/n the ordinance is valid. R: NO, the ordinance is void. The first part of the ordinance requiring an alien to secure an employment permit is regulatory in character because it involves the exercise of discretion on the part of the Mayor in approving or disapproving the applications. However, the second part which requires the payment of P50 as employee’s fee is not regulatory but a revenue measure. There is no logic or justification in exacting P50 from aliens who have been cleared for employment. The obvious purpose of the ordinance is to raise money under the guise of regulation. The P50 fee is unreasonable not only because it is excessive but because it fails to consider valid substantial differences in situation among individual aliens who are required to pay it. The same amount is being collected from every employed alien, whether he is casual or permanent, part time or full time, or whether he is a lowly employee or a highly paid executive.

Villanueva v. City of Iloilo: Uniformity

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The municipal board of Iloilo enacted ORDINANCE 11 (series of 1980) imposing 86 license tax fees on persons engaged in the business of operating tenement houses ((tenement house – any building or dwelling for renting space divided into separate apartments or accessories). The Villanuevas, owners of 4 tenement houses containing 34 apartments, challenged the validity of such ordinance because only the taxpayers of the City of Iloilo are singled out to pay taxes on their tenement houses, while citizens of other cities, where their councils do not enact a similar tax ordinance are permitted to escape such imposition. Lower court rendered the ordinance illegal as it is oppressive and unreasonable, constitutes double taxation and violates uniformity. I: W/n the ordinance violates the rule on equality and uniformity in taxation. R: NO. 1) The rule on equality and uniformity does not require that taxes for the same purpose should be imposed in different territorial subdivisions at the same time. Taxes are uniform and equal when imposed upon all property of the same class or character within the taxing authority. In this case, tenement buildings constitute a distinct class of property. 2) Contrary to petitioners' assertion that the tax in question is a REAL ESTATE tax, this argument cannot be sustained. The tax is not a fixed proportion of the assessed value of the tenement houses, and does not require the intervention of assessors or


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appraisers. It is not payable at a designated time or date, and is not enforceable against the tenement houses either by sale or distraint. RATHER, it is seen from the context of the ordinance that the intention is to impose a license tax on the operation of tenement houses, which is a form of business or calling. 3) Also, the petitioners' contention that they are doubly taxed because they are paying the real estate taxes and the tenement tax imposed by the ordinance in question is devoid of merit. A license tax may be levied upon a business or occupation although the land or property used in connection therewith is subject to property tax. This would not constitute double taxation because there is only double taxation when the SAME PROPERTY / SUBECT MATTER is taxed twice for the same purpose, w/in the same jurisdiction and period, and of the same kind of character of tax. Real estate and tenement tax aer NOT of the same kind / character. At all events, there is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform.

Pepsi-Cola Bottling Co. of the Phil. v. City of Butuan: Uniformity

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The City of Butuan enacted an ordinance imposing on any agent and/or consignee of any entity engaged in selling soft drinks a tax of 10 cents per case of 24 bottles to be paid at the end of every month. The tax shall be based from the cargo manifest, bill of lading, or on any record showing the number of cases received within the month. The ordinance provides that the revenue derived from such "shall be alloted as follows: 40% for Roads and Bridges Fund; 40% for the General Fund and 20% for the School Fund. Pepsi filed an action to nullify the ordinance on the ground that it partakes of the nature of an import tax and is highly unjust and discriminatory. I: W/n the ordinance is valid R: The ordinance is null and void. 1) The tax is discriminatory and violative of uniformity because it is levied only on those persons who are agents or consignees of another dealer, who must be one engaged in business outside the city. Thus, local dealers (w/in city) NOT acting for or on behalf of other merchants would be exempt from the tax. 2) Moreover, the tax shall be based on the number of bottles received, NOT SOLD, by the taxpayer. These circumstances show that the ordinance is limited in application to those soft drinks brought into the City from outside thereof. The tax thus partakes of the nature of an import duty, which is beyond the authority of the city to impose by express provision of law. 3) In order for valid classification to take place it must be germane to purpose of law, rest on substantial distinctions, apply equally to all members of same class, apply to present and future conditions.

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the tax imposed by CA 567 is unconstitutional, being levied for the aid and support of the sugar industry exclusively, which is NOT a public purpose. • I: W/n the tax is unconstitutional because it is not devoted to a public purpose. • R: NO, it is valid! • It is inherent in the power to tax that a state be free to select the subjects of taxation. Inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. • It does not matter that the funds raised under the Sugar Stabilization Act should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected; legislature is not req’d by the Consti to adhere to the policy of “all or none.” • Lastly, the taxation does not constitute expenditure of tax money for private purposes, since the funds will be used to increase sugar production, solve problems and improve working conditions in sugar mills.

There is no valid classification here because if the purpose of the law were merely to levy a burden upon the sale of soft drinks, there is no reason why sales thereof by dealers other than agents or consignees of producers or merchants outside the city should be exempt from the tax. On double taxation argument: double taxation, in general, is not forbidden by our fundamental law, so it cannot be sustained.

Ormoc Sugar Co. v. Treasurer of Ormoc City: Uniformity and Equal Protection • The Municipal Board of Ormoc City passed Ordinance No 4 imposing a municipal tax of 1% per export sale of sugar milled at the Ormoc Sugar Company. • Ormoc questioned the validity of the ordinance on the ground that it violated the equal protection clause and the rule of uniformity in taxation. • I: W/n the ordinance is valid. • R: NO, it is NOT. • The Local Autonomy Act gave chartered cities, municipalities and municipal districts authority to levy for public purposes just and uniform taxes, licenses or fees. • For a tax to be just and uniform, it must apply equally to things identically situated. HOWEVER, classification can be made as long as it is be germane to purpose of law, rest on substantial distinctions, apply equally to all members of same class, apply to present and future conditions. • In this case, the tax imposed is violative of the equal protection clause. • When the taxing ordinance was enacted, Ormoc Sugar was the ONLY sugar central in the city. • A reasonable classification should be in terms applicable to future conditions as well. The taxing power should not be singular and exclusive as to exclude any subsequent established sugar central from the coverage of the tax. • A subsequently established sugar central cannot be subject to tax because the ordinance expressly points to Ormoc Sugar Company Inc as the entity to be levied upon. Lutz v. Araneta- Uniformity • Commonwealth Act 567 or the Sugar Adjustment Act, was promulgated in 1940 in response to the imminent threat to the sugar industry by the imposition of export taxes upon sugar as provided in the Tydings-McDuffie Act, and the eventual loss of its preferential position in the US market. • In order to stabilize the sugar industry to prepare for the loss, CA 567 provided for an INCREASE in the existing tax on the manufacture of sugar (on a graduated basis), the proceeds of which would accrue to the Sugar Adjustment and Stabilization Fund (a special fund in the Phil Treasury). • Walter Lutz, in his capacity as administrator of the Estate of Antonio Ledesma, wanted to recover from the Collector of Internal Revenue the amount paid by the estate as taxes, alleging that


Association of Customs Brokers v. Municipal Board: Uniformity

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The Municipal Board of Manila passed an ordinance levying a property tax on all motor vehicles operating within the City of Manila. The ordinance provided that the rate of the tax would be 1% ad valorem per annum, and that the proceeds of the tax shall accrue to the Streets and Bridges Funds of the City, w/c will be used for the repair, maintenance, and improvement of its streets and bridges. The Charter of Manila gives the municipal board the power to tax motor vehicles, but this is limited by the Motor Vehicles Law, which disallows the imposition of fees on motor vehicles, EXCEPT property taxes imposed by a municipal corp. THUS, the law allows the City of Manila to impose a property tax on motor vehicles operating within its limits. However, the Association of Customs Brokers contended that the ordinance is void because it actually imposes a license tax in the guise of a property tax. I: W/n ordinance is valid R: NO, it is void! The ordinance infringes the rule of uniformity of taxation. This is because it exacts the tax upon all motor vehicles operating within the City of Manila, without distinguishing between those for HIRE and for PRIVATE USE, as well as those REGISTERED IN MANILA and those REGISTERD OUTSIDE BUT OCCASSIONALLY COME TO MANILA. The ordinance imposes the tax ONLY on those vehicles registered in Manila, even if those vehicles which are registered outside the city but which use its streets also contribute equally to the deterioration of the roads and bridges.

Eastern Theatrical Co. Inc v. Alfonso: Equality and Uniformity

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The City of Manila enacted an ordinance imposing a fee on the price of every admission ticket sold by cinematographers, theatres, vaudeville companies and boxing exhibitions. These fees shall be delivered by the operator 2 days after the performance. Otherwise, a violation should result to imprisonment and fine. Thus, 12 corporations engaged in motion picture business filed a complaint assailing the said ordinance for violating the principle of equality and uniformity of taxation because it did NOT tax other places of amusement, such as racetracks, cabarets, circuses, etc. I: W/n the ordinance violates the rule on equality and uniformity of taxation. R: Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Thus, the fact that some places of amusement are taxed while others like theatres and cinematographs are not does not violate uniformity and equality in taxation. Petitioners argued that the Revised Administrative Code confers upon the City of Manila the power to impose a tax on business but NOT on amusement and, consequently, the ordinance was beyond the City's power to enact. HOWEVER, the assumption is based on an arbitrary labeling of the kind of tax authorized by the said Code. The very fact that the said Code includes includes theaters, cinematographs, etc. will show conclusively that the power to tax amusement is expressly included within the power granted by the said Code.

Phil. Trust Co. v. Yatco: Uniformity • Several banks doing business in the Philippines, including Phil Trust and Peoples Bank, assailed the validity of the Revised Administrative Code for being discriminatory and violative of the rule on uniformity in taxation. • This is because the said law imposes a tax on capital, deposits, and circulation on all banks doing business in the Phils, while exempting the National City Bank of New York. • I: W/n the law violates the rule of uniformity in taxation. • R: No, it does NOT violate uniformity. • The exemption of an instrumentality of the Federal Government (NCBNY) does NOT deprive the Commonwealth of the Philippines of the power to tax the competitors of NCBNY. • A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found. • The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable. • In this case, the questioned statute applies uniformly to all banks in the Philippines without distinction and discrimination. • If the National City Bank is exempted from its operation because it is a federal instrumentality subject only to the authority of Congress, that


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alone could not have the effect of rendering it violative of the rule of uniformity. Also, a state may impose a different rate of taxation upon a foreign corporation for the privilege of doing business within the state than it applies to its own corporations upon the franchise which the state grants in creating them. The argument that the Revised Administrative Code was declared unconstitutional by the Supreme Court of the United States insofar as the NCBNY is erroneous. Posadas v. National City Bank held that the NCBNY in the Philippines was established by virtue of the Federal Reserve Act, w/c which authorized the establishment of branches of national banking associations in foreign countries or dependencies of the United States. Also it was held in Deomenech v National City Bank that "a dependency may NOT tax its sovereign" and the Philippines is a possession and dependency of the US.

Churchill v. Concepcion: Uniformity • Act 2432 amending Act 2339 was passed imposing an annual tax of P2 per square meter upon electric signs, billboards, and spaces used for posting or displaying temporary signs and all signs displayed on premises not occupied by buildings. • Churchill and Tait, co-partners doing business under the firm Mercantile Advertising Agency were owners of a billboard constructed on private property in Manila. • They were taxed P104. They paid under protest. • Subsequently, the filed a complaint against the CIR, assailing the validity of the tax for lack of uniformity because it was not graded according to value and was classified arbitrarily without reasonable ground. • I: W/n the law violates the rule on uniformity. • R: No, it does NOT violate the uniformity rule. • Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. • A tax is uniform when it operates with the same force and effect in every place where the subject is found. • Uniformity does not signify an intrinsic, but simply a geographical uniformity. • In this case, the P2/sq. meter tax is imposed on every electric sign or billboard wherever found in the Philippines. • The rule of uniformity does not require taxes to be graded according to the value of the subject upon which they are imposed, especially those levied as privilege or occupation taxes. • Also, the fact that the land upon which the billboards are located is taxed at so much per unit and the billboards at so much per square meter does not constitute "double taxation." • Double taxation does not necessarily affect its validity. British American Tobacco v Camacho • R.A. 8240 was passed recodifying the NIRC where Sec 142 was renumbered Sec 145.

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British American Tobacco assailed the validity of Sec. 145 of the NIRC (amended by RA 8240), arguing that the said provisions are violative of the equal protection and uniformity clause of the Constitution. Section 145 provides for a four-tier tax rate based on net retail price per pack of cigarettes: (1) low-priced, (2) medium-priced, (3) highpriced, and (4) premium-priced. Section 145 further provides that NEW BRANDS (registered after January 1, 1997) of cigarettes shall be taxed at their current retail price. If the current net retail price has not been established, the suggested net retail price shall be used to determine the specific tax classification. On the other hand, old or existing brands (registered before January 1, 1997) shall be taxed at their net retail price as of October 1, 1996. o Net retail price = price @ which cigarettes are sold on retail in 20 supermarkets in MM o Suggested net retail price = net retail price @ which brands of cigarettes are intended by the manufacturer to be sold To implement RA 8240, BIR issued a Revenue Regulation (RR No. 1-97) classifying existing brands of cigarettes as those existing or active (old) brands prior to January 1, 1997, while new brands of cigarettes are those registered after January 1, 1997. Another Revenue Regulation was issued amending the first (RR No. 9-2003) by providing BIR with the power to periodically review every two years / earlier the current net retail price of new brands to ESTABLISH / UPDATE their tax classification. In June 2001, British American Tobacco introduced the Lucky Strike Filter, Lucky Strike Lights and Lucky Strike Menthol Lights. Lucky Strike was taxed based on its suggested gross retail price from the time of its introduction in the market in 2001 until the BIR market survey in 2003. The brands were sold at P22.54, P22.61 and P21.23 so the applicable tax rate is P13.44 per pack. BAT now argues that the "classification freeze provision" violates the equal protection and uniformity of taxation clauses because the Lucky Strike brands are taxed based on their 1996 net retail prices while new brands are taxed based on their present day net retail prices. Thus, Lucky Strike suffers from higher taxes while its competitors pay a lower amount. BAT further argued that the tobacco excise law was discriminatory because under it, brands that entered the market after 1996 were imposed taxes based on their current retail prices while older brands paid taxes based on their 1996 retail prices. Meanwhile, Philip Morris, Fortune Tobacco, Mighty Corp. and JT International (respodnents-inintervention) claim that no inequality exists between cigarettes and that nullification of said annex would bring about tremendous loss. I: 1. W/n Sec. 145 of the NIRC violates EPC and uniformity of taxation clauses W/N the Revenue Regulations are invalid in so far as they empower BIR to reclassify and update the classification of new brands every two years or earlier R: Sec 145 NIRC is constitutional but the RRs are invalid for gratning the BIR the power to reclassify and update the classification. 1) NIRC is constitutional


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The classification freeze provision does not violate the equal protection and uniformity of taxation. It meets the standards for valid classification: rests on a substantial distinction, is germane to the purpose of the law, applies to present and future conditions and applies equally to all those belonging to the same class. (NOTE: The second condition, however, was not fully satisfied as it failed to promote fair competition among the players in the industry. However, this does not make the assailed law unconstitutional) The classification freeze provision was done in good faith and is germane to the purpose of the law. It was inserted for reasons of practicality and expediency. Since a new brand was not yet in existence at the time of the passage of RA 8240, then Congress needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify the brands as of October 1, 1996, was thus the logical and practical choice. With the amendments introduced by RA 9334, the freezing of the tax classifications now expressly applies not just to old brands (cigarettes which are taxed on the basis of average net retail price as of October 1, 1996) but to newer brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand that will be introduced in the future. Thus, the classification freeze provision could hardly be considered biased towared older brands over newer brands. Congress was even willing to delegate the power to periodically adjust the excise tax rate and tax brackets as well as to periodically resurvey and reclassify the cigarette brands based on the increase in the consumer price index to the DOF and the BIR. Thus, the provision was the result of Congress’s earnest efforts to improve the efficiency and effectivity of the tax administration over sin products while trying to balance the same with other State interests. On Uniformity: Uniformity of taxation requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. In the instant case, there is no question that the CFP meets the geographical uniformity requirement because the assailed law applies to ALL CIGARETTE BRANDS n the Philippines. On Inequitablity and Regressivity: BAT claims that the use of different tax bases for old brands as against new brands is discriminatory / inequitable, and that the CFP is regressive in character. This cannot be sustained because the CFP meets the requirements of the EPC. On regressivity -- the excise tax imposed on cigarettes is an indirect tax, and thus, regressive in character. HOWEVER, this does not mean that the law may be declared unconstitutional because the Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress shall EVOLVE progressive system of taxation. 2) The BIR RR is invalid because the NIRC does NOT authorize the BIR to update the tax classification of new brands every 2 years or earlier. The power to reclassify cigarette brands remains in Congress. Allowing the periodic reclassification of brands might tempt cigarette manufacturers to manipulate their brands' price levels or bribe the tax

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implementers to allow their brands to be classified as a lower tax bracket. ABAKADA v Purisima RA 9335 (Attrition Act of 2005) was enacted to optimize the revenuegeneration capability and collection of the BIR and BOC by providing a system of rewards and sanctions. This is done through the creation of a Rewards and Incentives Fund (Fund) and a Revenue Performance Evaluation Board (Board). It covers all officials and employees of the BIR and the BOC with at least six months of service, regardless of employment status. The Fund is sourced from the collection of the BIR and the BOC in excess of their revenue targets for the year. Any incentive or reward is taken from the fund and allocated to the BIR and the BOC in proportion to their contributions. Petitioners including ABAKADA, invoking their right as taxpayers, challenged the constitutionality of RA 9335: They claimed that limiting the scope of the system of rewards and incentives only to officials and employees of the BIR and the BOC violates the constitutional guarantee of equal protection. There is no reason why such system should NOT apply to OTHER officials and employees of all other government agencies. They assert that the law unduly delegates the power to fix revenue targets to the President as it lacks a sufficient standard on that matter. I: 1) W/n limiting the scope of the system of rewards and incentives only to officials and employees of the BIR and the BOC violates the constitutional guarantee of equal protection 2) Whether or not the law unduly delegates the power to fix revenue targets to the President. R: NO, it does not violate EPC and does NOT unduly delegate power to the President 1) The equal protection clause recognizes a valid and reasonable classification. RA 9335 has an expressed public policy, w/c is the optimization of the revenue-generation capability and collection of the BIR and the BOC. Since the subject of the law is the revenuegeneration capability and collection of the BIR and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies. Since the BIR and BOC perform the special function of taxation, such substantial distinction is germane and intimately related to the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. 2. Two tests determine the validity of delegation of legislative power: 1) the completeness test 2) the sufficient standard test A law is complete when it sets forth therein the policy to be executed and is sufficient when it provides adequate guidelines or limitations of the delegate’s authority


RA 9335 adequately states the policy and standards to guide the President in fixing revenue targets and the implementing agencies in carrying out the provisions of the law. Revenue targets are based on the original estimated revenue collection expected respectively of the BIR and the BOC for a given fiscal year as approved by the Development Budget and Coordinating Committee (DBCC) and submitted by the President to Congress. Thus, the determination of revenue targets does not rest solely on the President as it also undergoes the scrutiny of the Development Board Also, Section 7 specifies the limits of the Board’s authority and identifies the conditions under which officials and employees whose revenue collection falls short of the target by at least 7.5% may be removed from the service. Meralco v. Province of Laguna: Delegation to LGUs, Impairment Clause • Meralco was granted by several municipalities of the Province of Laguna a franchise to operate. • RA 7160 or the Local Gov Code of 1991 was then issued w/c allowed local government units to create their own sources of revenue and to levy taxes, fees and charges consistent w/ the basic policy of autonomy. • Purusant to this, the province of Laguna enacted an ordinance imposing on businesses enjoying a franchise a franchise tax of 50% of 1% of gross annual receipts. • Meralco paid under protest and sent a formal claim for refund to the Provincial Treasurer claiming that the franchise tax it had paid to the National Government (pursuant to P.D. 551) already included the franchise tax imposed by the Provincial Tax Ordinance. • Meralco also contended that Laguna’s imposition of franchise tax contravened the provisions of P.D. 551 Section 1 which provided that the franchise tax payable by all grantees of electric franchises shall be 2% of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current • I: W/n the province of Laguna had the power to levy the franchise tax • R: Yes. • Under the present Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. • The reason for this is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. • The LGC of 1991 explicitly authorizes provincial governments, notwithstanding any exemption granted by law, to impose a tax on businesses enjoying a franchise. • While the Court has referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being STRICTLY CONTRACTUAL. • However, contractual tax exemptions should not be confused w/ tax exemptions under franchises.

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Contractual tax exemptions are those agreed to by the taxing authority in contracts, such as those contained in government bonds, where the government acts in its private capacity and waives its governmental immunity. Tax exemptions of this kind may NOT be revoked without impairing the obligations of contracts. On the other hand, a franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Art 12 of the Consti provides that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.

Province of Misamis Oriental v. Cagayan Electric Power and Light Company (CEPALCO) • CEPALCO was granted a franchise to operate an electric, light, heat, and power system in Cagayan de Oro.

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The franchise imposed a 3% franchise tax which shall be in lieu of all taxes and assessments of whatever authority upon the privileges, earnings, income, etc, from which CEPALCO was expressly exempted. Subsequently the Local Tax Code was promulgated allowing provinces to impose a tax of ½ of 1% on businesses enjoying franchises. Pursuant to this, the Province of Misamis Oriental enacted an ordinance which also provided a franchise tax. CEPALCO refused to pay the additional tax, claiming the exemption granted to it under its franchise. Nevertheless, because of the opinion rendered by the Provincial Fiscal, upholding the legality of the Revenue Ordinance, CEPALCO paid under protest. I: W/n CEPALCO is exempt from paying the provincial franchise tax R: Yes. The franchise of CEPALCO expressly exempts it from payment of all taxes of whatever authority, except the 3% tax on its earning. The franchise granting the exemption is a special law applicable only to CEPALCO, while the Local Tax Code is a general tax law. The presumption is that special statutes are exceptions to the general law because they pertain to a special charter granted to meet a particular set of conditions and circumstances. Also, the Local Tax Regulation 3-75 issued by the Secretary of Finance made it clear that the franchise tax imposed under local tax ordinance pursuant to the Tax Code shall be collected from businesses holding franchise but NOT from business establishments whose franchise contain the ‘in-lieu-of-all-taxes-proviso’ Carcar Electric & Ice Plant vs. CIR: the tax exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the grantee. As a charter is in the nature of a private contract, the imposition of another franchise tax on the corporation by the local authority would constitute an impairment of the contract between the government and the corporation.


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MERALCO v Vera is not applicable in the present case because what the Government sought to impose on Meralco in that case was not a franchise tax but a COMPENSATING TAX on the equipment it imported.

CEPALCO v. CIR • CEPALCO was granted a legislative franchise (RA 3247) to operate an electric, light, heat, and power system in Cagayan de Oro.

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The legislative franchise imposed a 3% franchise tax which shall be in lieu of all taxes and assessments of whatever authority upon the privileges, earnings, income, etc, from which CEPALCO was expressly EXEMPTED. On June 1968, RA 5431 amended Sec 24 of the Tax Code by making liable for income tax all corporate taxpayers NOT exempt under the Tax Code.Thus, franchise companies were subjected to income tax in addition to franchise tax. However, in CEPALCO's case, its franchise was amended by RA 6020, effective 4 August 1969 w/c reenacted the tax exemption in its original charter or neutralized the modification made by RA 5431 more than a year before. By reason of the Tax Code amendment, the CIR sent a demand letter requiring CEPALCO to pay deficiency income taxes for 1968 to 1971. The company contested the assessments. The CIR cancelled the assessments for 1970 and 1971 but insisted on those for 1968 and 1969. The company filed a petition for review with the Tax Court, which held the company liable only for the income tax for the period from January to August 1969 / before the passage of RA 6020 which reiterated its tax exemption. I: W/n CEPALCO is exempt from paying the provincial franchise tax. R: Yes. The argument that Congress cannot impair a legislative franchise is untenable because under the Constitution, a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires RA 5431, in amending the Tax Code by subjecting to income tax all corporate taxpayers (not expressly exempted), had the effect of withdrawing CEPALCO's exemption from income tax. HOWEVER, the exemption was restored by the subsequent enactment of RA 6020 w/c reenacted the said tax exemption. Thus, CEPALCO is only liable for the income tax for the period from January 1 to August 3, 1969 when its tax exemption was modified by RA 5431. It is relevant to note that franchise companies, like PLDT have been paying income tax in addition to the franchise. Also, the 1969 assessment appears to be highly controversial. The Commissioner at the outset was not certain as to petitioner's income tax liability. It had reason not to pay income tax because of the tax exemption in its franchise.

Lealda Electric Co. v. CIR • In 1915, Julian Anson was granted a franchise to operate an electric light and power plant in Legaspi and Daraga Albay.

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The franchise was transferred to several parties until it was finally sold to Lealda Electric Co. Anson and his successors-in-interest regularly paid the 2% franchise tax imposed on all franchises. In 1946, the NIRC was amended by RA 39, increasing the franchise tax to 5%. Lealda paid at first, but later filed a claim for refund w/ the CIR contending that under its charter, it was liable to pay only 2% franchise tax. It argues that the franchise was a private contract between its predecessor-in-interest on one hand and the Government, on the other, and as such, cannot be amended by the Tax Code. Because of CIR’s inaction, it filed a petition w/ the CTA, w/c held Lealda liable for the 5% franchise tax I: W/n Lealda should pay 5% franchise tax. R: YES! The ruling in other cases (Visayan Electric and Manila Railrod) to the effect that special laws or charters may not be amended, altered or repealed, except by consent of all concerned cannot be inovked because: 1) Lealda’s charter contains an express provision to the effect that the same may be altered or repealed by Congress 2) the franchises involved in the cases cited differ substantially from Lealda’s franchise in that those of the Visayan Electric and of the Manila Railroad specifically provided that the franchise tax which the grantees were required to pay was to be “in lieu of all taxes of any kind levied, established, or collected by any authority whatsoever, now or in the future” Lealda's charter did NOT contain such provision. HISTORY: RA 39 amending the Tax Code became the basic franchise tax law by fixing the tax to be paid by holders of all existing and future franchises. Thus, the provisions of RA 39 should apply to Lealda since its franchise was already existing at the time of the adoption of the amendment.

Cassanovas v. Hord: Impairment Clause

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In 1897, the Spanish Gov granted Cassanovas certain mines in Ambos Camarines. The Internal Revenue Act imposes on all mining concessions granted prior to 1899 a property tax of P100 + an ad valorem tax of 3% of the actual market value of the output of the mines. The CIR thus considered Cassanovas to fall under such. Cassanovas assailed the validity of this provision on the ground that it impairs the obligations of contracts. Under the decree of the Spanish Government, the mining claim was subject only to P20 property tax + ad valorem tax of 3%. The decree provided that no other taxes except those mentioned shall be imposed upon mining industries. I: W/n there was a violation of the impairment clause R: Yes. Therefore, the provision is void.


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1) There was a contract between the Spanish Government and Cassanovas, the obligation of which contract was impaired by the Internal Revenue Law. A State may by contract based on consideration exempt the property of an individual or corporation from taxation either for a specified period or permanently. And it is equally well settled that the exemption is presumed to be on sufficient consideration, and binds the State if the charter containing it is accepted. Such contract can be enforced against the State at the instance of the corporation. 2) Also, the provision conflicts with Section 60 of the Act of Congress of 1 July 1902, which indicate that concessions can be cancelled only by reason of ILLEGALITY in the procedure by which they were obtained, or for FAILURE to comply with the conditions prescribed. The grounds were not shown or claimed in the case. The important distinction in this case is that there was consideration between both parties for entering into the contract. From the provisions of the deed, it was not a unilateral grant of a privilege by the Spanish Government. Cassanovas undertook to perform some things with respect to the mining claim in consideration of the privilege. Hence, there was a binding contract with reciprocal obligations, which the State cannot abrogate.

American Bible Society v. City of Manila: Free exercise of Religion • •

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The American Bible Society was a missionary society engaged in the distribution and sale of bibles in the Philippines. The City Treasurer of Manila informed the Society that it was conducting the business of general merchandising without a Mayor’s permit and municipal license, in violation of Ordinances 3000 and 2529. Ordinance 3000 requires one to obtain a Mayor’s permit before engaging in any business, trade, or occupation, except those on which the city is not allowed to impose a license or tax. Ordinance 2529 requires the quarterly payment of license fees based on gross sales from, among others, retail dealers in new merchandise, such as those engaged in the sale of books. The Society paid the fees in protest, claiming that it never received any profit from the sale of the materials. It then filed a complaint to declare the municipal ordinances in question unconstitutional for violating the non-establishment and free exercise clause of the Constitution. I: W/n the Society is required to pay the fees under the two ordinances. R: No, the Society is NOT required to pay. Religious groups and the press are not free from all financial burdens of government.

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The NIRC exempts associations operating exclusively for religious, charitable, or educational purposes from tax, PROVIDED that income from their PROPERTIES, real or personal, OR any activity conducted for profit shall be liable for tax. In this case, the act of selling bibles is purely religious and does not fall under the said provision. Even if the price asked for the bibles and other religious pamphlets was sometimes a little bit higher than their actual cost, it cannot mean that the Society was engaged in the business or occupation of selling merchandise for profit. For this reason, Ordinance 2529, which imposes a license tax on the exercise of the right to sell religious materials, cannot be applied to the Society, for in doing so, it would impair its free exercise and enjoyment of its religious profession and worship as well as its rights of dissemination of religious beliefs. On the other hand, Ordinance 3000 requiring a mayor’s permit before a person can engage in a business, does NOT impose any charge upon the enjoyment of a right granted by the Constitution nor tax the exercise of religious practices. Thus, it is not applicable to the Society, and cannot be considered unconstitutional even if applied to it. Thus, since Ordinance 2529 is not applicable to the Society, the City of Manila is powerless to license or tax the business of the Society. Hence, Ordinance 3000 is also inapplicable to the business of the Society.

Abra Valley College v. Aquino: Exemptions in favor of educational institutions

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Abra Valley College was an educational corporation and institution of higher learning duly incorporated with the SEC in 1948. The premises of Abra Valley were being used for the educational purposes of the college (as classrooms of its high school and college students). In addition, its second floor was the permanent residence of the President and Director of the College and his family. The ground floor was being rented to a commercial establishment, the Northern Marketing Corporation. The Municipal and Provincial treasurers issued a Notice of Seizure upon Abra Valley to satisfy their taxes. They then served a Notice of Sale, the sale being held on the same day. Dr. Millare, then municipal mayor, offered the highest bid and a certificate of sale was issued to him. Abra filed a petition to annul the Notice of Seizure and Notice of Sale. CIF ruled in favor of CIR, saying that the property was NOT being used exclusively for education purposes I: W/n the property was used exclusively for educational purposes, thereby exempting Abra Valley College from payment of tax. R: No. Abra Valley College is not exempt because the property was also being used for commercial purposes.


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The test of exemption from taxation is the USE of the property for purposes mentioned in the Constitution. While the Court allows a more liberal and non-restrictive interpretation of the phrase “exclusively used for educational purposes,” reasonable emphasis has always been made that exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. While the use of the second floor for residential purposes of the Director and his family may find justification under the concept of incidental use, which is complimentary to the main or primary purpose, the lease of the first floor to Northern Marketing CANNOT be considered incidental to the purpose of education. SC affirmed CFI’s decision subject to the modification that half of the assessed tax be returned to Abra, given that the ground floor is being used for commercial purposes (leased) BUT the second floor being used as incidental to education (residence of the director).

CIR v Bishop of the Missionary District of the Philippines • The Bishop of the Missionary District of the Phils in the USA is a corporation sole registered w/ SEC and in charge of managing estate properties in the Phils of the Missionary Society. On the other hand, the Missionary District is a duly incorporated and established religious society. It owns and operates diff hospitals in the Phils namely St. Luke’s, Brent and St. Stephen’s. • On different dates, the Missionary District in the Philippines received from the Missionary Society in the US various shipments of materials for the construction and operation of the new St. Luke’s Hospital and the Brent Hospital in St. Stephen’s. • The Missionary District also received from a certain William Minnis of Canada a stove for use of the Brent Hospital. • On these shipments, the CIR levied and collected the total amount of P118k+ as compensating tax. • The Bishop of the Missionary District filed claims for refund of the amount he had paid on the ground that under RA 1916, the materials received by him were exempt from the payment of compensating tax. • CIR denied the claim for refund on the ground that the shipments cannot be considered donations because the Missionary District is merely a branch of the Missionary Society, and are thus identical. It also alleged that St. Luke's Hospital is not a charitable institution and, therefore, is not exempt from taxation because its admits pay patients. The Secretary of Finance states in his Dept. Order No. 18 that hospitals admitting pay patients and charity patients are not charitable institutions.

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CTA rendered a decision holding the shipments exempt from taxation ordering CIR to refund to the Bishop. I: W/n the Bishop and Missionary District are exempt from tax R: YES! The following requisites must concur in order that a taxpayer may claim exemption under RA 1916: o 1) the imported articles must have been donated o 2) the donee must be a duly incorporated / established international civic organization, religious or charitable society, or institution for civic, religious or charitable purposes o 3) the articles so imported must have been donated for the use of the organization, society or institution or for free distribution and not for barter, sale or hire The Bishop is admitted to be a corporation sole duly registered with SEC and the Missionary District is a duly incorporated and established religious society. They are therefore entities separate and distinct from the Missionary Society in the USA. The fact that the Missionary District is a branch of the Missionary Society is of no moment because it is a branch only in religious matters, but in other respects, it is independent (just like the Phil Catholic church to the universal Catholic church). The materials and supplies were purchased by the Missionary Society with money obtained from contributions from other people who should be considered the real donors, affirmed by the testimony of Meyer, Treasurer of the Missionary District. Laslty, the Secretary of Finance CANNOT limit or otherwise qualify the enjoyment of this exemption granted under RA 1916 in implementing the law. Thus, the admission of pay patients does not detract from the charitable character of a hospital, if, as in the case of St. Luke’s Hospital, its fund are devoted exclusively to the maintenance of the institution

Lladoc v CIR • M.B. Estate of Bacolod City, donated P10k to Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, for the construction of a new Catholic Church in the locality. The total amount was actually spent for the purpose intended. • The following year, Fr. Ruiz was subsitituted by Fr. Lladoc. • Subsequently, the donor M.B. Estate, Inc. filed the donor's gift tax return. • CIR then issued an assessment for donee's gift tax against the Catholic Parish of Victorias, of which Fr. Lladoc was already the priest. The tax amounted to P1,370 including surcharges plus interests of 1% monthly, and the compromise for the late filing of the return. • Fr. Lladoc protested to the assessment and requested the withdrawal of such, but this was denied by the CIR, so he appealed to the CTA. • He contested that: o at the time of the donation, he was not the parish priest in Victorias and it was his predecessor, Fr. Ruiz, that should be liable


o

there is juridical person known as the "Catholic Parish Priest of Victorias," and, therefore, he should not be liable for the donee's gift tax and the head of the Diocese should be liable instead

o

• • • •

the assessment of the gift tax, even against the Roman Catholic Church, would not be valid, for such would be a clear violation of Art VI Sec 22 of the Constitution which exempts from taxation cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious purposes. CTA affirmed the decision of the CIR except with regard to the imposition of the compromise penalty in the amount of P20 Fr. Lladoc appealed to the SC, and the SC issued a resolution ordering parties to show cause why the Head of the Diocese should or should not be substituted in lieu of Lladoc. I: W/n Fr Lladoc should be liable for the assessed donee's gift tax on the P10k for the construction of the Victorias Parish R: YES, there is a tax liability, BUT Fr. Lladoc is NOT personally liable for the said gift tax. Instead, the Head of the Diocese (Bishop of Bacolod) should pay the said gift tax.

• 1) Gift tax is an excise tax, not property tax. Excise tax is NOT

included in tax exemption even if exclusively used for religious purposes.

• In the present case, what the Collector assessed was a donee's gift tax; the

assessment was not on the properties themselves. It did not rest upon general ownership; it was an excise upon the use made of the properties, upon the exercise of the privilege of receiving the properties. • When a gift tax is imposed on property used exclusively for religious purposes, it DOES NOT constitute an impairment of the Constitution. The phrase "exempt from taxation," as employed in the Constitution should not be interpreted to mean exemption from all kinds of taxes.There being no clear, positive or express grant of such privilege by law, in favor of petitioner, the exemption herein must be denied.

• 2) Head of Diocese is the real party in interest. The “Catholic Parish

Priest of Victorias” as the donee pertains to the Head of the Diocese, therefore making the latter the real party in interest and thus validly may substitute Fr. Lladoc as party in the case; and thus liable for the payment of the excise tax.

Herrera v QC Board of Assessment Appeals • The Director of the Bureau of Hospitals authorized Jose and Ester Herrera to establish and operate the St. Catherine’s Hospital. • The Herreras sent a letter to the QC Assessor requesting exemption from payment of real estate tax on the hospital, stating that the same was established for charitable and humanitarian purposes and not for commercial gain. • The exemption was granted effective years 1953 to 1955. • In 1955, however, the Assessor reclassified the properties from “exempt” to “taxable” effective 1956, as it was ascertained that out 32 beds in the hospital, 12 of which are for pay-patients. A school of midwifery is also operated within the premises of the hospital.

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• I: W/n St. Catherine’s Hospital is exempt from realty tax. • R: NO, it is not. • Where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character

•

The exemption in favor of property used exclusively for charitable or educational purpose EXTENDS to facilities which are incidental to and reasonably necessary for the accomplishment of said purpose, such as in the case of hospitals — a school for training nurses; a nurses’ home; property used to provide housing facilities for interns, resident doctors, superintendents and other members of the hospital staff; and recreational facilities for student nurses, interns and residents. • Thus, within the purview of the Constitution, St. Catherine’s Hospital is a charitable institution exempt from taxation. Bishop of Nueva Segovia v Provincial Board of Ilocos Norte • The Roman Catholic Apostolic Church, represented by the Bishop of Nueva Segovia, owned a parcel of land in the municipality of San Nicolas, Ilocos Norte, all four sides of which face on public streets. • On the south side is a part of the churchyard, the convent and an adjacent lot used for a vegetable garden, in which there is a stable and a well for the use of the convent. • In the center is the remainder of the churchyard and the church. • On the north side is an old cemetery with 2 of its walls still standing, and a portion where formerly stood a tower, the base of which may still be seen. • As required by the provincial board, the Church paid under protest, the land tax on the lot adjoining the convent and the lot which formerly was the cemetery with the portion where the tower stood. • The Bishop filed an action for the recovery of the sum paid by way of land tax, alleging that the collection of this tax is illegal. • The lower court declared that the tax collected on the lot, which formerly was the cemetery and on the portion where the tower stood, was illegal. Both parties appealed from this judgment. • I: W/n the parcels of land are exempt from tax • R: YES, the lots are exempt from land tax and the Province of Ilocos Norte should refund the amounts paid. • The exemption in favor of the convent in the payment of the land tax (Administrative Code) refers to the home of the parties who presides over the church and who has to take care of himself in order to discharge his duties. • It therefore must, in the sense, include not only the land actually occupied by the church, but also the adjacent ground destined to the ordinary incidental uses of man. • Except in large cities where the density of the population and the development of commerce require the use of larger tracts of land for buildings, a vegetable garden belongs to a house and, in the case of a


convent, it use is limited to the necessities of the priest, which comes under the exemption. • Land used as a lodging house by the people who participate in religious festivities, which constitutes an incidental use in religious functions, not for commercial purposes, comes within the exemption. Thus, the lot which formerly was the cemetery, while it is no longer used as such, constitutes an incidental use in religious functions, which also comes within the exemption. • SC reversed the appealed judgment in all its parts and held that both lots are exempt from land tax and the defendants are ordered to refund to plaintiff whatever was paid as such tax, without any special pronouncement as to costs. CIR v CA and YMCA • YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives. • In 1980, YMCA, among others, an amount of income (about P700k+) from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and from parking fees collected from non-members. • The CIR thus issued an assessment to YMCA totaling about P415k+ including surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. • YMCA protested the assessment and filed a letter. In reply, the CIR denied the claims of YMCA. • YMCA thus filed a petition to the CTA to take out the taxes and CTA ruled in favor of YMCA. • CIR filed a petition with the CA to reverse, but CA affirmed CTA's decision. • I: W/n the income derived from rentals of real property owned by YMCA (established as "a welfare, educational and charitable non-profit corporation") is subject to income tax under the NIRC and Constitution • R: YES, the income derived by YMCA from rentals of its real property is subject to income tax.

•

•

•

Under the NIRC: While Section 27 of the NIRC provides that nonprofit organizations and clubs shall not be taxed on their income, it also provides that this exemption will NOT apply to income derived from 1) properties, real or personal, and 2) any other activities conducted for profit shall be subject to tax (amended by PD 1457). Applying the doctrine of strict interpretation of tax exemptions, the phrase "any of their activities conducted for profit” does NOT qualify the word “properties.” This makes income from the property of the organization taxable, regardless of how that income is used -- whether for profit or for lofty non-profit purposes. Under the Constitution: Article VI, Section 28 of the Constitution exempts “charitable institutions” from the payment not only of taxes. HOWEVER, acdg to consti framers, the exemption does NOT pertain to income tax but only property taxes.

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•

For the YMCA to be granted the exemption as an “educational institution” under the Consti (Art 14 Sec 4), it must prove with substantial evidence that: a. it falls under the classification non-stock, non-profit educational institution; and b. the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes • However, no evidence was submitted by YMCA to prove that they met the requisites. The term “educational institution” or “institution of learning” has acquired a well-known technical meaning, of which the members of the Constitutional Commission are deemed cognizant. • Under the Education Act of 1982, such term refers to schools, which is synonymous with formal education OR a school seminary, college, or educational establishment. The Court, upon examining the “Amended Articles of Incorporation” and “ByLaws” of the YMCA, but found nothing in them that even hints that it is a school or an educational institution. • Even if YMCA is an educational institution, the Court also notes that YMCA did not submit proof of the proportionate amount of the subject income that was actually, directly and exclusively used for educational purposes.

NOTE (if Sir asks about how this differs with OTHER cases): The cases relied on by YMCA do not support its cause. YMCA of Manila v. CIR and Abra Valley College, Inc. v. Aquino are not applicable, because the controversy in both cases involved exemption from the payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay City is not in point either, because it involves a claim for exemption from the payment of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of Pasay City -- an issue not at all related to that involved in a claimed exemption from the payment if income taxes imposed on property leases. In Jesus Sacred Heart College v. Com. Of Internal Revenue, the party therein, which claimed an exemption from the payment of income tax, was an educational institution which submitted substantial evidence that the income subject of the controversy had been devoted or used solely for educational purposes. On the other hand, YMCA in the present case had not given any proof that it is an educational institution, or that of its rent income is actually, directly and exclusively used for educational purposes.

Lung Center of the Phils v QC

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•


The Lung Center of the Philippines, a non-stock and non-profit entity established by virtue of PD 1823, was the owner of a parcel of land in QC. In the middle of the lot was a hospital known as the Lung Center of the Philippines. A big space at the ground floor was being leased to private parties, for canteen and small store spaces, and to medical practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost ½ of the entire area on the left side of the building along Q Ave was vacant and idle, while a big portion on the right side, at the corner of Q Ave and Elliptical Road, was being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. The Lung Center accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying.

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Aside from its income from paying patients, it also received gov subsidies.

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• •

•

The City Assessor of QC assessed both the land and the hospital building for real property taxes amounting to about P4M.

•

Lung Center filed a Claim for exemption from real property taxes saying it was a charitable institution.

• •

The Lung Center’s request was denied, and a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QCLBAA) for the reversal of the resolution of the City Assessor.

•

The Lung Center alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of its hospital operation is to serve charity patients. However, the Local Board held Lung Center liable for real property taxes. Decision was affirmed by QC Central Board. Petition was elevated to SC.

• •

I: 1)W/n Lung Center is a charitable institution within the context of PD 1823 and under the Consti - YES 2) W/n the real properties of the Lung Center are exempt from real property taxes- NO R: 1) YES, the Lung Center is a charitable institution. To determine whether an enterprise is a charitable institution, the elements which should be considered include the statute creating it, its purpose, by-laws, services and nature/ use of properties. Under PD 1823, the Lung Center is a non-profit and non-stock corporation which, subject to the provisions of the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. The Articles of Incorporation of LC provide that its medical services are to be rendered to the public in general in any and all walks of life including those who are poor and the needy without discrimination. A charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is used for the CHARITABLE objective it is intended for, and no money inures to the private benefit of the persons managing or operating the institution. In this case, the money received by the Lung Center becomes a part of the trust fund and must be devoted to public trust purposes and cannot be diverted to private profit or benefit.


•

•

Under PD 1823, the Lung Center is entitled to receive donations. The Lung Center does not lose its character as a charitable institution simply because of gov subsidies (donation). 2) NO, not all are exempt from real property tax. The portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. Since taxation is the rule and exemption is the exception, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. Under PD 1823, the Lung Center does NOT enjoy any property tax exemption privileges for its real properties and buildings. If the intentions were otherwise, the same should have been among the enumeration of tax exempt privileges under Section 2 thereof. Under the 1973 and 1987 Constitutions and RA 7160 in order to be entitled to the exemption of property tax, the Lung Center should prove that a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.

o

If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. THUS, “exclusively” means SOLELY.

o

What is meant by actual, direct and exclusive use of the property for charitable purposes is the DIRECT, IMMEDIATE, ACTUAL application of the PROPERTY itself to the purposes for which the charitable institution is organized. It is NOT the use of INCOME of the property w/c is the controlling factor (to exempt).

In this case, while portions of the hospital are used for the treatment of patients, other parts are being leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for her business enterprise under the business name "Elliptical Orchids and Garden Center." Thus, portions of the land leased to private entities and individuals are NOT tax exempt, while those used for patients, paying and non-paying, are exempt.

SITUS OF TAXATION AND DOUBLE TAXATION Republic Bank v CTA

•

In 1971, Republic Bank was assessed the amount of about P1.3M+ as 1% monthly bank reserve deficiency tax for the year 1969.

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In 1973, RB was assessed the amount of about P1.9M+ as 1% monthly bank reserve deficiency tax for the year 1970.

•

On both occasions, RB requested reconsideration of the assessment which the CIR denied. RB contended that Section 249 of the Tax Code is no longer enforceable, because Section 126 of Act 1459 / the Corporation Law, which was allegedly the basis for the imposition of the 1% reserve deficiency tax, was repealed by Section 90 of Republic Act 337, the General Banking Act, and by Sections 100 and 101 of Republic Act 265. Sec. 249 of the Tax Code provides that banks will be charged 1% a month on the amount of reserve deficiencies incurred. Sec. 126 of the Corporation Law provides that “Reserve deficiencies shall be penalized at the rate of 1% per month upon the amount of the deficiencies and for the periods of their duration in accordance with the regulation to !be issued by the Bank Commissioner.” According to petitioner, Section 126 has been expressly repealed by Section 90 of the General Banking Act which provides that section 103-146 and 171-190 of the Corp Law are repealed. CTA, however, upheld the validity of the assessed taxes. I: W/n Sec. 249 of the Tax Code was repealed R: NO, Sec 249 is STILL enforceable. Both petitioner and respondent agree that the requirement on the maintenance of bank reserves, previously found in Section 126 of Act 1459 (The Corporation Law), remained prescribed based on Sec. 26 of RA 337, the General Banking Act, and Sections 100, 101, and 106 of RA. 265, the Central Bank Act, all providing for the reserve requirements on banking operations. RB argues that in case of a reserve deficiency, the violating bank would be liable at the same time for a tax of 1% a month payable to BIR (under Sec 249, Tax Code), PLUS a penalty of 1/10 of 1% a day payable to CB (Section 106, Central Bank Act). It posits that Sec 249 imposes not a tax but a PENALTY (since it states that “reserve deficiencies shall be penalized at the rate of one per centum per month…”)

• •

o

a penalty to the Central Bank by virtue of Section 106 for violation of Secs. 100 and 101, all of the Central Bank Act and

o

tax to the BIR for incurring a reserve deficiency.

Thus, it is clear from the statutes then in force that there was no double taxation involved. One was a PENALTY and the other was a TAX.


RB should not complain that it is being asked to pay twice for incurring reserve deficiencies. It can always avoid this predicament by not having reserve deficiencies. RB’s case is covered by two special laws-one a banking law and the other, a tax law.

FROM PAO: they're saying kasi that SEC 126 was repealed na. but then the basis kasi for SEC 126 can be found in other laws. like the GENERAL BANKING ACT. in that law it penalizes bank reserve deficiencies. parang they're saying they're being penalized TWICE. one by the law and the other by the BIR. but the one by the law is a TAX kasi its under nga the heading MISCELLANEOUS TAXES. so hindi sya pwede double taxation kasi 1 is a tax and the other is a penalty lang. Proctor & Gamble v Municipality of Jagna

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However, the law clearly intended for it to be charged as a tax for it falls under the heading TITLE VIII--MISCELLANEOUS TAXES. As the law stood during the years that RB was assessed for taxes on reserve deficiencies (1969 & 1970), RB had to pay twice:

At any rate, the SC has upheld the validity of double taxation. The payment of 1/10 of 1% for incurring reserve deficiencies (Section 106, Central Bank Act) is a penalty as the primary purpose involved is regulation, while the payment of 1% for the same violation (Second Paragraph,Section 249, NIRC) is a tax for the generation of revenue which is the primary purpose in this instance.

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The Municipal Council of Jagna, Bohol, enacted Municipal Ordinance 4 w/c imposed STORAGE FEES on all exportable copra deposited in the bodega w/in the jurisdiction of Jagna, Bohol at the rate of 10 cents PER 100 kilos. It also provides that all exportable copra deposited in the bodega within the Municipality of Jagna Bohol, is part of the surveillance and lookout of the Municipal Authorities. In this light, P&G, a domestic corp engaged in the manufacture of oil, soap and others, w/c maintained a bodega in the municipality where it stored COPRA (purchased from the municipality and shipped for its manufacturing ops), paid storage fees for 6 yrs from 1958 to 1963. The fees totalled P1M+. P&G then filed a suit in the CFI of Manila, praying:

o

to declare Ordinance 5 INAPPLICABLE Tto it or, that it be pronounced ultra-vires and void for being beyond the power of the Municipality to enact and

o

that defendant Municipality be ordered to refund to it the amount of P42k+ which it paid under protest; and costs

P&G argues that the tax imposed in the said ordinance is an “EXPORT TAX” on EXPORTABLE COPRA and thus, the said levy was inapplicable to their business because they are store copra for their EXCLUSIVE USE in connection w/ the manufacture of soap, edible oil, margarine and other similar products, for purposes of profit / revenue. TC ruled in favour of the Municipality, saying it had the power to enact the Ordinance under the Revised Admin Code (sec 2238), otherwise known as the General Welfare Clause. It also declared P&G’s right of

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action had prescribed under the 5-year period provided for by Article 1149 of the Civil Code. Thus, this direct appeal. I: 1) W/n MO 4 is ultra vires and void- NO, it is VALID!

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2) W/n P&G is entitled for the reimbursement of excess amount paid.NO! R:

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Ordinance No. 4 is valid as a municipality is authorized to impose 3 kinds of licenses, pursuant to the broad authority conferred upon municipalities by Commonwealth Act No. 472:  a license for regulation of useful occupation or enterprises;  license for restriction or regulation of non-useful occupations or enterprises; and  license for revenue It is thus unnecessary to determine whether the subject storage fee is a tax for revenue purposes or a license fee to reimburse defendant Municipality for service of supervision because defendant Municipality is authorized not only to impose a license fee but also to tax for revenue purposes. It has been held that a warehouse used for keeping or storing copra is an establishment likely to endanger the public safety or likely to give rise to conflagration because the oil content of the copra when ignited is difficult to put under control by water and the use of chemicals is necessary to put out the fire. And as the Ordinance itself states, all exportable copra deposited within the municipality is "part of the surveillance and lookout of municipal authorities. P&G's argument that the imposition of P0.10 per 100 kilos of copra stored in a bodega within defendant's territory is beyond the cost of regulation and surveillance is not well taken. As enunciated in the case of Victorias Milling Co. vs. Municipality of Victorias, supra. Municipal corporations are allowed wide discretion in determining the rates of imposable license fees even in cases of purely police power measures. In the case at bar, appellant has not sufficiently shown that the rate imposed by the questioned Ordinance is oppressive, excessive and prohibitive. When the Ordinance itself speaks of "exportable" copra, the meaning conveyed is NOTexclusively export to a foreign country but shipment out of the municipality. The storage fee impugned is not a tax on export because it is imposed not only upon copra to be exported but also upon copra SOLD AND USED for DOMESTIC PURPOSES if stored in any warehouse in the Municipality and the weight thereof is 100 kilos or more. Double taxation has also been defined as taxing the same person twice by the same jurisdiction for the same thing. In this case, a tax on P&G's products is different from a tax on the privilege of storing copra in a bodega situated within the territorial boundary of defendant municipality.


•

However, lower court erred in ruling that action had prescribed. In Municipality of Opon vs. Caltex Phil: the period for prescription of actions to recover municipal license taxes is 6 years under Article 1145(2) of the Civil Code. Thus, P&G's action brought within six years from the time the right of action first accrued in 1958 has not yet prescribed.

Pepsi-Cola v Municipality of Tanauan • This case involved 2 Municipal Ordinances and the Local Autonomy Act (RA 2264): o The Local Autonomy Act (RA 2264) grants municipalities the authority to impose municipal taxes or fees upon persons engaged in any occupation or business within their jurisdictions, provided that they were not allowed to impose percentage tax on sales and on items already subject to specific tax under the NIRC

o

Municipal Ordinance No. 23 of Tanauan, Leyte imposes on soft drink producers and manufacturers a tax of 1/16 of a centavo for every bottle of soft drink corked.

o

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Municipal Ordinance No. 27 imposes on soft drinks produced or manufactured a tax of 1 centavo on each gallon of volume capacity. Pepsi filed an action to declare the Local Autonomy Act and the two ordinances void. It claimed that the MOs constituted double taxation, because they cover the same subject matter and impose practically the same tax rate. I: W/n the MOs constitute double taxation R: NO. Double taxation, in general, is not forbidden by our fundamental law, since we have not adopted as part of the injunction against double taxation found in the Constitution of the United States and some states of the Union. Double taxation becomes obnoxious only where the taxpayer is taxed TWICE for the benefit of the SAME governmental entity / by the SAME jursidction for the SAME purpose, but not in a case where one tax is imposed by the State and the other by the city/municipality. In this case, petitioner is wrong in asserting that MO 23 and 27 constitute double taxation on its assumption that both ordinances are valid and legally enforceable. MO 23 levies or collects from soft drinks producers or manufacturers 1/16 of a centavo for every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered that the producer or manufacturer could increase the volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan enacted MO 27, approved on October 28, 1962, imposing a tax of 1 centavo on each GALLON of VOLUME capacity.

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The difference between the two ordinances clearly lies in the tax rate of the soft drinks produced. The intention of the Municipal Council of Tanauan in enacting MO 27 is thus clear: it was intended as a plain substitute for the prior MO 23, and operates as a repeal of the latter, even without words to that effect.

*Villanueva v City of Iloilo

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The municipal board of Iloilo enacted ORDINANCE 11 (series of 1980) imposing 86 license tax fees on persons engaged in the business of operating tenement houses ((tenement house – any building or dwelling for renting space divided into separate apartments or accessories). The Villanuevas, owners of 4 tenement houses containing 34 apartments, challenged the validity of such ordinance because only the taxpayers of the City of Iloilo are singled out to pay taxes on their tenement houses, while citizens of other cities, where their councils do not enact a similar tax ordinance are permitted to escape such imposition. Lower court rendered the ordinance illegal as it constitutes double taxation I: W/n ordinance amounts to double taxation R: NO! The petitioners' contention that they are doubly taxed because they are paying the real estate taxes and the tenement tax imposed by the ordinance in question is devoid of merit. A license tax may be levied upon a business or occupation although the land or property used in connection therewith is subject to property tax. This would not constitute double taxation because there is only double taxation when the SAME PROPERTY / SUBECT MATTER is taxed twice for the same purpose, w/in the same jurisdiction and period, and of the same kind of character of tax. Real estate and tenement tax are NOT of the same kind / character. At all events, there is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform.

*Victorias Milling v Municipality of Victorias • The municipal council of Victorias enacted Ordinance 1 w/c required sugar centrals operating w/in the municipality to pay an annual municipal license tax. • Based on the ordinance, Victorias Milling was assessed 40K (imposed on sugar centrals) and another 40K (imposed on sugar refineries). • Thus, Victorias Milling filed a suit to declare the ordinance void since it: o a) exceeds the amount fixed in Provincial Circular 12-A issued by the Finance Dept


b) is discriminatory, as it singles out VM, w/c is the only operator of a sugar central and a sugar refinery within the jurisdiction of defendant municipality o c) constitutes double taxation o d) the national government has preempted the field of taxation with respect to sugar centrals or refineries • The lower court held that the exaction was invalid because the municipality CANNOT impose a tax for revenue in the guise of a police measure. The amounts set forth in the ordinance also exceeded the cost of licensing, regulating, and surveillance. • I: W/n the ordinance was valid. • R: The ordinance was valid. o

•

There is no double taxation because the company is being taxed for the same object: One tax is on sugar centrals and the other is on sugar refineries. It just so happens that the company is both. • Also, the tax was imposed based on capacity of the sugar centrals to produce, so it was really a license on the occupation or business of sugar centrals and sugar refineries and not on the sugar itself; hence there was no identity of object of taxation • There is no discrimination despite the fact that the company is the only sugar producing entity in the municipality. Victorias Milling is not named in the ordinance and should another corporation decide to produce sugar in the area, it will be taxed accordingly. • GR: If not for police inspection, supervision, regulation = it is a revenue measure! *Compania General de Tabacos v City of Manila • Tabacalera paid for its liquor license and also paid sales tax on its sale of general merchandise, including liquor. • It claimed that it made an overpayment and demanded a refund of the sales tax paid on the ground that since it already paid the license fees, it was no longer bound to pay the sales tax on the liquor. • I: W/n Tabacalera is liable for sales tax on the liquor despite already having paid for its liquor license. • R: YES, Tabacalera is liable. • Generally, the term “tax” applies to all kinds of exactions which become public funds. Legally, however, a license fee is a legal concept quite distinct from tax. o Taxes are for raising revenues while license fees are imposed in the exercise of police power for purposes of regulation. • Under on ordinance, Tabacalera must pay license fees in order to continue enjoying the privilege of selling liquor, considering that the sale of intoxicating liquor is potentially harmful to public health and morals, and must be subject to State regulation. • Under another ordinance, Tabacalera is liable for sales tax on sales of general merchandise, including liquor. • Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article, without it being in violation of the rule against double taxation.

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clearly declares. Tax statutes are construed strictissimi juris against the government. FORMS OF ESCAPE FROM TAXATION Delpher Trades Corp v IAC

• Province of Bulacan v CA • The Sangguniang Panlalawigan of Bulacan passed a provincial ordinance which provided for the imposition of a 10% tax on the fair market value in the locality per cubic meter of ordinary stones, sand, grave, earth and other quarry resources, extracted from public lands or other public waters within its territorial jurisdiction.

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Thus the provinicial treasurer of Bulacan assessed Republic Cement Corporation for taxes from several parcels of private land in the province. Republic paid under protest, claiming that the imposition of such tax is beyond the power of the taxing authority of Bulacan. The case was eventually elevated to CA and CA ruled that the Province of Bulacan had NO authority to impose the tax I: W/n the Province of Bulacan has the authority to impose such tax.

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R: No, they do not have the authority. Petitioners contend that their authority comes from Section 186 of the LGC w/c provides that the province may levy taxes and fees not more than 10% of the fair market value per cubic meter of ordinary stones, sand, gravel etc, extracted from public lands.

•

However, a perusal of the said law shows that the tax imposed is an excise tax being a tax upon the performance, carrying on, or exercise of an activity and the LGC provides that cities, municipalities, and barangays shall NOT extend to excise taxes enumerated under the NIRC. The NIRC levies a tax on all quarry resources, regardless of origin, whether extracted from public or private land. Thus, a province may not ordinarily impose taxes on stones, sand, gravel, earth and other quarry resources, as the same are already taxed under the NIRC.

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HOWEVER, the province can impose a tax on stones, sand, gravel, earth and other quarry resources extracted from public land because it is expressly empowered to do so under the Local Government Code. As to the quarry resources extracted from PRIVATE LAND, it may not do so due to the limitations in the LGC (sec 133) in relation to the NIRC (Sec 151).

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Finally the petitioners cannot invoke the Regalian Doctrine to extend the coverage to quarry resources because taxes, being burdens are NOT presumed beyond what the applicable statute expressly and

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Pacheco and his sister owned a parcel of real estate land identified that was registered in Bulacan. They then leased the land to Construction Components Inc, and providing that during the existence or after the term of the lease, the lessor (Pacheco,sister) should he decide to sell the property leased, shall first offer the same to the lessee(Construction) and the lessee has the priority to buy under similar conditions. Construction then assigned its rights and obligations to Hydro Pipes w/ the consent of the Pachecos. A deed of exchange was executed between the Pachecos and Delpher Trades where Pachecos conveyed to Delpher the leased property together w/ another parcel of land also located in Malinta Estate, Valenzuela for 2,500 shares of stock of Delpher w/ a total value of P1.5M. On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, Hydro Pipes filed an amended complaint for reconveyance of the subject lot in its favor under conditions similar to those where Delpher acquired the property from the Pacheco’s. The CFI of Bulacan ruled in favor of Hydro Pipes who had the preferential right to acquire the property (right of first refusal), and Pacheco was ordered to immediately convey the property to Hydro Pipes. The IAC affirmed this decision. Delpher argued that the “deed of exchange” executed between Pacheco and Delpher was NOT a contract of sale, so it did not prejudice the right of first refusal in the contract between Pacheco and Hydro Pipes I: W/n the deed of exchange was a contract of sale R: W/n there was a violation of the right of first refusal entitled to Hydro Pipes R: NO, the deed of exchange was NOT a contract of sale; thus, there was no violation of the right of first refusal The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale because there was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, Hydro

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Pipes has no basis for its claim of a light of first refusal under the lease contract.

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In order to perpetuate their control over the property through the corporation and to avoid taxes, the two pieces of real estate w/c had been leased to Hydro Pipes, were transferred to the corporation by virtue of a deed of exchange of property. In exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares; they refer to this scheme as "estate planning." In effect, the Delpher Trades Corporation is a business conduit or alter ego of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes. Its other advantages are continuous control of the property, tax exemption benefits, and other inherent benefits in a corporation. A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. Thus, by removing the par value of shares, the attention of persons interested in the financial condition of a corporation is focused upon the value of assets and the amount of its debts.

Heng Tong Textiles v CIR

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Textiles from abroad were withdrawn from Customs by Pan-Asiatic Commercial, which paid, in the name of Heng Tong Textiles, the corresponding advance sales tax under Sec 183 of the Internal Revenue Code. CIR then assessed against Heng Tong Textiles deficiency sales taxes and surcharges from 1949-1950 in the sum of P89k for the importation of textiles from abroad. This was on the ground that Heng Tong was the REAL IMPORTER of goods and did not pay taxes due on the basis of gross selling prices. Hen Tong appealed the assessment to the Board of Appeals, and the case was transferred to the CTA upon its organization in 1954. I: 1) W/n the Hen Tong was the importer of the goods; 2) W/n it was guilty of fraud to warrant the imposition of a penalty of 50% deficiency R: YES HT was the importer but there was NO fraud to warrant imposition of penalty SC affirmed CTA findings that Heng Tong was the importer of the goods based on evidence: o HT and Pan-Asiatic were sister corporations.


Commercial docs covering the importations (shipping docs, insurance papers, etc.) were all in the name of HT o In connection w/ advance sales tax, Pan-Asiatic wrote a letter to HT providing a breakdown of the 5% sales tax together w/ official receipt numbers and other details o There is both documentary and testimonial evidence (witness declarations) to show that PA acted merely as INDENTOR. HT placed through PA orders for importations of textiles from the US. Although HT avers that the importation papers were placed in HT’s name only to accommodate and introduce HT to textile suppliers abroad and that it was in no position to make the importations due to its small P30k capital, these circumstances only show a PRIVATE ARRANGEMENT between HT and PA. It did not affect the role of HT as importer. SC perceived it the entire set-up as an ARRANGEMENT through w/c sales tax could be MINIMIZED by having PA as indorser withdraw goods from Customs upon payment of advance sales tax then sell it to Hen Tong at cost / negligible profit. o

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The goods were made to appear as having been sold so that no sales tax was paid by HT upon the sale of goods, nor was any sales tax paid on the supposed sales by PA. (The sales tax on sales of imported articles was based on GROSS SELLING price) HOWEVER, the arrangement itself does not justify the penalty imposed by CTA. Sec 183 of the Internal Revenue Code speaks of willful neglect to file the return / wilful making of a false / fraudulent return. An attempt to minimize one’s tax does not necessarily constitute fraud. A taxpayer may diminish his liability by any means w/c the law permits. Intention to minimize taxes in the context of fraud must thus be proven by CLEAR AND CONVINCING EVIDENCE. There was no showing of such in this case so penalty imposed by CTA is modified, eliminating the 50% penalty on deficiency sales tax.

CIR v Toda • CIC authorized Benigno Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90M. • Toda purportedly sold the property for P100 million to Rafael Altonaga, who, in turn, sold the same property on the same day to Royal Match for P200M.

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For the sale of the property to Royal Match (RMI), Altonaga paid capital gains tax in the amount of P10M. • CIC then filed its corporate annual income tax return for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of about P75k+.

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After crediting withholding taxes of P254k+, it paid P26k+ for its taxable income of P75k+ Toda sold his entire shares of stocks in CIC to Choa for P12.5M. Three and a half years later, Toda died.

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Subsequently, the BIR sent an assessment notice and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of about P79k+. • The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.

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The Estate of Toda received a Notice of Assessment from the CIR for deficiency income tax for the year 1989 in the amount of P79k+. • The Estate thereafter filed a protest, which the CIR dismissed.

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The estate filed a Petition for Review before the CTA alleging, among others, that the CIR erred in holding the estate liable for income tax deficiency. Holding that CTA ruled in favour of the Estate.

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I:W/n CTA erred in holding that Toda committed no fraud with intent to evade the tax on the sale of the properties of Cibelles Insurance Corporation • R: YES, CTA erred. Toda committed fraud so his Estate should pay the P79k+ deficiency income tax for 1989, plus legal interest until the amount is fully paid.

• The Estate admitted that the sale was made to Toda as part of the tax planning scheme of CIC. • The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. • Fraud pertains to acts and omissions for purposes of deception, breach of trust or taking advantage is taken of another.

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In this case, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and NOT the 35% corporate income tax.

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Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. • To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. The two sale transactions should be treated as a single direct sale by CIC to RMI.

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Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation:

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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 arms length.

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Tax evasion, on the other hand, 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. It connotes the integration of three factors: EBU!

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1) end to be achieved (payment of < taxes) 2) bad faith / evil state of mind 3) unlawful course of action / failure of action

All these factors are present in the instant case.

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Prior to the purported sale of the Cibeles property by CIC to Altonaga, CIC received P40M from from RMI, and NOT Altonaga.

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The P40M was debited by RMI and reflected in its trial balance as "other inv. – Cibeles Bldg." Another ₱40M was debited and reflected in RMI’s trial balance as "other inv. – Cibeles Bldg."

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This shows that the real buyer of the properties was RMI, and NOT Altonaga.


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EXEMPTION FROM TAXATION Davao Gulf Lumber v CIR • Davao Gulf is a licensed forest concessionaire possessing a Timber License Agreement granted by the Ministry of Natural Resources (now DENR). • For about 2 yrs, it purchased from various oil companies mineral oil and diesel fuel w/c it used exclusively for the exploitation and operation of its forest concession.

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The oil companies paid the specific taxes imposed under Secs153 and 156 of the NIRC on the sale of its products. Since the taxes were included in the purchase price, they were eventually passed on to the user -- Davao Gulf in this case. DG then filed before the CIR a claim for refund in the amount of about P120k+, w/c represented 25% of the specific taxes actually paid on the said fules and oils. This was based on the case of Insular Lumber v. CTA and Sec5, RA1435 w/c provided that when oils are used by miners/forest concessionaires, 25% will be refunded by the CIR upon submission of proof of actual use. (proceeds of the tax will accrue to road and bridge funds) DG being able to comply w/ the said procedure, filed w/ the CTA a petition for review.


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CTA found that DG was entitled to a partial refund of specific taxes in the reduced amt of about P2k+, since its claim on purchases of lubricating oil and manufactured oils other than lubricating oil had PRESCRIBED. In other words, CTA granted the claim, but computed the refund based on rates deemed paid under RA 1435, and NOT on the higher rates actually paid under the NIRC. DG elevated the case to the CA, insisting that the basis for computing the refund should be the increased rates in the NIRC and NOT under RA 1435. CA ruled that the claim for refund should indeed be computed on the basis of the amounts deemed paid under Secs 1 and 2 of RA 1435, and that the claims for refund w/c prescribed and those not filed in the admin level must be excluded. I: W/n DG is entitled under RA 1435 to the refund of 25% of the amt of specific taxes it actually paid on mineral oils / oil products taxed under the NIRC (refund based on increasedd rates) R: NO. DG is only entitled to a partial refund. 1) DG is entitled to partial refund under Sec5, RA 1435, which was enacted to provide means for increasing the Highway Special Fund. The specific taxes collected on gasoline and fuel accrue to the Fund, which is to be used for the construction and maintenance of the highway system. But because the gasoline and fuel purchased by mining and lumber concessionaires are used within their OWN compounds and roads, they do NOT directly benefit the fund and its use. Thus, the tax refund for such concessionares is but proper. 2) HOWEVER, since the partial refund authorized under Section 5, RA 1435, is in the nature of a tax exemption, it must be construed strictly against the grantee. RA 1435 and the subsequent pertinent statutes, after scrutiny, show no expression of a legislative will authorizing a refund based on the higher rates claimed by DG. The mere fact that the privilege of refund was included in Section 5, and not in Section 1, is insufficient to support DG’s claim. When the law itself does not explicitly provide that a refund under RA 1435 may be based on higher rates which were nonexistent at the time of its enactment, this Court cannot presume otherwise. A legislative lacuna cannot be filled by judicial fiat. DG then asserts that “equity and justice demand that the computation of the tax refunds be based on actual amounts paid under Sections 153 and 156 of the NIRC.” HOWEVER, there is no tax exemption solely on the ground of equity.

Phil Acetylene v CIR

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Philippine Acetylene Co. Inc (PAC). is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. From 1953 to 1958, it made various sales of its products to the NAPOCOR, a Phil gov agency, and the VOICE OF AMERICA, a US gov agency.

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The CIR assessed deficiency sales tax and surcharge on the sales, w/c amounted to about P12k+, pursuant to the NIRC.

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The company denied liability for the payment of the tax on the ground that both NAPOCOR and the VOA are exempt from taxation. It asked for a reconsideration of the assessment and, failing to secure one, appealed to the CTA. The CTA ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the MANUFACTURER and NOT the BUYER. PAC, being a manufacturer, CANNOT claim exemption from the payment of sales tax simply because its buyer, Napocor, is exempt. With respect to the sales made to the VOA, CTA held that goods purchased by the American Government or its agencies from manufacturers or producers are exempt from the payment of the sales tax under the agreement between the Government of the Philippines and that of the United States, provided the purchases are supported by certificates of exemption. I: W/n PAC should be exempt from sales tax R: NO. PAC should pay P12k+ deficiency tax. Statutes which impose a tax on sales, have been described as “acts with schizophrenic symptoms,” as they apparently have two faces — one that of a vendor tax, the other, a vendee tax. HOWEVER, this is clarified by the NIRC W/c provides that the sales tax “shall be paid by the MANUFACTURER or producer,” who must “make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings or gross value of output actually removed from the factory or mill warehouse and within

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When the economic burden of the tax finally falls on the purchaser, the tax becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. The method of listing the price and the tax separately and defining taxable gross receipts as the amount received less the amount of the tax added, merely avoids payment by the seller of a tax on the amount of the tax.

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Hence, the circular of the Bureau of Internal Revenue w/c gives the tax exemptions in the Agreement an expansive construction it is void. The sales to the VOA are subject to the payment of percentage taxes under section 186 of the Code. HOWEVER, the Napocor enjoys tax exemption by virtue of an act of Congress, in order to facilitate indebtedness.

CIR v CA and Ateneo de Manila • Ateneo de Manila University, is a non-stock, non-profit educational institution, was conducting research through an auxiliary unit, the Institute of Philippine Culture.

Sec 186, NIRC provides that a tax = to 7% of the gross selling price shall be levied on articles sold, to be paid by the manufacturer or producer. Sec 183 further provides that it persons conducting businesses should pay the percentage tax, because otherwise, the amount of the tax shall be increased by 25%, the increment to be a part of the tax.

The effect is still the same, namely, that the purchaser does NOT pay the tax. He pays or may pay the seller more for the goods because of the seller’s obligation, but that is all and the amount added because of the tax is paid to get the goods and for nothing else. But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax is largely a matter of economics. Then it can no longer be contended that a sales tax is a tax on the purchaser.

The tax imposed by section 186 of the NIRC is a tax on the manufacturer or producer and NOT a tax on the purchaser except probably in a very remote and inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like the NPC is permissible. The agreement between RP and the US concerning military bases provides tax exemption for goods that will be used EXCLUSIVELY in the construction, maintenance, operation and defense of bases. THUS, only SALES to the quartermaster are exempt from taxation.

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In 1983, Ateneo received from CIR a demand letter assessing Ateneo of the the sum of about P170k+ for alleged deficiency contractor’s tax, and an assessment in the sum of about P1M+ for alleged deficiency income tax for the fiscal year of March 1978. Denying said tax liabilities, Ateneo sent CIR a letter-protest contesting the validity of the assessments. CIR rendered a letter-decision canceling the assessment for deficiency income tax but modified the assessment for deficiency contractor’s tax by increasing the amount due to P190k+. Ateneo requested for a reconsideration or reinvestigation of the modified assessment. At the same time, it filed in the CTA a petition for review of the said letter-decision. While the petition was pending before the CTA, CIR issued a final decision reducing the assessment for deficiency contractor’s tax from P190k+ to P46k+, exclusive of surcharge and interest. CTA canceled the deficiency contractor’s tax assessment, w/c was affirmed by the CA. CIR filed a petition for review before the SC. I: W/n Ateneo should pay the 3% contractor’s tax under Sec 205 of the Tax Code R: NO. 1) In case of doubt, statutes on tax imposition are to be construed strongly against the GOV and in favor of citizens, because burdens are NOT to be imposed nor presumed beyond what is expressed.

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Ateneo’s IPC NEVER sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. Funds received by Ateneo are technically not a fee. They may however fall as gifts or donations which are “tax-exempt” as shown by Ateneo’s compliance w/ the NIRC requirement providing for the exemption of such gifts to an educational institution. 2) The term ‘independent contractors’ include persons whose activity consists essentially of the sale of all kinds of services for a fee. The term ‘gross receipts’ means all amounts received by the prime or principal contractor as the total contract price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable gross receipts of the subcontractor.

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Ateneo’s IPC cannot be deemed either as a contract of sale or a contract for a piece of work. By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

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In the case of a contract for a piece of work, the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation.

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HOWEVER, it is clear in from the evidence on record that there was no sale either of objects or services because there was no transfer of ownership over the research data obtained or the results of research projects undertaken by the IPC. TO SUM: Ateneo is NOT a contractor selling its services for a fee but an academic institution conducting these researches pursuant to its commitments to education and, ultimately, to public service. Education is and NOT profit is the motive for undertaking the research projects.

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• Caltex v Commission on Audit (this doesn’t cover all the issues, pls read the digest gen made/the original if you wanna be super sure) • The Oil Price Stabilization Fund (OPSF) was created by PD1958, amended by EO 137, for the purpose of minimizing frequent price changes brought about by exchange rate adjustments and/or changes in world market prices of crude oil and imported petroleum products. It was to be sourced from tax collections.

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COA sent a letter to Caltex, directing it to remit its collection to the OPSF, excluding that unremitted for 1986 and 1988 of the additional tax on petroleum products authorized under Section 8 of PD 1956; and that pending such remittance, all its claims for reimbursement from the OPSF shall be held in abeyance.


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Caltex requested COA for an early release of its reimbursement certificates from the OPSF. It invoked in support of such COA Circular No. 89-299 on the lifting of pre-audit of government transactions of national government agencies and GOCCs. However, COA denied this, and repeated its earlier directive to Caltex to forward payment of its unremitted collections to the OPSF. Caltex ten submitted a proposal to COA for the payment and the recovery of claims. COA approved the proposal but prohibited Caltex from further offseting remittances and reimbursements for the current and ensuing years. Caltex moved for reconsideration. I:1) W/n Caltex can claim for reimbursement of under recovery arising from sales to NAPOCOR -YES 1) W/n Caltex could be reimbursed on its sales to ATLAS and MARCOPPER-NO 2) W/n the amounts due from Caltex to the OPSF may be offsetted against Caltex’ outstanding claims from said funds-NO R: NO. 1) The COA admits in their Comment that under recovery arising from sales to NPC are reimbursable because NPC was granted full exemption from the payment of taxes; to prove this, COA traces the laws providing for such exemption. The last law cited is the Fiscal Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges of the National Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum products . . . are restored effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office of the President, NPC's tax exemption was confirmed and approved. Hence, Caltex can recover its claim arising from sales of petroleum products to the National Power Corporation. 2) With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, Caltex relies on Letter of Instruction (LOI) 1416 w/c ordered the suspension of payments of all taxes, duties, fees and other charges, whether direct or indirect, due and payable by the copper mining companies in distress to the national government. Pursuant to this LOI, Minister of Energy Velasco issued a Memorandum Circular w/c advised oil companies that ATLAS and MARCOPPER mining corps are among those declared to be in distress. COA denied such claim based on the fact that Caltex has no authority to claim reimbursement for the uncollected impost because LOI-1416 was issued when the OPSF was not yet existing and could not have contemplated OPSF imposts at the time of its formulation. The LOI was also never published in the Official Gazette so it has no force and effect.

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The SC said that even granting arguendo that the LOI has force and effect, Caltex’s claim must still fail. Tax exemptions as a general rule are construed strictly against the grantee and liberally in favor of the taxing authority. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. The party claiming exemption must therefore be expressly mentioned in the exempting law or at least be within its purview by clear legislative intent. In this case, CALTEX failed to prove that it is entitled, as a consequence of its sales to ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the payment of taxes by copper mining companies, it does not give petitioner the same privilege with respect to the payment of OPSF 3) Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. PD 1956, as amended by EO 137, explicitly provides that the source of OPSF is taxation. A taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

Luzon Stevedoring v CTA

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for towing and pulling purposes. Thus, they do not fall w/in the purview of the Tax Code amended by RA 3176.

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Luzon Stevedoring Corp., in 1961 and 1962, imported various engine parts and other equipment for the repair and maintenance of its tugboats for which it paid the assessed compensating tax under protest.

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Unable to secure a tax refund from the CIR, it filed a Petition for Review with the CTA, praying to be granted a refund of about P33k+. The CTA however denied the claims for refund due to lack of sufficient legal justification.

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LS filed a Motion for Reconsideration, but the same was denied. LS contends that "tugboats" are embraced and included in the term "cargo vessel" under the tax exemption provisions of Section 190 of the Revenue Code, as amended by RA 3176. LS argues that in legal contemplation, the tugboat and a barge loaded with cargoes with the tugboat towing the cargoe vessel for loading and unloading constitute a SINGLE VESSEL. Thus, the engines, spare parts and equipment imported by it and used in the repair and maintenance of its tugboats are exempt from compensating tax. On the other hand, CTA contended that "tugboats" are not "Cargo vessel" because they are neither designed nor used for carrying and/or transporting persons or goods by themselves but are mainly employed


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I: W/n the tax exemption accorded to cargo vessels also applicable to the tugboats NO. 1) The general rule is that any claim for exemption from the tax statute should be strictly construed against the taxpayer. In order that the importations in question may be declared exempt from the compensating tax, it is indispensable that the requirements of the amendatory law be complied with, namely:

o

1) the engines and spare parts must be used by the importer himself as a passenger and/or cargo vessel

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2) the said passenger and/or cargo vessel must be used in coastwise or oceangoing navigation

Accdg to Webster, “a tugboat is a strongly built, powerful steam or power vessel, used for towing and, now, also used for attendance on vessel.” Grolier Encyclopedia further provides that “a tugboat is a diesel or steam power vessel designed primarily for moving large ships to and’ from piers for towing barges and lighters in harbors, rivers and canals.” It is, according to Bouvier’s, “a vessel built for TOWING.” Clearly, the corporation’s tugboats do NOT fall under the categories of passenger and/or cargo vessels. It is a cardinal principle of statutory construction that when the law is clear, no interpretation is needed. 2) Regardless of construction and interpretation, it is also a fundmental rule that statutes are to be construed in the light of purposes to be achieved and the evils sought to be remedied. In this case, the legislature in amending Section 190 of the Tax Code by RA 3176 intended to provide incentives and inducements to bolster the shipping industry and NOT the business of stevedoring, as manifested in the sponsorship speech of Senator Gil Puyat. On analysis of the corporation’s transactions, CTA found no evidence that tugboats are passenger and/or cargo vessels used in the shipping industry as an independent business. On the contrary, the corporation’s own evidence supports the view that it is engaged as a stevedore, i.e. the work of unloading and loading of a vessel in port; and towing of barges containing cargoes is a part of its undertaking as a stevedore. Its trade name is indicative that its sole and principal business is stevedoring and lighterage, taxed under Section 191 of the National Internal Revenue Code as a contractor, and not an entity which transports passengers or freight for hire which is taxed under Section 192 of the same Code as a common carrier by water.

National Development Company v CIR

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The NDC entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The purchase price was to come from the proceeds of bonds issued by the Central Bank. Initial payments were made in cash and through irrevocable letters of credit. 14 promissory notes were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of the Philippines. The remaining payments and the interests thereon were remitted in due time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo. NDC remitted to the shipbuilders in Tokyo the total amount of about US$4M+ as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5k+. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. The NDC went to the CTA, w/c ruled in favor of the BIR, except for a slight reduction of the tax deficiency in the sum of P900, representing the compromise penalty. I: W/n NDC should be held liable for for withholding taxes on the interest remitted to the Japanese corporation R: YES. The interest remitted to the Japanese shipbuilders in Japan on the UNPAID BALANCE of the purchase price of the vessels acquired by NDC is interest derived from sources within the Philippines and therefore subject to income tax under the NIRC. The law, however, does not speak of activity but of the SOURCE. The Government’s right to levy and collect income tax on interest received by foreign corporations not engaged in trade or business within the Philippines is NOT based on the condition that the ACTIVITY be in the Philippines. Instead, it is the RESIDENCE of the obligor who pays the interest that is material in determining the source of interest. It is not the physical location of the securities, bonds or notes or the place of payment. The law specifies: “interest derived from SOURCES within the Philippines and interests on bonds, notes or other interest bearing obligations of residents, corporate or otherwise.” In this case, NDC is a Philippine corporation engaged in the business in the Philippines, it is a domestic corporation and resident of the Philippines. Thus, it is subject to tax. 2) NDC also has no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the government notes were exempt from taxation. The law invoked (RA 1407) did NOT state any exemption on said interest on securities.


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NDC has not established any tax exemption on the said transaction. The government was NOT the one who issued the notes but merely guaranteed the said issuances. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. Any doubt concerning this question must be resolved in favor of the taxing power. 3) In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the NDC closes its eyes to the nature of the entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws. 4) Lastly, it must be noted that NDC is NOT the one being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and NOT the Republic of the Philippines that was subject to the tax the NDC did not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders, as imposed by the Tax Code. LASTLY, the court has stated that in case of the doubt, the one withholding can just the pay tax and ask for refund later when an error in the payment exists.

Manila Electric Company v Vera

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Meralco was the holder of a franchise to construct, maintain, and operate an electric light, heat, and power system in the City of Manila and its suburbs. In 1962 and 1963, Meralco imported and received from abroad copper wires, transformers, and insulators for use in the operation of its business. The Collector of Customs, as deputy of the Commissioner of Internal Revenue, levied and collected a compensating tax. Meralco claimed for refund for the said years, but such claims were either not acted upon or denied by the Commissioner. I: W/n Meralco is exempt from payment of a compensating tax on poles, wires, transformers and insulators imported by it for use in the operation of its electric light, heat, and power system R: NO. Meralco is not exempt from paying the compensating tax provided for in Section 190 of the Tax Code. The purpose of Section 190 of the Tax Code is to “place casual importers, who are not merchants on equal footing with established merchants who pay sales tax on articles imported by them.” MERALCO’s claim for exemption from payment of the compensating tax is not clear or expressed, contrary to the rule that “exemptions from taxation are highly disfavored in law, and he who claims exemption must be able to justify his claim by the clearest grant of organic or statute law.”

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Tax exemption are strictly construed against the taxpayer, they being highly disfavored and may almost be said to be “odious to the law.” When exemption is claimed, it must be shown indubitably to exist, for every presumption is against it, and a well-founded doubt is fatal to the claim.

Maceda v Macaraig • Since May 27, 1976 (when PD 938 was issued) until June 11, 1984 when PD 1931 was promulgated (abolishing the tax exemptions of all GOCCs), oil firms never paid excise or specific and ad valorem taxes for petroleum products sold and delivered to the NPC. This nonpayment of taxes spanned for 8 years. • The oil companies started to pay specific and ad valorem taxes on their sales of oil products to NPC only after the promulgation of PD 1931 w/c withdrew all exemptions granted in favor of GOCCs and empowering the Fiscal Incentives Review Board (FIRB) to recommend to the President or to the Minister of Finance the restoration of the exemptions which were withdrawn. • FIRB issued Resolution 10-85 w/c restored the tax exemption privileges of NPC effective retroactively to June 11, 1984 up to June 30, 1985. • Thus, the NPC applied with the BIR for a refund of Specific Taxes paid on petroleum products in the total amount of about P58k+. • Maceda, Senate member, introduced Resolution 22 w/c was aimed at conducting an inquiry in aid of legislation in line w/ the reported tax manipulations and evasions by oil companies (particularly Caltex, Shell and Petrophil) by availing of their non-existing exemption of NPC from indirect taxes, w/c resulted in obtaining a tax refund totaling P 1.55 Billion from the Department of Finance • The Blue Ribbon Committee conducted a lengthy formal inquiry on the matter and recommended that the tax refund to NPC be cancelled, and also to cancel the approval of deed of Assignment by NPC to Caltex, and collect from Caltex its tax liabilities which were erroneously treated as paid or settled with the use of the tax credit certificate that NPC assigned to said firm. • Maceda contended that the exemption of NPC from INDIRECT TAXATION was revoked and repealed by the latest amendment to the NPC charter by PD 938, by the deletion of the phrases “directly or indirectly” and “on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of electric power” • The exemption of NPC provided in Section of PD 938 regarding the payments of “all forms of taxes, etc” cannot be interpreted to include indirect tax exception since tax statutes must be strictly construed against the one claiming the exemption must be strictly construed against the one claiming the exemption • I: W/n NPC is liable for indirect tax • R: NO, NPC is NOT liable for indirect tax • Indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else. For example, the excise and ad valorem taxes that oil companies pay to the BIR upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the “cash” and/or “selling price”.


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In interpreting a statute, legislative intent must be ascertained -- the reason for its enactment should be kept in mind and the statute should be construed with reference to its intended purpose + the evil sought to be remedied. In this case, NPC is a non-profit public corporation created for the general good and welfare (development of hydroelectric generation of power and production of electricity from other sources) wholly owned by the government. From the very beginning of its corporate existence, the NPC enjoyed preferential tax treatment to enable the Corporation to pay the indebtedness and obligation and in furtherance and effective implementation of the policy enunciated in Sec 1 of RA 6395. From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is obvious. In the earlier law, RA 358 the exemptions was worded in general terms, as to cover “all taxes, duties, fees, imposts, charges, etc” However, the amendment under RA 6395 enumerated the details covered by the exemption. Subsequently, PD 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect on all petroleum products used in its operation. PD 938 amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from “all forms of taxes, duties, fees, imposts” as well as costs and service fees including filing fees, appeal bonds, supersede as bonds, in any court or administrative proceedings.” The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax exemptions. Provisions granting exemptions to government agencies may be construed liberally, in favor of non-tax liability of such agencies. Thus, the rule that tax exemptions should be strictly construed is NOT applicable to NPC. The practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. In the case of property owned by the state or a city or other public corporations, the express exemption should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property "exemption is the rule and taxation the exception."

Maceda v Macaraig MR

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Unfazed by the Decision that the SC decision, Maceda filed a motion for reconsideration. In the process, a hearing was held on July 9, 1992 where all parties presented their respective arguments. However, the MR was denied. 1) What kind of tax exemption privileges does NPC have? Maceda contended that PD 938 repealed the indirect tax exemption of NPC as the phrase "all forms of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not expressly include "indirect taxes."

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The SC does not agree with this as a chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be completely tax exempt from all forms of taxes — direct and indirect. NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations upon its creation by virtue of C.A. No. 120. When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained were to be completely tax exempt. After the NPC was authorized to borrow from other sources of funds — aside issuance of bonds — it was again specifically exempted from all types of taxes "to facilitate payment of its indebtedness." Even when the ceilings for domestic and foreign borrowings were periodically increased, the tax exemption privileges of the NPC were maintained. NPC's tax exemption from real estate taxes was, however, specifically withdrawn by RA 987 but was restored by RA 6396. Moreover, PD 938, which raised its capital stock and USD borrowing rate, expressly states that the NPC must not only be able to pay its indebtedness but also to be exempt from ALL forms of taxes if its goal is to be achieved. 2) For what periods in time were these privileges being enjoyed? In the case of the tax exemption restoration of NPC, there is no other comparable entity — not even a single public or private corporation — whose rights would be violated if NPC's tax exemption privileges were to be restored. While there might have been a MERALCO before Martial Law, it is of public knowledge that the MERALCO generating plants were sold to the NPC in line with the State policy that NPC was to be the State implementing arm for the electrification of the entire country. Besides, MERALCO was limited to Manila and its environs. And as of 1984, there was no more MERALCO — as a producer of electricity — which could have objected to the restoration of NPC's tax exemption privileges. It should be noted that NPC was not asking to be granted tax exemption privileges for the first time. It was just asking that its tax exemption privileges be restored. Thus, NPC had its tax exemption privileges restored from 1984 to the present. 3) If there are taxes to be paid, who shall pay for these taxes? The oil companies which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold. HOWEVER, because NPC has been exempted from both direct and indirect taxation, the NPC must beheld exempted from absorbing the economic burden of indirect taxation.


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This means, on the one hand, that the oil companies which wish to sell to NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which could they shift to NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the other hand, that the NPC may refuse to pay the part of the "normal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases such oil from the oil companies — because to do so may be more convenient and ultimately less costly for NPC than NPC itself importing and hauling and storing the oil from overseas — NPC is entitled to be reimbursed by the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to the BIR.

A. Chronological review of the relevant NPC laws with respect to tax exemption provisions 1. November 3, 1936- CA 120 was enacted creating the National Power Corporation (NPC) to develop hydraulic power from all sources in the Philippines with a sum of P250,000 appropriated from the Philippine Treasury, whose main source of funds shall be exempt from taxation. 2. June 4, 1949- RA 357 was enacted authorizing the President to guarantee absolutely and unconditionally as primary obligor the payment of all NPC loans, wherein such loans shall be exempt from taxes. 3. On the same date, it was authorized for the first time to incur other types of indebtedness which shall also be exempt from taxation. 4. January 22, 1974- PD 380 was issued to give extra powers to NPC, wherein its capital stock was raised to P2 billion, and was authorized to borrow a total of USD 1 billion. 5. May 27, 1976- PD 938 was issued, raising its ceiling of indebtedness to P12 billion and its USD borrowing rate at USD 4 billion. Several tax laws were enacted that challenged the tax exemptions imposed on NPC. First, in 1976, PD 882 was passed withdrawing the tax exemption of NPC with regard to imports in order to reduce foreign exchange spending and to protect domestic industries. Second, PD 1177 was issued as it was the declared policy of the State to formulate and implement a National Budget that is an instrument of national development and that due to this, all units of government, including GOCCs, shall pay income taxes, customs duties and other taxes and fees imposed under revenue laws, provided that organizations otherwise exempted by law from the payment of such taxes/duties may ask from a SUBSIDY from the General Fund. Third, PD 1931 was passed in 1984, due to the economic morass after the Aquino Association. The Decree expressly repeals the grant of tax privileges to any GOCCs and all other units of the government. Lastly, in 1986, EO 93 (S’86) was issued with a view to correct presidential restoration or grant of tax exemption to other government and private entities without benefit of a review by the Fiscal Incentives Review Board. CIR v Gotamco & Sons, Inc. • The World Health Organization (WHO) is an international organization which has a regional office in Manila.

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As an international organization, it enjoys privileges and immunities which are defined more specifically in the Host Agreement entered into between the Philippines and the said Organization. Section 11 of the Agreement provides that the Organization, its assets, income and other properties shall be: exempt from all direct and indirect taxes. It is understood, however, that the Organization will not claim exemption from taxes which are, in fact, no more than charges for public utility services. When the WHO decided to construct a building to house its own offices, as well as other UN offices in Manila, it entered into a further agreement with the Government of the Philippines which stated that the Organization may import into the country materials and fixtures required for the construction free from all duties and taxes and agrees not to utilize any portion of the international reserves of the Government. In inviting bids for the construction of the building, the WHO informed the bidders that the building to be constructed belonged to an international organization with diplomatic status and thus exempt from the payment of ALL fees, licenses, and taxes. Thus, their bids "must take this into account and should not include items for such taxes, licenses and other payments to Government agencies. The construction contract was awarded to John Gotamco & Sons, Inc. on February 10, 1958 for a price upon completion of P452k+ The CIR imposed a contractor’s tax and stated that "as the 3% contractor's tax is not a direct nor an indirect tax on the WHO, but a tax that is primarily due from the CONTRACTOR, the same is not covered by the Host Agreement. The CIR sent a letter of demand to Gotamco demanding payment of about P16k+ representing the 3% contractor's tax plus surcharges on the gross receipts it received from the WHO. Gotamco appealed the CIR's decision to the CTA, which rendered a decision in favor of Gotamco and reversed the CIR’s decision. I: W/n Gotamco should pay 3% contractor's tax under Section 191 of the NIrC from the construction of the WHO building in Manila R: NO. 1) CIR’s contention that the contractor’s tax is an excise tax imposed upon the contactor (privilege of doing business) with no bearing on the WHO (thus, NOT an indirect tax on WHO), cannot hold water. Direct taxes are those that are demanded from the very person who should pay them while indirect taxes are those that are demanded in from one person in the expectation that he can shift the burden to someone else.


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The contractor's tax is course payable by the contractor but in the last analysis it is the OWNER of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax on WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. 2) CIR claims that in Philippine Acetylene Co. vs. CIR, the 3% contractor's tax fans directly on Gotamco and cannot be shifted to the WHO. HOWEVER, the said case is not controlling, since the Host Agreement specifically exempts the WHO from "indirect taxes." The Philippine Acetylene case involved a tax on SALES of goods which under the law had to be paid by the manufacturer or producer; the fact that the manufacturer or producer might have added the amount of the tax to the price of the goods did not make the sales tax "a tax on the purchaser."

*CIR v CA and YMCA • YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives. • In 1980, YMCA, among others, an amount of income (about P700k+) from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and from parking fees collected from non-members. • The CIR thus issued an assessment to YMCA totaling about P415k+ including surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. • YMCA protested the assessment and filed a letter. In reply, the CIR denied the claims of YMCA. • YMCA thus filed a petition to the CTA to take out the taxes and CTA ruled in favor of YMCA. • CIR filed a petition with the CA to reverse, but CA affirmed CTA's decision. • I: W/n the income derived from rentals of real property owned by YMCA (established as "a welfare, educational and charitable non-profit corporation") is subject to income tax under the NIRC and Constitution • R: YES, the income derived by YMCA from rentals of its real property is subject to income tax.

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Under the NIRC: While Section 27 of the NIRC provides that nonprofit organizations and clubs shall not be taxed on their income, it also provides that this exemption will NOT apply to income derived from 1) properties, real or personal, and 2) any other activities conducted for profit shall be subject to tax (amended by PD 1457). Applying the doctrine of strict interpretation of tax exemptions, the phrase "any of their activities conducted for profit” does NOT qualify the word “properties.” This makes income from the property of the

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organization taxable, regardless of how that income is used -- whether for profit or for lofty non-profit purposes.

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Under the Constitution: Article VI, Section 28 of the Constitution exempts “charitable institutions” from the payment not only of taxes. HOWEVER, acdg to consti framers, the exemption does NOT pertain to income tax but only property taxes. For the YMCA to be granted the exemption as an “educational institution” under the Consti (Art 14 Sec 4), it must prove with substantial evidence that: c. it falls under the classification non-stock, non-profit educational institution; and d. the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes • However, no evidence was submitted by YMCA to prove that they met the requisites. The term “educational institution” or “institution of learning” has acquired a well-known technical meaning, of which the members of the Constitutional Commission are deemed cognizant. • Under the Education Act of 1982, such term refers to schools, which is synonymous with formal education OR a school seminary, college, or educational establishment. The Court, upon examining the “Amended Articles of Incorporation” and “ByLaws” of the YMCA, but found nothing in them that even hints that it is a school or an educational institution. • Even if YMCA is an educational institution, the Court also notes that YMCA did not submit proof of the proportionate amount of the subject income that was actually, directly and exclusively used for educational purposes.

Nitafan v CIR • Nitafan, etc. were duly appointed and qualified Judges in the RTC, NCR. • They sough to prohibit CIR and the Financial Officer of the SC, from making any deduction of withholding taxes from their salaries. • According to them, any tax withheld from their compensation as judicial officers constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10, Article VIII of the 1987 Constitution mandating that during their continuance in office, their salary shall not be decreased. • They also cited the cases of Perfecto vs. Meer and Endencia vs. David would apply which declared the salaries of members of the Judiciary exempt from payment of the income tax and considered such payment as a diminution of their salaries during their continuance in office • I: W/n the withholding tax on judicial officers is unconstitutional • R: NO, it is constitutional. • The intent of the Constitutional Commission was to delete the proposed express grant of exemption from payment of income tax to members of the Judiciary, so as to "give substance to equality among the three branches of Government" in the words of Commissioner Rigos.


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In the course of the deliberations, it was further expressly made clear, specialty with regard to Commissioner Bernas' accepted amendment to the amendment of Commissioner Rigos, that the salaries of members of the Judiciary would be subject to the general income tax applied to all taxpayers. The Court thus discarded the ruling in Perfecto vs. Meer and Endencia vs. David that declared the salaries of members of the Judiciary exempt from payment of the income tax and considered such payment as a diminution of their salaries during their continuance in office. Also, the salaries of Justices and Judges are properly subject to a general income tax law applicable to all income earners. The payment of such income tax by Justices and Judges does NOT fall within the constitutional protection against decrease of their salaries during their continuance in office. Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for clarity, is again reproduced hereunder: "The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower courts shall be fixed by law. During their continuance in office, their salary shall not be decreased" (Italics supplied). It is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation of Justices and Judges but such rate must be higher than that which they are receiving at the time of enactment, or if lower, it would be applicable only to those appointed after its approval. It would be a strained construction to read into the provision an exemption from taxation in the light of the discussion in the Constitutional Commission.

*Province of Abra v Hernando • The Roman Catholic Bishop of Bangued wanted to be exempted from payment of real estate tax. • He filed an action for declaratory relief in the CFI of Abra. • The CFI rendered a summary judgment granting the exemption. • The Province of Abra filed an action for certiorari against the CFI on the ground that it granted the action for declaratory relief filed by the Roman Catholic Bishop without allowing the Province to answer and without hearing, in violation of its right to due process. • It also alleged that the judge (Hernando) failed to abide PD No. 464 which states that, “No court shall entertain any suit ASSAILING the validity of tax until the taxpayer pays under protest the tax assessed against him.. nor shall any court declare any portion of the tax assessed INVALID except if the taxpayer shall pay the just amount of tax determined by the court.” • I: W/n the judgment of the court granting the exemption to the Roman Catholic Bishop of Bangued is valid • R: NO, it is invalid

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In order to exempt religious institutions from the payment of real estate taxes, the property must be used exclusively, actually, and directly for religious purposes.

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Thus, To be exempted from realty tax, there must be proof of ACTUAL and DIRECT use of the property for religious or charitable purposes. In this case, the right of the Province of Abra to procedural due process was violated by the summary judgment granting the exemption. Instead of accepting the bare allegation of the bishop that the property was being used exclusively, directly, and actually for public purposes, the judge should have first required proof of these allegations.

* CIR v. Mitsubishi Metal Corp.: International Comity • Atlas Consolidated Mining entered into a Loan and Sales Contract with Mitsubishi. Under the Contract, Mitsubishi would lend Atlas $20M for the installation of a new concentrator for copper production, and in turn, Atlas would sell to Mitsubishi all the copper concentrates produced from the machine for the next 15 years. • Thereafter, Mitsubishi applied for a loan with Eximbank of Japan and other consortium of Japanese banks so that it could comply with its obligations under the contract. The total amount of both loans was $20M. • Approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as loanto Atlas and as consideration for importing copper concentrates from Atlas. • Atlas made interest payments in favor of Mitsubishi totaling P13M. The corresponding 15% tax on the interest in the amount of P1.9M was withheld and remitted to the Government. • Subsequently, Mitsubishi and Atlas filed a claim for tax credit, requesting that the P1.9M be applied against their existing tax liabilities on the ground that the interest earned by Mitsubishi on the loan was exempt from tax. • The NIRC provides that income received from loans in the Philippines extended by financing institutions owned, controlled, or financed by foreign governments are exempt from tax. • Mitsubishi and Atlas claim that the interest earned from the loan falls under the above exemption because Mitsubishi was merely acting as an agent of Eximbank, which is a financing institution owned, controlled, and financed by the Japanese Government. They allege that Mitsubishi was merely the conduit between Atlas and Eximbank, and that the ultimate creditor was really Eximbank.

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Since the transaction was between Mitsubishi and Atlas, the exemption that would have been applicable to Eximbank, does not apply. The interest is therefore not exempt from tax. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas, but this only proves the justification for the loan as represented by Mitsubishi which is a standard banking practice for evaluating the prospects of due repayment. “Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. While international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening means to violate our tax laws. Otherwise, the mere expedient of having Phil corp enter into a contract for loans with private foreign entities, which in turn will negotiate independently with their governments, could be availed to take advantage of the tax exemption law under discussion.

*31st Infantry Post Exchange v. Posadas: International Comity

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The 31st Infantry Post Exchange was an agency under the control of the US Army, operating in the Philippines. The Exchange bought goods, such as soap and toiletries, and resold them to officers, soldiers, and civilian employees of the US Army and their families. The proceeds derived from the sales were then used for the betterment of the condition of the personnel of the Army. In the course of its business, the Exchange purchased goods from merchants in the Philippines. The Collector of Internal Revenue collected from these merchants taxes at the rate of 1.5% of the gross value sold by them to the Exchange. The Exchange filed an action for prohibition against the CIR for him to desist from collecting the taxes from the merchants. The Exchange claims that the taxes imposed on the merchants were driving up the prices of goods sold to it by the merchants. The Exchange claims that the merchants should be exempt from taxes since the revenue law provides that no specific tax shall be collected on any goods sold and delivered directly to the US Army of Navy for their actual use or issue. I: W/N the merchants selling goods to the Exchange are exempt from sales tax. NO R: The tax exemption covers those goods that are sold directly to the US Army or Navy for their actual use or issue. In this case, the goods are sold to the Exchange for resale to individuals belonging to the Army or Navy, and not to the Army or Navy itself. Hence, they do not fall within the exemption. The rule is that without Congressional consent, no Federal agency or instrumentality can be taxed by state authority. However, only those agencies through which the Federal Government immediately

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and directly exercises its sovereign powers are immune from the taxing power of the states. The reason upon which the rule rests must be the guiding principle to control its operation. The limitations upon the taxing power of the state must receive a practical construction which does not seriously impair the taxing power of the Government imposing the tax. The effect of the tax upon the functions of the Government and the nature of the governmental agency determine finally the extent of the exemption. In this case, the tax laid upon Philippine merchants who sell to the Exchange does not interfere with the supremacy of the US Government or with the operations of its instrumentality the US Army, to such an extent or in such a manner as to render the tax illegal. The tax does not deprive the Army of the power to serve the Government or hinder the efficient exercise of its power.

PLDT v City of Davao • PLDT applied for a Mayor’s Permit to operate its Davao Metro Exchange.

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City of Davao did not act on the application, pending PLDT's unpaid local franchise tax of P3M+ (for the first to fourth quarter of 1999). PLDT protested the assessment and requested a refund of the franchise tax paid by it for the year 1997 and the first to the third quarters of 1998. Before, PLDT enjoyed tax exemption under Section 12 of RA 7082 (PLDT shall pay a franchise tax equivalent to 3% of all gross receipts of its business “in lieu of all taxes on this franchise or earnings thereof).

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refund. The trial court affirmed the City Treasurer’s decision.

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However, this exemption was withdrawn by the Local Government Code. PLDT contended that it was still exempt from the payment of franchise tax based on an opinion by the Bureau of Local Government Finance (BLGF - Department of Finance) w/c amended Section 23 of RA 7925 (Public Telecommunications Policy Act) in effect restored its exemptions from local taxes. It states that any “advantage, favor, privilege, exemption, or immunity” granted to existing franchises shall ipso facto become part of previously granted telecommunications franchises.

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PLDT claims that Smart and Globe enjoy exemption from the payment of the franchise tax by virtue of their legislative franchises. Relying on the BLGF opinion, PLDT then argues that because Smart and Globe are exempt from the franchise tax, it follows that it must likewise be exempt from the tax being collected by the City of Davao because the grant of tax exemption to Smart and Globe ipso facto extended the same exemption to it.

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1) The Local Government Code withdrew all tax exemptions previously enjoyed by all persons, natural or juridical (Section 193). The LGC further authorized local government units to impose a tax on businesses enjoying a franchise, notwithstanding the grant of tax exemption to them (Section 137). Case law also rules that tax exemptions are highly disfavored, and he who claims an exemption must be able to point to some positive provision of law creating the right. The exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. The acceptance of PLDT’s theory would result in absurd consequences. PLDT’s theory would require that, to level the playing field, any “advantage, favor, privilege, exemption, or immunity” granted to Globe must be extended to all telecommunications companies, including Smart. This could not have been the intent of Congress in enacting §23 of Rep. Act 7925. PLDT’s theory will leave the Government with the burden of having to keep track of all granted telecommunications franchises, lest some companies be treated unequally. The fact is that the term “exemption” in §23 is too general. A cardinal rule in statutory construction is that legislative intent must be ascertained from a consideration of the statute as a whole and not merely of a particular provision. The thrust of R.A. No. 7925 is to promote gradually the deregulation of the entry, pricing, and operations of all public telecommunications entities and thus promote a level playing field in the telecommunications industry. There is nothing in the language of §23 or in the proceedings of Congress in enacting this law which shows that it contemplates the grant of tax exemptions to all telecommunications entities, including those whose exemptions had been withdrawn by the LGC. 2) Also, the BLGF is NOT an administrative agency whose findings on questions of fact are given weight and deference in the courts. It was created merely to provide consultative services and technical assistance to local governments and the general public on local taxation, real property assessment, and other related matters, among others. The question raised by PLDT is a legal question, to wit, the interpretation of §23 of R.A. No. 7925. This is outside BLGF's competence. 3) Lastly, PLDT failed to present any proof that Globe and Smart were enjoying local franchise and business tax exemptions.

*Sea-Land Services Inc. v. CA: International Comity

City Treasurer Barcelona denied PLDT's protest and claim for tax


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Sea-Land, an American shipping company, entered into a contract with the US Government for the transport of military household goods and effects of US military personnel assigned to the Subic Naval Base. The BIR collected 1.5% income tax on the income derived by Sea-Land, which Sea-Land paid. Later, Sea-Land asked for a refund, claiming that it had paid the tax by mistake. It invoked the tax exemption provided in the RP-US Military Bases Agreement, which exempts from tax any profit derived by a US national under a contract with the US government in connection with the construction, maintenance, operation, and defense of the bases. Sea-Land filed a petition for review with the CTA to judicially pursue its claim for refund and to stop the running of the 2-year prescriptive period. CTA’s & CA denied refund. I: W/N Sea-Land falls within the coverage of the tax exemption. NO R: The transport or shipment of household goods and effects of USmilitary personnel is not included in the term construction, maintenance, operation, and defense of the bases. Neither can the activity be interpreted as directly related to the defense and security of the Philippine territories. It is therefore not covered by the exemption. “Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception.” The law “does not look with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.” The avowed purpose of tax exemption “is some public benefit or interest, which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption.” The hauling or transport of household goods and personal effects of U. S. military personnel would not directly contribute to the defense and security of the Philippines.

*Meralco v. Province of Laguna: Delegation to LGUs, Impairment Clause • Meralco was granted by several municipalities of the Province of Laguna a franchise to operate. • RA 7160 or the Local Gov Code of 1991 was then issued w/c allowed local government units to create their own sources of revenue and to levy taxes, fees and charges consistent w/ the basic policy of autonomy. • Purusant to this, the province of Laguna enacted an ordinance imposing on businesses enjoying a franchise a franchise tax of 50% of 1% of gross annual receipts. • Meralco paid under protest and sent a formal claim for refund to the Provincial Treasurer claiming that the franchise tax it had paid to the National Government (pursuant to P.D. 551) already included the franchise tax imposed by the Provincial Tax Ordinance. • Meralco also contended that Laguna’s imposition of franchise tax contravened the provisions of P.D. 551 Section 1 which provided that


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the franchise tax payable by all grantees of electric franchises shall be 2% of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current I: W/n the province of Laguna had the power to levy the franchise tax R: Yes. Under the present Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The reason for this is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. The LGC of 1991 explicitly authorizes provincial governments, notwithstanding any exemption granted by law, to impose a tax on businesses enjoying a franchise. While the Court has referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being STRICTLY CONTRACTUAL. However, contractual tax exemptions should not be confused w/ tax exemptions under franchises. Contractual tax exemptions are those agreed to by the taxing authority in contracts, such as those contained in government bonds, where the government acts in its private capacity and waives its governmental immunity. Tax exemptions of this kind may NOT be revoked without impairing the obligations of contracts. On the other hand, a franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Art 12 of the Consti provides that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.

* Tiu v. CA: Equal Protection of the Laws • Congress passed RA 7227 which created the Subic Special Economic Zone, granting tax and duty incentives (tax and duty-free importations of raw materials, capital and equipment) to businesses and residents within the area encompassed by the zone. • The law provides that no local and national taxes shall be imposed within the zone. In lieu of taxes, 3% of the gross income of enterprises operating within the zone shall be remitted to the National Government, 1% to the local government units, and 1% to a development fund to be utilized for the development of municipalities outside Olangapo and Subic. • Pres. Ramos later issued an EO specifying a “secured area” area within the zone in which the privileges were operative. o EO97

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tax and duty-free importations will only apply to raw materials, capital goods and equipment brought in by business enterprises into the SSEZ.

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Except for import tax and duties, all business are required to pay the specified taxes in Section 12(c) of RA7227.

-national economic impact -

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EO97-A  the tax incentives are only applicable to business enterprises and individuals residing within the secured area. Petitioners outside the “secured area” challenged the constitutionality of this EO for allegedly being violative of their right to equal protection of the laws. They assert that the SSEZ encompasses (1) the City of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic Naval Base. However, EO 97-A, according to them, narrowed down the area within which the special privileges granted to the entire zone would apply to the present “fenced-in former Subic Naval Base” only. It has hereby excluded the residents of the first two components of the zone from enjoying the benefits granted by the law. I: W/N the EO confining the application of the privileges under RA 7227 within the secured area and excluding the residents of the zone outside the secured area violates the equal protection clause. NO. R: There are real and substantive distinctions between the circumstances obtaining inside and outside the Subic Naval base, thereby justifying avalid and reasonable classification. For a valid classification, the following requisites must be present: 1. it must rest on substantial differences; 2. must be germane to the purpose of the law; 3. must not be limited to existing conditions only; and 4. must apply equally to all members of the same class. In this case, the purpose of the law is to accelerate the conversion of military reservations into productive areas (economic or industrial areas) . Thus, the lands covered under the Military Bases Agreement are its object. To achieve purpose, Congress deemed it necessary to extend economic incentives to attract and encourage investors. It was thus reasonable for the President to have delimited the application of some incentives to the confines of the former Subic military base, since it is this specific area which the government intends to transform and develop into a self-sustaining industrial and economic zone, particularly for the use of big foreign and local investors to use as operational bases for their businesses and industries. These big investors possess the capital necessary to spur economic growth and generate employment opportunities. There are substantial differences between the big investors who are being lured to establish and operate their industries in the so-called “secured area” and the present business operators outside the area.

Big investors lured into secured areas -billion-peso investments & thousand of new jobs

Present biz operators outside the are -no such magnitude -only local economic impact


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-biz activities outside secured areas are not likely to have any impact in achieving purpose of law which is to turn former military base to productive use for the benefit of the Phil economy There is, then, hardly any reasonable basis to extend to them the benefits and incentives accorded in RA 7227

Mactan Cebu International Airport Authority v Marcos

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Mactan Cebu Int’l Airport was created by virtue of RA 6958, mandated to “principally undertake the economical, efficient and effective control, management, and supervision of the Mactan International Airport in the Province of Cebu and the Lahug Airport in Cebu City.” Under Section 1 of the said RA, MCIA was given exemption from realty taxes imposed by the National Government on any of its political subdivisions, agencies, and instrumentalities. However, the Office of the Treasurer of Cebu City demanded payment for realty taxes on parcels of land belonging to the MCIA. MCIA objected invoking its tax exemption. It also asserted that it is an instrumentality of the government performing governmental functions, citing section 133 of the Local Government Code which puts limitations on the taxing powers of Local Government Units. The city refused insisting that MCIA is a GOCC performing proprietary functions whose tax exemption was withdrawn by Sections 193 and 234 of the Local Government Code. MCIA filed a declaratory relief before the RTC. RTC dismissed the petition, ruling that the LGC WITHDREW the tax exemption granted to the GOCCs. I: W/n the City of Cebu has the power to impose taxes on the MCIA R: YES. The LGC expressly repealed the exemption RA 6958, thereby withdrawing the exemption on realty tax given to the petitioner. Tax statutes are construed strictly against the government and liberally in favor of the taxpayer. However this does not apply if the grantee of the exemption is a political subdivision or instrumentality because the effect of such exemption is merely to reduce the amount of money that has to be handled by the government in the course of its operations. ALSO, since taxation is the rule and exemption is the exception, exemption may be withdrawn at the pleasure of the taxing authority (exception: contractual exemptions). The LGC authorized LGUs to grant tax exemption privileges. Thus, LGUs may also impose real property tax except on real property owned by the Republic of the Philippines or any of its political subdivisions.

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The exception to this is when the beneficial use has been granted to a taxable person.

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In this case, the land where the airports managed by the MCIA were erected can also be levied upon by the city of Cebu for the MCIA’s nonpayment of taxes. It was proven that in the city charter there was a “transfer” of the “lands,” from the city of Cebu to the petitioner, which amounted to an absolute conveyance of ownership not only mere beneficial use.

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Thus the ownership of the land passed from the Republic of the Philippines to the MCIA. As MCIA owns the said land, it CAN become the subject of levying for the nonpayment of taxes. Furthermore, MCIA is a “taxable person” under its Charter, and was only exempted from the payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real property tax. Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, it had already become, even if it be conceded to be an “agency” or “instrumentality” of the Government, a taxable person for such purpose in view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment of real property taxes applies to the MCIAA. NOTE: A distinction should also be made between the phrases “National Government” and “Republic of the Philippines”, as they are not interchangeable.“Republic of the Philippines” is broader and synonymous with “Government of the Republic of the Philippines” defined as the “corporate governmental entity through which the functions of government are exercised throughout the Philippines, including, save as the contrary appears from the context, the various arms through which political authority is made affective in the Philippines, whether pertaining to the autonomous regions, the provincial, city, municipal or barangay subdivisions or other forms of local government.” These “autonomous regions, provincial, city, municipal or barangay subdivisions” are the political subdivisions. On the other hand“National Government” refers “to the entire machinery of the central government, as distinguished from the different forms of local governments.” The National Government then is composed of the three great departments: the executive, the legislative and the judicial. An “agency” of the Government refers to “any of the various units of the Government, including a department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit therein.” An “instrumentality” refers to “any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned and controlled corporations.”

CIR v Robertson


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Frank Robertson was an American citizen born in the Philippines and repatriated to the US where he resided (Long Beach, California) and was employed at the US Navy. He was eventually assigned to Subic, Olongapo due to his work. James, his brother, was also born in the Philippines and resided in the country until repatriated to the US. He was also assigned to Subic, Olongapo due to his work in the Navy. Robert Cathey was a US-born citizen who became a US Navy employee stationed in Makati, MM while John Garrison, a Phil-born American citizen, was assigned to Subic after being repatriated to the US and joining the military. THUS, they were all citizens of the United States, holders of American passports and admitted as Special Temporary Visitors under Section 9 (a) visa of the Philippine Immigration Act of 1940, as amended. They were civilian employees in the U.S. Military Base in the Philippines in connection with its construction, maintenance, operation, and defense; and incomes were solely derived from salaries from the U.S. government by reason of their employment in the U.S. Bases in the Philippines. The CIR filed a petition for review w/ the SC, contending that the CTA erred in holding that Robertson, etc. were, by virtue of Article XII, Par 2 of the RPUS Military Bases Agreement of 1947, exempt from Philippine income tax. CIR argues that the laws granting tax exemptions must be construed strictly against the taxpayer, and that the burden of proof is on Robertson, etc. to establish that their residence in the country is by reason only of their employment in connection with the construction, maintenance, operation or defense of the U.S. Bases in the Philippines (as provided for under Article XII, Par. 2 of the RP-US Military Bases Agreement of 1947). According to CIR, they failed to discharge this burden, given that they own residential properties in the Phils in their names. I: W/n they are exempted R: YES, they are exempted. An examination of the words used and circumstances in the Agreement shows the basic intent "to exempt all U.S. citizens working in the Military Bases from the burden of paying Philippine Income Tax without distinction as to whether born locally or born in their country of origin." In this case, respondents and their families upon repatriation in 1945 had since acquired domicile and residency in the United States, and obtained employment with the United States Federal Service. It was not until after several years of a hiatus that they returned to the Philippines by reason of duties with the US military bases in the Philippines where they were gainfully employed by the U.S. Federal Government. The situation of the petitioners is of no different mold as of the rest of the U.S. civilian employees who continued to enjoy the benefits of tax exemption under the Agreement, Petitioners' circumstances before the questioned ruling remained obtaining thru the taxable years 1969-1972.

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This Court cannot depart from the plain meaning of the tax exemption provision. This does not however foreclose the possibility of respondents’ coming to roost in the country contingent upon the termination of their tour of duty, but only then may the bridge be crossed for tax purposes.

Basco v PAGCOR • PAGCOR was created by virtue of P.D. 1067 and granted a franchise to establish, operate and maintain gambling casinos on land or water within the territorial jurisdiction of the Philippines. • Its operation was originally conducted in the well known floating casino "Philippine Tourist." The operation was considered a success for it proved to be a potential source of revenue to fund infrastructure and socio-economic projects. • Subsequently,PAGCOR was created under P.D. 1869 to enable the Government to regulate and centralize all games of chance authorized by existing franchise or permitted by law -- particularly to establish clubs and amusement games in order to raise revenues for projects like flood control programs, beautification, sewerage and sewage projects, Tulungan ng Bayan Centers, Nutritional Programs, Population Control, etc. • PAGCOR is the 3rd largest source of government revenue, next to the BIR and BOC. • Basco, etc. then filed a petition seeking to annul the PAGCOR Charter / PD 1869 because it is allegedly contrary to morals, public policy and order. • Particularly, they allege that it waived the Manila city gov's right to impose taxes and license fees, which is recognized by law, and that because it intrudes into the local gov's right to impose local taxes and license fees, it violates the constitutionally enshrined principle of local autonomy. • Based on the PD 1869, PAGCOR as franchise holder is exempt from paying tax of any kind, except for a franchise tax of 5% gross revenues / earnings derived by the Corporation. • I: W/n PD 1869 creating PAGCOR is valid • R: YES. • Basco, etc.'s contention that P.D. 1869 constitutes a waiver of the right of the City of Manila to impose taxes and legal fees and violates the principle of local autonomy is WITHOUT MERIT.

3) The City of Manila's power to impose license fees on gambling, has long been revoked. As early as 1975, the power of local governments to regulate gambling thru the grant of "franchise, licenses or permits" was withdrawn by P.D. No. 771 and was vested exclusively on the National Government.

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4) Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a GOCC w/ an original charter, PD 1869. All of its shares of stocks are owned by the National Government, and it also exercises regulatory powers (to regulate gambling casinos).

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5) Basco, etc. also argues that the Local Autonomy Clause of the Constitution will be violated by P.D. 1869, but this is also without merit. The power of local government to "impose taxes and fees" is always subject to "limitations" which Congress may provide by law. Since PD 1869 remains an "operative" law until "amended, repealed or revoked", its "exemption clause" remains as an exception to the exercise of the power of local governments to impose taxes and fees. It cannot therefore be violative but rather is consistent with the principle of local autonomy.

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6) Besides, the principle of local autonomy under the 1987 Constitution simply means "decentralization." It does not make local governments sovereign within the state. HOW CASE ENDED (pero hindi related, wala lang haha reminiscent of consti): Gambling is generally immoral, and this is precisely so when the gambling resorted to is excessive. This excessiveness necessarily depends not only on the financial resources of the gambler and his family but also on his mental, social, and spiritual outlook on life. However, the mere fact that some persons may have lost their material fortunes, mental control, physical health, or even their lives does not necessarily mean that the same are directly attributable to gambling. Gambling may have been the antecedent, but certainly not necessarily the cause. For the same consequences could have been preceded by an overdose of food, drink, exercise, work, and even sex.

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1) The City of Manila, being a mere Municipal corporation has no inherent right to impose taxes. Its "power to tax" therefore must always yield to a legislative act which is superior having been passed upon by the state itself which has the "inherent power to tax."

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2) Congress has the power of control over local governments. If Congress can grant the City of Manila the power to tax certain matters, it can also provide for exemptions or even take back the power. THUS, the Charter of the City of Manila is subject to control by Congress.


Republic v IAC

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The BIR initiated an action in the CFI of Manila to collect deficiency income taxes from the Spouses Pastor for the years 1955 to 1959 in the amount of about P17k+ with 5% surcharge and 1% interest, with costs. After their Motion to Dismiss was denied, they filed an Answer, admitting that there was an assessment against them in the aforementioned amount but that they had availed of the TAX

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AMNESTY under PD Nos. 23, 213 and 370, paying the corresponding amnesty taxes to be able to remove their liabilities.

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The Government only filed the action against the spouses 10 years after the assessment on the deficient income taxes were made. The CFI ruled in favor of the spouses, saying that their tax liabilities were deemed settled under PD 213 (and not the other PDs) as shown in the Amnesty Income Tax Returns’ Summary Statement and the Tax Payment Acceptance Order which contain the assessment for the questioned years. By accepting payment, the Government has therefore WAIVED ITS RIGHT to recover further deficiency income taxes under existing assessments against them. The Gov filed an appeal w/ the IAC, alleging that the spouses were NOT qualified to avail of the tax amnesty because the benefits could only be availed of by persons WITHOUT pending assessment against them (according to Revenue Regulations Nos. 8-72 and 7-73). IAC dismissed the appeal, rulling that RR 7-73 was null and void for being contrary to/restrictive of PD 213. I: W/n payment of deficiency income taxes under a tax amnesty law operates to divest the government of the right to recover against the taxpayer even if there is an existing assessment against the latter R: YES. What was granted under PD 213 is not just an exemption but an amnesty, and the Government is estopped from collecting the difference between the deficiency tax assessment and the amount already paid by them as amnesty tax. Being in the nature of a general pardon/intentional overlooking of the State of its authority to impose penalties on persons otherwise guilty of evasion or like violations, it constitutes absolute forgiveness or a waiver by the Government of its right to collect what would otherwise be due it. The findings of respondent appellate court that the deficiency income taxes were paid by the spouses and accepted by the government under PD 213 are entitled the highest respect. In case of doubt, tax statutes are to be construed strictly against the Government and liberally in favor of the taxpayer.

CIR v CA & ROH (Jan 20, 1995) • August 13, 1986, CIR assessed ROH Auto Products, Inc. with income deficiency and business taxes for fiscal years that ended September 30, 1981 and September 30, 1982 in an aggregate amount of P1,410,157.71.

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August 22, 1986, when the President still has legislative powers, promulgated EO No. 41, declaring a one-time tax amnesty on unpaid income taxes, later amended to include estate and donor's taxes and taxes on business, for the taxable years 1981 to 1985.


• ROH Auto Products, Inc. availed the amnesty and paid the corresponding amnesty taxes due. And requested the CIR through a letter that the deficiency tax notice should be cancelled and withdrawn.

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CIR denied the request on the ground that Revenue Memorandum Order No. 4-87, dated 09 February 1987, implementing EO No. 41, had construed the amnesty coverage to include only assessments issued by the Bureau of Internal Revenue after the promulgation of the executive order on 22 August 1986 and not to assessments theretofore made.

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ROH appealed the denial to CTA, and ruled in favor of the taxpayer. The CTA ruled that provisions in the statute granting tax amnesty for unpaid taxes from 1981-1985 , to make taxpayers still answerable for a tax liability which, through the statute, should have been erased with the proper availment of the amnesty.

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CA affirmed the decision of the CTA. Tax Amnesty is to give tax evaders, who wish to relent and are willing to reform, a chance to do so by availing of the amnesty provided for by the statute and thereby become a part of the new society with a clean slate. • I: W/N Revenue Memorandum Order No. 4-87, promulgated to implement E.O. NO. 41, is valid? • R: NO.

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The authority of the Minister of Finance (now the Secretary of Finance), in conjunction with the Commissioner of Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal revenue laws cannot be controverted. Neither can it be disputed that such rules and regulations, as well as administrative opinions and rulings, ordinarily should deserve weight and respect by the courts. Much more fundamental than either of the above, however, is that all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law.

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EO 41 did not provide for the assessment made prior to its promulgation in the exclusionary clause, as CIR argued. The conclusion is clear, and it is that the executive order has been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically excepted by it.

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Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty herein granted: a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14; b) Those with income tax cases already filed in Court as of the effectivity hereof; c) Those with criminal cases involving violations of the income tax already filed in court as of the effectivity filed in court as of the effectivity hereof; d) Those that have withholding tax liabilities under the National Internal Revenue Code, as amended, insofar as the said liabilities are concerned;

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Those with tax cases pending investigation by the Bureau of Internal Revenue as of the effectivity hereof as a result of information furnished under Section 316 of the National Internal Revenue Code, as amended; f) Those with pending cases involving unexplained or unlawfully acquired wealth before the Sandiganbayan; g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code, as amended.

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Republic v Caguioa

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In 1992, Congress RA No. 7227 or the BASES CONVERSION AND DEVELOPMENT ACT OF 1992 which, among other things, created the Subic Special Economic and Freeport Zone (SSEZ) and the Subic Bay Metropolitan Authority (SBMA). RA No. 7227 provided incentives such as tax importations of raw materials, capital and equipment.

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However, exportation from the SSEZ to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws. It also provided that in lieu of paying taxes, 3% of the gross income earned by all businesses and enterprises within the SSEZ shall be remitted to the National Government, 1% each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, it established a development fund of 1% of the gross income earned by all businesses and enterprises within the SSEZ to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to be base areas. Pursuant to the law, respondent companies (Indigo Distribution, Star Trading, etc) applied for and were granted Certificates of Registration and Tax Exemption by the SBMA. The Certificate entitled them to tax and duty-free importation of materials for use solely within the Subic Bay Freeport Zone. Congress, however, subsequently passed R.A. No. 9334 w/c stated that the importation of cigars and cigarettes, distilled spirits, fermented liquors and wines into the Philippines, even if destined for tax and duty free shops, shall be subject to all applicable taxes, duties, charges, including excise taxes due thereon. This shall apply to those brought directly into the freeports of the SSEZ, under RA No. 7227. Because of this, SBMA issued a Memorandum directing the departments concerned to require locators/importers in the SBF to pay the corresponding duties and taxes on their importations of cigars, cigarettes, liquors, and wines before said items are cleared and released from the freeport.


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In line w/ this, the NIRC was amended (Sec 1310 w/c also provided that taxes and charges shall apply to the importation of cigarettes, liquor, wine, etc. On the basis of the said amendment, SBMA issued a Memorandum declaring that all importations of cigars, cigarettes, distilled spirits, fermented liquors and wines into the SBF shall be treated as ordinary importations subject to all applicable taxes, duties and charges, including excise taxes. Respondent companies wrote to the Collector of Customs and the SBMA Administrator requesting for a reconsideration of the directives on the imposition of such. Despite this, they were not allowed to file any warehousing entry for their shipments. Thus, they brought the action before the RTC, w/c ruled in their favour. I: W/n RA 9334 effectively withdrew the tax exemption of respondent companies. R: YES, the companies are NOT exempt from tax. Flowing from the basic precept of constitutional law that no law is irrepealable, Congress, in the legitimate exercise of its lawmaking powers, can enact a law withdrawing a tax exemption just as efficaciously as it may grant the same under Section 28(4) of Article VI of the Constitution (There is no vested right in a tax exemption, more so when the latest expression of legislative intent renders its continuance doubtful.). THUS, Congress can amend Section 131 of the NIRC in a manner it sees fit, as it did when it passed R.A. No. 9334. The rights granted under the Certificates of Registration and Tax Exemption of private respondents are not absolute and unconditional as to constitute rights in esse – those clearly founded on or granted by law or is enforceable as a matter of law. These certificates granting private respondents a “permit to operate” their respective businesses are in the nature of licenses, which the bulk of jurisprudence considers as neither a property nor a property right. 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. While the tax exemption contained in the Certificates of Registration of private respondents may have been part of the inducement for carrying on their businesses in the SBF, this exemption, nevertheless, is far from being contractual in nature in the sense that the nonimpairment clause of the Constitution can rightly be invoked. Lastly, whatever right may have been acquired on the basis of the Certificates of Registration and Tax Exemption must yield to the State’s valid exercise of police power. The said law was passed to curb the practice of taking advantage of tax exemption privileges to smuggle goods.

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Smart Communications, Inc. v City of Davao

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The Tax Code of the City of Davao imposes a tax on businesses enjoying a franchise in the amount of ¾ of 1% of the gross annual receipts for the preceding calendar year. This is based on the income / receipts realized within its territorial jurisdiction, notwithstanding any exemption granted by any law or other special law. SMART filed for declaratory relief, contending that: o Its telecenter in the aforementioned city was exempted from payment of such franchise taxes pursuant to its franchise under RA 7294

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RA 7160 (The Local Government Code) only applies to exemptions already existing at the time of its effectivity and NOT to future exemptions

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NATURE, CONSTRUCTION, APPLICATION AND SOURCES OF TAX LAWS Hilado v CIR

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The power of the City of Davao to impose a franchise tax is subject to statutory limitations such as the “in lieu of all taxes” clause found in Section 9 of R.A. No. 7294 o Such franchise tax imposed by the City of Davao violates the constitutional provision against impairment of contracts. The City of Davao opposed, invoking the power granted by the Constitution to local government units to create their own sources of revenue. TC ruled against Smart, on the ground that tax laws are strictly construed against the taxpayer, and that LGUs are empowered to tax by a valid delegation of legislative power and the direct authority granted to it by the fundamental law, hence not violative of the nonimpairment clause. I: W/n SMART is liable for franchise tax R: YES, SMART is liable. Section 137, in relation to Section 151 of the Local Government Code (RA 7160) allows local governments to impose franchise taxes, while Section 193 thereof withdrew all tax exemption privileges granted to franchises prior to its issuance, except local water districts, cooperatives duly registered under RA No. 6938, non-stock and nonprofit hospitals and educational institutions. Since Smart’s franchise (RA 7294) was granted two months AFTER the issuance of the Local Government Code, its tax exemption privileges are NOT deemed withdrawn by the Local Government Code. However, the phrase “in lieu of all taxes” in RA 7294 must be construed in the context of the whole Act granting the franchise to Smart. Tax statutes, and exemptions granted therein, are construed strictly against the taxpayer and liberally in favor of the Government. In this case, the 3% tax on all gross receipts “in lieu of all taxes” provision in RA 7294 was NOT clear whether it applies to both national and local taxes.


Thus, this provision must be construed strictly against Smart which claims the exemption. Smart has the burden of proving that, aside from the imposed 3% franchise tax, Congress intended it to be exempt from all kinds of franchise taxes - whether local or national. However, Smart failed in this regard. The was also no violation of the non-impairment clause of the Constitution. In fact, aside from the ambiguous “in lieu of all taxes” phrase in the franchise, it also has an express condition that it is subject to amendment, alteration, or repeal.

• •

• • • • •

• •

•

Emilio Hilado filed his income tax return for 1951 with the treasurer of Bacolod City wherein he claimed, among other things, the amount of P12k+ as a deductible item from his gross income pursuant to General Circular V-123 issued by the CIR. (This circular was issued pursuant to certain rules laid down by the Secretary of Finance.) On the basis of said return, an assessment notice demanding the payment of P9k+ was sent to Hilado, who paid the tax in monthly installments. Meanwhile, the Secretary of Finance, through the CIR issued General Circular V-139 which not only revoked and declared void his general Circular V- 123 but laid down the rule that losses of property which occurred during the period of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible in the year of actual loss or destruction of said property. As a consequence, the amount of P12k+ was disallowed as a deduction from Hilado’s gross income for 1951. Consequently, the CIR demanded from him P3k+ as deficiency income tax for said year. When the petition for reconsideration filed by Hilado was denied, he filed a petition for review w/ CTA. CTA affirmed CIR’s assessment, so Hilado filed an appeal w/ the SC. I: W/n CIR’s assessment was correct R: YES, CIR was correct. 1) Assuming that the amount claimed as a loss represents a portion of the 75% of his war damage claim which was not paid, the same would NOT be deductible as a loss in 1951 because, according to Hilado, the last installment he received from the War Damage Commission was in 1950. Thus, deduction could only be made from his 1950 gross income. Also, the amount cannot be considered a “business asset” which can be deducted as a loss because its collection is NOT enforceable as a

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matter of right, but is dependent merely upon the generosity of the US government.

• • • •

• •

•

2) As of the end of 1945, there was absolutely no law under which Hilado could claim compensation for the destruction of his properties during the battle for the liberation of the Philippines. 3) Under the Philippine Rehabilitation Act of 1946, the payments of claims by the War Damage Commission merely depended upon its discretion to be exercised in the manner it may see fit, but the nonpayment of which cannot give rise to any enforceable right. Also, the second Gen circular, w/c nullified the first is consistent w/ the NIRC (Sec. 30), which provides that that losses sustained are allowable as deduction only within the corresponding taxable year. 4) Philippine internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. As a matter of fact, income tax returns were filed during that period and income tax payment were effected and considered valid and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy. 5) The Secretary of Finance is vested with authority to revoke, repeal or abrogate the acts or previous rulings of his predecessor in office because the construction of a statute by those administering it is NOT binding on their successors. Thus, in the present case, when the Commissioner determined in 1937 that the petitioner was not exempt and never had been, it was his duty to determine, assess and collect the tax due for all years not barred by the statutes of limitation. The conclusion reached and announced by his predecessor in 1924 was NOT binding upon him. It did not exempt Hilado from tax. General Circular V-123, having been issued on a wrong construction of the law, cannot give rise to a vested right that can be invoked by a taxpayer. A vested right cannot spring from a wrong interpretation. CivCode also provides that “no vested or acquired right can arise from acts or omissions which are against the law or which infringe upon the rights of others.”

*Misamis Oriental Association of Coco Traders v Department of Finance Secretary Misamis Oriental Association of Coco Traders v. Dept. of Finance Secretary • The NIRC exempts from VAT the sale of agricultural non-food products in their original state if the sale is made by the primary producer or owner of the land from which the same are produced. • The sale made by any other person / entity, like a trader or dealer, is NOT exempt from the tax. • A revenue memorandum circular was issued, reclassifying COPRA into an agricultural non-food product.


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• • •

Misamis Oriental, w/c was engaged in the buying and selling of copra, claimed that the memorandum circular was discriminatory and violative of the equal protection clause because while coconut farmers and copra producers are exempt, TRADERS and DEALERS are NOT, although both sell copra in its original state. I: W/n there was a violation of equal protection. R: NO, it was not violative of EPC The Constitution does not forbid the differential treatment of persons so long as there is a REASONABLE basis for classifying them differently. In this case, there is a material or substantial difference between coconut farmers and copra producers, on the one hand, and copra traders and dealers, on the other. The farmers/ producers PRODUCE and SELL copra, while traders and dealers merely SELL copra. The Constitution does not forbid the differential treatment of persons so long as there is a reasonable basis for classifying them differently.

CIR v CA and ALAHAMBRA • ALHAMBRA INDUSTRIES, INC. was engaged in the manufacture and sale of cigar and cigarette products. • CIR assessed it for deficiency ad valorem tax on the removal of cigarette products from their place of production from Nov 1990 to Jan 1991. • Alhambra filed a protest for the withdrawal and cancellation of proposed assessment. CIR denied its protest stating that the decision was final. • Alhambra requested for a reconsideration but was also denied. It then paid under protest and filed a petition for review with the CTA. • The dispute arose from the discrepancy in the taxable base on which the excise tax is to apply on account of two incongruous BIR Rulings:

o

1) BIR Ruling 473-88 dated 4 October 1988 which excluded the VAT from the tax base in computing the 15% excise tax due

o

This was issued by the Deputy Commissioners to Yebana Tobacco Corporation allowing the said Corp to exclude VAT in the determination of the gross selling price for purposes of computing the ad valorem tax of its cigar and cigarette products in accordance with Sec. 127 of the Tax Code as amended by EO273

o

2) BIR Ruling 017-91 dated 11 February 1991 which included back the VAT in computing the tax base for 15% ad valorem tax.

o

CIR issued this ruling to Insular-Yebana Tobacco Corp. revoking BIR Ruling 473-88 for being violative of Sec.142 of the Tax Code This is the correct interpretation since sec 127 applies in GENERAL TO DOMESTIC PRODUCTS while sec 142 refers specifically to cigar and cigarettes only. Accordingly, sec 142 must prevail over section 127 which is a general provision of law insofar as the imposition of the ad valorem tax on cigar and cigarettes is concerned.

o

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• Alhambra relied on the 1st BIR Ruling as a basis for computing the amount of ad valorem tax.

•

• However, CIR sought to apply the revocation retroactively

to Alhambra’s removals of cigarettes for Nov 1990 to Jan 1991 on the grounds that the 1st BIR Ruling being an erroneous interpretation does NOT confer any vested right as to exempt it from the retroactive application of 2nd Ruling.

• Even if the 1

st

ruling is not erroneous Alhambra still acted in bad faith, which is an exception to the rule on non-retroactivity of BIR Rulings. Alhambra had knowledge that Sec. 142 of the Tax Code was the specific provision applicable to it, yet it applied Sec 127. • CTA ordered CIR to refund to Alhambra the erroneously paid ad valorem tax. • CIR appealed to the CA but CA affirmed the CTA ruling, holding that the retroactive application of BIR Ruling 017-91 CANNOT be allowed since Alhabmra did NOT act in bad faith, nor was it motivated by fraud.

• I: W/n Alhambra’s reliance on a void BIR ruling conferred upon it a vested right

• • • • • •

to apply the same in the computation of its ad valorem tax and claim for tax refund. • R: YES. CIR must refund Alhambra.

•

effect if it would be prejudicial to taxpayers. The only exceptions are: o A) where the taxpayer deliberately omits material facts from his return or any document required by the BIR

•

• Sec. 246 of the Tax Code provides that rulings will NOT have a retroactive o

B) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based or o C) where the taxpayer acted in bad faith • In this case, there was NO convincing evidence that Alhambra’s implementation of the computation mandated by BIR Ruling 473-88 was illmotivated or attended with a dishonest purpose. • In fact, as a sign of good faith, Alhambra immediately reverted to the computation mandated by BIR Ruling 017-91 upon knowledge of its issuance on 11 February 1991. • Also, the failure of Alhambra to consult BIR does not imply bad faith on the part of the former. *CIR v Lingayen Gulf • Lingayen Gulf, an electric power plant operator, was the grantee of a municipal franchise to supply electricity in Pangasinan. It was subject to a 2% franchise tax under the municipal franchise. • The CIR assessed Lingayen a deficiency franchise tax, computed at 5%, based on the rate prescribed by the NIRC, instead of the lower rates as provided in the municipal franchises. • Lingayen requested for a reinvestigation given that instead of incurring a deficiency liability, it made an overpayment of the franchise tax. • This was denied by the CIR so Lingayen appealed to the CTA. • In the meantime, RA 3843 was passed granting Lingayen a legislative franchise to supply electric current to the public, subject to 2% franchise tax.


The CIR claimed that the law was unconstitutional for being violative of the uniformity and equality of taxation clause of the Constitution since other similar franchises were subject to a 5% franchise tax imposed by the Tax Code. CTA dismissed CIR’s claim and ruled that the provisions of RA 3843 should apply. I: W/n RA 3843 violates the rule on uniformity and equality of taxation R: No. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. Uniformity means that all property belonging to the same class shall be taxed alike. The Legislature has the inherent power not only to select the subjects of taxation but to grant exemptions. TAX EXEMPTIONS have never been deemed violative of the equal protection clause. In this case, although Lingayen’s municipal franchises were obtained under Act No. 667 of the Philippine Commission, these original franchises have been replaced by a new legislative franchise, RA 3843. Lingayen’s power plant falls within the class of power plants created by Act No. 3636, as amended by C.A. No. 132 and RA 3843. RA 3843 merely transferred the petitioner's power plant from that class provided for in Act No. 667, until the approval of RA 3843. Thus, the law merely transferred Lingayen’s power plant from its former class to which it belonged. All power plants belonging to this particular class were subject to the same 2% tax and therefore, the rule on uniformity was not violated.

ABS-CBN Broadcasting Corp v CTA

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ABS-CBN was engaged in the business of telecasting local and foreign films acquired from foreign corporations not engaged in trade or business within the Philippines. For these, ABS paid rentals after withholding income tax of 30%of ½ of the film rentals. In so far as the income tax on non-resident corporations is concerned, section 24 (b) of the NIRC, amended by RA 2343 (June 20, 1959) used to provide that for foreign corporations, a tax of 30% on sources of income shall be collected in lieu of other taxes (rents, salaries, wages, dividends, etc.) To implement this, the CIR issued General Circular No. V-334 w/c provided that the local distributor should withhold 30% of ½ of the film rentals paid to the non-resident foreign film distributor and pay the same to this office in accordance with law unless the nonresident foreign film distributor makes a prior settlement of its income tax liability. Pursuant to this, ABS dutifully withheld and turned over to the BIR the amount of 30% of ½ of the film rentals paid by it to foreign corporations until 1968.

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Subsequently, the CIR issued Revenue Memorandum Circular No. 4-71, revoking General Circular No. V-334, and holding that the Gen Circ was "erroneous for lack of legal basis," because "the tax therein prescribed should be based on gross income without deduction whatever," providing that local films distributors and exhibitors shall deduct and withhold 35% of THE ENTIRE AMOUNT payable by them to non-resident foreign corporations. CIR issued against ABS a letter of assessment requiring them to pay deficiency withholding income tax on the remitted film rentals for the years 1965 through 1968 and film royalty as of the end of 1968 in the total amount of about P525k+ ABS requested for a reconsideration and withdrawal of the assessment. However, CIR issued a warrant of distraint and levy over ABS' personal as well as real properties.

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•

The Tax Code, w/ the insertion of RA 6110 provides that any revocation, modification, or reversal of and of the rules and regulations promulgated by the CIR shall not be given retroactive application if the relocation, modification, or reversal will be prejudicial to the taxpayers. The only exceptions are:

• •

•

•

o

a) where the taxpayer deliberately omits material facts from his return or any document required of him by BIR

o

b) where the facts subsequently gathered by BIR are materially different from the facts on which the ruling is based

o

c) axpayer acted in bad faith

It is clear from the foregoing that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive application where to so apply them would be prejudicial to taxpayers. The prejudice to petitioner of the retroactive application of Memorandum Circular No. 4-71 is beyond question. It was issued only in 1971, or three years after 1968, the last year that petitioner had withheld taxes under General Circular No. V-334. The assessment and demand on petitioner to pay deficiency withholding income tax was also made three years after 1968 for a period of time commencing in 1965. ABS was no longer in a position to withhold taxes due from foreign corporations because it had already remitted all film rentals and no longer had any control over them when the new Circular was issued. ABS also does not fall w/in any of the enumerated exceptions.


NOTE: CIR claims, however, that the provision on non-retroactivity is inapplicable in the present case in that General Circular No. V-334 is a nullity because in effect, it changed the law on the matter. CTA was thus correct in concluding that ABS did not acquire any vested right thereunder as the same was a nullity.

Philippine Bank of Communications v CIR

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ABS filed a Petition for Review with the CTA, CTA dismissed. I: W/n CIR can apply General Circular No. 4-71 retroactively and issue a deficiency assessment against petitioner in the amount of P 525k+ as deficiency withholding income tax for the years 1965 to 1968. R: NO. SC ruled in favour of ABS.

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Philippine Bank of Communications (PBCom) filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5M+. The taxes due were settled by applying PBCom's tax credit memos and accordingly, the BIR issued Tax Debit Memo for P3M+ and P1M+, respectively. Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, it reported a net loss of P14M+ and thus declared no tax payable for the year. But during these two years (1985 and 1986), PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes for both 1986 and 1986 (about P200k+ for each of those years). PBCom then requested the CIR, among others, for a tax credit of P5M+ representing the overpayment of taxes in the first and second quarters of 1985. 3 yrs later, PBCom filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 and 1986 (the P200k+ each) Pending CIR’s investigation, PBCom instituted a Petition for Review before the CTA. CTA denied the request for a tax refund or credit (P5M+) given that it was filed beyond the 2-year reglementary period provided for by law. The petitioner's claim for refund in 1986 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year. PBCom argued that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The RM Circular states that overpaid income taxes are NOT covered by the two-year prescriptive period under the Tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten 10 years under Article 1144 of the Civil Code. I: W/n the tax refund should be denied on the ground of prescription, despite PBCom’s reliance on RMC No. 7-85, changing the prescriptive period of 2 years to 10 years.

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R: No. The relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive period set by law. The NIRC states that the taxpayer may file a claim for refund or credit with the CIR w/in 2 years after payment of tax, before any suit in CTA is commenced.

Clearly, the prescriptive period of 2 years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. When the Acting CIR issued RMC 7-85, changing the prescriptive period of 2 years to 10 years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of the NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. Rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter. Art. 8 of the Civil Code recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition.

Moreover, the non-retroactivity of rulings by the CIR is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the CIR. Lastly, a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer.

CIR v Tokyo Shipping Co, Ltd.

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•

A memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same.

POWER TO TAX INVOLVES POWER TO DESTROY

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•

The 2-year prescriptive period should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.

CERTAIN DOCTRINES IN TAXATION

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Tokyo Shipping is a foreign corporation (represented by Soriamont Steamship Agencies in the Philippines) which owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. Mr. Edilberto Lising, the operations supervisor of Soriamont Agency, paid the required income and common carrier's taxes totalling about P107k+ based on the expected gross receipts of the vessel.


• • • • •

Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. NASUTRA and Soriamont mutually agreed to have the vessel sail for Japan without any cargo. Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the charter agreement, Tokyo Shipping instituted a claim for tax credit or refund of P107k+ before CIR. CIR failed to act promptly on the claim, so Tokyo filed a petition for review before CTA. CTA ruled in favour of Tokyo. CIR filed a petition contending that Tokyo had the burden of proof to support its claim of refund, Tokyo failed to prove that it did not realize any receipt from its charter agreement and it suppressed evidence when it did not present its charter agreement. I: W/n Tokyo is entitled to a refund or tax credit for amounts representing pre-payment of income and common carrier's taxes under the NIRC R: YES. CTA decision affirmed. Sec24 (b2) of the NIRC provides that a corporation organized under foreign law but doing business in the Phils shall be taxable upon the total net income derived in the preceding taxable year from all sources within the Philippines, PROVIDED that international carriers shall pay a tax of 2 1/2% on their gross Philippine billings. ("Gross Philippine Billings" include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. The gross revenue realized from the said cargo or mail include the gross freight charge up to final destination.) Pursuant to this, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the Philippines. THUS, before such a tax liability can be enforced, the taxpayer must be shown to have earned income sourced from the Philippines. A claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. The taxpayer has the burden of proof to show that he is entitled to refund. IN THIS CASE, there was sufficient evidence shown by Tokyo that it derived no receipt from its charter agreement with NASUTRA.. Documents presented were the Clearance Vessel to a Foreign Port issued by the District Collector of Customs, Port of Iloilo and the Certification by the Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The correctness of the contents of these documents regularly issued by officials of the Bureau of Customs cannot be doubted as indeed, they have not been contested by the petitioner.

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Taxpayers owe honesty to government just as government owes fairness to taxpayers. The court bewails the unyielding stance taken by the government in refusing to refund the sum of P107,142.75 erroneously prepaid by private respondent. The government delayed its refund for 15 years and thus rendered the refund just worth a damaged nickel. This is not the kind of success the government, especially the BIR, needs to increase its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund without any unreasonable delay what it has erroneously collected. In Roxas v. CTA, the power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

Reyes v Almanzor • JBL, Edmundo and Milagros Reyes are owners of parcels of land in Manila which are leased and occupied as dwelling sites by tenants for monthly rentals not exceeding P300. • In 1971, RA 6359 was passed prohibiting an increase of monthly rentals of dwelling units or of land on which another dwelling is located for one year after effectivity for rentals not exceeding P300 but allowing an increase of rent thereafter by not more than 10%. • The Act also suspended the operation of Article 1673 of the Civil Code (ejectment of lessess). • PD 20 amended RA 6359 by absolutely prohibiting the increase and indefinitely suspending Article 1673. • The Reyeses, thus, were precluded from raising the rentals and from ejecting the tenants. • In 1973, the City Assessor of Manila reclassified and reassessed the value of the properties based on the schedule of market values duly reviewed by the Secretary of Finance. • As it entailed an increase of the corresponding tax rates, the Reyeses filed a memorandum of disagreement with the Board of Tax Assessment Appeals and averring that the reassessments were excessive, unwarranted, unequitable, confiscatory and unconstitutional inasmuch as the taxes imposed exceeded the annual income derived from their properties. • They also argued that the “income approach” should have been used in determining land values instead of the “comparative sales approach” which the assessor adopted. • I: W/n the assessment of the Board was proper • R: NO. SC ruled in favor of Reyeses and board was askesd to make reassessment. • Taxation is equitable when its burden falls on those better able to pay. Taxation is progressive when its rate goes up depenfing on the resources of the person affected. Taxes are uniform when all taxable


•

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•

articles or kinds of property of the same class are taxed at the same rate. The taxing power has the authority to make reasonable and natural classification for purposes of taxation. Laws should operate equally and uniformly, however, on all persons under similar circumstances. Under the Real Property Tax Code (PD 464), property must be appraised at its current and fair market value. The market value of the properties covered by PD 20, thus cannot be equated with the market value of properties not so covered. The property covered by PD 20 has naturally a much lesser market value in view of the rental restrictions. The factors determinant of the assessed value of the properties under the “comparable sales approach” were not presented by the Board/Assessors:

1)

•

• •

that the sale must represent a bonafide arm's length transaction between a willing seller and a willing buyer 2) the property must be comparable property. Nothing can justify their view as it is of judicial notice that for properties covered by P.D. 20 especially during the time in question, there were hardly any willing buyers. As a general rule, there were no takers so that there can be no reasonable basis for the conclusion that these properties were comparable with other residential properties not burdened by P.D. 20. Also, although taxes are the lifeblood of the government and should be collected without unnecessary hindrance, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. In this case, since the Reyeses are burdened by the Rent Freeze Laws (RA 6359 and PD 20), they should not be penalized by the same government by the imposition of excessive taxes they cannot ill afford and would eventually result in the forfeiture of their properties, under the principle of social justice.

*Commissioner of Internal Revenue v. Algue • The Phil. Sugar Estate Development Company (PSEDC) appointed Algue, Inc., a family corporation, as its agent, authorizing it to sell its land, factories, and oil manufacturing process. • Pursuant to this authority, five members of the family corporation formed the Vegetable Oil Investment Corp. and induced other persons to invest in it. • The newly formed corporation then purchased the PSEDC properties. For this sale, PSEDC gave Algue, Inc. a commission of P125,000. • From this amount, Algue Inc. paid the five family members P75,000 as promotional fees. • Algue, Inc. declared this P75,000 as a deduction from its income tax as a legitimate business expense. • The CIR questioned the deduction, claiming that it was not an ordinary, reasonable, or necessary expense and was merely an attempt to evade payment of taxes.

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I: W/n the P75,000 is tax-deductible as a legitimate business expense of Algue, Inc. R: Yes, the P75,000 promotional fee is tax-deductible. Sec. 30 of the Tax Code provides that ordinary and necessary expenses incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered are taxdeductible. However, the burden in proving the validity of a claimed deduction belongs to the taxpayer. In this case, the burden has been satisfactorily discharged by the taxpayer Algue, Inc. Algue, Inc. was able to prove that the promotional fees were not fictitious and were in fact paid periodically to the five family members. Moreover, the amount of the promotional fees was reasonable, considering that the five payees actually performed a service for Algue, Inc. by making the sale of the properties of PSEDC possible. As a result of this sale, Algue, Inc. earned a net commission of P50,000. 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.

saying that for legal compensation to take place, both obligations must be liquidated and demandable.

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Hence, despite the natural reluctance to surrender part of one’s hardearned income, every person who is able to must contribute his share in running the government. The government, for its part, is expected to respond in the form of BENEFITS for general welfare. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary exaction by those in the seat of power.

•

However, it should also be exercised reasonably and in accordance with the prescribed procedure. If it is not, the taxpayer has a right to complain to the courts.

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SET-OFF OF TAXES Philex Mining Corp v CIR • BIR sent a letter to Philex asking it to settle its tax liabilities for 1991 to 1992 . • Philex protested that it has pending claims for VAT input credit/refund for the taxes it paid for 1989 and that the refund should be applied against the tax liabilities. • BIR replied that the pending claims have NOT yet been established so it follows that no legal compensation can take place, hence, the reiteration of the demand for payment. • Philex raised the issue to the CTA. • Pending proceeding in CTA, BIR issued a Tax Credit Certificate 13M which, when applied to the total tax liabilities of Philex of P123M effectively lowered the Philex's tax obligation.

•

Despite the reduction, CTA denied Philex’s petition for review and still ordered Philex to pay the remaining balance of P110M plus interest,


•

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The liquidated debt of the Philex to the government cannot, therefore, be set-off against the unliquidated claim which Philex conceived to exist in its favour. It also invoked the principle that "taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract." Philex appealed to the CA, which denied such appeal and its MR. A few days after the denial of MR, Philex obtained its VAT input credit/refund not only for 1989 to 1991 but also for 1992 and 1994. THUS, Philex contended that the same should off-set its excise tax liabilities since both had already become "due and demandable, as well as fully liquidated” and legal compensation can properly take place. I: 1) W/n legal compensation between the VAT input credit/refund and tax liability could take place- NO 2) W/n the imposition of interest and surcharge is unjustified – NO, it is justified 3) W/n BIR violated Section 106 of the NIRC when it gave the refunds only in 1996 – YES R: 1) Taxes cannot be subject to compensation. Government and the taxpayer are not creditors and debtors of each other. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. National Revenue Code of 1939 provided for offsetting but such provision was dropped in the NIRC of 1997. 2) Imposition of surcharges and interests are justified. The logic of such imposition is the principle that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Tax is that it is compulsory and does not depend upon the consent of the taxpayer. Tax Code of 1977: The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. 3) BIR, however, violated Section 106 of the NIRC. BIR violated the NIRC, which requires the refund of input taxes within 60 days, when it took them 5 YEARS to grant Philex’ tax claim for VAT input credit/refund. Once the claimant has submitted all the required documents it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that government render fair service to the taxpayers. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. BUT although it is admission of the lethargic manner by which the BIR handled Philex's tax claim, the State is not bound by the neglect of its agents and officers.

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Francia v IAC

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Engracio Francia was the registered owner of a residential lot and a 2story house in Pasay City. Subsequently, a 125-sqm portion of Francia’s property was expropriated by the Republic of the Philippines for the sum of P4k+ representing the estimated amount equivalent to the assessed value of the aforesaid portion. This was because of Francia’s failure to pay taxes for 14 years. The property was then sold at public auction pursuant to Section 73 of PD 464 known as the Real Property Tax Code. Fernandez was the highest bidder for the property. Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas. Francia then received a notice of hearing of an LRC Case, where Fernandez sought to cancel Francia’s TCT and issue a new one in his name. Francia thus filed a complaint to annul the auction sale, alleging that: o his tax liability should have been offset with the money paid to him by the government when they expropriated his other property o He was not duly notified of the auction sale o the price at which his property was sold was grossly inadequate with that of the property’s actual value (“shocking to the senses”) Lower court and IAC dismissed the complaint. I: W/n the auction was valid R: YES, it was valid By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279—

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(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other..xxx (3) that the two debts be due.

There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. The government and taxpayer are NOT mutually creditors and debtors of each other. In this case, the tax was due to the city government while the expropriation was effected by the national government.


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Moreover, the amount of P4k+ paid by the national government for the lot was deposited w/ the PNB LONG BEFORE the auction of the remaining property. OTHERS: Francia cannot deny receiving notice of the sale because he IN FACT admitted in his testimony that he received a letter regarding the sale, and it was negligence on his part when he ignored such notice; As a general rule, gross inadequacy of price is not material when the law gives the owner the right to redeem as when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect redemption.

Republic of the Phils v Mambulao Lumber Co • Mambulao Lumber Company owed the Republic of the Philippines a total sum of about P4k+ (plus 6% legal interest from the date of the filing of the complaint) for forest charges covering the period from September 10, 1952 to May 24, 1953.

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The liability was covered by a bond executed by General Insurance & Surety Corporation for the Company in favor of the Republic. The Company did not disput that it did have liabilities totaling about P4k+. HOWEVER, as a defense, it also claimed to have paid to the RP P9k+ for “reforestation charges” from July 1948 to December 1956 and April 1947 to June 1948. These were paid in pursuance of RA 115 w/c provides that there shall be collected, in addition to the regular forest charges provided under the NIRC, the amount of 50 cents on each cubic meter of timber cut out and removed from any public forest for commercial purposes. (purpose: reforestation of water sheds, denuded areas, etc.) The Company contended that since the Republic had not made use of those reforestation charges collected, Republic should refund them, so it requested a refund from the Director of Forestry (that the amt be credited w/ reforestation charges imposed on them) so that the amount if paid could be set-off I: W/n the P9k+ paid by the Company as reforestation charges may be SET OFF with the P4k+ forest charges due them R: NO, they cannot be set-off. 1) There is nothing in the law which requires that the amount collected as reforestation charges should be used exclusively for the reforestation of the area covered by the license of a licensee or concessionaire, and that if not so used, the same should be refunded to him. The amount paid by a licensee as reforestation charges is in the nature of a tax which forms a part of the Reforestation Fund, payable by him irrespective of whether the area covered by his license is reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out the purposes provided for thereunder, namely, the reforestation or afforestation, among others, of denuded areas needing reforestation or afforestation.

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2) Under Article 1278, NCC, compensation should take place when two persons are CREDITORS and DEBTORS of each other. In this case, RP and the Company are NOT mutual creditors and debtors of each other. Said amount are in the coffers of the government as tax collected. Since they are not mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. A claim for taxes is NOT a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or local governmental purposes. Why? Taxes are NOT in the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of the government. Making and enforcing them does NOT require CONSENT of taxpayers.

was that the land would be used for the construction of the Rizal Technological Colleges and Rizal Provincial Hospital.

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TAXPAYER SUIT Anti-Graft League of the Phils v San Juan

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President Marcos issued PD No. 674, establishing the Technological Colleges of Rizal. The PD, among others, directed the Board to provide funds for the purchase of a site and the construction of the necessary structures thereon. Acting upon an authority granted by the office of the President, the Province was able to negotiate with Ortigas & Co., Ltd. (Ortigas) for the acquisition of 4 parcels of land in Ugong Norte, Pasig. The projected construction, however, never materialized because of the decimation of the Province's resources brought about by the creation of the Metro Manila Commission (MMC) in 1976.

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12 yrs later, with the property lying idle and the Province needing funds to propel its 5-years Comprehensive Development Program, the then incumbent Board passed Resolution No. 87-205 authorizing the Governor to sell the same.

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The said property was eventually sold to Valley View Realty Development Corporation (Valley View) for P135M+, where P30M was given as downpayment.

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Because of this, Ortigas filed a case of rescission against the Province because the Province violated the provisions of their contract which


New officials then assumed office and the Board adopted Resolution No. 88-65 which provided for the rescission of the deed of sale between the Province and Valley View on the ground that the sale price was exceedingly low and, thus, prejudicial to the Province. Because of this, Valley View then filed a complaint against the Province for specific performance and damages. (There are now two cases against the board: specific performance and damages by Valley View and rescission of contract by Ortigas) The cases against the Province was resolved by entering into compromise agreements. With Valley View, the Province agreed to return the 30M downpayment. With Ortigas, the Province agreed to reconvey the 4 parcels of land to Ortigas for at P2,250 / sqm. This amount is higher than the market values separately determined by Asian Appraisal, Inc. and the Provincial Appraisal Committee which respectively pegged the price of the subject properties at P1,800 and P2,200/sqm. The Anti-Graft League filed a petition to nullify the agreement as taxpayers with legal standing. I: W/n this was a taxpayer's suit / Does petitioner possess the legal standing to question the transaction entered into by the Provincial Board of Rizal with private respondent Ortigas? R: NO, NOT A TAXPAYER SUIT AND NO LEGAL STANDING. To constitute a taxpayer's suit, two requisites must be met:

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1) that public funds are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed, and

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2) petitioner is directly affected by the alleged ultra vires act.

In this case, disbursement of public funds was only made in 1975 when the Province bought the lands from Ortigas at P110 per square meter in line with the objectives of P.D. 674. The AGL never referred to such purchase as an illegal disbursement of public funds but focused on the alleged fraudulent reconveyance of said property to Ortigas because the price paid was lower than the prevailing market value of neighboring lots. The first requirement, therefore, which would make this petition a taxpayer's suit is absent. As to the 2nd ground (w/n petitioner is directly affected), undeniably, as a taxpayer, AGL would somehow be adversely affected by an illegal use of public money. When, however, no such unlawful spending has been shown, as in the case at bar, AGL, even as a taxpayer, cannot question the transaction validly executed by and between the Province and Ortigas for the simple reason that it is not privy to said contract.

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In other words, AGL has absolutely no cause of action, and consequently no locus standi, in the instant case. The question in standing is whether such parties have "alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult constitutional questions.

Joya v Presidential Commission on Good Government • Mateo A.T. Caparas, then Chairman of PCGG, wrote then President Corazon C. Aquino, requesting her for authority to sign the proposed Consignment Agreement between the Republic of the Philippines through PCGG and Christie's of New York.

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President Aquino, through former Executive Secretary Catalino Macaraig, Jr., authorized PCGG Chairman to sign the Consignment Agreement allowing Christie's of New York to auction off the 82 Old Masters Paintings and antique silverware seized from Malacañang and the Metropolitan Museum of Manila alleged to be part of the ill-gotten wealth of the late President Marcos, his relatives and cronies. Petitioners Joya, etc. filed a petition for Mandamus with Prayer for Preliminary Injunction and/or Restraining Order to enjoin PCGG from proceeding with the auction sale. After the oral arguments, the SC issued a resolution denying the application for preliminary injunction.

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The sale pushed through and the $13M+ proceeds were turned over to the Bureau of Treasury. Petitioners claim that as Filipino citizens, taxpayers and artists deeply concerned with the preservation and protection of the country's artistic wealth, they have the legal personality to restrain respondents from acting contrary to their public duty to conserve the artistic creations as mandated by the 1987 Constitution and R.A. 4846 / The Cultural Properties Preservation and Protection Act. They also anchor their case on the premise that the paintings and silverware are public properties collectively owned by them and by the people in general to view and enjoy as great works of art. They allege that with the unauthorized act of PCGG in selling the art pieces, petitioners have been deprived of their right to public property without due process of law in violation of the Constitution. I: W/n petitioners had legal standing to file the petition R: NO, they did not. "Legal standing" means a personal and substantial interest in the case such that the party has sustained or will sustain direct injury as a result of the governmental act that is being challenged. The term "interest" is material interest, an interest in issue and to be affected by the decree, as distinguished from mere interest in the question involved, or a mere incidental interest.


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Moreover, the interest of the party plaintiff must be personal and not one based on a desire to vindicate the constitutional right of some third and related party. There are certain instances however when this Court has allowed exceptions to the rule on legal standing, as when a citizen brings a case for mandamus to procure the enforcement of a public duty for the fulfillment of a public right recognized by the Constitution, and when a taxpayer questions the validity of a governmental act authorizing the disbursement of public funds. Mandamus Suit: Although action is also one of mandamus filed by concerned citizens, it does not fulfill the criteria for a mandamus suit. A writ of mandamus may be issued to a citizen only when the public right to be enforced and the concomitant duty of the state are unequivocably set forth in the Constitution. In this case, petitioners are not after the fulfillment of a positive duty required of respondent officials under the 1987 Constitution. What they seek is the enjoining of an official act because it is constitutionally infirm. Also, the claim for the continued enjoyment and appreciation by the public of the artworks is at most a PRIVILEGE and NOT a consti right. Taxpayer’s Suit: A taxpayer's suit can prosper only if the governmental acts being questioned involve disbursement of public funds upon the theory that the expenditure of public funds by an officer is MISAPPLIED, which may be enjoined at the request of a taxpayer. Obviously, petitioners are not challenging any expenditure involving public funds but the disposition of what they allege to be public properties. Petitioners even admit that the paintings and antique silverware were acquired from private sources and not with public money.

Lozada v COMELEC

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A petition for mandamus was filed by Jose Mari Lozada and Romeo Igot as a representative suit for and in behalf of those who wanted to participate in the election irrespective of party affiliation. They filed the petition to compel the respondent COMELEC to call a special election to fill up existing vacancies numbering twelve (12) in the Interim Batasang Pambansa. The petition is based on Section 5(2), Article VIII of the 1973 Constitution w/c provides that when a vacancy arises in the (Regular) Batasang Pambansa 18 months or more before a regular election, the COMELEC shall call a special election to be held w/in 60 days after the vacancy occurs to elect the Member to serve the unexpired term.

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Lozada claimed that he is a taxpayer and a bonafide elector of Cebu City and a transient voter of Quezon City, Metro Manila, who desires to run for the position in the Batasan Pambansa. Igot alleges that, as a taxpayer, he has standing to petition by mandamus the calling of a special election as mandated by the 1973 Constitution. COMELEC opposed the petition alleging, substantially, that 1) petitioners lack standing to file the instant petition for they are not the proper parties to institute the action; 2) the Court has no jurisdiction to entertain this petition; and 3) Section 5(2), Article VIII of the 1973 Constitution does not apply to the Interim Batasan Pambansa. I: W/n petitioners as taxpayers and voters may file this instant petition. – NO! WON MANDAMUS may be filed with regard to the appropriation of public fund. – NO R: 1) As taxpayers, petitioners may not file the instant petition, for nowhere therein is it alleged that tax money is being illegally spent. The act complained of is the inaction of the COMELEC to call a special election, as is allegedly its ministerial duty under the constitutional provision above cited, and therefore, involves no expenditure of public funds. It is only when an act complained of, which may include a legislative enactment or statute, involves the illegal expenditure of public money that the so-called taxpayer suit may be allowed. What the case at bar seeks is one that entails expenditure of public funds which MAY BE illegal because it would be spent for a purpose that of calling a special election has no authority either in the Constitution or a statute. 2) As voters, neither have petitioners the requisite interest or personality to qualify them to maintain and prosecute the present petition. The unchallenged rule is that the person who impugns the validity of a statute must have a personal and substantial interest in the case such that he has sustained, or will sustain, direct injury as a result of its enforcement. In this case, the alleged inaction of the COMELEC to call a special election to fill-up the existing vacancies in the Batasan Pambansa, standing alone, would adversely affect only the generalized interest of all citizens. 3) It is obvious that the holding of special elections in several regional districts where vacancies exist, would entail huge expenditure of money. Only the Batasan Pambansa can make the necessary appropriation for the purpose, and this power of the Batasan Pambansa may neither be subject to mandamus by the courts much less may COMELEC compel the Batasan to exercise its power of appropriation.


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From the role Batasan Pambansa has to play in the holding of special elections, which is to appropriate the funds for the expenses thereof, it would seem that the initiative on the matter must come from said body, not the COMELEC, even when the vacancies would occur in the regular not interim Batasan Pambansa. The power to appropriate is the sole and exclusive prerogative of the legislative body, the exercise of which may not be compelled through a petition for mandamus OTHER: Section 5(2), Article VIII of the 1973 Constitution refers to the regular Batasang Pambansa (BP) and not the interim BP. Therefore, their claim to hold special elections to fill in the vacancies in the interim BP will fail for there is no basis for such in the Transitory Provisions of the Constitution governing procedures in the interim BP.

INCOME TAX

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IN GENERAL Madrigal v Rafferty

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Vicente Madrigal and Susana Paterno were married prior to January 1, 1914. The marriage was contacted under the provisions of law concerning conjugal partnerships.

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On February 1915, Vicente Madrigal filed a sworn declaration w/ the CIR showing that his total net income for the year 1914 is P296k.

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Subsequently, Madrigal submitted the claim that the P296k did NOT represent his income for 1914, BUT it was in fact the income of the conjugal partnership, and that in computing and assessing the additional income tax provided for by the Act of Congress of Oct. 3, 1913, the income declared should be divided: ½ from Madrigal and ½ from Paterno. • This question was submitted to the Atty. General, who in an opinion ruled in favour of Madrigal. • The revenue officers were still unsatisfied, so they forwarded this opinion to Washington for a decision by the US Treasury Dept. • The US CIR reversed the opinion of the Atty. General.

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Madrigal paid under protest, then he filed an action in CFI Manila against CIR and Deputy CIR for recovery of P3.7k. alleged to have been wrongfully and illegally assessed and collected by the CIR, under the Income Tax Law. • CIR argued that the taxes imposed by the Income Tax Law are taxes upon INCOME and NOT upon capital and property. The fact that Madrigal’s marriage was under conjugal partnership has no bearing on income considered as income. • The answer of the defendants sets forth the basis of defendants’ stand in the following way: The income of Madrigal and Paterno for the year 1914 was made up of 3 items: 1. 362k – profits made by Madrigal in coal and shipping business 2. 4k – profits made by Paterno in her embroidery business 3. 16k – profits made by Madrigal in pawnshop business

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Gross income (P383k) MINUS general deductions (P86k)= Net income (P296k) I: W/N the additional income tax should be divided into 2 equal parts because of the conjugal partnership existing between them. –NO BGROUND: Income tax law of US extended to Phils was for the purpose of mitigating the evils arising from inequalities of wealth through a progressive scheme of taxation, w/c places a burden on those who are able to pay. Income tax is supposed to reach the earnings of the entire nongovernmental property of the country. Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a FUND; income is a FLOW. CAPITAL is a fund of property existing at an instant of time. INCOME is a flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. CAPITAL is wealth, while INCOME is service of wealth. SC of Georgia: “The fact that property is a tree, income is the fruit; labor is a tree, income is a fruit; capital is a tree, income is a fruit. A tax on income is not a tax on property. Income, as here used can be defined as PROFITS or GAINS. In this case, Susana Paterno has an inchoate right in the property of her husband during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ownership of property acquired as income AFTER SUCH INCOME HAS BECOME CAPITAL. She has NO ABSOLUTE RIGHT to ONE-HALF THE INCOME of the conjugal partnership. As she has no estate and income actually and legally vested in her and entirely distinct from her husband’s property, the income CANNOT properly be considered SEPARATE INCOME of the wife for the purposes of additional tax. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of 8k, granted by law. The higher schedules of the additional tax directed at incomes of the wealthy may not be partially defeated by reliance on the provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect. The only occasion for a wife making a return is where she has income from a sole and separate estate in excess of $3,000, but together they have an income in excess of $4,000, in which the latter event either the husband or wife may make the return but not both. In all instances the income of husband and wife whether from separate estates or not, is taken as a WHOLE for the purpose of the NORMAL TAX. Where the wife has income from a separate estate makes return made by


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her husband, while the incomes are added together for the purpose of the normal tax they are taken SEPARATELY for the purpose of the additional tax. In this case, however, the wife has no separate income within the contemplation of the Income Tax Law.

Fisher v Trinidad • The Philippine American Drug Company (PADC) was a corporation duly organized and existing under Phil law and Fisher was a stockholder in the coproration. • PADC, as result of the business for that year, declared a "stock dividend." The proportionate share of the said stock divided of the Fisher as P24,800, such amount being issued to Fisher. • Later on, Fisher, upon demand of the CIR, paid under protest the sum of about P889 as income tax on the said stock dividend. • CIR demurred to the petition upon the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained, so Fisher appealed. • Fisher cited US SC decisions to sustain his claim where in each of the cases, an effort was made to collect an "income tax" upon "stock dividends" and it was held that "stock dividends" were CAPITAL and NOT income and therefore NOT subject to the "income tax" law. • CIR argued that although in Eisner v Macomber, a "stock dividend is NOT income," said Act No. 2833, in imposing the tax on the stock dividend, does not violate the provisions of the Jones Law, and that US statutes providing for tax on stock dividends are diff from Phil statutes. • In the US (Chapter 463, Act of Congress), the term "dividends" pertains to any distribution made / ordered to be made by a corporation-- stock dividend shall be considered income, to the amount of its cash value. • In the Phils, Act No. 2833, the term "dividends" pertains to any distribution made / ordered to be made by a corporation, . . . out of its earnings or profits accrued since March 1, 1913 and payable to its shareholders, whether in cash or in stock of the corporation, . . . . Stock dividend shall be considered income, to the amount of the earnings or profits distributed. • I: W/n "stock dividends" are "income" and taxable under the provisions of Act 2833 • R: NO, they are not.

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In this case, SC first determined the definition of “stock dividends.” Stock dividends represent undistributed increase in the capital of corporations/ entities for a particular period. They are used to show the increased interest or proportional shares in the capital of each stockholder. In other words, the inventory of the property of the corporation, etc., for particular period shows an increase in its capital, so that the stock theretofore issued does NOT show the real value of the stockholder's interest, and additional stock is issued showing the increase in the actual capital, or property, or assets of the corporation, etc. Black’s Law: An income is the return in money from one's business, labor, or capital invested; gains, profit or private revenue.

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the increased value of the assets of corporation.

Justice Hughes of US SC defined income as cash / its equivalent. IT DOES NOT mean choses in action/ unrealized increments in the value of the property The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation, but ALL THE PROPERTY / CAPITAL of the corp STILL BELONGS to the corp. There has been no separation of the interest of the stockholder from the general capital of the corporation. Thus, a certificate of stock represented by the stock dividend is simply a statement of his proportional interest or participation in the capital of the corporation. The Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in its common acceptation. They DID NOT intend that at a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such property can be reached under the ordinary from of taxation. There is a DISTINCTION between an extraordinary cash dividend, no matter when earned, and stock dividends declared. ECD is a disbursement to the stockholder of accumulated earnings, and the corp parts w/ AL INTEREST on it. SD, on the other hand, involves NO disbursement and parts w/ NOTHING. The stockholder receives NOT an actual dividend but certificate of stock which simply evidences his interest in the entire capital, including such as by investment of accumulated profits has been added to the original capital. They are not income to him, but represent additions to the source of his income, namely, his invested capital. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate indebtedness Justice Wilkin: "A dividend is a corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is declared, these corporate profits belong to the corporation, NOT to the stockholders, and are liable for corporate indebtedness. A careful reading of ACT 2833 will show that, while it permitted a tax upon income, the same provided that income shall include gains, profits, and income derived from salaries, wages, or compensation for personal services, as well as from interest, rent, dividends, securities, etc. Thus, income received as dividends IS taxable as an income but an income from "dividends" is a very different thing from receipt of a "stock dividend." INCOME FROM DIVIDENDS is the actual receipt of profits while STOCK DIVIDEND is the a receipt of a representation of


Limpan Investment Corp v CIR

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Limpan Investment Corporation (Limpan) was a domestic corporation duly registered since 1955. It was engaged in the business of leasing real properties. It principal stockholders were the spouses Lim (Isabelo and Purificacion), who owned and controlled 99% of its total paid-up capital. Isabelo Lim was also the president and chairman of the board. Limpan’s real properties consisted of several lots and buildings, mostly situated in Manila and in Pasay City, acquired from Isabelo and his mother. Limpan duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of about P3k+ and P11k+ respectively, for which it paid the corresponding taxes for such. Later on, the BIR conducted an investigation of the said income tax returns and discovered that Limpan had underdeclared its rental incomes by P20k and P81k during the said years, and had claimed excessive depreciation of its buildings in the sums of P4k+ and P16k+ covering the same period. CIR thus issued its letter-assessment and demand for payment of deficiency income tax and surcharge against Limpan, in the amount of P30k+. Limpan asked CIR for reconsideration of the assessment, but CIR denied. Limpan filed its petition for review before the CTA. During the trial, it came out that Limpan had undeclared more than ½ of the amount (P12,100.00 out of P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and more than 1/3 of the amount (P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported rental income for the year 1957 during the trial. Thus, CTA upheld CIR’s assessment. I: W/n CTA was correct in holding that Limpan had unreported rental incomes for the years 1956 and 1957 R: YES. Limpan admitted through its own witness (Secretary-Treasurer Solis) that it had undeclared more than one-half ½ of the amount found by BIR examiners and more than 1/3 ascertained by the same examiners as unreported rental income for the year 1957, contrary to its original

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claim to the revenue authorities. THUS, it had the burden to of establishing clear and convincing evidence to the contrary, w/c it failed to do.

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The excuse that Isabelo and his mother retained ownership of the lands and only later transferred the ownership to Limpan to justify the alleged verbal agreement whereby they would turn over to Limpan 6% of the value of its properties to be applied to the rentals of the land and in exchange for whatever rentals they may collect from the tenants who refused to recognize the new owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged transferors, or by any document or unbiased evidence. Limpan’s denial and explanation of the non-receipt of the remaining unreported income for 1957 is not substantiated by satisfactory corroboration. ALSO, Isabelo was not presented as witness nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein. The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of Limpan to accept the same, and was not the fault of its tenants; hence, Limpan is deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as rental income in said year, since it is income just the same regardless of its source. Depreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts. Findings of the CTA should not be disturbed.

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Conwi v CTA

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Petitioners Conwi, etc. were Filipino citizens and employees of Procter and Gamble (P&G), Philippine Manufacturing Corporation which is a subsidiary of P&G, Cincinnati, Ohio. In the year 1970 and 1971, they were assigned, for certain periods, to other subsidiaries of P&G outside of the Philippines and were earning US dollars. When they filed their income tax returns, they computed their tax due by applying the dollar-peso conversion rates on the basis of the floating rate ordained by the BIR ruling No. 70-27. The said ruling states that:

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Petitioners from the second case also filed using the same conversion rate but amended their income tax returns in 1973 and used the par


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value of the peso as prescribed in Section 48 of RA 265 in relation to CA 699. The said computation resulted in the alleged overpayments and their claim for refund. Petitioners filed petition for review before the CTA. CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income tax on the dollar earnings of the petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71(free market rate of conversion). Thus, their claims were denied. I: W/n petitioners are entitled to refund R: NO, they are not. Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange transactions because foreign exchange transactions refer to those transactions where there is conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another. They were earning in their assigned nation’s currency and also spending in said currency, and thus, there was no foreign exchange involved. Thus, the Commissioner erred in concluding that their income taxes fell under Central Bank Circular No. 42. Going to the issue of what rate of exchange shall be used, the petitioners contended that since their incomes are not in the form of foreign exchange transactions; that there are no actual inward remittances, they are not included in the coverage of CB Circular No. 289 which provides for specific instances when the par value of the peso shall NOT be the conversion rate used and thus, they claim that the par value of the Philippine peso should be used. HOWEVER, SC agreed w/ Commissioner’s argument that the said CB Circular speaks of receipts of foreign exchange or foreign borrowings and investments, but NOT income tax. Thus, he had to use the prevailing free market rate of exchange in these cases because of the need to ascertain the true and correct amount of income in Philippine peso of dollar earners. The income of the petitioners, as Filipino citizens temporarily residing abroad, is still subject to income tax as stated in Sec. 21 of the NIRC. To implement such, Sec. 338 of the NIRC empowers the Secretary of Finance to “promulgate all needful rules and regulations” to effectively enforce its provisions. Thus, Revenue Memorandum Circ. Nos. 7-71 and 41-71 were promulgated to prescribe a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. These circulars were validly promulgated and are presumed to be valid until revoked by the Secretary of Finance himself. Thus, the petitioners were correctly taxed by the Commissioner.

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Since they have already paid their 1970 and 1971 income taxes under the uniform rate of exchange prescribed by the said circulars, there is no reason for the Commissioner to refund them of any taxes. NOTE: Income = an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment; cash or its equivalent; a flow of the fruits of one’s labor General Principles SEC. 23. General Philippines. –

Principles

of

Income

Taxation

in

the

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Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. C.

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Income tax on individuals

Definitions

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Resident citizens and resident aliens Sec 22 (F) The term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof. Garrison v CA


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Petitioners Garrison, etc . were US citizens employed in the US Naval Base in Olongapo. They received separate notices from Ladislao Firmacion, District Revenue Officer stationed at Olongapo City, informing them that they had not filed their respective income tax returns for the year 1969, as required by Section 45 of the NIRC, and directing them to file the said returns within 10 days from receipt of the notice. Petitioners refused to file their income tax returns, claiming that they are NOT resident aliens but only special temporary visitors. They also claimed to be exempt by virtue of the US-RP Military Bases Agreement. CFI however found the petitioners guilty of violating Section 45 of the NIRC. This was affirmed by CA, ruling that "physical or bodily presence" in the country is sufficient by itself to qualify the petitioners as resident aliens despite the fact that they were not "residents" of the Philippines immediately before their employment by the US Government at Subic Naval Base and that their presence during the period concerned was dictated by their respective work as employees of the US Naval Base. I: W/n petitioners are resident aliens, hence not exempt from Section 45 of the NIRC R: YES, they are. Thus, they are not exempt from tax. Sec 45 NIRC provides that an alien residing in the Phils who has a gross income of at least P1,800 for the taxable year is required to file an income tax return. This is regardless of whether gross income was derived from sources w/in or outside the Phils. This provision is also contained in the Military Bases Agreement between the Phils and US, w/c provides that no national of the US serving / employed in the Phils in connection w/ the construction, maintenance, etc of bases shall be liable to pay income tax, EXCEPT for income derived from PHILIPPINE SOURCES / sources other than US sources. In this case, the petitioners fall within the letter of the codal that an “alien residing in the Philippines” is obliged “to file an income tax return.” None of them may be considered a non-resident alien, “a mere transient or sojourner,” who is not under any legal duty to file an income tax return under the Philippine Tax Code. This is made clear by Revenue Regulations No. 2 of the Department of Finance (Feb 1940) w/c provides that an alien actual present in the Philippines who is not a mere transient or sojourner IS a resident of the Philippines for purposes of income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. Also, looking at the Bases Agreement, it is clear that for American nationals residing in the country may be relieved of the duty to pay income tax for any given year, it is incumbent on them to show BIR

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that in that year they had derived income exclusively from their employment in connection with the US bases, and none whatever “from Philippine sources or sources other than the US sources.” Non-resident citizens (E) The term "nonresident citizen" means: (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. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident 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. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. RR 1-79 (January 8, 1979) – di raw mahanap? RR 5-01 (July 31, 2001) – see separate doc (from Greta) BIR Ruling 33-00 (Sept 5, 2000)

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phrase "most of the time" shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year. (Sec. (2)(c), Revenue Regulations No. 1-79) The same exemption applies to an overseas contract worker but as such worker, the time spent abroad is not material for tax exemption purposes. All that is required is for the worker's employment contract to pass through and be registered with the Philippine Overseas Employment Agency (POEA). (BIR Ruling No. 033-2000 dated September 05, 2000)

Non-resident aliens engaged in business in the Philippines Sec. 22 (G) The term "nonresident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof. Sec. 5 & 6, RR 2 – di raw mahanap ? Minimum wage earner Added by RA 9504 on June 17, 2008: Sec 22. (GG) The term “statutory minimum wage” earner shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE) (HH) The term “minimum wage earner” shall refer to a worker in the private sector 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/ she is assigned. Dependent Sec 35 (B), Tax Code - Additional Exemption for Dependents.

INCOME TAX; Overseas Contract Worker - Section 23(C) of the Tax Code of 1997 provides that an individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines. Corollary thereto, Section 22(E)(3) of the same Code provides that 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. Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sourced income for being a non-resident citizen or for being an overseas contract worker (CW). All employees whose services are rendered abroad for being seconded or assigned for at least 183 days may fall under the first category and are therefore exempt from payment of Philippine income tax. The


There shall be additional exemption of P25,000 for each dependent NOT exceeding 4. The additional exemption for dependents shall be claimed by only ONE of the spouses in the case of married individuals. In case of legally separated spouses, additional exemptions may be claimed ONLY by the spouse who has CUSTODY of the children / children: PROVIDED, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed. For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and

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not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

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*income tax notes  see kinds of income tax…

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• • • • • PERSONAL AND ADDITIONAL EXEMPTIONS Pansacola v CIR


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Carmelino F. Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5,950. In it, he claimed the increased amounts of personal and additional exemptions under Sec 35 of the NIRC, although his certificate of income tax withheld on compensation indicated the lesser allowed amounts on these exemptions. Thus, he claimed the P5k+ refund w/ BIR, but BIR denied. CTA also denied his claim, saying it would be absurd to allow the deduction from a taxpayer’s gross income earned on a certain year of exemptions availing on a different taxable year. Pansacola sought reconsideration, but it was denied. CA also denied his petition, ruling that the NIRC took effect on January 1, 1998, thus the increased exemptions were effective only to cover taxable year 1998 and CANNOT be applied retroactively. I: W/n the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, could be availed of for the taxable year 1997 (thus making Pansacola entitled to refund) R: NO! Personal and additional exemptions under Section 35 of the NIRC are fixed amounts to which certain individual taxpayers (citizens, resident aliens) are entitled. Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers (Sec 35, A and B). The NIRC (Sec 75, D) provides that personal and additional exemptions shall be determined in accordance with the main provisions in Title II, NIRC . The NIRC defines "taxable income" as the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. (Sec 31) On the other hand, "taxable year" means the calendar year, upon the basis of which the net income is computed under Title II of the NIRC (Sec 22, P). Moreover, the taxable income of an individual shall be computed on the basis of the calendar year (Sec 43) in which they are "paid or accrued" or "paid or incurred” (Sec 45). Therefore, the income subject to income tax is the taxpayer’s income as derived and computed during the CALENDAR YR, his taxable year. (Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and Sections 43, 45 and 79 (H)) CLEARLY, what the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and NOT at the time the return is filed and the tax due thereon is paid.

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The NIRC (Sec 35 C) allows a taxpayer to still claim the corresponding full amount of exemption for a taxable year, e.g. if he marries, has additional dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry, turn 21 years old; or become gainfully employed. It is as if the changes in his or his dependents’ status took place at the close of the taxable year. Consequently, his correct taxable income and his corresponding allowable deductions had already been determined as of the end of the calendar year.

M.E. Holdings Corp v CIR & CTA

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In the case of petitioner, the availability of the aforementioned deductions if he is thus entitled, would be reflected on his tax return filed on or before the April 15, 1999 as mandated by Section 51 (C) (1).

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Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual taxpayer’s gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999.

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The NIRC made NO REFERENCE that the personal and additional exemptions shall apply on income earned before January 1, 1998. OTHERS: Petitioner’s reliance in Umali is misplaced. In Umali, SC noted that despite being given authority by the NIRC (Sec 29) to adjust these exemptions, no adjustments were made to cover 1989. RA 7167 is entitled "An Act Adjusting the Basic Personal and Additional Exemptions Allowable to Individuals for Income Tax Purposes to the Poverty Threshold Level, Amending for the Purpose Section 29, Paragraph (L), Items (1) and (2) (A), of the National Internal Revenue Code, As Amended, and For Other Purposes." Thus, the adjustment provided by RA 7167 effective 1992, should consider the poverty threshold level in 1991, the time it was enacted. And we observed therein that since the exemptions would especially benefit lower and middle-income taxpayers, the exemption should be made to cover the past year 1991. To such an extent, Rep. Act No. 7167 was a social legislation intended to remedy the non-adjustment in 1989 (legislative intent). HOWEVER, in this case, there is NOTHING in the NIRC that expresses any such intent. It is not a social legislation. At the time petitioner filed his 1997 return and paid the tax due thereon in April 1998, the increased amounts of personal and additional exemptions in Section 35 were not yet available. It has NOT YET accrued as of December 31, 1997, the last day of his taxable year. Petitioner’s taxable income covers his income for the calendar year 1997. The law cannot be given retroactive effect because nothing in the law provides for such. Personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken.


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RA 7432, otherwise known as An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes was passed on April 23, 1992. It granted, among others, a 20% sales discount on purchases of medicines by qualified senior citizens. In April 15, 1996, petitioner M.E. Holding Corporation (M.E.) filed its 1995 Corporate Annual Income Tax Return, claiming the 20% sales discount it granted to qualified senior citizens. M.E. treated the discount as deductions from its gross income purportedly in accordance with Revenue Regulation (RR) 2-94, Section 2(i) of the BIR issued in August 23, 1993 w/c defines TAX CREDIT as the amount representing the 20% discount granted to senior citizens (for establishments relating to restos, drugstores, theaters, etc.) – the said discount shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes. ME claimed deductions amounting to about P600k+ but later filed the RETURN under PROTEST, arguing that the discount to senior citizens should be treated as tax credit under Sec. 4(a) of RA 7432, and NOT as mere deductions from ME’s gross income as provided under RR 2-94. Sec 4, RA 7432 states that senior citizens shall be entitled to a 20% discount on establishments (relative to transporation, hotels, meds, etc.), provided that private establishments may claim the cost as tax credit (NOTE, but not in casea tax credit is a recognition of partial payment already made towards taxes due) Subsequently, ME sent BIR a letter-claim stating that it overpaid its income tax because of BIR’s erroneous interpretation of Sec. 4(a) of RA 7432. Due to BIR’s inaction, ME filed an appeal before the CTA. CTA decided in favor of ME granting its claim for refund partially (P122k+), representing overpaid income tax for 1995. CTA said that the 20% sales discount granted to qualified senior citizens should be treated as tax credit and NOT as a deductible item from gross income / sales, as pointed out by RA 7432. RA 7432 is a law w/c prevails over an administrative issuance such as RR 2-94. Grant was partial because ME failed to support the rest of the claimed discount w/ corresponding cash slips. ME filed an MR attributing its failure to submit the cash slips to the inadvertence of its independent auditor, and the court should have accepted other evidence presented such as special record books. It also argued that the tax credit should be based on the actual discount and not on the acquisition cost of the medicines.

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treatment for sales discount purchases of qualified senior citizens of medicines.

CTA denied the MR, applying the CA ruling in CIR v. Elmas Drug Corporation where the term “cost of discount” pertained only to DIRECT ACQUISITON COST, excluding administrative and other incremental costs.

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CA on appeal agreed w/ CTA on this point. It also said that claims for refund, being in the nature of a claim for exemption, should be construed in strictissimi juris against the taxpayer. ME thus elevated case to SC.

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I: 1) W/n lower courts erred in not appreciating other documents proving the amt of discounts granted to senior citizens (other than the cash slips) – NO, lower courts were correct

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Said law provides that senior citizens shall be entitled to a 20% discount on establishments and the establishments may claim discounts as tax deduction based on the net cost of the goods sold or services rendered. THUS, starting taxable year 2004, the 20% sales discount granted by establishments to qualified senior citizens is to be treated as tax deduction, no longer as tax credit. THUS, CIR ordered to issue a tax credit certificate in favor of ME amounting to P151, 201.71

2) W/n the term “cost” under Sec4A of RA 7432 is equivalent ONLY to ACQUISITION COST – NO, ME is entitled to the FULL amount of sales discount, not just to acquisition cost R: 20% sales discount may be claimed as a TAX CREDIT, per RA 7432. 1) Findings of fact of the TC, particularly when affirmed by the CA, are binding upon the SC, unless there is strong evidence to merit otherwise. While it may be true that the authenticated special record books yield the same data found in the cash slips, they cannot be considered by the courts to corroborate pieces of evidence that have, in the first place, been disallowed. M.E. offered the disallowed cash slips as evidence only after the CTA had rendered its assailed decision. Also, proofs presented entitling a taxpayer to an exemption must be STRICTLY scrutinized. 2) Bicolandia Drug Corporation v. CIR: the term “cost” as found in RA 7432 was interpreted by SC to mean the 20% discount extended by a private establishment to senior citizens in their purchase of medicines. SC also said that GOV should FULLY SHOULDER the cost of the sales discount granted to senior citizens. Thus, the CA decision construing the word “cost” as the acquisition cost of medicines was REVERSED and SET ASIDE. Accordingly, M.E. is entitled to a tax credit equivalent to the actual 20% sales discount it granted to qualified senior citizens. HOWEVER, SC did NOT agree w/ lower courts on what ME is entitled to. RA 7432 expressly provides that the sales discount may be claimed as TAX CREDIT, not as tax refund. In this case, ME originally prayed for a tax refund for its tax overpayment for 1995. The CTA and the CA granted the desired refund, albeit at a lower amount due to their interpretation, erroneous as it turned out to be, of the term “cost.”ﾝ It must be noted that on Feb 26, 2004, RA 9257, or The Expanded Senior Citizens Act of 2003, amending RA 7432, was signed into law, ushering in, upon its effectivity on March 21, 2004, a new tax


J. Income Tax on Resident Foreign Corporations BRANCH PROFIT REMITTANCE TAX Bank of America NT & SA v CA

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Bank of America was a foreign corporation duly licensed to engage in business in the Philippines. It paid 15% branch profit remittance tax on profit from its regular banking unit operations (about P7M+) and on profit from its foreign currency deposit unit operations (about P445k+). The tax was based on net profits after income tax w/o deducting the amount corresponding to the 15% tax. Later, Bank of America claimed a refund from the BIR of the portion of payment corresponding to the 15% branch profit remittance tax, given that the tax should have been computed on the basis of profits ACTUALLY remitted, and NOT on the amount BEFORE profit remittance tax. CTA upheld petitioner bank in its claim for refund, but CA set aside CTA decision.

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I: W/n CA was correct in reversing CTA’s decision (what is the correct tax base for the BRANCH profit remittance tax?) – NO, CTA was correct. R: CTA was correct; bank can claim refund because tax base should be the PROFIT remitted abroad, NOT that w/c is applied for. What is applicable is still Rev Ruling of Jan 21, 1980. Nothing in the law indicates that the 15% tax on branch profit remittance is on the total amount of profit to be remitted abroad which shall be collected and paid in accordance with the tax withholding device provided in Sections 53 and 54 of the Tax Code. The Tax Code provides that "ANY profit remitted abroad by a branch to its head office shall be subject to a tax of 15%." NOWHERE is there said of "base on the total amount ACTUALLY APPLIED for by the branch with the Central Bank of the Philippines. The term "any profit remitted abroad" can only mean such profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is commonly and popularly accepted and understood. In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount SENT ABROAD, and the law (then in force) calls for nothing further. The taxpayer is a single entity, and it should be understandable if, such as in this case, it is the local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government. The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latter's shares of stock are owned by such foreign corporations.

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Burroughs Ltd was a foreign corporation doing business in the Philippines w/ a branch in Makati. In 1979, Burroughs applied with the Central Bank for authority to remit their branch profits to their parent company abroad amounting to P7.6M. It paid the 15% branch profit remittance tax based on the prior amount (P1.147M) but actually remitted to the head office only approximately P6.5M: * amount applied for (P7.6M) – branch profit (15% of 7.6M) = 6.5M They filed a claim for a tax refund, saying that the 15% remittance tax should have been based on the AMOUNT ACTUALLY REMITTED and NOT the amount BEFORE actual remittance. The tax should have amounted to P974,999.89. The CTA agreed with Burroughs Limited and ordered the CIR to issue a tax credit in their favor.


I: W/n the tax base is the amount applied for remittance or the profit actually remitted after deducting the 15% profit remittance tax- WHAT IS ACTUALLY REMITTED W/N Burroughs Limited is entitled to the tax refund -YES, THEY ARE R: NIRC Sec 24 provides that any profit remitted abroad by the branch to its head office shall be subject to a tax of 15%. Based on this, the 1980 BIR Ruling also provided (c/o Comnissioner Plana) that the 15% would be imposed on the branch profits actually remitted and not on the total branch profits out of which the remittance is to be made. In the present case, the CIR argues that the 1980 BIR Ruling was superseded by 1982 Memorandum Circular No. 8-82 (March 17, 1982) which states that the tax will be based on the profit remittance actually applied for because the tax is collected at the source. However, the court ruled that the branch profits were actually remitted in 1979, making the applicable interpretation that of the 1980 BIR Ruling and NOT the 1982 Memorandum Circular. Sec. 327 of the NIRC states that rulings cannot be given retroactive effect if they would cause prejudice to the taxpayer, except in the following exceptions:

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CIR v Burroughs Ltd

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CIR filed a petition w/ the SC to determine the appropriate tax base to be used in computing the 15% branch profit remittance tax.

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a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or

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(c) where the taxpayer acted in bad faith. In this case, making the 1982 Memorandum Circular retroactive would prejudice Burroughs Limited, and they do not fall into any of the exceptions of Sec. 327. Applying the BIR ruling, Burroughs was correct in claiming it made an overpayment, so the remittance tax should be computed as follows: Profits actually remitted (P6.5M) * remittance tax rate (15%) = P970k+ NOTE: GLENN says that Sir said there's something wrong with this case. It's a double application of the 15% -- you apply 15% to the branch profit and when you get the sum, you still apply the remittance tax rate

Compania General Tobacos de Filipinas v CIR – CTA Case • Compania was a foreign corp doing business in the Phils through a branch office.

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It paid 15% branch profit remittance and later claimed a refund for overpayment. Compania contended that the correct tax base for computing the branch profit remittance tax should be the profit ACTUALLY remitted abroad net of income already subjected to final tax. To support its contention, Compania brought to the attention CIR v vs. Burroughs in Jan 21, 1980 w/c provides that 15% remittance tax should be imposed on amt ACTUALLY remitted. CIR on the other hand contends that the case of Burroughs is not applicable to the instant case because of Revenue Memorandum Circular No. 8-82, dated March 17, 1982, which states that since the "tax is imposed and collected at source, necessarily the tax base should be the amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad." As the latter ruling seems to have given rise to some misconception that it modified BIR Ruling No. 016-79 with respect to the manner of computation of the 15% branch profit remittance tax, this Office issued a clarificatory ruling on October 23, 1981 explaining — The above ruling (of January 21, 1980) merely EMPHASIZED the distinction between the total branch profit which is remittable and that portion of the branch profit actually remitted without deduction on account of the tax to be paid. The phrase "any profit remitted abroad" should be construed to mean the profit to be remitted. Hence, there must be an actual remittance, as distinguished from profit which is remittable. EXAMPLE: If the total branch profit is P115k but the amount to be remitted is P100k, then tax base should be P100k. Moreover, the 15% profit remittance tax imposed by Section 24 (b)(2) of the Tax Code is an income tax, it is therefore clear that the same is non-deductible from the gross (profit) income. Inasmuch as the tax is an exaction on profit realized for remittance abroad, the deduction thereof as an expense is not sustained by law nowhere in Section 30 of the Tax Code is it provided that the same is deductible. Besides deductions from gross income are masters of legislative grace, what is not expressly granted by the law is deemed withheld. Considering that the 15% branch profit remittance tax is imposed and collected at source, necessarily the tax base should be the amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad. It is desired that this Circular be given as wide publicity as possible. Remitted = refers to the total branch profits w/c would be sent abroad and NOT total profits of the branch (not all of w/c need to be sent abroad) THUS, the company is entitled to a refund or tax credit in the amount of P152,690.61 corresponding to overpaid branch profit remittance taxes during the years from 1981 to 1983. As to the 1984 and 1985 branch profit remittance taxes, no refund or tax credit is due the petitioner since the latter did not present any proof of passive income it received during the period.


K. Income Tax on Non-resident Foreign Corporations CIR v SC Johnson and Son, Inc.

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SC Johnson and Son, Inc., a domestic corporation (DC), entered into a license agreement with the SC Johnson and Son, USA, a non-resident foreign corporation (NRFC), where SC Johnson was granted the right to use, among others, the trademark, patents and technology owned by the NRFC. In return, the DC obliged to pay SC Johnson USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid to the Bureau of Internal Revenue (BIR). Subsequently, the DC claimed from the BIR a refund of overpaid withholding tax on royalties arguing that the preferential rate of 10% (instead of 25%) should apply to the respondent because royalties paid by it to SC Johnson USA is only subject to 10% withholding tax PURSUANT TO THE MOST FAVORED CLAUSE of the RP-US Tax Treaty in relation to the RP-Germany Tax Treaty. The RP-US Tax Treaty provides that:

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Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. However, the tax imposed by that Contracting State shall not exceed: In the case of the United States, 15% of the gross amount of the royalties, and in the case of the Philippines, the least of 25% of the gross amount of the royalties, 15% of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and The lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State.

The RP-Germany Tax Treaty provides that such royalties may also be taxed in the Contracting State in which they arise, and according to the of that State, but the tax so charged shall not exceed 10% of the gross amount of royalties from the use of a patent, trademakrk, etc. The RP-West Germany Tax Treaty also allows tax credit of 20% of the gross amount of such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 to 15% under such treaty. I: W/N SC Johnson USA is entitled to the “most favored nation” tax rate of 10% on royalties as provided in the RP-US Tax Treaty in relation to the RP-Germany Tax Treaty

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R: NO. The concessional tax rate of 10% provided for in the RP-Germany Tax Treaty should apply if the tax imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean that respondent SC Johnson must proved that the RPUS Tax Treaty grants similar tax reliefs to residents of the US in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. The RP-US and RP-Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty expressly allows crediting against income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid. The purpose of the most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the most favored among other countries. It is intended to establish the principle of equality of international treatment providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in eh tax treaty under which the taxpayer is liable. Both Articles 13 of the RP-US Tax Treaty and Article 12 of the RPGermany Tax Treaty speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate of US firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. THE SIMILARITY IN THE CIRCUMSTANCES OF PAYMENT OF TAXES IS A CONDITION FOR THE ENJOYMENT OF MOST FAVORED NATION TREATMENT PRECISELY TO UNDERSCORE THE NEED FOR EQUALITY OF TREATMENT. RP-US Tax Treaty DOES NOT GIVE A MATCHING CREDIT OF 20% FOR THE TAXES PAID TO THE PHILIPPINES ON ROYALTIES AS ALLOWED UNDER the RP-West Germany Tax Treaty, SC Johnson cannot be deemed entitled to the 10% granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. Tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming exemption. The burden of proof is upon him who claims exemption in his favor and he


must be able to justify his claim by the clearest grant of organic or statute law. SC Johnson is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RPWest Germany Treaty.

Marubeni v CIR • Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. • AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. These taxes were paid by AG&P to the BIR as evidenced by Central Bank Receipts.

•

Petitioner, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.

•

In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled that the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as amended. • Petitioner claimed for the refund or issuance of a tax credit "representing profit tax remittance erroneously paid on the dividends remitted by AG&P to the head office in Tokyo. • Commissioner of Internal Revenue denied petitioner's claim for refund/credit. The Court of Tax Appeals affirmed. Hence, the instant petition for review. • It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni Japan is likewise a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977. • Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign corporation and not engaged in trade or business in the Philippines, is subject to tax on income earned from Philippine sources at the rate of 35 % of its gross

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o

income under Section 24 (b) (1) of the same Code but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded between the Philippines and Japan. Thus, taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance tax totals (sic) 25 %, the amount refundable offsets the liability, hence, nothing is left to be refunded.

•

I: WON Marubeni Japan is a resident or a non-resident foreign corporation under Philippine laws. • R: YES • The alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There can be no other logical conclusion considering the undisputed fact that the investment (totalling 283.260 shares including that of nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that petitioner, having made this independent investment attributable only to the head office, cannot now claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %.

•

But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a nonresident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate imposed by the PhilippineJapan Tax Convention pursuant to Article 10 (2) (b).

o

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To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad." Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as reflected in the phrase "shall not exceed." This means that any tax imposable by the contracting state concerned should not exceed the 25 % limitation and that said rate would apply only if the tax imposed by our laws exceeds the same. In other words, by reason of our bilateral negotiations with Japan, we have agreed to have our right to tax limited to a certain extent to attain the goals set forth in the Treaty. Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980 o Petitioner, being a non-resident foreign corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines. [Section 24 (b) (1)].


•

However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation. It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.

N.V. Reederij “Amsterdam” and Royal Interocean Lines v CIR

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M.V. Amstelmeer and M.V. "Amstelkroon”, vessels of N.V. Reederij "Amsterdam" (NVRA), called on Philippine ports to load cargo to be shipped to foreign destinations. The freight fees were paid abroad in the amount of US$98,175.00 in 1963 for the former and US$137,193.00 in 1964 for the latter. Royal Interocean Lines (RIL) acted as husbanding agent for the vessels for a fee or commission. No income tax appears to have been paid by NVRA on the freight receipts. The CIR assessed NVRA’s deficiency income taxes as "a non-resident foreign corporation not engaged in trade or business in the Philippines” under Section 24 (b) (1) of the then Tax Code. On the other hand, RIL, on the assumption that NVRA is a foreign corporation engaged in trade or business in the Philippines, filed an income tax return in the amount of ₱1,835.52 and ₱9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e) of the NIRC and Section 163 of Revenue Regulations No. 2, and computed at the exchange rate of ₱2.00 = $1.00. Both NVRA and RIL filed a protest against the CIR’s assessment, which was denied. On appeal to the Court of Tax Appeals, the assessments were modified by eliminating the 50% fraud compromise penalties imposed upon petitioners. A motion for reconsideration was filed but it was denied by the court. I: W/n NVRA, a foreign corporation not having any office or place of business in the Philippines, be considered, for tax purposes, as a foreign corporation not engaged in trade or business in the Philippines (non-resident corporation) OR a foreign corporation engaged in trade or business in the Philippines (resident corporation) R: NVRA is a foreign corporation not authorized or licensed to do business in the Philippines.

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In fact, it only made two calls in Philippine ports (1963 and 1964). For a foreign corporation to be considered engaged in trade or business in the Philippines for taxation purposes, its business transactions in the country must be continuous, and not casual, as in this case. The then Tax Code (and the present NIRC) taxes foreign corporations on their income only from sources within the Philippines (domestic corporations are taxed on their income from sources within and outside the Philippines). A resident corporation (a foreign corporation doing business in the Philippines) is permitted to deductions from gross income but only to the extent connected with income earned in the Philippines pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e) of the Code. On the other hand, a non-resident corporation (a foreign corporation not doing business in the Philippines) is taxable on income from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities Compensations, remunerations, emoluments, or other fixed or determinable annual or periodical or casual gains, profits and income and capital gains"

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• • • •

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Since NVRA is a non-resident foreign corporation, organized and existing under the laws of The Netherlands with principal office in Amsterdam and not licensed to do business in the Philippines, the latter provision should apply.

•

This means that NVRA should be taxed at the rate of 35% of its gross income regardless of its amount. (A resident corporation is taxed at a rate of 25% upon the amount but which taxable net income does not exceed ₱100,000.00, and 35% upon the amount but which taxable net income exceeds ₱100,000.00.)

The Manila Wine Merchants, Inc. v CIR

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•

The tax is 30% (now 35%) of such gross income pursuant to Section 24 (b) (1) of the then Tax Code.

L. Improperly Accumulated Earnings Tax (IAET)

•

Wack Golf and Country Club. Wine Merchants also acquired USA Treasury Bills valued at around P347k

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Manila Wine Merchants, which was organized in 1937, was engaged in the importation and sale of whiskey, wines, liquor, and distilled spirits. Its original paid up capital was P500k. At one point, they reduced their capital to P250k with the approval of the SEC but this reduction was never implemented. When business began to flourish, they increased their capital to P1M again with SEC approval in 1958. Wine Merchants invested in several companies including Acme Commercial Co. Union Insurance of Canton, and bought shares in Wack


The CIR examined the books of Wine Merchants and found that it had unreasonably accumulated a surplus of P428k from 1947-1957 in excess of the reasonable needs of business subject to the surtax of 2% imposed by Section 25 of the Tax Code. CIR then demanded payment for the Improperly Accumulated Earnings Tax (IAET). Wine Merchant appealed to the Court of Tax Appeals (CTA). CTA ruled that the purchase of shares in Wack Wack, Union Insurance, and Acme Commercial were harmless and not subject to 25% surtax. However, the purchase of US T-Bills was in no way related to the business of importing and selling wines and ordered Wine Merchants to pay IAET on the T-Bills. Wine Merchants appealed. They contend that it will be used to finance their importation, a dollar reserve would be useful in meeting urgent orders of customers, and the money will be used for future expansion by buying its own lot and office building. I: W/n the investment of the US Treasury Bills should be considered an investment in unrelated business. R: YES, it is unrelated. “Reasonable needs” means the immediate needs of the business. If the corporation cannot prove this, then its not an immediate need. Also, American cases have held that investment of earnings of a corporation in stock securities of an unrelated business usually indicates an accumulation beyond the reasonable need of the business. To determine the “reasonable needs” of the business in order to justify an accumulation of earnings, the US Courts have developed the immediacy test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it was generally held that if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business and the penalty tax would apply. The controlling intention of the taxpayer is that which is manifested AT THE TIME of accumulation and NOT subsequently declared intentions which are merely the product of afterthought. A speculative and indefinite purpose will not suffice.

CIR v Tuason

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In 1981, CIR assessed Antonio Tuason, Inc. 25% surtax on unreasonable accumulation of surplus for the years 1975 to 1978 by virtue of Section 25 of the Tax Code, which levies an additional tax on corporation improperly accumulating profits or surplus. CIR based his determination on the ground that:

a.

Antonio Tuason, Inc. was a mere holding or investment company for the corporation did not involve itself in the

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development of subdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its income mostly from interest, dividends and rental realized from the sale of realty. b. 99.99% in value of the outstanding stock of Antonio Tuason, Inc., is owned by Antonio Tuason himself.

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CIR "conclusively presumed" that when the corporation accumulated (instead of distributing to the shareholders) a surplus of over P3 million from its earnings in 1975 up to 1978, the purpose was to avoid the imposition of the progressive income tax on its shareholders.

Tuason Inc. protested the assessment on the 25% surtax on the ground that the accumulation of surplus profits during the years in question was solely for the purpose of expanding its business operations as real estate broker (surplus profits set aside to build sufficient capital to construct an apartment building, condo unit, etc). It DENIED that its purpose was to evade payment. However, it was found out that the corporation did not really use up its surplus profits. It allegation that P1.5M+ was spent for the construction of an apartment building and P1.7M+ for the purchase of a condominium unit in Urdaneta Village in 1980 was REFUTED by the Declaration of Real Property on the apartment building which shows that its market value is only P429k+, and the Tax Declaration on the condominium unit which reflects a market value of P293k+ only (total is P 773,720). The enormous discrepancy between the alleged investment cost and the declared market value of these pieces of real estate was not denied nor explained by Tuason. I: W/n Tuason is a holding company and/or investment company, accumulated surplus and is liable for 25% surtax on undue accumulation of surplus– YES

•

R: CIR’s assessment of a 25% surtax against the Antonio Tuason, Inc. is reinstated, but only on the latter's unspent accumulated surplus profits of P2,489,585.88. The P 773,720 invested in its business operations (apartment and condominium unit) is not subject to the 25% surtax. • 1) Tuazon IS a holding / investment company because it did not involve itself in the development of subdivisions but merely SUBDIVIDED its own lots and sold them for bigger profits. It derived its income from interest, dividends and rental realized from the sale of realty.

• Also, that the amount spent for construction of the bldg and amount for purchase of the condo has a BIG DISCREPANCY shows that it was beyond the reasonable needs requirement.

• All

presumptions are in favor of the correctness of petitioner's assessment against the private respondent. It is incumbent upon the taxpayer to prove the contrary. Unfortunately, the private respondent failed to overcome the presumption of correctness of the Commissioner's assessment and the presumption that its failure to distribute surplus profits is for the reasonable needs of the business.

Cyanamid Phils v CA • Cyanamid Philippines, Inc. is a corporation organized under Philippine laws and a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. • It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an importer/indentor. • CIR sent an assessment letter to Cyanamid and demanded the payment of deficiency income tax of P119k+ for taxable year 1981. • Cyanamid protested the assessments particularly, (1) the 25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00; and 1981 Deficiency Percentage Assessment of P8,846.72.

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The CIR in a letter addressed to SGV & Co., refused to allow the cancellation of the assessment notices and rendered its resolution and ruled that the said availment does not result in cancellation of assessments.

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Cyanamid appealed to CTA, claiming that CIR's assessment representing the 25% surtax on its accumulated earnings for the year 1981 had no legal basis for the following reasons:

o

(a) Cyanamid accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness

o

(b) Cyanamid is a wholly owned subsidiary of American Cyanamid Company, a corporation organized under the laws of the State of Maine, in the United States of America, whose shares of stock are listed and traded in New York Stock Exchange.

• The touchstone of liability is the PURPOSE behind the accumulation of the

income and NOT the CONSEQUENCES of the accumulation. Thus, failure to pay dividends to stockholders must be for the purpose of using undistributed earnings and profits for reasonable needs of the business. Otherwise, the company would be liable for unreasonable accumulation of surplus.

• In this case, it is plain to see that the company's failure to distribute dividends to its stockholders was for reasons other than the reasonable needs of the business. • 2) Tuazon is liable for the 25% surtax because 99.9% in value of the outstanding stock of Tuazon is owned by Antonio Tuazon himself. This gives the conclusive presumption that the purpose of accumulated earnings was to avoid the income tax of its shareholder.


o •

THUS, there were no individual shareholder income taxes by Cyanamid's accumulation of earnings and profits, instead of distribution of the same. CTA denied the petition, saying that Cyanamid is still liable.

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I: W/n the corporation liable is for the accumulated earnings tax for the year 1981 • R: YES, corp is liable.

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1) Sec. 25 of the old NIRC of 1977 states that if any corporation is formed for the purpose of preventing the imposition of the tax upon its shareholders / members or the shareholders / members of

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another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to 25% of the undistributed portion of its accumulated profits or surplus.

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This shall be in ADDITION to the tax imposed by Sec24, and shall be computed, collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax.

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The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders.

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The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed.

capital was expected to increase further when more funds were generated from the succeeding year's sales.

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There was NO REASON to expect a "working capital deficit" which could have necessitated an increase in working capital, as rationalized by Cyanamid. M. Tax-exempt corporations CIR v Sinco Educational Corp • In 1949, Vicente G. Sinco (Sinco) established and operated an educational institution known as the Foundation College of Dumaguete.

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The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and authorized by the Central Bank of the Philippines to hold shares of stocks of banks.

•

Cyanamid does not fall among those exempt classes. Besides, the rule on enumeration is that the express mention of one person, thing, act, or consequence is construed to exclude all others.\ • 2) Cyanamid CANNOT rely on the BARDAHL formula, w/c allowed retention, as working capital reserve, sufficient amounts of liquid assets to carry the company through one operating cycle. In this case, it contended that it had considerable liquid funds based on the 2:21:1 ratio of current assets to current liabilities.

•

Using this formula, Cyanamid needed at least P33k- as working capital. As of 1981, its liquid asset was only P25k+ so it still had a deficit of about P7k+. Therefore, the P9k+ accumulated income as of 1981 may be validly accumulated to increase its working capital for the succeeding year.

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HOWEVER, the companies where the "Bardahl" formula was applied, had operating cycles much shorter than that of Cyanamid.

o

In Atlas Tool Co., Inc, vs. CIR,20  company’s operating cycle was only 3.33 months or 27.75% of the year

o

In Cataphote Corp. of Mississippi vs. United States

 the corporation's operating cycle was only 56.87 days, or 15.58% of the year.

o

In the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year, reflecting that petitioner will need sufficient liquid funds, of at least three quarters of the year, to cover the operating costs of the business.

•

As of 1981 the working capital of Cyanamid was P25k+, or more than twice its current liabilities. Plus, the working


•

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In 1951, in view of the requirement of the Department of Education that as far a practicable, schools and colleges recognized by the government should be incorporated, Sinco and the members of his immediate family organized a non-stock corporation known as the V.G. Sinco Educational Institution Inc., which was capitalized by Sinco and his family. This corporation continued the operations of the Foundation College of Dumaguete. Sinco acted as chairman of the board of directors, president of the college, and as a teacher, but did not collect his salary. The college derived its income solely from the tuition fees paid by students enrolled and realized profits out of its operation but did not distribute any dividend or profit to its stockholders. An investigation conducted by the BIR revealed that the college realized a taxable net income for the year 1949 and for the year 1950. The income tax returns of the college for the years 1951 to 1953 have yet been verified but the college reported taxable net profits in 1951, losses in 1952, and profits in 1953. The Collector of Internal Revenue (CIR) assessed against the college an income tax for the years 1950 and 1951, which the college paid. 2 yrs later, the corporation commenced an action in the CFI of Negros Oriental for the refund of the amounts paid, claiming that it is exempt from the payment of the income tax because it is organized and maintained exclusively for the educational purposes and no part of its net income inures to the benefit of any private individual. CIR said that part of the net income accumulated by the corporation inured to the benefit of Sinco, president and founder of the corporation, and therefore it is not entitled to the exemption prescribed by the law. I: W/n the corporation should be exempt from payment of income taxes. R: YES, the corp is a non-profit institution. Payment of MODERATE salaries to those who work for a school or college as a remuneration for their services is NOT considered as distribution of profit as would make the school one conducted for profit. In this case, since its organization, the corp never distributed any dividend or profit to its stockholders. Although part of its income went

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to the payment of its teachers or professors and to the other expenses of the college, this was incident to an educational institution. Still, none of the income has ever been channeled to the benefit of any individual stockholder. It was unfair to conclude that part of the income of the corporation as an institution inured to the benefit of one of its stockholders simply because part of the income was carried in its books as accumulated salaries of its president and teacher. Much less can it be said that the payments made by the college to the Community Publishers, Inc. redounded to the personal benefit of Sinco simply because he is one of its stockholders. Mayor and Common Council of Borough of Princeton vs. State Board of Taxes & Assessments, et al.: The principal officer of the school was formerly its owner and principal and such principal he was given a salary for his services. The court held that school is not conducted for profit merely because moderate salaries were paid to the principal and to the teachers. Of course, it is not denied that the corporation charges tuition fees and other fees for the different services it renders to the students and in fact it is its only source of income, but such fact does not in itself make the school a profit-making enterprise that would place it beyond the purview of the law. Every responsible organization must be so run as to, at least, insure its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have a surplus. Upon the other hand, the CIR’s pretense would limit the benefits of the exemption, under said section 27 (e), to institutions which do not hope, or propose, to have such surplus. Under this view, the exemption would apply only to schools which are on the verge of bankruptcy, for — unlike the United States, where a substantial number of institutions of learning are dependent upon voluntary contributions and still enjoy economic stability, such as Harvard, the trust fund of which has been steadily increasing with the years — there are, and there have always been, very few educational enterprises in the Philippines which are supported by donations, and these organizations usually have a very precarious existence. The final result of the CIR’s contention, if adopted, would be to discourage the establishment of colleges in the Philippines, which is precisely the opposite of the objective consistently sought by our laws.

RETIREMENT BENEFITS, PENSIONS, GRATUITIES, etc. CIR v CA (1992) • • • • •

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GCL Retirement Plan was an employees' trust maintained by the employer, GCL Inc., to provideretirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by the CIR. In 1984, GCL made investments and earned interest income from where 15% tax was w/held as imposed by PD 1959. GCL thus filed w/ the CIR claims for refund in the amounts w/held by Anscor Capital Investment Corp and Commercial Bank of Manila. GCL said in a letter that it disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income under RA 4917 in relation to Section 56(b) of the Tax Code. CIR denied the request so case was elevated to CTA and CTA ruled in favor of GCL. I: W/n GCL Plan is exempt from the final withholding tax on interest income from money placements and purchase of treasury bills required by Pres. Decree No. 1959 R: YES, GCL Plan is exempt.

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GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with RA 4917, w/c provides that any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes. This provision should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, w/c specifically exempted employee's trusts from income tax. The reason for the creation of employees' trusts or benefit plans is to provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. What is more, it is established for their exclusive benefit and for no other purpose. Employees’ trusts are exempt in order to encourage the formation and establishment of such private Plans for the benefit of laborers and employees outside of the Social Security Act. Otherwise, taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law.

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Said Decree, being a general law, can not repeal by implication a specific provision, Section 56(b) now 53 [b]) in relation to RA 4917 granting exemption from income tax to employees' trusts.

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Jesus N. Borromeo v. The Hon. Civil Service Commission: Terminal leave pay is a RETIREMENT BENEFIT, and is thus not subject to income tax. Commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. In the exercise of sound personnel policy, the government encourages unused leaves to be accumulated. The government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg, which the senior citizen may look forward to, is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits.

RE: REQUEST OF ATTY. BERNARDO ZIALCITA

Deletion in PD 1959 of the provisos regarding tax exemption and preferential tax rates under the old law, therefore, can not be deemed to extent to employees' trusts.

CIR v CA (1991) • Efren P. Castaneda retired from the government service as revenue attaché in the Philippine Embassy in London, England. • Upon retirement, he received, among other benefits, terminal-leave pay from w/c CIR withheld about P12k+, allegedly representing income tax thereon. • Castaneda filed a formal written claim with CIR for a refund of the said amount, saying that he cash equivalent of his terminal leave is exempt from income tax. • To comply with the two-year prescriptive period within which claims for refund may be filed, Castaneda filed with the CTA Petition for Review, seeking the refund of income tax withheld from his terminal leave. • CTA ruled in favor of Castaneda and ordered CIR to refund him. • CIR thus appealed to SC saying that the terminal-leave pay is INCOME / part of compensation for services rendered. There can thus be no “commutation of salary” when a government retiree applies for

terminal leave, because he is not receiving it as salary. What he applies for is a “commutation of leave credits.” Thus, it is taxable. I: W/n it terminal leave pay received by a gov employee is taxable R: NO. Terminal leave pay is NOT subject to withholding income tax.

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SC passed a resolution regarding the amounts claimed by Atty. Zialcita during his retirement. SC said that terminal leave pay of Atty. Zialcita received by virtue of his compulsory retirement can NEVER be considered a part of his salary subject to the payment of income tax. Rather, it falls under the phrase' other similar benefits received by retiring employees and workers, within the meaning of Section 1 of PD No. 220 and is thus exempt from the payment of income tax. PD 985 also makes it clear that the actual service is the period of time for which pay has been received, excluding the period covered by terminal leave. CIR through SolGen moved for reconsideration. SC, however, denied the MR and held that the money value of the accumulated leave credits of Atty. Bernardo Zialcita are NOT taxable. Since terminal leave is applied for by an officer or employee who has already severed his connection with his employer and is no longer working, then it follows that the terminal leave pay, which is the cash value of his accumulated leave credits, is no longer compensation for services rendered. It CANNOT be viewed as salary. EO 1077: Any officer / gov employee who voluntarily resigns or is separated from service through no fault of his own and whose leave benefits are NOT covered by special law, shall be entitled to the commutation of all the accumulated vacation and/or sick leaves to his credit, exclusive of Saturdays, Sundays and holidays, without limitation as to the number of days of vacation and sick leaves that he may accumulate. NIRC, Sec 28: Retirement benefits, pensions and gratuities received by gov officials and employees shall NOT be included in gross income.

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In the case of Atty. Zialcita, he rendered government service from 1962 to 1990, until he reached the compulsory retirement age of 65 years. Upon his compulsory retirement, he is entitled to the commutation of his accumulated leave credits to its money value. Compulsory retirement may be considered as a "cause beyond the control of the said official or employee". Consequently, the amount that he received by way of commutation of his accumulated leave credits as a result of his compulsory retirement, or his terminal leave pay, falls within the enumerated exclusions from gross income and is therefore not subject to tax.

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The terminal leave pay of Atty. Zialcita may likewise be viewed as a "retirement gratuity received by government officials and employees" which is also another exclusion from gross income as provided for in the Sec 28, NIRC. The case of Atty. Bernardo Zialcita is merely an administrative matter involving an employee of the SC who applied for retirement benefits and who questioned the deductions on the benefits given to him. Hence, the resolution applies only to employees of the Judiciary. It cannot be extended to other gov employees because in effect, SC would be rendering an advisory opinion.

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The Chief of the Finance Division likewise sought clarification with respect to the applicability of the resolution to employees of the Supreme Court to those who:

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avail of optional retirement resign/ are separated from the service through no fault of their own

The two groups mentioned above are also entitled to terminal leave pay in accordance with the Revised Admin Code, Sec 286.

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INCOME DERIVED BY FOREIGN GOVERNMENT CIR v MITSUBISHI METAL CORP

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Atlas Consolidated Mining entered into a Loan and Sales Contract with Mitsubishi where it was provided that Mitsubishi would LEND Atlas $20M for the installation of a new concentrator for copper production. In turn, Atlas would SELL to Mitsubishi all the copper concentrates produced from the machine for the next 15 years. Thereafter, Mitsubishi applied for a loan with Eximbank of Japan and other consortium of Japanese banks so that it could comply with its obligations under the contract. The total amount of both loans was $20M. Approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as loan to Atlas and as consideration for importing copper concentrates from Atlas.


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Atlas made interest payments in favor of Mitsubishi totaling P13M. The corresponding 15% tax on the interest in the amount of P1.9M was withheld and remitted to the Government. Subsequently, Mitsubishi and Atlas filed a claim for tax credit, requesting that the P1.9M be applied against their existing tax liabilities on the ground that the interest earned by Mitsubishi on the loan was exempt from tax. The NIRC provides that income received from loans in the Philippines extended by financing institutions owned, controlled, or financed by foreign governments are exempt from tax. Mitsubishi and Atlas claim that the interest earned from the loan falls under the above exemption because Mitsubishi was merely acting as an agent of Eximbank, which is a financing institution owned, controlled, and financed by the Japanese Government. They allege that Mitsubishi was merely the conduit between Atlas and Eximbank, and that the ultimate creditor was really Eximbank. I: W/N the interest income from loans extended to Atlas by Mitsubishi is excluded from gross income taxation and therefore excluded from withholding tax. R: NO, interest income is NOT exempt from tax. NIRC provides that income received from loans in the Phils extended by financial institutions owned, controlled or financed by foreign govs are exempt from tax. Mitsubishi and Atlas thus claim that interest income from the loan falls under such exemption because Mitsubishi was merely an agent of Eximbank, a financing institution owned,controlled and financed by the Jap gov. HOWEVER, Mitsubishi was NOT a mere agent of Eximbank. It entered into the agreement with Atlas in its own independent capacity. The transaction between Mitsubishi and Atlas on one hand, AND Mitsubishi and Eximbank on the other, were separate and distinct. Thus, the interest income of the loan paid by Atlas to Mitsubishi is entirely different from the interest income paid by Mitsubishi to Eximbank. What was subject of the withholding tax is not the interest income paid by Mitsubishi to Eximbank but the interest income earned by Mitsubishi from the loan to Atlas. Since the transaction was between Mitsubishi and Atlas, the exemption that would have been applicable to Eximbank, does not apply. The interest is therefore not exempt from tax. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas, but this only proves the justification for the loan as represented by Mitsubishi which is a standard banking practice for evaluating the prospects of due repayment. Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. While international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a

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foreign government, scrupulous care must be taken to avoid opening means to violate our tax laws. Otherwise, the mere expedient of having Phil corp enter into a contract for loans with private foreign entities, which in turn will negotiate independently with their governments, could be availed to take advantage of the tax exemption law under discussion.

Q. DEDUCTIONS

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CIR v ISABELA CULTURAL CORP

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Isabela Cultural Corporation (ICC), a domestic corp, received from the CIR an assessment letter demanding payment of the amounts of P333k+ and P4k+ as deficiency income tax and expanded withholding tax inclusive of surcharge and interest, respectively, for the 1986. ICC requested reconsideration in a letter. However, it received a final notice before seizure demanding payment of the amounts stated in the said notices. ICC thus filed a petition for review w/ CTA. CTA rendered a decision canceling and setting aside the assessment notices issued against ICC. It held that the claimed deductions for professional and security services were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof could not be determined at that time. CTA also held that ICC did not understate its interest income on the subject promissory notes. It found that it was the BIR which made an overstatement of said income when it compounded the interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the application of compounded interest. CA affirmed this. I: W/n CA correctly: (1) sustained the deduction of the expenses for professional and security services from ICC’s gross income; and (2) held that ICC did not understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC


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withheld the required 1% withholding tax from the deductions for security services. R: YES. The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: o (a) the expense must be ordinary and necessary; o (b) it must have been paid or incurred during the taxable year; o (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and o (d) it must be supported by receipts, records or other pertinent papers Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. In the instant case, the accounting method used by ICC is the accrual method. The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. In this case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960’s. From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services. The failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions

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cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For another, it could have reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant. In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to present evidence showing that even with only "reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said company would charge for its services. ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable deductions for the taxable year 1986

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General Foods Inc., which is engaged in the manufacture of beverages such as “Tang,” “Calumet” and “Kool-Aid,” filed its income tax return for the fiscal year ending February 28, 1985.

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In said tax return, GenFoods claimed as deduction, among other business expenses, the amount of P9M+ for media advertising for “Tang.”

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CIR disallowed 50% or P4M+ of the deduction and assessed the corp a deficiency income taxes in the amount of P2M+. Corp filed an MR but was denied so it appealede to CTA. CTA dismissed the appeal, so corp filed a petition for review w/ CA. CA reversed CTA decision, ruling in favour of corp. I: W/n the subject media advertising expense for “Tang” incurred by respondent corporation was an ordinary and necessary expense fully deductible under the National Internal Revenue Code (NIRC) R: NO, it is NOT DEDUCTIBLE. Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed. Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides that there shall be allowed as deduction from gross income all ordinary


(a) the expense must be ordinary and necessary (b) it must have been paid or incurred during the taxable year; o (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and o (d) it must be supported by receipts, records or other pertinent papers. The parties are in agreement that the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was necessary. However, their views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary. These two requirements must be met. There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number of factors. o

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CIR v GENERAL FOODS (PHILS) INC.

and necessary expenses paid or incurred during the taxable year in carrying on, or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession. Simply put, to be deductible from gross income, the subject advertising expense must comply with the following requisites:

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In the case at bar, the P9M+ claimed as media advertising expense for “Tang” alone was almost one-half of its total claim for “marketing expenses.” Aside from that, corporation also claimed P2M+ as “other advertising and promotions expense” and another P1M+ for consumer promotion. Furthermore, the subject P9M+ media advertising expense for “Tang” was almost double the amount of corporation’s P4M+ general and administrative expenses. The subject expense for the advertisement of a single product is inordinately large. Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time. In this case, the subject advertising expense was of the second kind. Not only was the amount staggering; the respondent corporation itself

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also admitted, in its letter protest to the Commissioner of Internal Revenue’s assessment, that the subject media expense was incurred in order to protect the corporation’s brand franchise.

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The corporation’s venture to protect its brand franchise was tantamount to efforts to establish a reputation. This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures.

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For bonuses to be deductible it must answer two questions:

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First, has personal service actually been rendered by the officers? o Second, if so, is it a reasonable allowance therefore? In this case, the shares in the profit were extraordinary and unusual expenses and as such, cannot be deemed as necessary expenses. Aguinaldo was also held liable to pay surcharge and interest on the back taxes.

AGUINALDO v CIR

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Aguinaldo Industries Corp. was engaged in two lines of business: the manufacture of fishing nets, handled by its Fish Net Division, and the manufacture of furniture, which in turn was handled by its Furniture Division. For accounting purposes, each division kept separate books of accounts as required by the Department of Finance. The net incomes for the Fish Net Division and the Furniture Division were computed separately. Aguinaldo Industries had previously acquired land in Muntinlupa for its fishing net factory, but when it acquired more suitable land for the purpose, it sold the Muntinlupa property for a profit, which was entered in its books as miscellaneous income as distinguished from its tax exempt income. In 1951, Aguinaldo Industries filed separate returns for its fishing and furniture divisions. The BIR investigating officers found that AIC Fish Net deducted from its gross income the amount of 61k as additional renumeration paid to the officers of Aguinaldo Industries. The examiner found that this money was taken from the sale of the Muntinlupa property, an isolated transaction not in the usual course of business. Thus, the examiner recommended that the amount be disallowed as a deduction. AIC contends that the money was paid as an allowance or bonus to its officers as provided in its by-laws. CTA upheld the CIR’s decision and held Aguinaldo Industries liable for 17k in back taxes. AIC argues that the profit derived from the sale of the Muntinlupa land is not taxable for it is tax exempt under RA 901 as a new and necessary industry. I: W/n the bonus given to Aguinaldo’s officers was an ordinary and necessary business expense and therefore deductible R: No, it was not deductible. The records show that the sale effected through a broker who got a commission and there is no evidence of any service rendered by the officer. In computing net income, there shall be allowed as deductions “all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business including reasonable allowances for personal services actually incurred.”


In the basis of the forgoing standard, the bonus cannot be deemed as a deductible expense for tax purposes, even though the sale could be classified as a transaction for carrying on the trade or business of the corporation. There is no actual evidence that the officers actually rendered some service in the perfection of the sale

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ATLAS CONSOLIDATED MINING & DEV CORP v CIR • Atlas is a mining company and CIR assessed it for deficiency income taxes of about P500k+ in 1957 and P200k+ in 1958. • This was based on an understanding that only gold mines were taxexempt (RA 909).

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Atlas protested and asked for its reconsideration. Later, a ruling was issued by the Secretary of Finance, who clarified that the exemption in RA 909 applied to all mines, not just gold mines. The CIR recomputed the assessment. It eliminated the P546k deficiency and reduced the P215k deficiency to P39k. Atlas still appealed to the CTA and assailed the disallowance of the following items as deductible from their gross income: transfer agent’s fee, stockholder’s relation service fee, US stock listing expenses, suit expenses and provision for contingencies. The CTA allowed the aforementioned deductions except for the items titled stockholder’s relation services and suit expenses (only partial disallowance, from P23k to P13k to finally, as deduced by the CTA, P6k). Since the exemption was only good until the first quarter of 1958, ¾ of the net taxable income of petitioner is subject to income tax. Hence, it assessed ¾ of Atlas’ promotion fees (amounting to P25k for the whole year) with income tax. Both parties appealed to the SC regarding the decision of the CTA. I/ R: 1. Were the expenses paid for the services rendered by a PR firm to be considered allowable deduction as business expense? NO, it is considered a capital expenditure. This is based on US jurisprudence where it was held that expenses incurred to create a favorable image does NOT make it a business expense.

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Test of deductibility: 1) expense must be ordinary & necessary 2) it must be paid or incurred n carrying on a trade or business 3) it must be proven by evidence 2. Was the US stock listing fee to be considered allowable deduction? YES, because it is made annually to the stock exchange for the privilege of having its stock listed. It is therefore ordinary & necessary. An expense is necessary - when it is appropriate & helpful in the development of the taxpayer's business. It is ordinary - when it is normal in relation to the business of the taxpayer. But there is no hard & fast rule on this. INTENTION is also important 3. Were suit expenses to be considered allowable deduction? NO,litigation expenses incurred in defense or protection of title are CAPITAL in nature and not deductible. It is considered a part of the cost of the property.

Fireman, Baguio Police were not allowed as deductions. As well as the contributions to civic org., Our lady of Fatima Chapel. Rationale: 1. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals. …. "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, leasing or renting property on his own account as principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . ..”.

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ROXAS v CTA

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Antonio, Eduardo and Jose formed a partnership, Roxas y Compania, to manage the 19,000 hectares agricultural lands in Nasugbu, Batangas, a residential lot in Malate, Manila and shares of stocks in different corporations acquired from their ancestors. • After the WWII, the Government persuaded the Roxas brothers and agreed to sell 13,500 hectares of their property in Batangas to be distributed by the government to the actual occupants as part of the government’s land reform program, for P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. • However, the government did not have enough funds to pay them. So they make arrangement for the Rehabilitation Finance Corp. to advance 1.5M as loan with the land as collateral. Roxas y Cia. will then pay its loan from the proceeds of the yearly amortizations paid by the farmers. • Antonio and Eduardo got married, leaving Jose to stay in the house for which he paid rentals to Roxas y Cia. the amount of P8000/yr. • The CIR assessed the company deficiencies in real estate dealer’s tax on the house rentals from Jose, securities dealer’s tax from profits from the purchase and sale of securities and the unreported net profits from the sale of the Batangas Land. It also disallowed deductions claimed by the brothers. Roxas protested the assessment. • Issues: 1. W/N Roxas y Cia. is liable for payment of fixed real estate dealer’s tax? YES 2. W/N the profit derived from the sale of Batangas land considered an ordinary gain 100% taxable?NO 3. W/N the expenses claimed can be included as deductions?

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R: The Roxas y Cia. is liable to pay fixed tax as real estate dealer from the rentals of Jose but the Batangas land is considered a capital asset 50% taxable only. The contributions to the Manila Police trust fund was allowed as deductions. The Christmas funds to Pasay Police, Pasay


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The sale of the Batangas land is only an isolated transaction and it was done at the request of the government for lack of funds to pay the said property. The Municipality of Nasugbu even passed a resolution expressing gratitude to the Roxas y Cia. ”In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.” Deductions must be proven by the taxpayer to be reasonable, ordinary and necessary and must be incurred in connection to the business. • Tickets for banquet in Honor of Sergio Osmena – no connection to the business • Civic Groups (organized by Herald) for needy – Herald not a corporation but an association for charity • Contributions (Our Lady of Fatima at FEU) – FEU gives dividends and Fatima has not shown to belong to Church A contribution to the government entity is valid as deductions if used EXCLUSIVELY for public purposes. • Christmas Funds (Pasay & Baguio Police, Pasay Fireman) – Not for public purpose, gifts to families of public officials • Contributions (Manila Police Trust Fund) – intended to be used for public purpose

ZAMORA v CIR Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns the years 1951 and 1952. The Collector of Internal Revenue found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable. The collector required him to pay the deficiency income tax for the years 1951 and 1952. On appeal by Zamora, the CTA modified the decision appealed from and ordered him to pay the reduced total sum of P30,258.00 (P22,980.00 and P7,278.00, as deficiency income tax for the years 1951 and 1952, respectively), pursuant to section 51(e), Int. Revenue Code. With costs against petitioner. Having failed to obtain a reconsideration of the decision, Mariano Zamora appealed.

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It is alleged by Mariano Zamora that the CTA erred in disallowing P10,478.50 as promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the whole amount of P20,957.00 as promotion expenses in his 1951 income tax returns, should be allowed and not merely one-half of it, on the ground that, while not all the itemized expenses are supported by receipts, the absence of some supporting receipts has been sufficiently and satisfactorily established. For the said amount was spent by Mrs. Esperanza A. Zamora (wife of Mariano), during her travel to Japan and the United States to purchase machinery for a new Tiki-Tiki plant, and to observe hotel management in modern hotels. The CTA, however, found that for said trip Mrs. Zamora obtained only the sum of P5,000.00 from the Central Bank and that in her application for dollar allocation, she stated that she was going abroad on a combined medical and business trip, which facts were not denied by Mariano Zamora. No evidence had been submitted as to where Mariano had obtained the amount in excess of P5,000.00 given to his wife which she spent abroad. No explanation had been made either that the statement contained in Mrs. Zamora's application for dollar allocation that she was going abroad on a combined medical and business trip, was not correct. The alleged expenses were not supported by receipts. Mrs. Zamora could not even remember how much money she had when she left abroad in 1951, and how the alleged amount of P20,957.00 was spent. Issue: Whether the CTA erred in (1) disallowing P10,478.50, as promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora (which is ½ of P20,957.00, supposed business expenses); (2) disallowing 3-½% per annum as the rate of depreciation of the Bay View Hotel Building Held: Petition is dismissed. Decision appealed from is affirmed. Ratio: • Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business o Since promotion expenses constitute one of the deductions in conducting a business, same must testify these requirements. Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurred. o Considering that the application of Mrs. Zamora for dollar allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came under the category of ordinary and necessary expenses; part thereof constituted her personal expenses. o There having been no means by which to ascertain which expense was incurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit, the Collector and the CTA in their decisions, considered 50% of the said amount as business expenses and the other 50%, as her personal expenses. The allocation is very fair to Mariano Zamora, there having been no receipt whatsoever, submitted to explain the alleged business expenses, or proof of the connection which


said expenses had to the business or the reasonableness. While in situations like the present, absolute certainty is usually no possible, the CTA should make as close an approximation as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of his own making. • Representation expenses fall under the category of business expenses which are allowable deductions from gross income, if they meet the conditions prescribed by law, particularly section 30 (a) [1], of the Tax Code; that to be deductible: o Business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business. o Those expenses must also meet the further test of reasonableness in amount. o That when some of the representation expenses claimed by the taxpayer were evidenced by vouchers or chits, but others were without vouchers or chits, documents or supporting papers. o There is no more than oral proof to the effect that payments have been made for representation expenses allegedly made by the taxpayer and about the general nature of such alleged expenses.

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Accordingly, it is not possible to determine the actual amount covered by supporting papers and the amount without supporting papers, the court should determine from all available data, the amount properly deductible as representation expenses. o In view hereof, the CTA did not commit error in allowing as promotion expenses of Mrs. Zamora claimed in Mariano Zamora's 1951 income tax returns, merely one-half. • Petitioner Mariano Zamora alleges that the CTA erred in disallowing 3½% per annum as the rate of depreciation of the Bay View Hotel Building but only 2-½%. In justifying depreciation deduction of 3-½%, Mariano Zamora contends that (1) the Ermita District, where the Bay View Hotel is located, is now becoming a commercial district; (2) the hotel has no room for improvement; and (3) the changing modes in architecture, styles of furniture and decorative designs, "must meet the taste of a fickle public". It is a fact, however, that the CTA, in estimating the reasonable rate of depreciation allowance for hotels made of concrete and steel at 2-½%, the three factors just mentioned had been taken into account already. o Normally, an average hotel building is estimated to have a useful life of 50 years, but inasmuch as the useful life of the building for business purposes depends to a large extent on the suitability of the structure to its use and location, its architectural quality, the rate of change in population, the shifting of land values, as well as the extent and maintenance and rehabilitation. It is allowed a depreciation rate of 2-½% corresponding to a normal useful life of only 40 years. Consequently, the stand of the petitioners cannot be sustained.

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C.M. Hoskins & Co, Inc. • CM Hoskins is a domestic corporation engaged in the real estate business as brokers, managing agents, & administrators. • Mr. C.M. Hoskins owns 99.6% of the corp and was the company President. • He was also Chairman of the Board and received salary and bonuses and got 50% share of the sales commissions earned by the company. • He also got 50% of the supervision fees received by the company as managing agents of Paradise Farms subdivision. • CM Hoskins filed its income tax return w/ net income of about P92k+. • After paying the latter, CIR verified the tax returns and DISALLOWED 4 items of deduction & assessed it deficiency income taxes. • The Tax Court set aside 3 of the disallowances, but upheld CIR’s disallowance of the 50% supervision fees earned by Mr. Hoskins. (P99k+)

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I: W/n the 50% share of Mr. Hoskins in the supervision fees received by the company can be considered as deductions (CIR claims that this amount is inordinately large, bearing a very close relationship to the Mr. Hoskin's dominant stockholdings and therefore amounted in law to a distribution of its earnings and profits) R: NO. In this case, Hoskins was:

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Chairman of the board of directors of CM Hoskins, w/c bears his name

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owned 99.6% of its total authorized capital stock

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was salesman-broker for his company, receiving a 50% share of the sales commissions earned by petitioner, besides his monthly salary of P3,750.00 amounting to an annual compensation of P45,000.00 and an annual salary bonus of P40,000.00 plus free use of the company car and receipt of other similar allowances and benefits

Thus, the Tax Court correctly ruled that the payment by CM Hoskins to Hoskins 50% share of the 8% supervision fees received by CM Hoskins as managing agents of the real estate, subdivision projects of Paradise Farms, Inc. and Realty Investments, Inc. was inordinately large and could not be considered a deduction. If such payment were to be allowed as a deductible item, then Hoskins would receive on these three items alone (salary, bonus and supervision fee) a total of P189k+, which would be double the petitioner's reported net income for the year. While a ONE-time fee could be considered fair & deductible as an expense, in this case, Mr.Hoskins was receiving these supervisory fees EVERY YEAR regardless of whether services were actually rendered by him. If it was allowed, his total compensation would be DOUBLE the company's own net income.


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The fact that such payment was authorized by a standing resolution of CM Hoskins's board of directors, since "Hoskins had personally conceived and planned the project" cannot change the picture. There could be no question that as Chairman of the board and practically an absolutely controlling stockholder of petitioner, holding 99.6% of its stock, Hoskins wielded tremendous power and influence in the formulation and making of the company's policies and decisions. Test of Reasonableness for Bonuses: (CPR)

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1) the payment of bonuses is in fact compensation 2) it must be for personal services actually rendered

3) the bonuses, when added to the salaries, are reasonable when measured by the amount & quality of the services performed with relation to the business of the taxpayer. Hopkins fails to pass the test. On the right of the employer as against CIR to fix the compensation of its officers and employees, the question of the allowance or disallowance thereof as deductible expenses for income tax purposes is subject to determination by CIR, unless they are reasonable.

Calanoc v CIR

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The Social Welfare Commission (SWC) issued a solicitation permit to Calanoc in order to solicit and receive contributions for the orphans and destitute children of the Child Welfare Workers Club of the Commission. Calanoc then financed and promoted a boxing and wrestling exhibition at the Rizal Memorial Stadium for the said charitable purpose. Before the exhibition took place, Calanco applied w/ CIR for exemption from payment of the amusement tax, relying on the provisions of Section 260 of the National Internal Revenue Code. CIR answered that the exemption depended upon Calanoc's compliance with the requirements of law. After the said exhibition, CIR investigated the tax case of Calanoc, and from the statement of receipts which was furnished the agent, CIR found that the gross sales amounted to P26k+; the expenditures incurred was P25k+ and the net profit was only P1,375. Upon examination of the said receipts, the agent also found the following items of expenditures: (a) P461.65 for police protection; (b) P460.00 for gifts; (c) P1,880.05 for parties; and (d) several items for representation. Out of the proceeds of the exhibition, only P1.3k+ was remitted to the SWC for the said charitable purpose for which the permit was issued. CIR demanded from Calanoc the payment of the amount of 533.00; the expenditures incurred was P25,157.62; and the net profit was only P1,375,38.

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CIR thus DENIED the exemption and demanded payment of amusement taxes. This was authorized by the Secretary of Finance, given that net proceeds are not substantial or where the expenses are exorbitant Not satisfied with the assessment imposed upon him, Calanoc brought this case to the CTA, but CTA ruled in favor of CIR. I: W/n Calanoc is exempt from paying the amusement tax. R: No, Calanoc must pay the assessed tax The Court examined the records of the case and agreed with the lower court that most of the items of expenditures contained in the statement submitted to the agent are either exorbitant or not supported by receipts. The expenditures for the gifts, parties and other items for representation are rather excessive, considering that the purpose of the exhibition was for a charitable cause. Also, Calanoc denies having received the stadium fee of P1k which is not included in the receipts, and claims that if he did, he can not be made to pay almost seven times the amount as amusement tax. HOWEVER, evidence showed that while he did not receive said stadium fee, amount was paid by the O-SO Beverages directly to the stadium for advertisement privileges in the evening of the entertainments. Thus, Calanoc had no right to include it as expense items. IT seems that the P1k went into his pocket and was NOT accounted for. Calanoc also admitted that he could not justify the other expenses, such as those for police protection and gifts. He claims further that the accountant who prepared the statement of receipts is already dead and could no longer be questioned on the items contained in said statement. MOREOVER, the payment of P461.65 for police protection is illegal as it is a consideration given by the Calanoc to the police for the performance by the latter of the functions required of them to be rendered by law.

Kuenzle Streiff v CIR • Kuenzle & Streiff, Inc is a domestic corporation engaged in the importation of textiles, hardware, sundries, chemicals, pharmaceuticals, lumbers, groceries, wines and liquor; in insurance and lumber; and in some exports. • When Kuenzle filed its Income Tax Return with CIR, it deducted from its gross income certain items which were the: 1. salaries, directors' fees and bonuses of its non-resident president & VP; 2. bonuses of its resident officers and employees; and 3. interests on earned but unpaid salaries and bonuses of its officers and employees. • CIR however DISALLOWED the deductions of all 3 items enumerated above and assessed Kuenzle for deficiency income taxes.


• Kuenzle requested for the re-examination of this assessment and contended

that the 3 items enumerated are treated as Deductions from gross income invoking sec34 of NIRC. Specifically, the salaries and fees of the non-resident president and VP as well as the bonuses of resident officers and employees fall under EXPENSES which are ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered.

• CIR modified its assesment by allowing as deductible all items comprising

directors' fees and salaries of the non-resident president and VP, BUT disallowing: o bonuses to be deducted insofar as they exceed the salaries of the recipients, o interests on earned but unpaid salaries and bonuses to be deducted as well

• CTA: upheld the assessment made by the CIR. CTA ruled that while the

bonuses given to the non-resident officers are reasonable, bonuses given to the resident officers and employees are, quite EXCESSIVE.

• I/R: • 1) W/n the reasonableness of the amount of bonuses given to resident officers

and employees should follow the same pattern for determining the reasonableness of the amount of bonuses given to non-resident officers- YES • GR: Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do NOT exceed a REASONABLE compensation for the services rendered. • The condition precedents to the deduction of bonuses to employees are: (CPR) (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3) the bonuses, when added to the salaries, are reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer • There is no fixed test for determining the reasonableness of a given bonus as compensation. However, in determining whether the particular salary or compensation payment is reasonable, the situation must be considered as a whole.

• In this case, Kuenzle contended that it is error to apply the same measure of

reasonableness to both resident and non-resident officers because the nature, extent and quality of the services performed by each with relation to the business of the corporation widely differ.

• According to the corp’s management, the non-resident officers rendered the

same amount of efficient personal service and contribution to deserve equal treatment in compensation and other emoluments.

• Since the non-resident president and VP gave the same amount of duties and services as compared to resident officers and employees (nonresidents gave their full time and attention to the services of the corporation, directed and supervised the business operations, were policy-makers, etc.), there is NO

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SPECIAL REASON for granting greater bonuses to the lower ranking officers than those given to non-resident president and VP.

• 2) W/n bonuses given in EXCESS of the yearly salaries of the employees can

be allowable as deductions – YES • This is because of the determination of REASONABLENESS FACTORS: o a) post-war policy of the corporation in giving salaries at low levels because of the unsettled conditions resulting from war o b) the imposition of government controls on imports and exports and on the use of foreign exchange which resulted in the diminution of the amount of business and the consequent loss of profits on the part of the corporation

o

C) payment of bonuses in amounts a little more than the yearly salaries received considering the prevailing circumstances is in our opinion reasonable.

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• 3) W/n the payment of interests on earned but unpaid salaries and bonuses can be considered deductions- NO

• In order that interest may be deductible, it must be paid "on indebtedness".

Here the items involved are unclaimed salaries and bonus participation w/c CANNOT constitute indebtedness because even if they constitute an obligation on the part of the corporation, it is not the corp’s fault if they remained unclaimed. Since the corporation had at all times sufficient funds to pay the salaries of its employees, whatever an employee may fail to collect is NOT an indebtedness. It is the employee’s concern to collect it in due time.

INTEREST Paper Industries Corp of the Phils v CA

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The Paper Industries Corporation of the Philippines ("Picop"), is a Philippine corporation registered with the Board of Investments ("BOI") as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills. In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in order to finance the purchase of machinery and equipment needed for its operations. Picop also issued promissory notes of about P230M, on w/c it paid P45M in interest. In its 1977 Income Tax Return, Picop claimed the interest payments on the loans as DEDUCTIONS from its 1977 gross income. The CIR disallowed this deduction upon the ground that, because the loans had been incurred for the purchase of machinery and equipment, the interest payments on those loans should have been capitalized instead and claimed as a depreciation deduction taking into account the adjusted basis of the machinery and equipment (original acquisition cost plus interest charges) over the useful life of such assets.


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I: W/n the interest payments can be deducted from gross income – YES transaction tax R: The 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or the other tax treatment of such interest payments. Accordingly, the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied. In this case, the CIR does not dispute that the interest payments were made by Picop on loans incurred in connection with the carrying on of the registered operations of Picop, i.e., the financing of the purchase of machinery and equipment actually used in the registered operations of Picop. Neither does the CIR deny that such interest payments were legally due and demandable under the terms of such loans, and in fact paid by Picop during the tax year 1977. The CIR has been unable to point to any provision of the 1977 Tax Code or any other Statute that requires the disallowance of the interest payments made by Picop. THIS PART DI KO SUPER MAGETS:

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The CIR invokes Section 79 of Revenue Regulations No. 2 w/c provides that Interest calculated for cost-keeping or other purposes on account of capital or surplus invested in the business, which does not represent a charge arising under an interest-bearing obligation, is not allowable deduction from gross income. • It is claimed by the CIR that Section 79 of Revenue Regulations No. 2 was "patterned after" paragraph 1.266-1 (b), entitled "Taxes and Carrying Charges Chargeable to Capital Account and Treated as Capital Items" of the U.S. Income Tax Regulations, which paragraph reads as follows: (B) Taxes and Carrying Charges. — The items thus chargeable to capital accounts are — (11) In the case of real property, whether improved or unimproved and whether productive or nonproductive. (a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds). 21 The truncated excerpt of the U.S. Income Tax Regulations quoted by the CIR needs to be related to the relevant provisions of the U.S. Internal Revenue Code, which provisions deal with the general topic of adjusted basis for determining allowable gain or loss on sales or exchanges of property and allowable depreciation and depletion of capital assets of the taxpayer: Present Rule. The Internal Revenue Code, and the Regulations promulgated thereunder provide that "No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary or his delegate, are chargeable to capital account with respect to property, if the taxpayer

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elects, in accordance with such regulations, to treat such taxes or charges as so chargeable." At the same time, under the adjustment of basis provisions which have just been discussed, it is provided that adjustment shall be made for all "expenditures, receipts, losses, or other items" properly chargeable to a capital account, thus including taxes and carrying charges; however, an exception exists, in which event such adjustment to the capital account is not made, with respect to taxes and carrying charges which the taxpayer has not elected to capitalize but for which a deduction instead has been taken. The "carrying charges" which may be capitalized under the above quoted provisions of the U.S. Internal Revenue Code include, as the CIR has pointed out, interest on a loan "(but not theoretical interest of a taxpayer using his own funds)." What the CIR failed to point out is that such "carrying charges" may, at the election of the taxpayer, either be (a) capitalized in which case the cost basis of the capital assets, e.g., machinery and equipment, will be adjusted by adding the amount of such interest payments or alternatively, be (b) deducted from gross income of the taxpayer. Should the taxpayer elect to deduct the interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments. In other words, the taxpayer is not entitled to both the deduction from gross income and the adjusted (increased) basis for determining gain or loss and the allowable depreciation charge. The U.S. Internal Revenue Code does not prohibit the deduction of interest on a loan obtained for purchasing machinery and equipment against gross income, unless the taxpayer has also or previously capitalized the same interest payments and thereby adjusted the cost basis of such assets.

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Under the law, for interest to be deductible, it must be shown that: o there be an indebtedness o there should be interest upon it o what is claimed as an interest deduction should have been paid or accrued within the year. Here, it is conceded that the interest paid by de Preito was in consequence of the late payment of her donor's tax, and the same was paid within the year it is sought to be declared. The only question to be determined, as stated by the parties, is whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code w/c provides that In computing net income there shall be allowed as deductions the amount of interest paid within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt from taxation as income under this Title. The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money. Within the meaning of that definition, it is apparent that a tax may be considered an indebtedness. The term "debt" is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another, either for contract, or the requirement of the law. Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income under section 30(b) of the Tax Code above quoted.

TAXES

CIR v Vda. De Prieto • In 1945, Consuelo de Prieto conveyed by way of gifts to her four children real property with a total assessed value of about P890k. • After the filing of the gift tax returns, CIR appraised the real property donated for gift tax purposes at P1M+ and assessed the total sum of about P117k as donor's gift tax, interest and compromises due thereon. • The donor's tax was paid by de Preito, but since the sum of about P55k represnted the total interest on account of deliquency, she calimed the P55k as deduction from her income tax return. • CIR, however, disallowed the claim and assessed de Prieto deficiency income tax due on the P55k, surcharge and compromise for the late payment. • I: W/n interest on LATE PAYMENT of donor's tax be claimed as deduction in income tax return • R: YES.


CIR v Lednicky *NOTE: There are 3 cases involved here, all of which were elevated to the SC and were decided jointly given that they involve the same parties and issues. The Tax Court decided for the spouses, but SC reversed the decision. GR 18286: V. E. Lednicky and Maria Valero Lednicky, were husband and wife, both American citizens residing in the Philippines, and have derived all their income from Philippine sources. In 1957, the spouses filed their income tax return for 1956 and correspondingly paid taxes amounting to about P320k+. In 1959, the spouses filed an amended income tax return for 1956. The amendment consisted in a claimed deduction paid in 1956 to the US government as federal income tax for 1956. Simultaneously with the filing of the amended return, the spouses requested the refund. When the Commissioner of Internal Revenue failed to answer the claim for refund, the spouses filed a petition with the Court of Tax Appeals. GR 18169: The same thing was done in 1956, when the spouses filed their domestic income tax return for 1955 and later on filed an amended income tax return. On the basis of this amended return, the spouses paid about P570k+.

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After audit, the Commissioner determined a deficiency of P16k+, which amount the spouses paid. Back in 1955, however, the spouses filed with the US Internal Revenue Agent in Manila their Federal income tax return for the years 1947, 1951, 1952, 1953 and 1954 on income from Philippine sources on a cash basis. Payment of these federal income taxes, including penalties and delinquency interest in the amount of $264,588.82, were made in 1955 to the US Director of Internal Revenue, Baltimore, Maryland, through the National City Bank of New York, Manila Branch. In 1958, the spouses amended their Philippines income tax return for 1955 to including US Federal income taxes, interest accruing up to 15 May 1955, and exchange and bank charges, totaling P516k+ and filed a claim for refund. GR 21434: The facts are similar to above cases but refer to the spouses’ income tax returns for 1957, filed in 1958, for which the spouses paid a total sum of P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction of P190,755.80, representing taxes paid to the US Government on income derived wholly from Philippine sources. The spouses also filed a claim for refund of overpayment.

4.

LOSSES PICOP v CA

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Issue: W/n a US citizen, residing in the Phils who derived all his income from the Phils can deduct from his income tax the amount of income taxes paid to the US government

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Held/ Ratio: NO.

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The construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the law’s intent that the right to deduct income taxes paid to foreign government from the taxpayer’s gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4). Thus, unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. The purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by deduction from gross income and by tax credit. This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option, so that he must be entitled to a tax credit (the spouses admittedly are not so entitled because all their income is derived from Philippine sources), or the option to deduct from gross income disappears altogether.

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Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, while the taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. As between the Philippines, where the income was earned and where the taxpayer is domiciled, and the United States, where that income was not earned and where the taxpayer did not reside, it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief from the alleged double taxation should come from the United States, and not from the Philippines, since the US’s right to burden the taxpayer is solely predicated on his citizenship, without contributing to the production of the wealth that is being taxed.

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To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latter power to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident. Every time the rate of taxation imposed upon an alien resident is increased by his own government, his deduction from Philippine taxes would correspondingly increase, and the proceeds for the Philippines diminished, thereby subordinating our own taxes to those levied by a foreign government. Such a result is incompatible with the status of the Philippines as an independent and sovereign state.

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The Paper Industries Corporation of the Philippines ("Picop"), is a Philippine corporation registered with the Board of Investments ("BOI") as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills. In 1977, Picop entered into a merger agreement with Rustan Pulp & Paper Mills & Rustan Manfucturing Corp (both also BOI-registered). But before the merge, Rustan had accumulated losses of P 81 million while Picop had a profit of P 9 million. Picop claimed P 44 million of Rustan's accumulated losses as deduction against its 1977 gross income. It used the NOLCO as basis. The CIR disallowed it saying that previous losses were incurred by ANOTHER TAXPAYER, not Picop. I: W/n Picop was entitled to deductions for net operating losses incurred by Rustan Pulp & Paper Mills R: No. As a general rule, Net Operating Losses CANNOT be carried over for those corps that are NOT registered with the BOI as a preferred pioneer enterprise. Losses may be deducted from gross income ONLY IF such lossess were actually sustained in the SAME YEAR that they are deducted. RA 5186 (Investment Incentives Act) was given as a very special incentive ONLY to registered pioneer firms and ONLY with respect to their registered operations. The purpose is to allow these firms to accumulate its losses in the early years of its business and offset the losses in the later years when they are already earning. This privilege is given only to the SAME ENTERPRISE engaged in the SAME REGISTERED OPERATIONS. In the instant case, to allow the deduction claimed by Picop would be to permit one corp, Picop, to benefit from the operating losses accumulated by another corporation or enterprise, RPPM. RPPM far from benefiting from the tax incentive granted by the BOI statute, in fact gave up the struggle and went out of existence and its

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former stockholders joined the much larger group of Picop's stockholders. To grant Picop's claimed deduction would be to permit Picop to shelter its otherwise taxable income (an objective which Picop had from the very beginning) which had not been earned by the registered enterprise which had suffered the accumulated losses.

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BAD DEBTS Philex Mining c CIR

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Philex Mining and Baguio Gold entered into an agreement wherein the Philex would manage and operate Baguio Gold’s mining claim, the Sto. Niño mine. The agreement was denominated as a Special Power of Attorney. In the course of managing and operating the project, Philex Mining made advances of cash and property in with the agreement.

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However, the mine suffered continuing losses over the years which resulted Philex’s withdrawal as manager of the mine and in the eventual cessation of mine operations. Thereafter, the parties executed a "Compromise with Dation in Payment" wherein Baguio Gold admitted an indebtedness to Philex in the amount of P179M+ and agreed to pay the same in three segments by first assigning Baguio Gold's tangible assets to Philex, transferring to Philex its equitable title in its Philodrill assets and finally settling the remaining liability through properties that Baguio Gold may acquire in the future. Subsequently, Philex wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio Gold by charging P112M to allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982 operations. In its 1982 annual income tax return, Philex deducted from its gross income the amount of P112M as "loss on settlement of receivables from Baguio Gold against reserves and allowances." However, the BIR disallowed the amount as deduction for bad debt and assessed petitioner deficiency income tax. Philex protested, arguing that the deduction must be allowed since all requisites for a bad debt deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it was charged off within the taxable year when it was determined to be worthless. I: W/n advances made by Philex to Baguio Gold can be considered a bad debt and be deductible- NO

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The SPA clearly provides that Philex would only be entitled to the return of a proportionate share of the mine assets to be computed at a ratio that the manager's account had to the owner's account. Except to provide a basis for claiming the advances as a bad debt deduction, there is no reason for Baguio Gold to hold itself liable to Philex under the compromise agreements, for any amount over and above the proportion agreed upon in the SPA. In this case, the advances were not "debts" of Baguio Gold to petitioner inasmuch as Baguio was under no unconditional obligation to return the same to the former under the SPA. As for the amounts that Philex paid as guarantor to Baguio Gold's creditors, the tax court was correct in saying that Baguio Gold's debts were not yet due and demandable at the time that Philex paid the same. Verily, Philex pre-paid Baguio Gold's outstanding loans to its bank creditors and this conclusion is supported by the evidence on record. Thus, Philex cannot claim the advances as a bad debt deduction from its gross income. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed. I n this case, petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income.

Phil Refining Co v CA

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R: Advances were in the nature of an INVESTMENT and NOT a loan, therefore not deductible.

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A reading of the agreement shows denominated as the SPA indicates that the parties had intended to create a partnership and establish a common fund for the purpose.

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They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine.

Philippine Refining Company (PRC) was assessed by Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the year 1985. PRC protested the assessment based on the erroneous disallowances of "bad debts" and "interest expense" although the same are both allowable and legal deductions. CIR, however, issued a warrant of garnishment against the deposits of PRC at a branch of City Trust Bank, in Makati, Metro Manila. PRC accordingly filed a petition for review with the Court of Tax Appeals (CTA) on the same assignment of error. The Tax Court reversed and set aside the Commissioner's disallowance of the interest expense but maintained the disallowance of the supposed bad debts of 13 (out of 16) debtors. PRC then elevated the case to respondent Court of Appeals which denied due course to the petition for review. I: W/N the bad debts can be deducted.

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R: Said accounts have not satisfied "worthlessness of a debt". Mere testimony of the worthlessness of said exercise which lacks documentary evidence employee of PRC.

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of the

Financial Accountant of PRC explaining the debts is nothing more than a self-serving probative value. There was no iota of to give support to the testimony of an

Collector vs. Goodrich International Rubber Co., for debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that: o (1) there is a valid and subsisting debt.

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the requirements

(2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer

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Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future.

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Furthermore, it must be shown that the taxpayer EXERTED DILIGENT EFFORTS to collect debts. (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court.) In this case, PRC claims that: 1) one customer's store was burnt down with nothing left that can be garnished 2) one customer was murdered & left no assets 3) one customer's goods were hi-jacked 4) a former employee who owes them money can't be found 5) one customer lost his stocks through robbery and became bankrupt 6) one customer is a foreign corp and it would be more costly to sue them in their own country 7) one customer is a government agency so that PRC did not file suit against it all instances showed that no evidence was presented to show proof of its effort to collect the debt. HOWEVER, no evidence was presented to show proof of its effort to collect the debt. The Court vehemently rejects the absurd thesis of petitioner that despite the supervening delay in the tax payment, nothing is lost on the part of the Government because in the event that these debts are collected, the same will be returned as taxes to it in the year of the recovery. Petitioner also questions the imposition of the 25% surcharge and 25% delinquency interest due to delay in its payment of the tax assessed. The fact that petitioner appealed the assessment to the CTA and that the same was modified does not relieve petitioner of the penalties incident to delinquency.

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Fernandez Hermanos v CIR • Fernandez is a domestic corp engaged in business as an investment company. They were assessed deficiency income taxes due to some discrepancies on their deductible claims.


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They claimed losses on worthlessness of shares of stock in Mati Lumber since it was no longer in operation. They claimed bad debts on Palawan Mines which had requested financial help to enable it to resume its mining operation. The company lent it money on the condition that Palawan will pay it 15% of its net profits. But after 5 years of cash advances, Palawan still suffered losses so that finally, the Fernandez became convinced that it could no longer recover the cash advances and wrote them off as bad debts even if Palawan was STILL IN OPERATION. They claimed losses in its operation of Balamban Coal Mines. The mine was actually abandoned in 1952. However, Fernandez had claimed the losses in 1950 & 51 saying that since the road to the mine was not constructed, it could not and did not sell any coal during these years. They claimed a depreciation allowance for its buildings at an annual rate of 10%. But the CIR said the reasonable rate should have been 3% They had an increase in net worth coming from an error in its insurance company's books so that it appeared that its liability to creditors was actually LOWER. The CIR claimed this to be taxable. Since Palawan Mines could not repay its debt, it transferred its CONTRACTUAL RIGHTS to Fernandez as partial payment. The company then deducted 1/5th of the amount as DEPLETION CHARGE claiming as basis their engineer's estimate that the mine would be exhausted in 5 years. The CIR disallowed this. Is / R: 1. Can the losses in Mati Lumber be deducted? Since the owner of Mati had been proven to have left for Spain and died there and had left no assets. - YES, there was sufficient evidence. 2. Can the cash advances to Palawan be considered bad debts? Since the company gave advances to Palawan WITHOUT expectation of repayment.-NO, becoz these advances are considered INVESTMENTS, not LOANS. The record showed that the two companies had the SAME BOARD OF DIRECTORS. Also, the agreement clearly shows that it did not expect to be repaid. And finally, there cannot be a PARTIAL deduction of bad debts. 3. Can the claims for losses be deductible in 1950 & 51? Or should it be in 1952 when the mine was abandoned?-NO, it can only be claimed in 1952 because some definite event must fix the time when the loss is sustained. The event is the abandonment of the mine. 4. Was the 10% per annum depreciation rate excessive? -YES, there was no evidence to justify that the buildings had a useful life of only 10 years. 5. Was the apparent increase in net worth taxable? Since it arose from the insurance company's bookkeeping error? -NO, the increase was not the result of receipt by the company of unreported or unexplained taxable income. It was merely the result of the correction

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of erro relating to its indebtedness to its creditors. It cannot be considered income and therefore is not taxable.

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6. Can it deduct 1/5th of the value of the contractual rights EVEN IF it had not actually used the mine nor sold the products? -NO, the exhaustion must be BY PRODUCTION. The Tax Code provides allowance for depletion of mines ONLY for that which has been mined and and the products actually sold during the year.

DEPRECIATION Basilan Estates, Inc v CIR • Basilan Estates is a Philippine corporation engaged in coconut industry.

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It filed its income tax returns and was charged deficiency income tax due to disallowed depreciation, travelling expenses, miscellaneous expenses and unreasonably accumulated profits. Due to the nonpayment of the amount, a warrant of levy was issued but was not executed because Basilan was able to get the Deputy of CIR to hold execution and maintain constructive embargo instead. Notice was then served that the levy would be executed. Thus, Basilan filed before the CTA a petition for review of the Commisioner’s assessment alleging prescription of period for assessment and collection, error in disallowing claimed depreciations, traveling and miscellaneous expenses and error in finding the existence of unreasonably accumulated profits but CA affirmed he deficiency assessment. I: W/n the deficiency assessments were proper

1952 the commissioner had already determined the depreciation allowable on the said assets in the amount of P36,842.04. Thus the depreciation beyond P36,842.04 is not allowed. Limpan Investment Corp v CIR

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R: YES, they were proper. Depreciation is the gradual diminution in useful value of tangible property resulting from wear and tear. An owner is entitled to see that from his earnings the value of the property invested is kept unimpaired so that at the end of ay given term of years the original investment remains as it was in the beginning. Thus the law permits taxpayer to recover gradually his capital investment free from income tax. Under the tax code, a deduction is allowed from gross income for depreciation but NOT beyond the acquisition cost. If beyond the acquisition cost, the owner would also be able to recover profit. In this case, Basilan claimed deductions for depreciation of its assets up to 1949 on the basis of their acquisition cost. In 1950, it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement (P51,252.98). Thus, the CIR was correct in allowing it depreciation based on the SAME OLD ASSETS only, and NOT the reappraised value. Anything beyond the acquisition cost is already considered PROFIT. Upon investigation, the CIR found that the reappraised assets in 1953 were the same ones which depreciation was claimed in 1952. And in


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Limpan, a domestic corporation duly registered, is engaged in the business of leasing real properties. Its principal stockholders are the spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and control 99% of its total paid-up capital. Its president and chairman of the board is the same Isabelo Lim. The corp duly filed its 1956 and 1957 income tax returns and respectively paid corresponding taxes. Subsequently, the BIR conducted an investigation of the corp’s income tax returns and ascertained that Limpan had underdeclared its rental incomes during these taxable years and had claimed excessive depreciation of its buildings in the covering the same period. On the basis of these findings, CIR issued its letter-assessment and demand for payment of deficiency income tax and surcharge against petitioner corporation. Limpan asked for reconsideration regarding the assessment, but it was denied. I: W/n Limpan is liable for payment of deficiency. R: YES, Limpan is liable for deficiency. Limpan admitted through its own witness (Vicente G. Solis – Corporate Secretarty-Treasurer), that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out of P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and more than one-third (1/3) of the amount (P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported rental income for the year 1957, contrary to its original claim to the revenue authorities, it was incumbent upon it to establish the remainder of its pretensions by clear and convincing evidence, that in the case is lacking. The excuse that Lim retained ownership of the lands and only later transferred or disposed of the ownership of the buildings existing thereon to the corporation, so as to justify the alleged verbal agreement whereby they would turn over to the corporation 6% of the value of its properties to be applied to the rentals of the land and in exchange for whatever rentals they may collect from the tenants who refused to recognize the new owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged transferors, or by any document or unbiased evidence. Also, Lim was not presented as witness to corraborate the testimony Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein.

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Lastly, the Court held that "depreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts", and the findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion, and Lim has not shown any arbitrariness or abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive depreciation in its returns. It appearing that the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court pronounced as having strong persuasive effect in this jurisdiction, for having been the result of scientific studies and observation for a long period in the United States, after whose Income Tax Law ours is patterned, the foregoing error is devoid of merit.

DEPLETION Consolidated Mines, Inc v CTA • Consolidated Mines (CM), engaged in mining, had filed its income tax returns for 1951, 1952, 1953 and 1956.

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In 1957, examiners of the Bureau of Internal Revenue investigated the income tax returns filed by the Company because on August 10, 1954, its auditor, Felipe Ollada claimed the refund of the sum of P107,472.00 representing alleged overpayments of income taxes for the year 1951. After the investigation the examiners reported that CM had overstated its claim for depletion. The CIR then assessed CM for deficiency taxes. CM appealed this assessment to the CTA. CM then questioned the judgment of the CTA regarding the rate of depletion it adopted. I: W/n CM overstated its rate of depletion; W/n the rate of depletion adopted by the CTA was proper R: Yes, CM overstated its rate of depletion. The rate of depletion per ton of the ore deposit mined and sold by the Company is P0.6196 per ton 49 not P0.59189 as contended by the Commissioner nor P1.0197 as claimed by the Company; The Tax Code provides that in computing net income there shall be allowed as deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec. 30(g) (1) (B)].

The formula for computing the rate of depletion is: Cost of Mine Property ---------------------------Estimated Ore Deposit

= Rate of Depletion


The Commissioner and the Company do not agree as to the figures corresponding to either factor that affects the rate of depletion per unit. The figures according to the Commissioner are: P2,646,878.44 (mine cost) ---------------------------= P0.59189 (Rate of Depletion) 4,471,892 tons (Estimated Ore Deposit) while the Company insists they are: P4,238,974.57 (mine cost) ---------------------------= P1.0197 (Rate of Depletion) 4,156,888 tons (Estimated Ore Deposit) They agree, however, that the "cost of the mine property" consists of (1) mine cost; and (2) expenses of development before production. As to mine cost, the parties are practically in agreement — the Commissioner says it is P2,515,000 (the Company puts it at P2,500,000). As to expenses of development before production the Commissioner and the Company widely differ. The Company claims it is P1,738,974.56, while the Commissioner says it is only P131,878.44. As an income tax concept, depletion is wholly a creation of the statute 21 — "solely a matter of legislative grace." 22 Hence, the taxpayer has the burden of justifying the allowance of any deduction claimed. 23 As in connection with all other tax controversies, the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer, and this is true with respect to the value of the property constituting the basis of the deduction.

(The following discussion is about the difference between the expenses of development before production) As proof that the amount spent for developing the mines was P1,738,974.56, the Company relies on the testimony of Eligio S. Garcia and on Exhibits 1, 31 and 38. Exhibit I is the Company's report to its stockholders for the year 1947. It contains the Company's balance sheet as of December 31, 1946 (Exhibit I-1). Among the assets listed is "Mines, Improvement & Dev." in the amount of P4,238,974.57 (costs of mine property), which, according to the Company, consisted of P2,500,000, purchase price of the mine, and P1,738,974.56, cost of developing it. The Company has not explained in detail in what amount or the lesser amount of P1,738,974.56 consisted. Nor has it explained how that bigger amount became P1,738,974.56 in the balance sheet for December 31, 1946. (Simply put, CM was not able to explain what the P1.7m consisted.) CM could not prove the authenticity of the P4.2m amount because they merely based the amount from a balance sheet, which they failed to produce in court. So the court relied instead on the Commissioner’s take on the cost of mine property which is P2,646,878.44. To prove the commissioner’s cost

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of mine property, it presented Exhibit 31. This is a memorandum which pointed out that CM failed to take into account the difference between depreciable and depletiable expenditures. (Kaya nareach ng CM yung P4m na amount kasi kinonsider nila na ang depletiable at depreciable expenses ay one and the same. Kaya tumaas yung cost of mine property because of this. Kapag tinanggal yung depreciable expenses, bababa yung cost of mine property kaya P2m na lang as per assessment of the Commissioner.) Now as to the second part of the costs of mine property, the Court relied on the Commissioner’s assessment which is P131, 878.44 kasi may mas basis siya compared to CM. Since yung computation ni CM (yung sa taas) is wrong, the court cannot rely on it so they relied on the Commissioner’s assessment. Hindi na tinanggap yung P1.7m na assessment ng CM kasi walang basis. As to the estimated ore deposit, the Company's figure is "4,156,888 tons," while that of the Commissioner is the larger figure "4,471,892 tons." The difference of 315,004 tons was due to the fact that the Commissioner took into account all the ore that could probably be removed and marketed by the Company, utilizing the total tonnage shipped before and after the war (933,180 tons) and the total reserve of shipping material pegged at 3,583,712 tons. This is wrong! The Commissioner should not have included the pieces of ore that had broken loose and become detached by erosion from their original position could hardly be viewed as still forming part of the total estimated ore deposit. Having already been broken up into numerous small pieces and practically rendered useless for mining purposes, the same could not appreciably increase the ore potentials of the Company's mines. The following are the correct figures. The correct figures therefore are: P2,515,000.00 (mine cost proper) + P131,878.44 (development cost) 4,271,892 (estimated ore deposit) or P2,646,878.44 (mine cost) = P0.6196 (rate of depletion deposit) 4,271,892 (estimated ore per ton)

"Patent and Trademark License Agreement" with the latter under which the petitioner agreed to pay to 3M-St. Paul a technical service fee of 3% and a royalty of 2% of its net sales. Both agreements were submitted to, and approved by, the Central Bank of the Philippines. In its income tax return for the fiscal year ended October 31, 1974, the petitioner claimed the following deductions as business expenses: (a) royalties and technical service fees of P 3,050,646.00; and (b) pre-operational cost of tape coater of P97,485.08. On the first item, the respondent Commissioner of Internal Revenue allowed a deduction of ₱797,046.09 only as technical service fee and royalty for locally manufactured products, but disallowed the sum of ₱2,323,599.02 alleged to have been paid by the petitioner to 3M-St. Paul as technical service fee and royalty on ₱46,471,998.00 worth of finished products imported by the petitioner from the parent company, on the ground that the fee and royalty should be based only on locally manufactured goods. The improper deduction was treated by respondent as a disguised dividend or income. On the second item, respondent allowed ₱19,544.77 or one-fifth (1/5) of petitioner's capital expenditure of ₱97,046.09 for its tape coater which was installed in 1973 because such expenditure should be amortized for a period of five (5) years, hence, payment of the disallowed balance of ₱77,740.38 should be spread over the next four (4) years. Respondent ordered petitioner to pay ₱840,540 as deficiency income tax on its 1974 return, plus ₱353,026.80 as 14% interest per annum from February 15, 1975 to February 15, 1976, or a total of ₱1,193,566.80. Petitioner protested the assessment in a letter dated March 7, 1980. The respondent Commissioner did not answer the protest. Instead, he issued warrants of distraint and levy on October 1, 1984. On October 23, 1984, petitioner appealed to the Court of Tax Appeals by petition for review with a prayer for the issuance of a writ of preliminary injunction to stop the enforcement of the warrants of distraint and levy. The writ was issued upon petitioner posting a ₱1,850,000 bond.The Tax Court rendered a decision on August 14, 1987 upholding the Commissioner's ruling. Petitioner's motion for reconsideration of the decision was denied by the Tax Court on April 6, 1988. Hence, this petition. Issue: Whether or not the ruling of CIR is proper?

RESEARCH AND DEVELOPMENT 3M Phils v CIR Facts: 3M Philippines, Inc., a subsidiary of 3M-St. Paul, is a non-resident foreign corporation with principal office in St. Paul, Minnesota, USA. It is the exclusive importer, manufacturer, wholesaler, and distributor in the Philippines of all products of the latter. To enable it to manufacture, package, promote, market, sell and install the highly specialized products of its parent company, and render the necessary post-sales service and maintenance to its customers, petitioner entered into a "Service Information and Technical Assistance Agreement" and a


Held: Finding no reversible error in the decision of the Court of Tax Appeals, the petition for review is denied. Because remittances to foreign licensors of technical service fees and royalties are made in foreign exchange, CB Circular No. 393 (Regulations Governing Royalties/Rentals) dated December 7, 1973 was promulgated by the Central Bank as an exchange control regulation to conserve foreign exchange and avoid unnecessary drain on the country's international reserves Section. 3-C of the circular provides that royalties shall be paid only on commodities manufactured by the licensee under the royalty agreement. Clearly, no royalty is payable on the wholesale price of finished products

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imported by the licensee from the licensor. However, petitioner argues that the law applicable to its case is only Section 29(a)(1) of the Tax Code which provides:

(a)

Expenses. — (1) Business expenses. — (A) In general. — All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; travelling expenses while away from home in the pursuit of a trade, profession or business, rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade, profession or business, for property to which the taxpayer has not taken or is not taking title or in which he has no equity. Petitioner points out that the Central bank "has no say in the assessment and collection of internal revenue taxes as such power is lodged in the Bureau of Internal Revenue," that the Tax Code "never mentions Circular 393 and there is no law or regulation governing deduction of business expenses that refers to said circular." The argument is specious, for, although the Tax Code allows payments of royalty to be deducted from gross income as business expenses, it is CB Circular No. 393 that defines what royalty payments are proper. Hence, improper payments of royalty are not deductible as legitimate business expenses.

ESSO Standard Eastern v CIR Facts: ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum conscessions. The Commissioner disallowed the claim on the ground that the expenses should be capitalized and might be written off as a loss only when a “dry hole” should result. Hence, ESSO filed an amended return where it asked for the refund of P323,270 by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary and necessary expenses in the same return amount representing margin fees it had paid to the Central Bank on its profit remittances to its New York Office. Issue: Whether the margin fees may be considered ordinary and necessary expenses when paid. Held: For an item to be deductible as a business expense, the expense must ebe ordinary and necessary; it must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade or business. In addition, the taxpayrer must substantially prove by evidence or records teh deductions claimed under law, otherwise, the same will be disallowed. There has been no attempt to define “ordinary and necessary” with precision. However, as guiding principle in the proper adjudication of conflicting claims, an expenses is considered necessary where the expenditure is appropriate and helpdul in the


development of the taxpayer’s business. It is ordinary when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer’s business; the expenditure, to be an allowable deduction as a business expense, must be determined from the nature of the expenditure itself, and on the extent and permanency of the work accomplished by the expenditure. Herein, ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires; which is erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations. CAPITAL ASSETS Calasanz v CIR Ursula Calasanz (wife of Tomas) inherited from her father a parcel of land in Cainta, Rizal. In order to liquidate her inheritance, she had the land surveyed, and subdivided into lots, and put up improvements such as roads, drainage, lighting, etc., to make it more saleable. Afterwards, the lots were sold. She and her husband in the same year filed a join income tax return with the BIR, disclosing a profit of P 31, 060. 06 from the sale of the lots, and reported 50% or P15,530.03 as taxable capital gains. However upon audit and review, they were adjudged as petitioners engaged in real estate business and were thus assessed real estate dealer’s tax and deficiency income tax on ordinary gain. The spouses Calasanz contended that inherited land is a capital asset within the meaning of Section 34 of the Tax Code and that an heir who liquidates his inheritance cannot be said to have engaged in real estate business and may not be denied the preferential tax treatment given to gains from sale of capital assets, merely because he disposed of it in the only possible and advantageous way. They also averred that the land was sold because of their intention to effect a liquidation, it’s being divided into smaller lots made it easier to dispose of. However they also admitted that the improvements they introduced to the land were added to facilitate its sale. On the other hand, respondent Commissioner maintained that the imposition of the taxes in question is in accordance with law since petitioners are deemed to be in the real estate business for having been involved in a series of real estate transactions pursued for profit. Respondent argued that property acquired by inheritance may be converted from an investment property to a business property if, as in the present case, it was subdivided, improved, and subsequently sold and the number, continuity and frequency of the sales were such as to constitute "doing business." Respondent likewise contended that inherited property is by itself neutral and the fact that the ultimate purpose is to liquidate is of no moment for the important inquiry is what the taxpayer did with the property. Respondent concluded that since the lots are ordinary assets, the profits realized therefrom are ordinary gains, hence taxable in full.

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Issue: Whether or not petitioners are real estate dealers liable for real estate dealer’s fixed tax Whether the gains realized from the sale are taxable in full as ordinary income or capital gains taxable at capital gain rates Held: The Court decided in favor of the respondent. Petitioners engaged in the real estate business and accordingly, the gains from the sale of the lots are ordinary income taxable in full. Ratio: The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines capital assets as follows: [1] Capital assets.-The term 'capital assets' means property held by the taxpayer [whether or not connected with his trade or business], but does not include, stock in trade of the taxpayer or other property of a kind which would properly be included, in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection [f] of section thirty; or real property used in the trade or business of the taxpayer. If an asset is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction. However there is no fixed formula or rule which can determine whether a property sold by a taxpayer was sold in the ordinary course of business or whether it was sold as a capital asset. The facts and circumstances of each case must be analyzed to determine that. A property initially classified as a capital asset may be treated as an ordinary asset if a combination of the factors show that the activity was in furtherance of or in the course of 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 saleable. 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. Upon an examination of the facts on record, the activities of petitioners are indistinguishable from those invariably employed by one engaged in the business of selling real estate. This is primarily due to the development of the real property. The petitioners did not sell the land in the condition they acquired it. It was originally agricultural land, which they turned into a residential area, introducing numerous improvements in order to entice buyers. The cost of the improvements amounted to a large amount, and the extensive improvements indicate that the seller held the property primarily for sale to customers in the ordinary course of business.


The existence of contract receivables, and the sizable amount of the receivables in comparison of the sales volume during the same period shows that lots were sold on instalment basis, and suggests the number, continuity, and frequency of the sales. Another indicator of participating in real estate business is the circumstance that the lots were advertised 13 for sale to the public and that sales and collection commissions were paid out during the period in question. Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation. The fact that property is sold for purposes of liquidation does not foreclose a determination that a "trade or business" is being conducted by the seller. The real property can be sold without losing the benefits of the capital gain provision, unless he enters the real estate business and carries on the sale in the manner in which such a business is ordinarily conducted. In that event, the liquidation constitutes a business and a sale in the ordinary course of such a business and the preferred tax status is lost.

ORDINARY INCOME Tuason v Lingad In 1948 the petitioner inherited from his mother several tracts of land, among which were two contiguous parcels situated on Pureza and Sta. Mesa streets in Manila, with an area of 318 and 67,684 square meters, respectively. When the petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine lots. Twenty-eight were allocated to their then occupants who had lease contracts with the petitioner's predecessor at various times from 1900 to 1903, which contracts expired on December 31, 1953. The 29th lot (hereinafter referred to as Lot 29), with an area of 48,000 square meters, more or less, was not leased to any person. It needed filling because of its very low elevation, and was planted to kangkong and other crops. After the petitioner took possession of the mentioned parcels in 1950, he instructed his attorney-in-fact, J. Antonio Araneta, to sell them. There was no difficulty encountered in selling the 28 small lots as their respective occupants bought them on a 10-year installment basis. Lot 29 could not however be sold immediately due to its low elevation. Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into small lots and paved with macadam roads. The small lots were then sold over the years on a uniform 10-year annual amortization basis. J. Antonio Araneta, the petitioner's attorney-in-fact, did not employ any broker nor did he put up advertisements in the matter of the sale thereof. In 1953 and 1954 the petitioner reported his income from the sale of the small lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On May 17, 1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small lots, against a contrary ruling of a revenue examiner. On the basis of the 1957 opinion of the Collector of Internal Revenue, the revenue examiner approved the petitioner's treatment of his income from the sale of the lots in question. which was concurred in by the Commissioner of Internal Revenue.

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On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's profits from the sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner received a letter from the Bureau of Internal Revenue advising him to pay deficiency income tax for 1957 Issue: 1.)W/n he was engaged in the business of leasing the lots he inherited from his mother as well other real properties 2.)W/n his subsequent sales of the mentioned lots cannot be recognized as sales of capital assets but of "real property used in trade or business of the taxpayer Held: the judgment of the Court of Tax Appeals is affirmed, except the portion thereof that imposes 5% surcharge and 1% monthly interest, which is hereby set aside. No costs. Rationale: As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whether or not connected with his trade or business, except: (1) stock in trade or other property included in the taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or business. If the taxpayer sells or exchanges any of the properties above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss. Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a corporation) from the sale or exchange of capital assets held for more than twelve months, only 50% of the net capital gain shall be taken into account in computing the net income. When the petitioner obtained by inheritance the parcels in question, transferred to him was not merely the duty to respect the terms of any contract thereon, but as well the correlative right to receive and enjoy the fruits of the business and property which the decedent had established and maintained. 7 Moreover, the record discloses that the petitioner owned other real properties which he was putting out for rent, from which he periodically derived a substantial income, and for which he had to pay the real estate dealer's tax Under the circumstances, the petitioner's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets. The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve a different characterization for tax purposes. Circumstances show that he was engaged in the real estate business This Court notes, however, that in ordering the petitioner to pay the deficiency income tax, the Tax Court also required him to pay a 5% surcharge plus 1% monthly interest. In our opinion this additional requirement should be eliminated because the petitioner relied in good faith upon opinions rendered by no less than the highest officials of the Bureau of Internal Revenue, including the Commissioner himself. China Banking Corp v CA


Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with "deposit-taking" function. The investment amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share. In the course of the regular examination of the financial books and investment portfolios of petitioner conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has become insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income. Respondent Commissioner of internal Revenue disallowed the deduction and assessed petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and compromise penalty. The disallowance of the deduction was made on the ground that the investment should not be classified as being "worthless" and that, although the Hongkong Banking Commissioner had revoked the license of First CBC Capital as a "deposit-taping" company, the latter could still exercise, however, its financing and investment activities. Assuming that the securities had indeed become worthless, respondent Commissioner of Internal Revenue held the view that they should then be classified as "capital loss," and not as a bad debt expense there being no indebtedness to speak of between petitioner and its subsidiary. Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court sustained the Commissioner, holding that the securities had not indeed become worthless and ordered petitioner to pay its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest per annum until fully paid. When the decision was appealed to the Court of Appeals, the latter upheld the CTA. In its instant petition for review on certiorari, petitioner bank assails the CA decision. The petition must fail. The claim of petitioner that the shares of stock in question have become worthless is based on a Profit and Loss Account for the Year-End 31 December 1987, and the recommendation of Bangko Sentral that the equity investment be written-off due to the insolvency of the subsidiary. While the matter may not be indubitable (considering that certain classes of intangibles, like franchises and goodwill, are not always given corresponding values in financial statements, there may really be no need, however, to go of length into this issue since, even to assume the worthlessness of the shares, the deductibility thereof would still be nil in this particular case. At all events, the Court is not prepared to hold that both the tax court and the appellate court are utterly devoid of substantial basis for their own factual findings. Subject to certain exceptions, such as the compensation income of individuals and passive income subject to final tax, as well as income of non-resident aliens and foreign corporations not engaged in trade or business in the Philippines, the

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tax on income is imposed on the net income allowing certain specified deductions from gross income to be claimed by the taxpayer. Among the deductible items allowed by the National Internal Revenue Code ("NIRC") are bad debts and losses. An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital asset. A capital asset is defined negatively in Section 33(1) of the NIRC; viz: (1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section twenty-nine; or real property used in the trade or business of the taxpayer.” Thus, shares of stock; like the other securities defined in Section 20(t) of the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. Section 20(u) of the NIRC defines a dealer in securities thus: "(u) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom." In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. Section 29(d)(4)(B) of the NIRC states: "(B) Securities becoming worthless. - If securities as defined in Section 20 become worthless during the tax" year and are capital assets, the loss resulting therefrom shall, for the purposes of his Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets." The above provision conveys that the loss sustained by the holder of the securities, which are capital assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange


but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets.”A similar kind of treatment is given, by the NIRC on the retirement of certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. In these cases, the NIRC dispenses, in effect, with the standard requirement of a sale or exchange for the application of the capital gain and loss provisions of the code. Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer. In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation of petitioner bank whose shares in said investee corporation are not intended for purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a capital loss, not an ordinary loss, to the investor. Section 29(d)(4)(A), of the NIRC expresses: "(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in Section 33." The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section 29(d)(4)(A), read: "Section 33. Capital gains and losses. “x x x

xxx

x x x.

"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. 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 foregoing limitation an shall not be included in determining the applicability of such limitation to other losses.” The exclusionary clause found in the foregoing text of the law does not include all forms of securities but specifically covers only bonds, debentures, notes, certificates or other evidence of indebtedness, with interest coupons or in registered form, which are the instruments of credit normally dealt with in the usual lending operations of a financial institution. Equity holdings cannot come close to being, within the purview of "evidence of indebtedness" under the second sentence of the aforequoted paragraph. Verily, it is for a like thesis

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that the loss of petitioner bank in its equity in vestment in the Hongkong subsidiary cannot also be deductible as a bad debt. The shares of stock in question do not constitute a loan extended by it to its subsidiary (First CBC Capital) or a debt subject to obligatory repayment by the latter, essential elements to constitute a bad debt, but a long term investment made by CBC. One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the gain or loss upon the sale or exchange of property, as the case may be, shall be recognized. The complete text reads: “SECTION 34. Determination of amount of and recognition of gain or loss."(a) Computation of gain or loss. - 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 basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be to sum of money received plus the fair market value of the property (other than money) received. (As amended by E.O. No. 37) "(b) Basis for determining gain or loss from sale or disposition of property. - The basis of property shall be - (1) The cost thereof in cases of property acquired on or before March 1, 1913, if such property was acquired by purchase; or "(2) The fair market price or value as of the date of acquisition if the same was acquired by inheritance; or "(3) If the property was acquired by gift the basis shall be the same as if 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, then for the purpose of determining loss the basis shall be such fair market value; or "(4) If the property, other than capital asset referred to in Section 21 (e), was acquired for less than an adequate consideration in money or moneys worth, the basis of such property is (i) the amount paid by the transferee for the property or (ii) the transferor's adjusted basis at the time of the transfer whichever is greater. "(5) The basis as defined in paragraph (c) (5) of this section if the property was acquired in a transaction where gain or loss is not recognized under paragraph (c) (2) of this section. (As amended by E.O. No. 37) “(c) Exchange of property.

"(1) General rule.- Except as herein provided, upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. "(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation which is, a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock in another corporation also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation. "No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return of property." The above law should be taken within context on the general subject of the determination, and recognition of gain or loss; it is not preclusive of, let alone renders completely inconsequential, the more specific provisions of the code. Thus, pursuant, to the same section of the law, no such recognition shall be made if the sale or exchange is made in pursuance of a plan of corporate merger or consolidation or, if as a result of an exchange of property for stocks, the exchanger, alone or together with others not exceeding four, gains control of the corporation. Then, too, how the resulting gain might be taxed, or whether or not the loss would be deductible and how, are matters properly dealt with elsewhere in various other sections of the NIRC. At all events, it may not be amiss to once again stress that the basic rule is still that any capital loss can be deducted only from capital gains under Section 33(c) of the NIRC. In sum (a) The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset. (b) Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a capital, not an ordinary, loss. (c) The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become "worthless." MERGER / CONSOLIDATION


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CIR v Rufino This is a petition for review on certiorari of the CTA decision which absolved petitioners from liability for capital gains tax on stocks received by them from Eastern Theatrical, Inc. The Rufinos were majority stockholders of Eastern Theatrical Co., Inc (hereinafter Old ETC) which had a corporate term of 25 years, which terminated on January 25, 1959, president of which was Ernesto Rufino. On December 8, 1958, the Eastern Theatrical Co, Inc. (hereinafter New ETC, with a corporate term of 50 years) was organized, and the Rufinos were also the majority stockholders of the corporation, with Vicente Rufino as the GeneralManager. Both ETCs were engaged in the same business. Old ETC held a stockholder’s meeting to merge with the New ETC on December 17, 1958 to continue its business after the end of Old ETC’s corporate term. The merger was authorized by a board resolution. It was expressly declared that the merger was necessary to continue operating the Capitol and Lyric Theaters in Manila even after the expiration of corporate existence, to preserve both its booking contracts and to uphold its collective bargaining agreements. Through the two Rufinos (Ernesto and Vicente), a Deed of Assignment was executed, which conveyed and transferred all the business, property, assets and good will of the Old ETC to the New ETC in exchange for shares of stock of the latter to be issued to the shareholders at the rate of one stock for each stock held in the Old ETC. The Deed was to retroact from January 1, 1959. New ETC’s Board approved the merger and the Deed of Assignment on January 12, 1959 and all changes duly registered with the SEC. The BIR, after examination, declared that the merger was not undertaken for a bona fide business purpose but only to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock. He then imposed deficiency assessments against the private respondents, the Rufinos. The Rufinos requested for a reconsideration, which was denied. Therefore, they elevated their matter to the CTA, who reversed the judgment of the CIR, saying that they found that there was “no taxable gain derived from the exchange of old stocks simply for new stocks for the New Corporation” because it was pursuant to a valid plan of reorganization. The CIR raised it to the SC on petition for review on certiorari. Issue:

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WON there was a valid merger and that there was no taxable gain derived therefrom—YES, the CTA was correct in ruling that there WAS a merger and that no taxable gain was derived. CTA decision is AFFIRMED.

Rationale: • Validity of transfer In support of its argument that the Rufinos were trying to avoid the payment of capital gains tax, the CIR said that the New ETC did not actually issue stocks in exchange for the properties of the Old ETC. The increase in capitalization only happened in March 1959, or 37 days after the Old ETC expired. Prior to registration, the New ETC could not have validly performed the transfer. The SC ruled that the retroactivity of the Deed of Assignment cured the defect and there was no impediment.

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Bona Fide Business Purpose

The criterion of the law is that the purpose of the merger must be for a bona fide business purpose and not for the purpose of escaping taxes. The case of Helvering v. Gregory stated that a mere “operation having no business or


corporate purpose—a mere devise which put on the form of a corporate reorganization as a disguise for concealing its real character and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business but to transfer a parcel of corporate shares.” When the corporation created is nothing more than a contrivance, there is no legitimate business purpose. The Court states that there is no such furtive intention in this case. In fact, the New ETC continues to operate the Capitol and Lyric movie theaters even up to 27 years after the merger. There is as yet no dissolution, so the Rufinos haven’t gained any benefit yet from the merger, which makes them no more liable than the time the merger took place. The government’s remedy: The merger merely deferred the payment for taxes until the future, which the government may assert later on when gains are realized and benefits are distributed among the stockholders as a result of the merger. The taxes are not forfeited but merely postponed and may be imposed at the proper time later on. BUSINESS PURPOSE Gregory v Helvering Petitioner Gregory was the owner of all the stock of United Mortgage Corporation, which held among its assets 1,000 shares of the Monitor Securities Corporation. In order to procure a transfer of these shares to herself and diminish the amount of income tax which would result from a direct transfer by way of dividend, she sought to bring about a 'reorganization' under section 112(g) of the Revenue Act of 1928. Averill Corporation was organized under the laws of Delaware. Three days later, the United Mortgage Corporation transferred to the Averill Corporation the 1,000 shares of Monitor stock, for which all the shares of the Averill Corporation were issued to the petitioner. Subsequently, Averill Corporation was dissolved, and liquidated by distributing all its assets, namely, the Monitor shares, to the petitioner. No other business was ever transacted, or intended to be transacted, by that company. Petitioner thereafter paid tax on the capital net gains when she sold her shares. The Commissioner of Internal Revenue, being of opinion that the reorganization attempted was without substance and must be disregarded, held that petitioner was liable for a tax as though the United corporation had paid her a dividend consisting of the amount realized from the sale of the Monitor shares. Issue: W/N there had been a “reorganization’ within the meaning of the Revenue Act of 1928 and therefore make petitioner Gregory liable only to a tax on the capital net gain for the sale of his shares of stocks under the Averill Corporation and not tax on the dividends. NO Held: The judgment is AFFIRMED.

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Rationale: Section 112 of the Revenue Act of 1928 (26 USCA 2112) deals with the subject of gain or loss resulting from the sale or exchange of property. Such gain or loss is to be recognized in computing the tax, except as provided in that section. 'Sec. 112. ... (g) Distribution of Stock on Reorganization. If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock of securities shall be recognized. ... '(1) The term 'reorganization' means ... (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. ... ' A transfer made 'in pursuance of a plan of reorganization' (section 112(g) of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose-a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death. In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.


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Taxation Part 2, Digests

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