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CIR V. PLDT
DECEMBER 15, 2005

 Indirect Taxes; VAT

FACTS:

PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install,
operate and maintain a telecommunications system throughout the Philippines.

For equipment, machineries and spare parts it imported for its business on
different dates, PLDT paid the BIR value-added tax (VAT).

PLDT filed on December 2, 1994 a claim for tax credit/refund of the VAT it
paid in connection with its importation of various equipment, machineries and
spare parts needed for its operations.

It based its claim on its tax exemption privilege under Section 12 of R. A.

7082, which reads:

Sec. 12. … In addition thereto, the grantee shall pay a franchise

tax equivalent to three percent (3%) of all gross receipts of the
telephone or other telecommunications businesses transacted under
this franchise by the grantee, its successors or assigns, and the
said percentage shall be in lieu of all taxes on this franchise
or earnings thereof.

ISSUE:

Whether or not PLDT is exempt from paying value-added tax (VAT).

HELD (Dry Run):

PLDT is not exempt from paying value-added tax, since its exemption privilege
does not exempt it from indirect taxes. The clause "in lieu of all taxes" in Section
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. Statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer.

FURTHER DISCUSSIONS:

Taxation is the rule, exemption is the exception. Accordingly, statutes granting

tax exemptions must be construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority. To him, therefore, who claims a refund
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or exemption from tax payments rests the burden of justifying the exemption by
words too plain to be mistaken and too categorical to be misinterpreted.

As to who shall bear the burden of taxation, taxes may be classified into
either direct tax or indirect tax.

In context, direct taxes are those that are exacted from the very person who, it
is intended or desired, should pay them; they are impositions for which a
taxpayer is directly liable on the transaction or business he is engaged in.

On the other hand, indirect taxes are those that are demanded, in the first
instance, from, or are paid by, one person in the expectation and intention that
he can shift the burden to someone else. Stated elsewise, indirect taxes are
taxes wherein the liability for the payment of the tax falls on one person but the
burden thereof can be shifted or passed on to another person, such as when the
tax is imposed upon goods before reaching the consumer who ultimately pays for
it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax
burden, not the liability to pay it, to the purchaser as part of the price of goods
sold or services rendered.

By tacking the VAT due to the selling price, the seller remains the person
primarily and legally liable for the payment of the tax. What is shifted only to the
intermediate buyer and ultimately to the final purchaser is the burden of the tax.
Stated differently, a seller who is directly and legally liable for payment of an
indirect tax, such as the VAT on goods or services, is not necessarily the person
who ultimately bears the burden of the same tax. It is the final purchaser or end-
user of such goods or services who, although not directly and legally liable for
the payment thereof, ultimately bears the burden of the tax.

The NIRC classifies VAT as "an indirect tax, the amount of which may be
shifted or passed on to the buyer, transferee or lessee of the goods". 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 or on
its earnings. It is imposed on all taxpayers who import goods (unless such
importation falls under the category of an exempt transaction under Sec. 109 of
the Revenue Code) 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.

It bears to stress that the liability for the payment of the indirect taxes lies
only with the seller (here, seller of the goods to the PLDT in case such foreign
seller is subject to VAT) of the goods or services, not in the buyer thereof. Thus,
one (here PLDT) cannot invoke one’s exemption privilege to avoid the passing on
or the shifting of the VAT to him by the manufacturers/suppliers of the goods he
purchased. Hence, it is important to determine if the tax exemption granted to a
taxpayer specifically includes the indirect tax which is shifted to him as part of
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the purchase price, otherwise it is presumed that the tax exemption embraces
only those taxes for which the buyer is directly liable.

Time and again, the Court has stated that taxation is the rule, exemption is
the exception. Accordingly, statutes granting tax exemptions must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority. To him, therefore, who claims a refund or exemption from tax
payments rests the burden of justifying the exemption by words too plain to be
mistaken and too categorical to be misinterpreted.

If we were to adhere to the appellate court’s interpretation of the law that the
"in lieu of all taxes" clause encompasses the totality of all taxes collectible under
the Revenue Code, then, the immediately following limiting clause "on this
franchise and its earnings" would be nothing more than a pure jargon bereft of
effect and meaning whatsoever.

Significantly, in Manila Electric Company [Meralco] vs. Vera, the Court

declared the relatively broader exempting clause "shall be in lieu of all taxes and
assessments of whatsoever nature … upon the privileges earnings, income
franchise ... of the grantee" written in par. # 9 of Meralco’s franchise as not so all
encompassing as to embrace indirect tax.

It may be so that in Maceda vs. Macaraig, Jr. the Court held that an
exemption from "all taxes" granted to the National Power Corporation (NPC)
under its charter includes both direct and indirect taxes. But far from providing
PLDT comfort, Maceda in fact supports the case of herein petitioner (CIR), the
correct lesson of Maceda being that an exemption from "all taxes" excludes
indirect taxes, unless the exempting statute, like NPC’s charter, is so couched as
to include indirect tax from the exemption. Wrote the Court:

However, the amendment under Republic Act No. 6395

enumerated the details covered by the exemption. Subsequently,
P.D. 380, made even more specific the details of the exemption of
NPC to cover, among others, both direct and indirect taxes on all
petroleum products used in its operation. Presidential Decree No.
938 [NPC’s amended charter) amended the tax exemption by
simplifying the same law in general terms. It succinctly exempts
NPC from "all forms of taxes, duties fees …."

The use of the phrase "all forms" of taxes demonstrate the

intention of the law to give NPC all the tax exemptions it has been
enjoying before.

It is evident from the provisions of P.D. No. 938 that its purpose is
to maintain the tax exemption of NPC from all forms of taxes
including indirect taxes as provided under R.A. No. 6395 and P.D.
380 if it is to attain its goals.
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It cannot be over-emphasized that tax exemption represents a loss of revenue

to the government and must, therefore, not rest on vague inference. When
claimed, it must be strictly construed against the taxpayer who must prove that
he falls under the exception. And, if an exemption is found to exist, it must not be
enlarged by construction, since the reasonable presumption is that the state has
granted in express terms all it intended to grant at all, and that, unless the
privilege is limited to the very terms of the statute the favor would be extended
beyond dispute in ordinary cases.

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT
blanket exemption from payment of indirect taxes, which, in the ultimate
analysis, are not taxes on its franchise or earnings. PLDT has not shown its
eligibility for the desired exemption. None should be granted.

SILKAIR (SINGAPORE) V. CIR

FEBRUARY 6, 2008

 Indirect Taxes Must Be Paid by Statutory Taxpayer; Passed on as Part

of the Purchase Price

FACTS:

Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under the laws
of Singapore which has a Philippine representative office, is an international air
carrier operating the Singapore-Cebu-Davao-Singapore, Singapore-Davao-Cebu-
Singapore, and Singapore-Cebu-Singapore routes.

Silkair filed with the Bureau of Internal Revenue (BIR) a written application
for the refund of P4,567,450.79 excise taxes it claimed to have paid on its
purchases of jet fuel from Petron Corporation from January to June 2000.

Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of
1997 which reads
 
Sec. 135. Petroleum Products sold to International Carriers and
Exempt Entities or Agencies. – Petroleum products sold to the
following are exempt from excise tax:
 
(b) Exempt entities or agencies covered by tax treaties,
conventions, and other international agreements for their use and
consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from
similar taxes petroleum products sold to Philippine carriers, entities
or agencies;
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and Article 4(2) of the Air Transport Agreement between the Government of the
Republic of the Philippines and the Government of the Republic of Singapore (Air
Transport Agreement between RP and Singapore) which reads
 
“Fuel, lubricants, spare parts, regular equipment and aircraft
stores introduced into, or taken on board aircraft in the territory of
one Contracting party by, or on behalf of, a designated airline of the
other Contracting Party and intended solely for use in the operation
of the agreed services shall, with the exception of charges
corresponding to the service performed, be exempt from the same
customs duties, inspection fees and other duties or taxes imposed in
the territories of the first Contracting Party , even when these
supplies are to be used on the parts of the journey performed over
the territory of the Contracting Party in which they are introduced
into or taken on board. The materials referred to above may be
required to be kept under customs supervision and control.”
 
ISSUE:

Whether or not Silkair’s claim for refund or tax credit will prosper.

HELD (Dry Run):

Silkair’s claim for refund or tax credit will not prosper, because it is not the
proper party to ask for such a claim considering that it is not the statutory
taxpayer, but Petron. Moreover, the additional amount billed to it by Petron is not
a tax but part of the purchase price. Furthermore, there is no showing of
legislative intent that Sec. 135 of the NIRC and the Air Transport Agreement
grant exemptions from indirect taxes. Statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer.

FURTHER DISCUSSIONS:

Firstly, assuming arguendo that Sec. 135 (b) of the NIRC of 1997 and the Air
Transport Agreement between RP and Singapore grant exemptions from indirect
taxes, Silkair cannot claim for refund or tax credit because it is not the statutory
taxpayer, but Petron. Section 130 (A) (2) of the NIRC provides that “unless
otherwise specifically allowed, the return shall be filed and the excise tax paid
by the manufacturer or producer before removal of domestic products from place
of production.”

Secondly, the excise taxes on fuel passed on to Silkair by Petron is not a tax
but part of the purchase price which the latter should pay in order to get the
article.
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And lastly, the exemption granted under Section 135 (b) of the NIRC of 1997
and Article 4(2) of the Air Transport Agreement between RP and Singapore
cannot, without a clear showing of legislative intent, be construed as including
indirect taxes. Statutes granting tax exemptions must be construed in
strictissimi juris against the taxpayer and liberally in favor of the taxing
authority, and if an exemption is found to exist, it must not be enlarged by
construction.

CIR V. BRITISH OVERSEAS AIRWAYS CORPORATION

April 30, 1987

EN BANC

 Foreign Corporation Doing or Engaging In or Transacting Business

FACTS:

BOAC is a 100% British Government-owned corporation organized and

existing under the laws of the United Kingdom. It is engaged in the international
airline business and is a member-signatory of the Interline Air Transport
Association (IATA). As such it operates air transportation service and sells
transportation tickets over the routes of the other airline members. During the
periods covered by the disputed assessments, it is admitted that BOAC had no
landing rights for traffic purposes in the Philippines, and was not granted a
Certificate of public convenience and necessity to operate in the Philippines by
the Civil Aeronautics Board (CAB). Consequently, it did not carry passengers
and/or cargo to or from the Philippines, although during the period covered by
the assessments, it maintained a general sales agent in the Philippines —
Wamer Barnes and Company, Ltd., and later Qantas Airways — which was
responsible for selling BOAC tickets covering passengers and cargoes.

The CTA held that the proceeds of sales of BOAC passage tickets in the
Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways,
during the period in question, do not constitute BOAC income from Philippine
sources "since no service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not subject to
Philippine income tax. The CTA position was that income from transportation is
income from services so that the place where services are rendered determines
the source.

ISSUE:

1. What constitutes "doing" or "engaging in" or "transacting" business?

2. Is BOAC doing business in the Philippines?

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HELD (Dry Run):

1. The term “doing” or “engaging in” or “transacting business” implies a

continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization.

2. Yes, BOAC is doing business in the Philippines. During the periods covered
by the subject assessments, it was maintaining a general sales agent in the
Philippines. That general sales agent, from 1959 to 1971, was engaged in (1)
selling and issuing tickets; (2) breaking down the whole trip into series of trips —
each trip in the series corresponding to a different airline company; (3) receiving
the fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered. Those
activities were in exercise of the functions which are normally incident to, and
are in progressive pursuit of, the purpose and object of its organization as an
international air carrier. There should be no doubt then that BOAC was "engaged
in" business in the Philippines through a local agent during the period covered by
the assessments.

FURTHER DISCUSSIONS:

There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the
business organization. "In order that a foreign corporation may be regarded as
doing business within a State, there must be continuity of conduct and intention
to establish a continuous business, such as the appointment of a local agent,
and not one of a temporary character.

BOAC, during the periods covered by the subject - assessments, maintained a

general sales agent in the Philippines, That general sales agent, from 1959 to
1971, was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips — each trip in the series corresponding to a
different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement as
prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those
activities were in exercise of the functions which are normally incident to, and
are in progressive pursuit of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its main activity, is the
very lifeblood of the airline business, the generation of sales being the
paramount objective. There should be no doubt then that BOAC was "engaged
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in" business in the Philippines through a local agent during the period covered by
the assessments.

Next, we address ourselves to the issue of whether or not the revenue from
sales of tickets by BOAC in the Philippines constitutes income from Philippine
sources and, accordingly, taxable under our income tax laws.

The words 'income from any source whatever' disclose a legislative policy to
include all income not expressly exempted within the class of taxable income
under our laws. Income means "cash received or its equivalent"; it is the amount
of money coming to a person within a specific time ...; it means something
distinct from principal or capital. For, while capital is a fund, income is a flow. As
used in our income tax law, "income" refers to the flow of wealth.

Did such "flow of wealth" come from "sources within the Philippines"?

The source of an income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the Philippines,
it is sufficient that the income is derived from activity within the Philippines. In
BOAC's case, the sale of tickets in the Philippines is the activity that produces
the income. The tickets exchanged hands here and payments for fares were also
made here in Philippine currency. The site of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of
supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a

common carrier, it constitutes the contract between the ticket-holder and the
carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare
and the corresponding obligation of the carrier to transport the passenger upon
the terms and conditions set forth thereon. The ordinary ticket issued to
members of the traveling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the parties entering into
the relationship.

True, Section 37(a) of the Tax Code, which enumerates items of gross income
from sources within the Philippines, namely: (1) interest, (21) dividends, (3)
service, (4) rentals and royalties, and (6) sale of personal property, does not
mention income from the sale of tickets for international transportation. However,
that does not render it less an income from sources within the Philippines.
Section 37, by its language, does not intend the enumeration to be exclusive. It
merely directs that the types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the section will show that it
does not state that it is an all-inclusive enumeration, and that no other kind of
income may be so considered. "
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BOAC, however, would impress upon this Court that income derived from
transportation is income for services, with the result that the place where the
services are rendered determines the source; and since BOAC's service of
transportation is performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under our income tax
laws. The Tax Court upholds that stand in the joint Decision under review.

The absence of flight operations to and from the Philippines is not

determinative of the source of income or the site of income taxation. Admittedly,
BOAC was an off-line international airline at the time pertinent to this case. The
test of taxability is the "source"; and the source of an income is that activity ...
which produced the income. Unquestionably, the passage documentations in
these cases were sold in the Philippines and the revenue therefrom was derived
from a activity regularly pursued within the Philippines. And even if the BOAC
tickets sold covered the "transport of passengers and cargo to and from foreign
cities", it cannot alter the fact that income from the sale of tickets was derived
from the Philippines. The word "source" conveys one essential idea, that of origin,
and the origin of the income herein is the Philippines.

EVANGELISTA V. CIR
October 15, 1957

EN BANC

 For Purposes of the Tax on Corporations, the National Internal

Revenue Code Includes Partnership within the Purview of the Term
Corporation

FACTS:

Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista are the

petitioners in this case.

The petitioners borrowed from their father the sum of P59,400.00 which
amount together with their personal monies was used by them for the purpose of
buying real properties.

On February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an
area of 3,713.40 sq. m. including improvements thereon from the sum of
P100,000.00; this property has an assessed value of P57,517.00 as of 1948.

On April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land
with an aggregate area of 3,718.40 sq. m. including improvements thereon for
P130,000.00; this property has an assessed value of P82,255.00 as of 1948.
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On April 28, 1944 they purchased from the Insular Investments Inc., a lot of
4,353 sq. m. including improvements thereon for P108,825.00. This property has
an assessed value of P4,983.00 as of 1948.

On April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq.
m. including improvements thereon for P237,234.34. This property has an
assessed value of P59,140.00 as of 1948.

They appointed their brother Simeon Evangelista to 'manage their properties

with full power to lease; to collect and receive rents; to issue receipts therefor; in
default of such payment, to bring suits against the defaulting tenants; to sign all
letters, contracts, etc., for and in their behalf, and to endorse and deposit all
notes and checks for them.

After having bought the above-mentioned real properties the petitioners had
the same rented or leases to various tenants.

It further appears that on September 24, 1954 respondent Collector of

Internal Revenue demanded the payment of income tax on corporations, real
estate dealer's fixed tax and corporation residence tax for the years 1945-1949.

ISSUE:

Whether petitioners are subject to the tax on corporations.

HELD (Dry Run):

The petitioners are subject to tax on corporations.

At the outset, the petitioners formed a partnership. The essential elements of

a partnership are two, namely: (a) an agreement to contribute money, property or
industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The said elements are present in the present case as they
contribute money and property to a common fund and their purpose was to
engage in real estate transactions as shown by the circumstances.

For purposes of the tax on corporations, the National Internal Revenue Code,
includes partnership, no matter how created or organized, within the purview of
the term "corporation." They are, therefore, subject to tax on corporations.

FURTHER DISCUSSIONS:

The Internal Revenue provides:

The term 'corporation' includes partnerships, no matter how created or

organized, joint-stock companies, joint accounts (cuentas en participacion),
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associations or insurance companies, but does not include duly registered

general co-partnerships.

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind

themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.

Pursuant to the article, the essential elements of a partnership are two,

namely: (a) an agreement to contribute money, property or industry to a common
fund; and (b) intent to divide the profits among the contracting parties.

The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common
fund. Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, we are
fully satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in

existence. It was not a property inherited by them pro indiviso.
They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common
fund.

2. They invested the same, not merely in one transaction, but in

a series of transactions. On February 2, 1943, they bought a
lot for P100,000.00. On April 3, 1944, they purchased 21 lots
for P18,000.00. This was soon followed on April 23, 1944, by
the acquisition of another real estate for P108,825.00. Five (5)
days later, they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transactions undertaken, as well as the
brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design
that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired
by the petitioners in February, 1943. In other words, one
cannot but perceive a character of habitually peculiar to
business transactions engaged in the purpose of gain.

3. The aforesaid lots were not devoted to residential purposes,

or to other personal uses, of petitioners herein. The properties
were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of
rentals.
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4. Since August, 1945, the properties have been under the

management of one person, namely Simeon Evangelista, with
full power to lease, to collect rents, to issue receipts, to bring
suits, to sign letters and contracts, and to indorse and deposit
notes and checks. Thus, the affairs relative to said properties
have been handled as if the same belonged to a corporation or
business and enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10)
years, or, to be exact, over fifteen (15) years, since the first
property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.

The collective effect of these circumstances is such as to leave no room for

doubt on the existence of said intent in petitioners herein.

Petitioners insist, however, that they are mere co-owners, not copartners, for,
in consequence of the acts performed by them, a legal entity, with a personality
independent of that of its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar. This pretense was
correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships". When our
Internal Revenue Code includes "partnerships" among the entities subject to the
tax on "corporations", said Code must allude, therefore, to organizations which
are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely one of the most typical
forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of
said Code, "the term corporation includes partnerships, no matter how created or
organized." Again, pursuant to said section 84(b), the term "corporation" includes,
among other, joint accounts, (cuentas en participation)" and "associations," none
of which has a legal personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact,
as above stated, "duly registered general co-partnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by
law (sections 24 and 84 [b] from the connotation of the term "corporation" It may
not be amiss to add that petitioners' allegation to the effect that their liability in
connection with the leasing of the lots above referred to, under the management
of one person — even if true, on which we express no opinion — tends to
increase the similarity between the nature of their venture and that corporations,
and is, therefore, an additional argument in favor of the imposition of said tax on
corporations.
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For purposes of the tax on corporations, our National Internal Revenue Code,
includes these partnerships — with the exception only of duly registered general
co-partnerships — within the purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein constitute a partnership, insofar as said
Code is concerned and are subject to the income tax for corporations.

OÑA V. CIR
May 25, 1972

EN BANC

 Unregistered Partnership

FACTS:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oña and her five children.

In 1948, a civil case was instituted in the Court of First Instance of Manila for
the settlement of her estate. Thereafter, the administrator submitted the project
of partition, which was approved by the Court in 1949.

The Tax Court found that instead of actually distributing the estate of the
deceased among themselves pursuant to the project of partition approved in
1949, the properties remained under the management of Lorenzo T. Oña who
used said properties in business by leasing or selling them and investing the
income derived therefrom and the proceed from the sales thereof in real
properties and securities. As a result of which said properties and investments
steadily increased yearly. And all these became possible because petitioners
never actually received any share of the income or profits from Lorenzo T. Oña
and instead, they allowed him to continue using said shares as part of the
common fund for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits of their common
business as reported by the said Lorenzo T. Oña.

On the basis of the foregoing facts, respondent Commissioner of Internal

Revenue found that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax.

ISSUE:

Whether the petitioners are subject to corporate income tax.

HELD (Dry Run):

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The petitioners are subject to corporate income tax. From the moment
petitioners allowed not only the incomes from their respective shares of the
inheritance but even the inherited properties themselves to be used by Lorenzo T.
Oña as a common fund in undertaking several transactions or in business, with
the intention of deriving profit to be shared by them proportionally, such act was
tantamount to actually contributing such incomes to a common fund and, in
effect, they thereby formed an unregistered partnership. For taxation purposes,
an unregistered partnership is within the purview of the term “corporation”. They
are, therefore, subject to corporate income tax.

FURTHER DISCUSSIONS:

It is thus incontrovertible that petitioners did not, contrary to their contention,

merely limit themselves to holding the properties inherited by them. Indeed, it is
admitted that during the material years herein involved, some of the said
properties were sold at considerable profit, and that with said profit, petitioners
engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It
is likewise admitted that all the profits from these ventures were divided among
petitioners proportionately in accordance with their respective shares in the
inheritance. In these circumstances, it is Our considered view that from the
moment petitioners allowed not only the incomes from their respective shares of
the inheritance but even the inherited properties themselves to be used by
Lorenzo T. Oña as a common fund in undertaking several transactions or in
business, with the intention of deriving profit to be shared by them
proportionally, such act was tantamount to actually contributing such incomes to
a common fund and, in effect, they thereby formed an unregistered partnership
within the purview of the above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the
heirs can be considered as co-owners rather than unregistered co-partners
within the contemplation of our corporate tax laws aforementioned. Before the
partition and distribution of the estate of the deceased, all the income thereof
does belong commonly to all the heirs, obviously, without them becoming thereby
unregistered co-partners, but it does not necessarily follow that such status as
co-owners continues until the inheritance is actually and physically distributed
among the heirs, for it is easily conceivable that after knowing their respective
shares in the partition, they might decide to continue holding said shares under
the common management of the administrator or executor or of anyone chosen
by them and engage in business on that basis. Withal, if this were to be allowed,
it would be the easiest thing for heirs in any inheritance to circumvent and
render meaningless Sections 24 and 84(b) of the National Internal Revenue
Code.

For tax purposes, the co-ownership of inherited properties is automatically

converted into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a common fund
with intent to produce profits for the heirs in proportion to their respective shares
 15

in the inheritance as determined in a project partition either duly executed in an

extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such
partition, the heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly
he becomes liable individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his co-heirs under a
single management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. This is exactly what happened to petitioners
in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the

Civil Code, providing that: "The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived,"
and, for that matter, on any other provision of said code on partnerships is
unavailing. In Evangelista, supra, this Court clearly differentiated the concept of
partnerships under the Civil Code from that of unregistered partnerships which
are considered as "corporations" under Sections 24 and 84(b) of the National
Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice,
elucidated on this point thus:

As regards the second question raised by petitioners about the segregation,

for the purposes of the corporate taxes in question, of their inherited properties
from those acquired by them subsequently, We consider as justified the following
ratiocination of the Tax Court in denying their motion for reconsideration:

In connection with the second ground, it is alleged that, if

there was an unregistered partnership, the holding should be
limited to the business engaged in apart from the properties
inherited by petitioners. In other words, the taxable income of
the partnership should be limited to the income derived from
the acquisition and sale of real properties and corporate
securities and should not include the income derived from the
inherited properties. It is admitted that the inherited properties
and the income derived therefrom were used in the business of
buying and selling other real properties and corporate
securities. Accordingly, the partnership income must include
not only the income derived from the purchase and sale of
other properties but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited

properties may be considered as individual income of the respective heirs only so
long as the inheritance or estate is not distributed or, at least, partitioned, but
 16

the moment their respective known shares are used as part of the common
assets of the heirs to be used in making profits, it is but proper that the income of
such shares should be considered as the part of the taxable income of an
unregistered partnership. This, We hold, is the clear intent of the law.

CIR V. JAVIER
July 31, 1991

 Fraudulent Return

FACTS:

The pertinent facts read as follows:

2. That on or about June 3, 1977, Victoria L. Javier, the wife of

private respondent, received from the Prudential Bank and
Trust Company in Pasay City the amount of US$999,973.70
remitted by her sister, Mrs. Dolores Ventosa, through some
banks in the United States, among which is Mellon Bank, N.A.

3. That on or about June 29, 1977, Mellon Bank, N.A. filed a

complaint with the Court of First Instance of Rizal against
private respondent, his wife and other defendants, claiming
that its remittance of US$1,000,000.00 was a clerical error and
should have been US$1,000.00 only, and praying that the
excess amount of US$999,000.00 be returned on the ground
that the defendants are trustees of an implied trust for the
benefit of Mellon Bank with the clear, immediate, and
continuing duty to return the said amount from the moment it
was received.

4. That on or about November 5, 1977, the City Fiscal of Pasay

City filed an Information with the then Circuit Criminal Court
(docketed as CCC-VII-3369-P.C.) charging private respondent
herein and his wife with the crime of estafa, alleging that they
misappropriated, misapplied, and converted to their own
personal use and benefit the amount of US$999,000.00 which
they received under an implied trust for the benefit of Mellon
Bank and as a result of the mistake in the remittance by the
latter.

5. That on March 15, 1978, private respondent herein filed his

Income Tax Return for the taxable year 1977 showing a gross
income of P53,053.38 and a net income of P48,053.88 and
stating in the footnote of the return that "Taxpayer was
 17

recipient of some money received from abroad which he

presumed to be a gift but turned out to be an error and is now
subject of litigation."

6. That on or before December 15, 1980, private respondent

herein received a letter from the acting Commissioner of
Internal Revenue dated November 14, 1980, together with
income assessment notices for the years 1976 and 1977,
demanding that private respondent herein pay on or before
December 15, 1980 the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years 1976
and 1977 respectively.

7. That on December 15, 1980, private respondent wrote the

Bureau of Internal Revenue that he was paying the deficiency
income assessment for the year 1976 but denying that he had
any undeclared income for the year 1977 and requested that
the assessment for 1977 be made to await final court decision
on the case filed against him for filing an allegedly fraudulent
return.

8. That on November 11, 1981, private respondent herein

received from Acting Commissioner of Internal Revenue Romulo
Villa a letter dated October 8, 1981 stating in reply to his
December 15, 1980 letter-protest that "the amount of Mellon
Bank's erroneous remittance which you were able to dispose, is
definitely taxable."

The Commissioner also imposed a 50% fraud penalty against Javier.

ISSUE:

Is the private respondent liable to the 50% fraud penalty?

HELD (Dry Run):

No, the private respondent is not liable to the 50% fraud penalty. The fraud
contemplated by law is intentional fraud. Javier’s notation in the return which
states that “Taxpayer was the recipient of some money from abroad which he
presumed to be a gift but turned out to be an error and is now subject of
litigation” should be interpreted merely as an error or mistake of fact or law not
constituting fraud. Such notation was practically an invitation for investigation.

FURTHER DISCUSSIONS:
 18

Under the then Section 72 of the Tax Code (now Section 248 of the 1988
National Internal Revenue Code), a taxpayer who files a false return is liable to
pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in
case payment has been made.

We are persuaded considerably by the private respondent's contention that

there is no fraud in the filing of the return and agree fully with the Court of Tax
Appeals' interpretation of Javier's notation on his income tax return filed on
March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad
which he presumed to be a gift but turned out to be an error and is now subject
of litigation that it was an "error or mistake of fact or law" not constituting fraud,
that such notation was practically an invitation for investigation and that Javier
had literally "laid his cards on the table."

In Aznar v. Court of Tax Appeals, fraud in relation to the filing of income tax
return was discussed in this manner:

The fraud contemplated by law is actual and not constructive. It

must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up
some legal right. Negligence, whether slight or gross, is not
equivalent to the fraud with intent to evade the tax contemplated by
law. It must amount to intentional wrong-doing with the sole object
of avoiding the tax. It necessarily follows that a mere mistake
cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes
in making entries in the returns and in the assessment, respectively,
under the inventory method of determining tax liability, it would be
unfair to treat the mistakes of the petitioner as tainted with fraud
and those of the respondent as made in good faith.

Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion and the mere
understatement of a tax is not itself proof of fraud for the purpose of tax evasion.

A "fraudulent return" is always an attempt to evade a tax,

but a merely "false return" may not be, Rick v. U.S., App. D.C.,
161 F. 2d 897, 898.

In the case at bar, there was no actual and intentional fraud through willful
and deliberate misleading of the government agency concerned, the Bureau of
Internal Revenue, headed by the herein petitioner. The government was not
induced to give up some legal right and place itself at a disadvantage so as to
prevent its lawful agents from proper assessment of tax liabilities because Javier
did not conceal anything. Error or mistake of law is not fraud. The petitioner's
zealousness to collect taxes from the unearned windfall to Javier is highly
commendable. Unfortunately, the imposition of the fraud penalty in this case is
 19

not justified by the extant facts. Javier may be guilty of swindling charges,
perhaps even for greed by spending most of the money he received, but the
records lack a clear showing of fraud committed because he did not conceal the
fact that he had received an amount of money although it was a "subject of
litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge
imposed as fraud penalty by the petitioner against the private respondent in the
deficiency assessment should be deleted.

CIR V. BANK OF COMMERCE

June 8, 2005

 The 20% Final Withholding Tax on Bank’s Interest Income Form Part
of the Taxable Gross Receipts in Computing the 5% Gross Receipts
Tax

FACTS:

In 1994 and 1995, the respondent Bank of Commerce derived passive income
in the form of interests or discounts from its investments in government securities
and private commercial papers.  On several occasions during the said period, it
paid 5% gross receipts tax on its income, as reflected in its quarterly percentage
tax returns. Included therein were the respondent bank’s passive income from
the said investments amounting to P85,384,254.51, which had already been
subjected to a final tax of 20%.

Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia Bank
Corporation v. Commissioner of Internal Revenue, CTA Case No. 4720, holding
that the 20% final withholding tax on interest income from banks does not form
part of taxable gross receipts for Gross Receipts Tax (GRT) purposes. The CTA
relied on Section 4(e) of Revenue Regulations (Rev. Reg.) No. 12-80.

Relying on the said decision, the respondent bank filed an administrative

claim for refund with the Commissioner of Internal Revenue on July 19, 1996. It
claimed that it had overpaid its gross receipts tax for 1994 to 1995 by
P853,842.54, computed as follows:

Gross receipts subjected to

Final Tax Derived from Passive
Investment                                           
        P85,384,254.51
                                                  
                      x                          20%
20% Final Tax Withheld                                
17,076,850.90
 20

at
Source                                             
           x                              5%
                                                       
               P     853,842.54

ISSUE:

Is the 20% final withholding tax on bank’s interest income form part of the
taxable gross receipts in computing the 5% gross receipts tax?

HELD (Dry Run):

Yes. The word “gross” must be used in its plain and ordinary meaning.  It is
defined as “whole, entire, total, without deduction.” The gross interest, without
deduction, is the amount the borrower pays, and the income the lender earns, for
the use by the borrower of the lender’s money.  The amount of the final tax
plainly covers for the interest earned and is consequently part of the taxable
gross receipt of the lender.

Moreover, there is no law which allows the deduction of 20% final tax from
the respondent bank’s interest income for the computation of the 5% gross
receipts tax. 

FURTHER DISCUSSIONS:

The Tax Code does not define “gross receipts.” Absent any statutory
definition, the Bureau of Internal Revenue has applied the term in its plain and
ordinary meaning.

In National City Bank v. CIR, the CTA held that gross receipts should be
interpreted as the whole amount received as interest, without deductions;
otherwise, if deductions were to be made from gross receipts, it would be
considered as “net receipts.” The CTA changed course, however, when it
promulgated its decision in Asia Bank; it applied Section 4(e) of Rev. Reg. No. 12-
80 and the ruling of this Court in Manila Jockey Club, holding that the 20% final
withholding tax on the petitioner bank’s interest income should not form part of
its taxable gross receipts, since the final tax was not actually received by the
petitioner bank but went to the coffers of the government.

The Court agrees with the contention of the petitioner that the appellate
court’s reliance on Rev. Reg. No. 12-80, the rulings of the CTA in Asia Bank, and
of this Court in Manila Jockey Club has no legal and factual bases.  Indeed, the
Court ruled in China Banking Corporation v. Court of Appeals that:

… In Far East Bank & Trust Co. v. Commissioner and

Standard Chartered Bank v. Commissioner, both promulgated
 21

on 16 November 2001, the tax court ruled that the final

withholding tax forms part of the bank’s gross receipts in
computing the gross receipts tax.  The tax court held that
Section 4(e) of Revenue Regulations No. 12-80 did not prescribe
the computation of the amount of gross receipts but merely
authorized “the determination of the amount of gross receipts
on the basis of the method of accounting being used by the
taxpayer.”

The word “gross” must be used in its plain and ordinary meaning.   It is
defined as “whole, entire, total, without deduction.”  A common definition is
“without deduction.” “Gross” is also defined as “taking in the whole; having no
deduction or abatement; whole, total as opposed to a sum consisting of separate
or specified parts.” Gross is the antithesis of net. Indeed, in China Banking
Corporation v. Court of Appeals, the Court defined the term in this wise:

As commonly understood, the term “gross receipts” means the

entire receipts without any deduction.  Deducting any amount from
the gross receipts changes the result, and the meaning, to net
receipts.  Any deduction from gross receipts is inconsistent with a
law that mandates a tax on gross receipts, unless the law itself
makes an exception.  As explained by the Supreme Court of
Pennsylvania in Commonwealth of Pennsylvania v. Koppers
Company, Inc., -

Highly refined and technical tax concepts have been

developed by the accountant and legal technician primarily
because of the impact of federal income tax legislation. 
However, this in no way should affect or control the normal
usage of words in the construction of our statutes; and we
see nothing that would require us not to include the proceeds
here in question in the gross receipts allocation unless
statutorily such inclusion is prohibited. Under the ordinary
basic methods of handling accounts, the term gross receipts,
in the absence of any statutory definition of the term, must
be taken to include the whole total gross receipts without
any deductions, x x x. [Citations omitted] (Emphasis
supplied)”

Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of
Missouri held:

The word “gross” appearing in the term “gross receipts,” as

used in the ordinance, must have been and was there used as
the direct antithesis of the word “net.” In its usual and ordinary
meaning “gross receipts” of a business is the whole and entire
amount of the receipts without deduction.  On the contrary,
 22

“net receipts” usually are the receipts which remain after

deductions are made from the gross amount thereof of the
expenses and cost of doing business, including fixed charges
and depreciation.  Gross receipts become net receipts after
certain proper deductions are made from the gross.  And in the
use of the words “gross receipts,” the instant ordinance, of
course, precluded plaintiff from first deducting its costs and
expenses of doing business, etc., in arriving at the higher base
figure upon which it must pay the 5% tax under this ordinance.
(Emphasis supplied)

The Court, likewise, declared that Section 121 of the Tax Code expressly
subjects interest income of banks to the gross receipts tax. “Such express
inclusion of interest income in taxable gross receipts creates a presumption that
the entire amount of the interest income, without any deduction, is subject to the
gross receipts tax.  Indeed, there is a presumption that receipts of a person
engaging in business are subject to the gross receipts tax.  Such presumption
may only be overcome by pointing to a specific provision of law allowing such
deduction of the final withholding tax from the taxable gross receipts, failing
which, the claim of deduction has no leg to stand on.  Moreover, where such an
exception is claimed, the statute is construed strictly in favor of the taxing
authority.  The exemption must be clearly and unambiguously expressed in the
statute, and must be clearly established by the taxpayer claiming the right
thereto.  Thus, taxation is the rule and the claimant must show that his demand
is within the letter as well as the spirit of the law.”

In this case, there is no law which allows the deduction of 20% final tax from
the respondent bank’s interest income for the computation of the 5% gross
receipts tax.  On the other hand, Section 8(a)(c), Rev. Reg. No. 17-84 provides
that interest earned on Philippine bank deposits and yield from deposit
substitutes are included as part of the tax base upon which the gross receipts
tax is imposed.  Such earned interest refers to the gross interest without
deduction since the regulations do not provide for any such deduction.  The
gross interest, without deduction, is the amount the borrower pays, and the
income the lender earns, for the use by the borrower of the lender’s money.  The
amount of the final tax plainly covers for the interest earned and is consequently
part of the taxable gross receipt of the lender.

In the same vein, the respondent bank’s reliance on Section 4(e) of Rev. Reg.
No. 12-80 and the ruling of the CTA in Asia Bank is misplaced.  The Court’s
discussion in China Banking Corporation is instructive on this score:

CBC also relies on the Tax Court’s ruling in Asia Bank that
Section 4(e) of Revenue Regulations No. 12-80 authorizes the
exclusion of the final tax from the bank’s taxable gross
receipts.  Section 4(e) provides that:
 23

Sec. 4.

(e) Gross receipts tax on banks, non-bank financial

intermediaries, financing companies, and other non-bank
financial intermediaries not performing quasi-banking
functions. - The rates of taxes to be imposed on the gross
receipts of such financial institutions shall be based on all
items of income actually received.  Mere accrual shall not be
considered, but once payment is received on such accrual or in
cases of prepayment, then the amount actually received shall
be included in the tax base of such financial institutions, as
provided hereunder. (Emphasis supplied by Tax Court)

Section 4(e) states that the gross receipts “shall be based on all items of
income actually received.”  The tax court in Asia Bank concluded that “it is but
logical to infer that the final tax, not having been received by petitioner but
instead went to the coffers of the government, should no longer form part of its
gross receipts for the purpose of computing the GRT.”

The Tax Court erred glaringly in interpreting Section 4(e) of Revenue

Regulations No. 12-80.  Income may be taxable either at the time of its actual
receipt or its accrual, depending on the accounting method of the taxpayer. 
Section 4(e) merely provides for an exception to the rule, making interest income
taxable for gross receipts tax purposes only upon actual receipt.  Interest is
accrued, and not actually received, when the interest is due and demandable
but the borrower has not actually paid and remitted the interest, whether
physically or constructively.  Section 4(e) does not exclude accrued interest
income from gross receipts but merely postpones its inclusion until actual
payment of the interest to the lending bank.  This is clear when Section 4(e)
states that “[m]ere accrual shall not be considered, but once payment is received
on such accrual or in case of prepayment, then the amount actually received
shall be included in the tax base of such financial institutions.”

Actual receipt of interest income is not limited to physical receipt.  Actual

receipt may either be physical receipt or constructive receipt.  When the
depository bank withholds the final tax to pay the tax liability of the lending
bank, there is prior to the withholding a constructive receipt by the lending bank
of the amount withheld.  From the amount constructively received by the lending
bank, the depository bank deducts the final withholding tax and remits it to the
government for the account of the lending bank.  Thus, the interest income
actually received by the lending bank, both physically and constructively, is the
net interest plus the amount withheld as final tax.

The concept of a withholding tax on income obviously and necessarily implies

that the amount of the tax withheld comes from the income earned by the
taxpayer.  Since the amount of the tax withheld constitutes income earned by
the taxpayer, then that amount manifestly forms part of the taxpayer’s gross
 24

receipts.  Because the amount withheld belongs to the taxpayer, he can transfer
its ownership to the government in payment of his tax liability.  The amount
withheld indubitably comes from income of the taxpayer, and thus forms part of
his gross receipts.

CREBA V. ROMULO
March 9, 2010/ Corona, J.

EN BANC

 MCIT

FACTS:

Petitioner Chamber of Real Estate and Builders’ Associations, Inc. is

questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424.

Petitioner assails the validity of the imposition of minimum corporate income

tax (MCIT) on corporations.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations.

Petitioner argues that the MCIT violates the due process clause because it levies
income tax even if there is no realized gain. Petitioner claims that the MCIT under
Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive,
arbitrary and confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said provision
only considers the cost of goods sold and other direct expenses; other major
expenditures, such as administrative and interest expenses which are equally
necessary to produce gross income, were not taken into account. Thus, pegging
the tax base of the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized
gain."

Section 27(E) of RA 8424 provides (Examinee’s Note: the provision cited below
is not yet amended up to the present date, January 6, 2014):

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the

gross income as of the end of the taxable year, as defined
herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its
business operations, when the minimum income tax is greater
 25

than the tax computed under Subsection (A) of this Section for
the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of

the [MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3)
immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. – The

Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers
losses on account of prolonged labor dispute, or because of
force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to

promulgate, upon recommendation of the Commissioner, the
necessary rules and regulations that shall define the terms and
conditions under which he may suspend the imposition of the
[MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the

[MCIT] provided under Subsection (E) hereof, the term ‘gross
income’ shall mean gross sales less sales returns, discounts
and allowances and cost of goods sold. "Cost of goods sold"
shall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and
use.

For trading or merchandising concern, "cost of goods sold"

shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the
goods are actually sold including insurance while the goods are
in transit.

For a manufacturing concern, "cost of goods manufactured

and sold" shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service,

"gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services"
shall mean all direct costs and expenses necessarily incurred
to provide the services required by the customers and clients
including (A) salaries and employee benefits of personnel,
 26

consultants and specialists directly rendering the service and

(B) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost of
supplies: Provided, however, that in the case of banks, "cost of
services" shall include interest expense.

ISSUE:

Whether or not the imposition of the MCIT on domestic corporations is

unconstitutional.

HELD (Dry Run):

The imposition of the MCIT is not unconstitutional. The claim of the petitioner,
that it is highly confiscatory because it is tantamount to a confiscation of capital,
is not meritorious. The MCIT is not a tax on capital. It is imposed on gross
income which is arrived at by deducting the capital spent by a corporation in the
sale of its goods such as the cost of goods and other direct expenses from gross
sales. Clearly, the capital is not being taxed. Furthermore, the MCIT is not an
additional tax imposition. It is imposed in lieu of the normal net income tax, and
only if the normal income tax is suspiciously low.

FURTHER DISCUSSIONS:

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424

to the Philippine taxation system. It came about as a result of the perceived
inadequacy of the self-assessment system in capturing the true income of
corporations. It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control
and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector.

MCIT Is Not Violative of Due Process

Taxes are the lifeblood of the government. Without taxes, the government can
neither exist nor endure. The exercise of taxing power derives its source from the
very existence of the State whose social contract with its citizens obliges it to
promote public interest and the common good.

Taxation is an inherent attribute of sovereignty. It is a power that is purely

legislative. Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation. It has the authority to prescribe a certain
tax at a specific rate for a particular public purpose on persons or things within
its jurisdiction. In other words, the legislature wields the power to define what
 27

tax shall be imposed, why it should be imposed, how much tax shall be imposed,
against whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check against its
abuse is to be found only in the responsibility of the legislature (which imposes
the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by
constitutional limitations. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no]

person shall be deprived of life, liberty or property without due process of law."
In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly
be invoked to invalidate, in appropriate cases, a revenue measure when it
amounts to a confiscation of property. But in the same case, we also explained
that we will not strike down a revenue measure as unconstitutional (for being
violative of the due process clause) on the mere allegation of arbitrariness by the
taxpayer. There must be a factual foundation to such an unconstitutional taint.
This merely adheres to the authoritative doctrine that, where the due process
clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character.

Petitioner is correct in saying that income is distinct from capital. Income

means all the wealth which flows into the taxpayer other than a mere return on
capital. Capital is a fund or property existing at one distinct point in time while
income denotes a flow of wealth during a definite period of time. Income is gain
derived and severed from capital. For income to be taxable, the following
requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital

because capital is not income. In other words, it is income, not capital, which is
subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the

capital spent by a corporation in the sale of its goods, i.e., the cost of goods and
other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in

lieu of the normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of net income tax
 28

due from a corporation, pegging the rate at a very much reduced 2% and uses as
the base the corporation’s gross income.

Besides, there is no legal objection to a broader tax base or taxable income by

eliminating all deductible items and at the same time reducing the applicable tax
rate.

Statutes taxing the gross "receipts," "earnings," or "income" of particular

corporations are found in many jurisdictions. Tax thereon is generally held to
be within the power of a state to impose; or constitutional, unless it interferes
with interstate commerce or violates the requirement as to uniformity of taxation.

The United States has a similar alternative minimum tax (AMT) system which
is generally characterized by a lower tax rate but a broader tax base. Since our
income tax laws are of American origin, interpretations by American courts of our
parallel tax laws have persuasive effect on the interpretation of these laws.
Although our MCIT is not exactly the same as the AMT, the policy behind them
and the procedure of their implementation are comparable. On the question of the
AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit
stated in Okin v. Commissioner:

In enacting the minimum tax, Congress attempted to remedy

general taxpayer distrust of the system growing from large
numbers of taxpayers with large incomes who were yet paying
no taxes.

We thus join a number of other courts in upholding the

constitutionality of the [AMT]. It is a rational means of obtaining
a broad-based tax, and therefore is constitutional.

The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation.

American courts have also emphasized that Congress has the power to
condition, limit or deny deductions from gross income in order to arrive at the net
that it chooses to tax. This is because deductions are a matter of legislative
grace.

Absent any other valid objection, the assignment of gross income, instead of
net income, as the tax base of the MCIT, taken with the reduction of the tax rate
from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative
experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property.
 29

In sum, petitioner failed to support, by any factual or legal basis, its

allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike
down a law as unconstitutional simply because of its yokes. Taxation is
necessarily burdensome because, by its nature, it adversely affects property
rights. The party alleging the law’s unconstitutionality has the burden to
demonstrate the supposed violations in understandable terms.

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due

process of law because the MCIT is being imposed and collected even when
there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — The MCIT shall be imposed

whenever such corporation has zero or negative taxable
income or whenever the amount of [MCIT] is greater than the
normal income tax due from such corporation. (Emphasis
supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such

corporation has zero or negative taxable income, merely defines the coverage of
Section 27(E). This means that even if a corporation incurs a net loss in its
business operations or reports zero income after deducting its expenses, it is still
subject to an MCIT of 2% of its gross income. This is consistent with the law
which imposes the MCIT on gross income notwithstanding the amount of the net
income. But the law also states that the MCIT is to be paid only if it is greater
than the normal net income. Obviously, it may well be the case that the MCIT
would be less than the net income of the corporation which posts a zero or
negative taxable income.

CIR V.
CA, CTA, and YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
PHILIPPINES, INC./ October 14, 1998

 Tax Exemption

FACTS:

Private Respondent Young Men's Christian Association of the Philippines, Inc.

(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.
 30

In 1980, private respondent earned, among others, an income of P676,829.80

from leasing out a portion of its premises to small shop owners, like restaurants
and canteen operators, and P44,259.00 from parking fees collected from non-
members. On July 2, 1984, the commissioner of internal revenue (CIR) issued an
assessment to private respondent, in the total amount of P415,615.01 including
surcharge and interest, for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and deficiency withholding
tax on wages.

Private respondent, for it to be exempted from payment of the tax, invoked the
following:

1. Sec. 30 of the NIRC,

2. Article VI, Section 28 of par. 3 of the 1987 Constitution; and

3. Article XIV, Section 4, par. 2 of the Constitution.

ISSUE:

Is the rental income of the YMCA from its real estate subject to tax under Sec.
30 of the NIRC?

HELD (Dry Run):

Yes, the rental income of the YMCA from its real estate is subject to tax.

While the income received by the organizations enumerated in Section 30 of

the NIRC, to which the respondent is included, is, as a rule, exempted from the
payment of tax in respect to income received by them as such, the exemption
does not apply to income derived from any of their properties, real or personal,
regardless of the disposition made of such income.

FURTHER DISCUSSIONS:

Is the Rental Income of the YMCA Taxable?

At the outset, we set forth the relevant provision of the NIRC (Examinee’s
Note: The present NIRC provision is inserted):

Section 30. Exemptions from Tax on Corporations. - The

following organizations shall not be taxed under this Title in
respect to income received by them as such:

(A) Labor, agricultural or horticultural organization not

organized principally for profit;
 31

(B) Mutual savings bank not having a capital stock represented

by shares, and cooperative bank without capital stock
organized and operated for mutual purposes and without
profit;

(C) A beneficiary society, order or association, operating for the

exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or
association, or nonstock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the

benefit of its members;

(E) Nonstock corporation or association organized and operated

exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inures to the benefit
of any member, organizer, officer or any specific person;

(F) Business league chamber of commerce, or board of trade,

not organized for profit and no part of the net income of which
inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but

operated exclusively for the promotion of social welfare;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company,

mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local
character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of
meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and

operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds
of sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them;
 32

Notwithstanding the provisions in the preceding

paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be
subject to tax imposed under this Code.

Petitioner CIR argues that while the income received by the organizations
enumerated in Section 30 of the NIRC is, as a rule, exempted from the payment
of tax "in respect to income received by them as such," the exemption does not
apply to income derived ". . . from any of their properties, real or personal, or
from any of their activities conducted for profit, regardless of the disposition
made of such income"

Petitioner adds that "rental income derived by a tax-exempt organization from

the lease of its properties, real or personal, is not, therefore, exempt from income
taxation, even if such income is exclusively used for the accomplishment of its
objectives." We agree with the commissioner.

The exemption claimed by the YMCA is expressly disallowed by the very

wording of the last paragraph of then Section 27 of the NIRC which mandates
that the income of exempt organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the tax imposed by the same Code.
Because the last paragraph of said section unequivocally subjects to tax the rent
income of the YMCA from its real property, the Court is duty-bound to abide
strictly by its literal meaning and to refrain from resorting to any convoluted
attempt at construction.

Private Respondent Invoked Article VI, Section 28 of par. 3 of the 1987

Constitution

Article VI, Section 28 of par. 3 of the 1987 Constitution reads:

Charitable institutions, churches and personages or

convents appurtenant thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.

Invoking not only the NIRC but also the fundamental law, private respondent
submits that Article VI, Section 28 of par. 3 of the 1987 Constitution, exempts
"charitable institutions" from the payment not only of property taxes but also of
income tax from any source.

Accordingly, Justice Hilario G. Davide, Jr., a former constitutional

commissioner, who is now a member of this Court, stressed during the Concom
debates that ". . . what is exempted is not the institution itself . . .; those
 33

exempted from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational
purposes." Father Joaquin G. Bernas, an eminent authority on the Constitution
and also a member of the Concom, adhered to the same view that the exemption
created by said provision pertained only to property taxes.

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "the
tax exemption covers property taxes only." Indeed, the income tax exemption
claimed by private respondent finds no basis in Article VI, Section 26, par. 3 of
the Constitution.

Article XIV, Section 4, par. 3 of the Constitution

Article XIV, Section 4, par. 3 of the Constitution reads:

All revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the
manner provided by law.

Proprietary educational institutions, including those

cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestment.

Private respondent also invokes Article XIV, Section 4, par. 3 of the

Constitution, claiming that the YMCA "is a non-stock, non-profit educational
institution whose revenues and assets are used actually, directly and
exclusively for educational purposes so it is exempt from taxes on its properties
and income."

We reiterate that private respondent is exempt from the payment of property

tax, but not income tax on the rentals from its property. The bare allegation alone
that it is a non-stock, non-profit educational institution is insufficient to justify its
exemption from the payment of income tax.

As previously discussed, laws allowing tax exemption are construed

strictissimi juris. Hence, for the YMCA to be granted the exemption it claims
under the aforecited provision, it must prove with substantial evidence that (1) it
falls under the classification non-stock, non-profit educational institution; and (2)
the income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes. However, the Court notes that not a
scintilla of evidence was submitted by private respondent to prove that it met the
said requisites.
 34

Is the YMCA an educational institution within the purview of Article XIV,

Section 4, par. 3 of the Constitution? We rule that it is not. 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. The
school system is synonymous with formal education, which "refers to the
hierarchically structured and chronologically graded learnings organized and
provided by the formal school system and for which certification is required in
order for the learner to progress through the grades or move to the higher levels."
The Court has examined the "Amended Articles of Incorporation" and "By-Laws"
of the YMCA, but found nothing in them that even hints that it is a school or an
educational institution.

Furthermore, under the Education Act of 1982, even non-formal education is

understood to be school-based and "private auspices such as foundations and
civic-spirited organizations" are ruled out. It is settled that the term "educational
institution," when used in laws granting tax exemptions, refers to a ". . . school
seminary, college or educational establishment . . . ." Therefore, the private
respondent cannot be deemed one of the educational institutions covered by the
constitutional provision under consideration.

Words used in the Constitution are to be taken in their

ordinary acceptation. While in its broadest and best sense
education embraces all forms and phases of instruction,
improvement and development of mind and body, and as well
of religious and moral sentiments, yet in the common
understanding and application it means a place where
systematic instruction in any or all of the useful branches of
learning is given by methods common to schools and
institutions of learning. That we conceive to be the true intent
and scope of the term [educational institutions,] as used in the
Constitution.

Moreover, without conceding that Private Respondent YMCA is an educational

institution, the Court also notes that the former did not submit proof of the
proportionate amount of the subject income that was actually, directly and
exclusively used for educational purposes. Article XIII, Section 5 of the YMCA by-
laws, which formed part of the evidence submitted, is patently insufficient, since
the same merely signified that "[t]he net income derived from the rentals of the
commercial buildings shall be apportioned to the Federation and Member
Associations as the National Board may decide." In sum, we find no basis for
granting the YMCA exemption from income tax under the constitutional provision
invoked.

DELPHER TRADES CORPORATION V. IAC

 35

January 26, 1988

“Estate Planning”

FACTS:

Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169
square meters of real estate.

The said co-owners leased to Hydro Pipes Philippines, Inc. the same property
and providing that during the existence or after the term of this lease the lessors,
should they decide to sell the property leased shall first offer the same to the
lessee and the letter has the priority to buy.

On January 3, 1976, a deed of exchange was executed between lessors

Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby
the former conveyed to the latter the leased property for 2,500 shares of stock of
defendant corporation.

On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes
Philippines, Inc., filed a complaint for reconveyance of the property.

The resolution of the case hinges on whether or not the "Deed of Exchange" of
the properties executed by the Pachecos on the one hand and the Delpher Trades
Corporation on the other was meant to be a contract of sale which, in effect,
prejudiced the private respondent's right of first refusal over the leased property
included in the "deed of exchange."

Eduardo Neria, a certified public accountant and son-in-law of the late

Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation;
that the corporation was organized by the children of the two spouses (spouses
Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar
Angeles) who owned in common the parcel of land leased to Hydro Pipes
Philippines in order to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish this end, two pieces of
real estate, including Lot No. 1095 which had been leased to Hydro Pipes
Philippines, were transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of exchange of property; that 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; and that at the
time of incorporation, he knew all about the contract of lease of Lot. No. 1095 to
Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer
to this scheme as "estate planning."
 36

Under this factual backdrop, the petitioners contend that there was actually
no transfer of ownership of the subject parcel of land since the Pachecos
remained in control of the property. Thus, the petitioners allege: "Considering
that the beneficial ownership and control of petitioner corporation remained in
the hands of the original co-owners, there was no transfer of actual ownership
interests over the land when the same was transferred to petitioner corporation
in exchange for the latter's shares of stock. The transfer of ownership, if
anything, was merely in form but not in substance. In reality, petitioner
corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in
substance and in effect an identity of interest."

The petitioners maintain that the Pachecos did not sell the property. They
argue that there was no sale and that they exchanged the land for shares of
stocks in their own corporation. "Hence, such transfer is not within the letter, or
even spirit of the contract. There is a sale when ownership is transferred for a
price certain in money or its equivalent (Art. 1468, Civil Code) while there is a
barter or exchange when one thing is given in consideration of another thing (Art.
1638, Civil Code)."

We rule for the petitioners.

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. But this character of proportionate interest is not hidden
beneath a false appearance of a given sum in money, as in the case
of par value shares. The capital stock of a corporation issuing only
no-par value shares is not set forth by a stated amount of money,
but instead is expressed to be divided into a stated number of
shares, such as, 1,000 shares. This indicates that a shareholder of
100 such shares is an aliquot sharer in the assets of the
corporation, no matter what value they may have, to the extent of
100/1,000 or 1/10. 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. (Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107).

Moreover, there was no attempt to state the true or current market value of
the real estate. Land valued at P300.00 a square meter was turned over to the
family's corporation for only P14.00 a square meter.
 37

It is to be stressed that by their ownership of the 2,500 no par shares of

stock, the Pachecos have control of the corporation. Their equity capital is 55% as
against 45% of the other stockholders, who also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit 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.

As explained by Eduardo Neria:

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there

any benefit to the spouses Hernandez and Pacheco in
connection with their execution of a deed of exchange
on the properties for no par value shares of the
defendant corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation

in entering in the deed of exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are

these benefits to the spouses of this deed of exchange?

A Continuous control of the property, tax exemption

benefits, and other inherent benefits in a corporation.

Q What are these advantages to the said spouses from

the point of view of taxation in entering in the deed of
exchange?

A.: Having fulfilled the conditions in the income tax law,

providing for tax free exchange of property, they were
able to execute the deed of exchange free from income
tax and acquire a corporation.
 38

Q What provision in the income tax law are you

referring to?

A I refer to Section 35 of the National Internal Revenue

Code under par. C-sub-par. (2) Exceptions regarding the
provision which I quote: "No gain or loss shall also be
recognized if a person exchanges his property for stock
in a 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."

Q Did you explain to the spouses this benefit at the time

you executed the deed of exchange?

A Yes, sir.

Q You also, testified during the last hearing that the

decision to have no par value share in the defendant
corporation was for the purpose of flexibility. Can you
explain flexibility in connection with the ownership of
the property in question?

A. There is flexibility in using no par value shares as

the value is determined by the board of directors in
increasing capitalization. The board can fix the value of
the shares equivalent to the capital requirements of the
corporation.

Q Now also from the point of taxation, is there any

flexibility in the holding by the corporation of the
property in question?

A Yes, since a corporation does not die it can continue

to hold on to the property indefinitely for a period of at
least 50 years. On the other hand, if the property is
held by the spouse the property will be tied up in
succession proceedings and the consequential
payments of estate and inheritance taxes when an
owner dies.

Q Now what advantage is this continuity in relation to

ownership by a particular person of certain properties
in respect to taxation?

A The property is not subjected to taxes on succession

as the corporation does not die.
 39

Q So the benefit you are talking about are inheritance

taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

HELD:

The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to
decrease the amount of what otherwise could be his taxes or altogether avoid
them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc.
v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293
U.S. 465, 7 L. ed. 596).

CIR V. CEBU TOYO CORPORATION

February 16, 2005

 VAT
 Zero-Rated Transactions

FACTS:

Respondent Cebu Toyo Corporation is a domestic corporation engaged in the

manufacture of lenses and various optical components used in television sets,
cameras, compact discs and other similar devices. Its principal office is located
at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City, Cebu. It is a
subsidiary of Toyo Lens Corporation, a non-resident corporation organized under
the laws of Japan. Respondent is a zone export enterprise registered with the
Philippine Economic Zone Authority (PEZA), pursuant to the provisions of
Presidential Decree No. 66. It is also registered with the Bureau of Internal
Revenue (BIR) as a VAT taxpayer.

As an export enterprise, respondent sells 80% of its products to its mother

corporation, the Japan-based Toyo Lens Corporation, pursuant to an Agreement
of Offsetting. The rest are sold to various enterprises doing business in the
MEPZ. Inasmuch as both sales are considered export sales subject to Value-
Added Tax (VAT) at 0% rate under Section 106(A)(2)(a) of the National Internal
Revenue Code, as amended, respondent filed its quarterly VAT returns from
April 1, 1996 to December 31, 1997.

On March 30, 1998, respondent filed with the Tax and Revenue Group of the
One-Stop Inter-Agency Tax Credit and Duty Drawback Center of the Department
 40

of Finance, an application for tax credit/refund of VAT paid for the period April 1,
1996 to December 31, 1997 representing excess VAT input payments.

Before the CTA, the respondent posits that as a VAT-registered exporter of

goods, it is subject to VAT at the rate of 0% on its export sales that do not result
in any output tax. Hence, the unutilized VAT input taxes on its purchases of
goods and services related to such zero-rated activities are available as tax
credits or refunds.

Both the Commissioner of Internal Revenue and the Office of the Solicitor
General argue that respondent Cebu Toyo Corporation, as a PEZA-registered
enterprise, is exempt from national and local taxes, including VAT, under Section
24 of Rep. Act No. 7916 and Section 109 of the NIRC. Thus, they contend that
respondent Cebu Toyo Corporation is not entitled to any refund or credit on input
taxes it previously paid as provided under Section 4.103-1 of Revenue
Regulations No. 7-95, notwithstanding its registration as a VAT taxpayer. For
petitioner claims that said registration was erroneous and did not confer upon
the respondent any right to claim recognition of the input tax credit.

The respondent counters that it availed of the income tax holiday under E.O.
No. 226 for four years from August 7, 1995 making it exempt from income tax
but not from other taxes such as VAT. Hence, according to respondent, its export
sales are not exempt from VAT, contrary to petitioner’s claim, but its export sales
is subject to 0% VAT. Moreover, it argues that it was able to establish through a
report certified by an independent Certified Public Accountant that the input
taxes it incurred from April 1, 1996 to December 31, 1997 were directly
attributable to its export sales. Since it did not have any output tax against
which said input taxes may be offset, it had the option to file a claim for
refund/tax credit of its unutilized input taxes.

ISSUE:

Rule on the following arguments by the CIR.

1. Respondent being registered with the Philippine Economic Zone Authority

(PEZA) as an ecozone export enterprise, its business is not subject to VAT
pursuant to Section 24 of RA No. 7916 in relation to Sec. 103 of the Tax Code, as
amended by RA No. 7716.

2. Since respondent’s business is not subject to VAT, it is not entitled to refund of

input taxes pursuant to Section 4.103-1 of the Revenue Regulations No. 7-95.

HELD (Dry Run):

The argument of the CIR that the respondent is not subject to VAT is bereft of
merit. This argument turns a blind eye to the fiscal incentives granted to PEZA-
registered enterprises under Section 23 of Rep. Act No. 7916. Under said statute,
 41

the respondent could avail of an income tax holiday pursuant to provisions of

E.O. No. 226, thus exempt it from income taxes for a number of years but not
from other internal revenue taxes such as VAT; or it could avail of the tax
exemptions on all taxes, including VAT under P.D. No. 66 and pay only the
preferential tax rate of 5%. The respondent availed of the income tax holiday for
four (4) years starting from August 7, 1995. Hence, respondent is not exempt
from VAT and it correctly registered itself as a VAT taxpayer.

Since the respondent is engaged in taxable transactions subject to VAT, and

since it is engaged in sales outside the Philippines, such sales are subject to
value-added tax at 0%. Under the value-added tax system, a zero-rated sale by
a VAT-registered person, which is a taxable transaction for VAT purposes, shall
not result in any output tax. However, the input tax on his purchase of goods,
properties or services related to such zero-rated sale shall be available as tax
credit or refund. The argument, therefore, of the CIR that the respondent is not
entitled to refund of input taxes is likewise bereft of merit.

FURTHER DISCUSSIONS:

Petitioner’s contention that respondent is not entitled to refund for being

exempt from VAT is untenable. This argument turns a blind eye to the fiscal
incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act
No. 7916. Note that under said statute, the respondent had two options with
respect to its tax burden. It could avail of an income tax holiday pursuant to
provisions of E.O. No. 226, thus exempt it from income taxes for a number of
years but not from other internal revenue taxes such as VAT; or it could avail of
the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only
the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of
Appeals and the Court of Tax Appeals found that respondent availed of the
income tax holiday for four (4) years starting from August 7, 1995, as clearly
reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where
respondent specified that it was availing of the tax relief under E.O. No. 226.
Hence, respondent is not exempt from VAT and it correctly registered itself as a
VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions.

Taxable transactions are those transactions which are subject to value-added

tax either at the rate of ten percent (10%) or zero percent (0%). In taxable
transactions, the seller shall be entitled to tax credit for the value-added tax paid
on purchases and leases of goods, properties or services.

An exemption means that the sale of goods, properties or services and the use
or lease of properties is not subject to VAT (output tax) and the seller is not
allowed any tax credit on VAT (input tax) previously paid. The person making the
exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT. Thus, a VAT-
registered purchaser of goods, properties or services that are VAT-exempt, is not
 42

entitled to any input tax on such purchases despite the issuance of a VAT invoice
or receipt.

Now, having determined that respondent is engaged in taxable transactions

subject to VAT, let us then proceed to determine whether it is subject to 10% or
zero (0%) rate of VAT. To begin with, it must be recalled that generally, sale of
goods and supply of services performed in the Philippines are taxable at the rate
of 10%. However, export sales, or sales outside the Philippines, shall be subject
to value-added tax at 0% if made by a VAT-registered person. Under the value-
added tax system, a zero-rated sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchase of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund.

In principle, the purpose of applying a zero percent (0%) rate on a taxable

transaction is to exempt the transaction completely from VAT previously collected
on inputs. It is thus the only true way to ensure that goods are provided free of
VAT. While the zero rating and the exemption are computationally the same, they
actually differ in several aspects, to wit:

(a) A zero-rated sale is a taxable transaction but does not result in an

output tax while an exempted transaction is not subject to the output tax;

(b) The input VAT on the purchases of a VAT-registered person with zero-
rated sales may be allowed as tax credits or refunded while the seller in
an exempt transaction is not entitled to any input tax on his purchases
despite the issuance of a VAT invoice or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject to

VAT, are required to register while registration is optional for VAT-exempt
persons.

In this case, it is undisputed that respondent is engaged in the export

business and is registered as a VAT taxpayer per Certificate of Registration of
the BIR. Further, the records show that the respondent is subject to VAT as it
availed of the income tax holiday under E.O. No. 226. Perforce, respondent is
subject to VAT at 0% rate and is entitled to a refund or credit of the unutilized
input taxes, which the Court of Tax Appeals computed at P2,158,714.46, but
which we find—after recomputation—should be P2,158,714.52.

WHEREFORE, the petition is DENIED for lack of merit. Petitioner is hereby

ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT
CERTIFICATE in favor of respondent.

SOUTH AFRICAN AIRWAYS V. CIR

 43

February 16, 2010/ Velasco, Jr., J.

Examinee’s Note: Take the principles and rules involved and compare the cited
provisions in this case to the present pertinent provisions of the NIRC.

 Sec. 28(A)(1) of the 1997 NIRC

 Gross Philippine Billings

FACTS:

Petitioner South African Airways is a foreign corporation organized and

existing under and by virtue of the laws of the Republic of South Africa. Its
principal office is located at Airways Park, Jones Road, Johannesburg
International Airport, South Africa. In the Philippines, it is an internal air carrier
having no landing rights in the country. Petitioner has a general sales agent in
the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel sells passage
documents for compensation or commission for petitioner’s off-line flights for the
carriage of passengers and cargo between ports or points outside the territorial
jurisdiction of the Philippines. Petitioner is not registered with the Securities and
Exchange Commission as a corporation, branch office, or partnership. It is not
licensed to do business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly and annual
income tax returns for its off-line flights.

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal

Revenue a claim for the refund of the amount of PhP 1,727,766.38 as
erroneously paid tax on Gross Philippine Billings (GPB) for the taxable year
2000.

ISSUE:

1. Whether or not South African Airways is liable to tax on Gross Philippine

Billings.

2. If it is not liable for tax on its Gross Philippine Billings, is it liable under
28(A)(1) of the 1997 NIRC?

HELD (Dry Run):

1. South African Airways is not liable to tax on Gross Philippine Billings.

"Gross Philippine Billings" refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or passage document.
 44

Inasmuch as it does not maintain flights to or from the Philippines, it is not liable
to tax on Gross Philippine Billings.

2. Yes. Off-line air carriers, such as South African Airways, having general
sales agents in the Philippines are engaged in or doing business in the
Philippines and that their income from sales of passage documents is income
from within the Philippines. Thus, it is liable for the 32% (now, 30%) tax on its
taxable income under Section 28(A)(1) of the 1997 NIRC.

International air carriers that do not have flights to and from the Philippines
but nonetheless earn income from other activities in the country will be taxed at
the rate of 32% (now, 30%) of such income.

FURTHER DISCUSSIONS:

Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable

Income

Preliminarily, we emphasize that petitioner is claiming that it is exempted

from being taxed for its sale of passage documents in the Philippines. Petitioner,
however, failed to sufficiently prove such contention.

In essence, petitioner calls upon this Court to determine the legal implication
of the amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB. It is
petitioner’s contention that, with the new definition of GPB, it is no longer liable
under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax on
GPB is inapplicable to it, it is thereby excluded from the imposition of any income
tax.

GPB is now defined under Sec. 28(A)(3)(a):

"Gross Philippine Billings" refers to the amount of gross revenue

derived from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue
and the place of payment of the ticket or passage document.

It is the place of sale that is irrelevant; as long as the uplifts of passengers

and cargo occur to or from the Philippines, income is included in GPB.

As correctly pointed out by petitioner, inasmuch as it does not maintain flights

to or from the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997
NIRC. This much was also found by the CTA. But petitioner further posits the
view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from
paying any other income tax for its sale of passage documents in the Philippines.

Such position is untenable.

 45

In Commissioner of Internal Revenue v. British Overseas Airways Corporation

(British Overseas Airways), which was decided under similar factual
circumstances, this Court ruled that off-line air carriers having general sales
agents in the Philippines are engaged in or doing business in the Philippines and
that their income from sales of passage documents here is income from within
the Philippines. Thus, in that case, we held the off-line air carrier liable for the
32% (now, 30%) tax on its taxable income.

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any
categorical term, exempt all international air carriers from the coverage of Sec.
28(A)(1) of the 1997 NIRC. Certainly, had legislature’s intentions been to
completely exclude all international air carriers from the application of the
general rule under Sec. 28(A)(1), it would have used the appropriate language to
do so; but the legislature did not. Thus, the logical interpretation of such
provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general
rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does not
apply, a resident foreign corporation, whether an international air carrier or not,
would be liable for the tax under Sec. 28(A)(1).

Thus, British Overseas Airways applies to the instant case. The findings
therein that an off-line air carrier is doing business in the Philippines and that
income from the sale of passage documents here is Philippine-source income
must be upheld.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign
corporations are liable for 32% (now, 30%) tax on all income from sources within
the Philippines. Sec. 28(A)(3) is an exception to this general rule.

An exception is defined as "that which would otherwise be included in the

provision from which it is excepted. It is a clause which exempts something from
the operation of a statue by express words." Further, "an exception need not be
introduced by the words ‘except’ or ‘unless.’ An exception will be construed as
such if it removes something from the operation of a provision of law."

In the instant case, the general rule is that resident foreign corporations shall
be liable for a 32% (now, 30%) income tax on their income from within the
Philippines, except for resident foreign corporations that are international carriers
that derive income "from carriage of persons, excess baggage, cargo and mail
originating from the Philippines" which shall be taxed at 2 1/2% of their Gross
Philippine Billings. Petitioner, being an international carrier with no flights
originating from the Philippines, does not fall under the exception. As such,
petitioner must fall under the general rule. This principle is embodied in the Latin
maxim, exception firmat regulam in casibus non exceptis, which means, a thing
not being excepted must be regarded as coming within the purview of the
general rule.
 46

To reiterate, the correct interpretation of the above provisions is that, if an

international air carrier maintains flights to and from the Philippines, it shall be
taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air
carriers that do not have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at the rate of 32% (now,
30%) of such income.

CIR V. CA AND COMMONWEALTH MANAGEMENT AND SERVICES

CORPORATION
March 30, 2000

 VAT

FACTS:

Commonwealth Management and Services Corporation (COMASERCO, for

brevity), is a corporation duly organized and existing under the laws of the
Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform collection, consultative and other
technical services, including functioning as an internal auditor, of Philamlife and
its other affiliates.

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an

assessment to private respondent COMASERCO for deficiency value-added tax
(VAT) amounting to P351,851.01, for taxable year 1988.

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest

objecting to the latter's finding of deficiency VAT.

COMASERCO asserted that the services it rendered to Philamlife and its

affiliates, relating to collections, consultative and other technical assistance,
including functioning as an internal auditor, were on a "no-profit, reimbursement-
of-cost-only" basis. It averred that it was not engaged in the business of
providing services to Philamlife and its affiliates. COMASERCO was established
to ensure operational orderliness and administrative efficiency of Philamlife and
its affiliates, and not in the sale of services. COMASERCO stressed that it was
not profit-motivated, thus not engaged in business. In fact, it did not generate
profit but suffered a net loss in taxable year 1988. COMASERCO averred that
since it was not engaged in business, it was not liable to pay VAT.

ISSUE:
 47

Whether COMASERCO was engaged in the sale of services, and thus liable to
pay VAT thereon.

HELD (Dry Run):

COMASERCO was engaged in the sale of services. "Sale of services" refers to

the performance of all kinds of services for others for a fee, remuneration or
consideration. It includes the supply of technical advice, assistance or services
rendered in connection with technical management or administration of any
scientific, industrial or commercial undertaking or project.

It is immaterial whether the primary purpose of a corporation indicates that it

receives payments for services rendered to its affiliates on a reimbursement-on-
cost basis only, without realizing profit, for purposes of determining liability for
VAT on services rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered is subject to VAT.

FURTHER DISCUSSIONS:

Petitioner avers that to "engage in business" and to "engage in the sale of

services" are two different things. Petitioner maintains that the services rendered
by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are
subject to VAT. VAT is a tax on the value added by the performance of the
service. It is immaterial whether profit is derived from rendering the service.

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by

Executive Order (E. O.) No. 273 in 1988, provides that:

Sec. 99. Persons liable. — Any person who, in the course of

trade or business, sells, barters or exchanges goods, renders
services, or engages in similar transactions and any person
who, imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 100 to 102 of this Code.

COMASERCO contends that the term "in the course of trade or business"
requires that the "business" is carried on with a view to profit or livelihood. It
avers that the activities of the entity must be profit-oriented. COMASERCO
submits that it is not motivated by profit, as defined by its primary purpose in
the articles of incorporation, stating that it is operating "only on reimbursement-
of-cost basis, without any profit." Private respondent argues that profit motive is
material in ascertaining who to tax for purposes of determining liability for VAT.

We disagree.
 48

Contrary to COMASERCO's contention the above provision clarifies that even

a non-stock or non-profit, organization is liable to pay VAT on the sale of goods or
services. VAT is a tax on transactions, imposed at every stage of the distribution
process on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable thereto. The
term "in the course of trade or business" requires the regular conduct or pursuit
of a commercial or an economic activity regardless of whether or not the entity is
profit-oriented.

The definition of the term "in the course of trade or business" present law
applies to all transactions even to those made prior to its enactment. Executive
Order No. 273 stated that any person who, in the course of trade or business,
sells, barters or exchanges goods and services, was already liable to pay VAT.

Sec. 108 of the National Internal Revenue Code of 1997 defines the phrase
"sale of services" as the "performance of all kinds of services for others for a fee,
remuneration or consideration." It includes "the supply of technical advice,
assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking or project."

On February 5, 1998, the Commissioner of Internal Revenue issued BIR

Ruling No. 010-98 emphasizing that a domestic corporation that provided
technical, research, management and technical assistance to its affiliated
companies and received payments on a reimbursement-of-cost basis, without
any intention of realizing profit, was subject to VAT on services rendered. In fact,
even if such corporation was organized without any intention realizing profit,
any income or profit generated by the entity in the conduct of its activities was
subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates

that it receives payments for services rendered to its affiliates on a
reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered. As long as the entity provides
service for a fee, remuneration or consideration, then the service rendered is
subject to VAT.

COMMISSIONER OF INTERNAL REVENUE V. MANILA MINING

CORPORATION
August 31, 2005

Examinee’s Note: Just concentrate on the rule that the input VAT paid must be
substantiated by purchase invoices or official receipts.

 Input VAT
 49

FACTS:

Respondent, a mining corporation duly organized and existing under

Philippines laws, is registered with the Bureau of Internal Revenue (BIR) as a
VAT-registered enterprise.

In 1991, respondent’s sales of gold to the Central Bank (now Bangko Sentral
ng Pilipinas) amounted to P200,832,364.70.

Respondent, relying on a letter from then BIR Deputy Commissioner Victor

Deoferio that:

under Sec. 2 of E.O. 581 as amended, gold sold to the

Central Bank is considered an export sale which under Section
100(a)(1) of the NIRC, as amended by E.O. 273, is subject to
zero-rated if such sale is made by a VAT-registered person

filed with the Commissioner of Internal Revenue (CIR) an application for tax
refund/credit of the input VAT it paid from July 1- December 31, 1999 in the
amount of P8,173,789.60.

The CIR argued that respondent’s failure to submit documentary evidence to

confirm the veracity of its claims is fatal.

ISSUE:

Whether respondent adduced sufficient evidence to prove its claim for

refund of its input VAT for taxable year 1991 in the amounts of P5,683,035.04
and P8,173,789.60.

HELD:

As export sales, the sale of gold to the Central Bank is zero-rated, hence, no
tax is chargeable to it as purchaser. Zero rating is primarily intended to be
enjoyed by the seller – respondent herein, which charges no output VAT but can
claim a refund of or a tax credit certificate for the input VAT previously charged
to it by suppliers.

For a judicial claim for refund to prosper, however, respondent must not only
prove that it is a VAT registered entity and that it filed its claims within the
prescriptive period. It must substantiate the input VAT paid by purchase
invoices or official receipts.

This respondent failed to do.

 50

CIR V. PHILIPPINE HEALTH CARE PROVIDERS, INC.

August 24, 1997

 VAT

FACTS:

The Philippine Health Care Providers, Inc., herein respondent, is a corporation

organized and existing under the laws of the Republic of the Philippines.
Pursuant to its Articles of Incorporation, its primary purpose is "To establish,
maintain, conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the sick and
disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization."

Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT
or E-VAT Law) took effect, amending further the National Internal Revenue Code
of 1977. Then on January 1, 1998, R.A. No. 8424 (National Internal Revenue
Code of 1997) became effective. This new Tax Code substantially adopted and
reproduced the provisions of E.O. No. 273 on VAT and R.A. No. 7716 on E-VAT.

In the interim, on October 1, 1999, the BIR sent respondent a Preliminary

Assessment Notice for deficiency in its payment of the VAT and documentary
stamp taxes (DST) for taxable years 1996 and 1997.

ISSUE:

Whether respondent's services are subject to VAT.

HELD (Dry Run):

In its letter to the BIR requesting confirmation of its VAT-exempt status,

respondent described its services as follows:

Under the prepaid group practice health care delivery system adopted by
Health Care, individuals enrolled in Health Care's health care program are
entitled to preventive, diagnostic, and corrective medical services to be dispensed
by Health Care's duly licensed physicians, specialists, and other professional
technical staff participating in said group practice health care delivery system
established and operated by Health Care. Such medical services will be
dispensed in a hospital or clinic owned, operated, or accredited by Health Care.
To be entitled to receive such medical services from Health Care, an individual
must enroll in Health Care's health care program and pay an annual fee.
Enrollment in Health Care's health care program is on a year-to-year basis and
enrollees are issued identification cards.
 51

Respondent is not actually rendering medical service but merely acting as a

conduit between the members and their accredited and recognized hospitals and
clinics. It merely provides and arranges for the provision of pre-need health care
services to its members for a fixed prepaid fee for a specified period of time. It
then contracts the services of physicians, medical and dental practitioners,
clinics and hospitals to perform such services to its enrolled members.

Perforce, as respondent does not actually provide medical and/or hospital

services, as provided under Section 103 on exempt transactions, but merely
arranges for the same, its services are not VAT-exempt.

CIR V. SEKISUI JUSHI PHILIPPINES, INC.

July 21, 2006/ Panganiban, J.

Examinee’s Note: This digest concentrates on the rule that an ecozone is

deemed a separate customs territory. Other matters retained by the Examinee
are, in his opinion, still good up to the present and can provide proper
illumination on the subject matter.

 VAT

FACTS:

Business enterprises registered with the Philippine Export Zone Authority

(PEZA) may choose between two fiscal incentive schemes: (1) to pay a five
percent preferential tax rate on its gross income and thus be exempt from all
other taxes; or (b) to enjoy an income tax holiday, in which case it is not exempt
from applicable national revenue taxes including the value-added tax (VAT). The
present respondent, which availed itself of the second tax incentive scheme, has
proven that all its transactions were export sales. Hence, they should be VAT
zero-rated.

Respondent is a domestic corporation duly organized and existing under and

by virtue of the laws of the Philippines with principal office located at the Special
Export Processing Zone, Laguna Technopark, Biñan, Laguna. It is principally
engaged in the business of manufacturing, importing, exporting, buying, selling,
or otherwise dealing in, at wholesale such goods as strapping bands and other
packaging materials and goods of similar nature, and any and all equipment,
materials, supplies used or employed in or related to the manufacture of such
finished products.

Having registered with the Bureau of Internal Revenue (BIR) as a value-

added tax (VAT) taxpayer, respondent filed its quarterly returns with the BIR, for
the period January 1 to June 30, 1997, reflecting therein input taxes in the
 52

amount of P4,631,132.70 paid by it in connection with its domestic purchase of

capital goods and services. Said input taxes remained unutilized since
respondent has not engaged in any business activity or transaction for which it
may be liable for output tax and for which said input taxes may be credited.

On November 11, 1998, respondent filed with the One-Stop-Shop Inter-Agency

Tax Credit and Duty Drawback Center of the Department of Finance (CENTER-
DOF) an application for tax credit/refund of VAT input taxes paid for the period
January 1 to June 30, 1997.

ISSUE:

Is an ecozone a separate customs territory? If yes, state the effect of such a

rule on sales by suppliers from outside its borders.

HELD:

An ecozone, while geographically within the Philippines, is deemed a

separate customs territory and is regarded in law as foreign soil. Sales by
suppliers from outside the borders of the ecozone to this separate customs
territory are deemed as exports and treated as export sales.

FURTHER DISCUSSIONS:

An entity registered with the PEZA as an ecozone may be covered by the VAT
system. Section 23 of Republic Act 7916, as amended, gives a PEZA-registered
enterprise the option to choose between two fiscal incentives: a) a five percent
preferential tax rate on its gross income under the said law; or b) an income tax
holiday provided under Executive Order No. 226 or the Omnibus Investment
Code of 1987, as amended. If the entity avails itself of the five percent
preferential tax rate under the first scheme, it is exempt from all taxes, including
the VAT; under the second, it is exempt from income taxes for a number of years,
but not from other national internal revenue taxes like the VAT.

The respondent had availed itself of the fiscal incentive of an income tax
holiday under Executive Order No. 226.

By availing itself of the income tax holiday, respondent became subject to the
VAT. It correctly registered as a VAT taxpayer, because its transactions were not
VAT-exempt.

An ecozone, while geographically within the Philippines, is deemed a

separate customs territory and is regarded in law as foreign soil. Sales by
suppliers from outside the borders of the ecozone to this separate customs
territory are deemed as exports and treated as export sales. These sales are
zero-rated or subject to a tax rate of zero percent.
 53

Notwithstanding the fact that its purchases should have been zero-rated,
respondent was able to prove that it had paid input taxes in the amount of
P4,377,102.26. The CTA found, and the CA affirmed, that this amount was
substantially supported by invoices and Official Receipts.

On the other hand, since 100 percent of the products of respondent are
exported, all its transactions are deemed export sales and are thus VAT zero-
rated. It has been shown that respondent has no output tax with which it could
offset its paid input tax. Since the subject input tax it paid for its domestic
purchases of capital goods and services remained unutilized, it can claim a
refund for the input VAT previously charged by its suppliers. The amount of
P4,377,102.26 is excess input taxes that justify a refund.

ALLIED BANKING CORPORATION V. CIR

February 5, 2010/ Del Castillo, J.

 Administrative Protest

FACTS:

On April 30, 2004, the Bureau of Internal Revenue (BIR) issued a Preliminary
Assessment Notice (PAN) to petitioner Allied Banking Corporation for deficiency
Documentary Stamp Tax (DST) in the amount of P12,050,595.60 and Gross
Receipts Tax (GRT) in the amount of P38,995,296.76 on industry issue for the
taxable year 2001. Petitioner received the PAN on May 18, 2004 and filed a
protest against it on May 27, 2004.

On July 16, 2004, the BIR wrote a Formal Letter of Demand with Assessment
Notices to petitioner, which partly reads as follows:

It is requested that the above deficiency tax be paid

immediately upon receipt hereof, inclusive of penalties incident
to delinquency. This is our final decision based on
investigation. If you disagree, you may appeal the final
decision within thirty (30) days from receipt hereof, otherwise
said deficiency tax assessment shall become final, executory
and demandable.

Petitioner received the Formal Letter of Demand with Assessment Notices on

August 30, 2004.

On September 29, 2004, petitioner filed a Petition for Review with the CTA
which was raffled to its First Division and docketed as CTA Case No. 7062.
 54

On December 7, 2004, respondent CIR filed his Answer. On July 28, 2005, he
filed a Motion to Dismiss on the ground that petitioner failed to file an
administrative protest on the Formal Letter of Demand with Assessment Notices.

ISSUE:

May the Formal Letter of Demand dated July 16, 2004 be construed as a
final decision of the CIR appealable to the CTA under RA 9282?

HELD (Dry Run):

Yes. The Formal Letter of Demand with Assessment Notices which was not
administratively protested by the petitioner can be considered a final decision of
the CIR appealable to the CTA because the words used, specifically the words
"final decision" and "appeal", taken together led petitioner to believe that the
Formal Letter of Demand with Assessment Notices was in fact the final decision
of the CIR on the letter-protest it filed and that the available remedy was to
appeal the same to the CTA. The petitioner cannot be blamed for not filing a
protest. The CIR is now estopped from claiming that he did not intend the Formal
Letter of Demand with Assessment Notices to be a final decision.

FURTHER DISCUSSIONS:

Section 7 of RA 9282 expressly provides that the CTA exercises exclusive

appellate jurisdiction to review by appeal decisions of the CIR in cases involving
disputed assessments.

The CTA, being a court of special jurisdiction, can take cognizance only of
matters that are clearly within its jurisdiction. Section 7 of RA 9282 provides:

Sec. 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as

herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases

involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or
other matters arising under the National Internal Revenue Code
or other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases

involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or
other matters arising under the National Internal Revenue Code
or other laws administered by the Bureau of Internal Revenue,
where the National Internal Revenue Code provides a specific
 55

period of action, in which case the inaction shall be deemed a

denial;

The word "decisions" in the above quoted provision of RA 9282 has been
interpreted to mean the decisions of the CIR on the protest of the taxpayer
against the assessments. Corollary thereto, Section 228 of the National Internal
Revenue Code (NIRC) provides for the procedure for protesting an assessment. It
states:

SECTION 228. Protesting of Assessment. – When the

Commissioner or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the
taxpayer of his findings: Provided, however, That a
preassessment notice shall not be required in the following
cases:

(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing
on the face of the return; or

(b) When a discrepancy has been determined between the tax

withheld and the amount actually remitted by the withholding
agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of

excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the
same amount claimed against the estimated tax liabilities for
the taxable quarter or quarters of the succeeding taxable year;
or

(d) When the excise tax due on excisable articles has not been
paid; or

(e) When an article locally purchased or imported by an exempt

person, such as, but not limited to, vehicles, capital equipment,
machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.

The taxpayers shall be informed in writing of the law and

the facts on which the assessment is made; otherwise, the
assessment shall be void.

Within a period to be prescribed by implementing rules and

regulations, the taxpayer shall be required to respond to said
notice. If the taxpayer fails to respond, the Commissioner or his
 56

duly authorized representative shall issue an assessment

based on his findings.

Such assessment may be protested administratively by filing

a request for reconsideration or reinvestigation within thirty
(30) days from receipt of the assessment in such form and
manner as may be prescribed by implementing rules and
regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted;
otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted

upon within one hundred eighty (180) days from submission of
documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision, or from the lapse of
the one hundred eighty (180)-day period; otherwise, the
decision shall become final, executory and demandable.

In the instant case, petitioner timely filed a protest after receiving the PAN. In
response thereto, the BIR issued a Formal Letter of Demand with Assessment
Notices. Pursuant to Section 228 of the NIRC, the proper recourse of petitioner
was to dispute the assessments by filing an administrative protest within 30
days from receipt thereof. Petitioner, however, did not protest the final
assessment notices. Instead, it filed a Petition for Review with the CTA. Thus, if
we strictly apply the rules, the dismissal of the Petition for Review by the CTA
was proper.

The case is an exception to the rule on exhaustion of administrative

remedies

However, a careful reading of the Formal Letter of Demand with Assessment

Notices leads us to agree with petitioner that the instant case is an exception to
the rule on exhaustion of administrative remedies, i.e., estoppel on the part of the
administrative agency concerned.

In the case of Vda. De Tan v. Veterans Backpay Commission, the respondent

contended that before filing a petition with the court, petitioner should have first
exhausted all administrative remedies by appealing to the Office of the
President. However, we ruled that respondent was estopped from invoking the
rule on exhaustion of administrative remedies considering that in its Resolution,
it said, "The opinions promulgated by the Secretary of Justice are advisory in
nature, which may either be accepted or ignored by the office seeking the
opinion, and any aggrieved party has the court for recourse". The statement of
the respondent in said case led the petitioner to conclude that only a final
judicial ruling in her favor would be accepted by the Commission.
 57

Similarly, in this case, we find the CIR estopped from claiming that the filing
of the Petition for Review was premature because petitioner failed to exhaust all
administrative remedies.

The Formal Letter of Demand with Assessment Notices reads:

Based on your letter-protest dated May 26, 2004, you

alleged the following:

1. That the said assessment has already prescribed in

accordance with the provisions of Section 203 of the Tax Code.

2. That since the exemption of FCDUs from all taxes found in

the Old Tax Code has been deleted, the wording of Section
28(A)(7)(b) discloses that there are no other taxes imposable
upon FCDUs aside from the 10% Final Income Tax.

Contrary to your allegation, the assessments covering GRT

and DST for taxable year 2001 has not prescribed for [sic]
simply because no returns were filed, thus, the three year
prescriptive period has not lapsed.

With the implementation of the CTRP, the phrase "exempt

from all taxes" was deleted. Please refer to Section 27(D)(3) and
28(A)(7) of the new Tax Code. Accordingly, you were assessed
for deficiency gross receipts tax on onshore income from foreign
currency transactions in accordance with the rates provided
under Section 121 of the said Tax Code. Likewise, deficiency
documentary stamp taxes was [sic] also assessed on Loan
Agreements, Bills Purchased, Certificate of Deposits and
related transactions pursuant to Sections 180 and 181 of NIRC,
as amended.

The 25% surcharge and 20% interest have been imposed

pursuant to the provision of Section 248(A) and 249(b),
respectively, of the National Internal Revenue Code, as
amended.

It is requested that the above deficiency tax be paid

immediately upon receipt hereof, inclusive of penalties incident
to delinquency. This is our final decision based on
investigation. If you disagree, you may appeal this final
decision within thirty (30) days from receipt hereof, otherwise
said deficiency tax assessment shall become final, executory
and demandable. (Emphasis supplied)
 58

It appears from the foregoing demand letter that the CIR has already made a
final decision on the matter and that the remedy of petitioner is to appeal the
final decision within 30 days.

In Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue, we

considered the language used and the tenor of the letter sent to the taxpayer as
the final decision of the CIR.

In this case, records show that petitioner disputed the PAN but not the Formal
Letter of Demand with Assessment Notices. Nevertheless, we cannot blame
petitioner for not filing a protest against the Formal Letter of Demand with
Assessment Notices since the language used and the tenor of the demand letter
indicate that it is the final decision of the respondent on the matter. We have
time and again reminded the CIR to indicate, in a clear and unequivocal
language, whether his action on a disputed assessment constitutes his final
determination thereon in order for the taxpayer concerned to determine when his
or her right to appeal to the tax court accrues. Viewed in the light of the
foregoing, respondent is now estopped from claiming that he did not intend the
Formal Letter of Demand with Assessment Notices to be a final decision.

Moreover, we cannot ignore the fact that in the Formal Letter of Demand with
Assessment Notices, respondent used the word "appeal" instead of "protest",
"reinvestigation", or "reconsideration". Although there was no direct reference for
petitioner to bring the matter directly to the CTA, it cannot be denied that the
word "appeal" under prevailing tax laws refers to the filing of a Petition for
Review with the CTA. As aptly pointed out by petitioner, under Section 228 of the
NIRC, the terms "protest", "reinvestigation" and "reconsideration" refer to the
administrative remedies a taxpayer may take before the CIR, while the term
"appeal" refers to the remedy available to the taxpayer before the CTA. Section 9
of RA 9282, amending Section 11 of RA 1125, likewise uses the term "appeal"
when referring to the action a taxpayer must take when adversely affected by a
decision, ruling, or inaction of the CIR. As we see it then, petitioner in appealing
the Formal Letter of Demand with Assessment Notices to the CTA merely took the
cue from respondent. Besides, any doubt in the interpretation or use of the word
"appeal" in the Formal Letter of Demand with Assessment Notices should be
resolved in favor of petitioner, and not the respondent who caused the confusion.

To be clear, we are not disregarding the rules of procedure under Section 228
of the NIRC, as implemented by Section 3 of BIR Revenue Regulations No. 12-99.
It is the Formal Letter of Demand and Assessment Notice that must be
administratively protested or disputed within 30 days, and not the PAN. Neither
are we deviating from our pronouncement in St. Stephen’s Chinese Girl’s School
v. Collector of Internal Revenue, that the counting of the 30 days within which to
institute an appeal in the CTA commences from the date of receipt of the decision
of the CIR on the disputed assessment, not from the date the assessment was
issued.
 59

What we are saying in this particular case is that, the Formal Letter of
Demand with Assessment Notices which was not administratively protested by
the petitioner can be considered a final decision of the CIR appealable to the CTA
because the words used, specifically the words "final decision" and "appeal",
taken together led petitioner to believe that the Formal Letter of Demand with
Assessment Notices was in fact the final decision of the CIR on the letter-protest
it filed and that the available remedy was to appeal the same to the CTA.

TAN V. DEL ROSARIO

October 3, 1994/ Vitug, J.

EN BANC

Examinee’s Note: Absorb only the principles involved.

 Schedular Approach
 Global Treatment

Republic Act No. 7496, amended certain provisions of the National Internal
Revenue Code.

The pertinent provisions of Sections 21 and 29, so referred to, of the National
Internal Revenue Code, as now amended, provide:

Sec. 21. Tax on citizens or residents. —

(f) Simplified Net Income Tax for the Self-Employed and/or

Professionals Engaged in the Practice of Profession. — A tax is
hereby imposed upon the taxable net income as determined in
Section 27 received during each taxable year from all sources,
other than income covered by paragraphs (b), (c), (d) and (e) of
this section by every individual whether
a citizen of the Philippines or an alien residing in the
Philippines who is self-employed or practices his profession
herein, determined in accordance with the following schedule:

Not over P 10,000 3%

Over P 10,000 but not P300 + 9% of
over P 30,000 excess over
P10,000
Over P 30,000 but not P 2,100 + 15% of
over P 120,000 excess over P
30,000
 60

Over P 120,000 but not P 15,600 + 20% of

over P 350,000 excess over P
120,000
Over P 350,000 P 61,000 + 30% of
excess over P
350,000

Sec. 29. Deductions from gross income. — In computing taxable

income subject to tax under Sections 21(a), 24(a), (b) and (c);
and 25 (a)(1), there shall be allowed as deductions the items
specified in paragraphs (a) to (i) of this section: Provided,
however, That in computing taxable income subject to tax
under Section 21 (f) in the case of individuals engaged in
business or practice of profession, only the following direct
costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the

course of or pursuant to the business or practice of their
profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief

organizations for the rehabilitation of calamity stricken areas
declared by the President; and

(g) Interest paid or accrued within a taxable year on loans

contracted from accredited financial institutions which must be
proven to have been incurred in connection with the conduct of
a taxpayer's profession, trade or business.

For individuals whose cost of goods sold and direct costs are
difficult to determine, a maximum of forty per cent (40%) of their
gross receipts shall be allowed as deductions to answer for
business or professional expenses as the case may be.

The allowance for deductible items, it is true, may have significantly been
reduced by the questioned law in comparison with that which has prevailed
prior to the amendment; limiting, however, allowable deductions from gross
income is neither discordant with, nor opposed to, the net income tax concept.
 61

The fact of the matter is still that various deductions, which are by no means
inconsequential, continue to be well provided under the new law.

What may instead be perceived to be apparent from the amendatory law is

the legislative intent to increasingly shift the income tax system towards the
schedular approach in the income taxation of individual taxpayers and to
maintain, by and large, the present global treatment on taxable corporations. We
certainly do not view this classification to be arbitrary and inappropriate.

Schedular approach is a system employed where the income tax treatment

varies and made to depend on the kind or category of taxable income of the
taxpayer.

Global treatment is a system where the tax treatment views indifferently the
tax base and generally treats in common all categories of taxable income of the
taxpayer.

CIR V. COURT OF APPEALS AND CITYTRUST BANKING CORPORATION

July 21, 1994/ Regalado, J.

 Refund

FACTS:

In a letter dated August 26, 1986, herein private respondent corporation filed
a claim for refund with the Bureau of Internal Revenue (BIR) in the amount of
P19,971,745.00 representing the alleged aggregate of the excess of its carried-
over total quarterly payments over the actual income tax due, plus carried-over
withholding tax payments on government securities and rental income, as
computed in its final income tax return for the calendar year ending December
31, 1985.

Thereafter, Citytrust filed a petition with the Court of Tax Appeals claiming
the refund of its income tax overpayments for the years 1984 and 1985 in the
total amount of P19,971,745.00.

Thereafter, said court rendered its decision in the case, the decretal portion of
which declares:

WHEREFORE, in view of the foregoing, petitioner is entitled

to a refund but only for the overpaid taxes incurred in 1984
and 1985.
 62

A motion for the reconsideration of said decision was filed by the Solicitor
General. It was contended for the first time in that motion that herein private
respondent had outstanding unpaid deficiency income taxes. Petitioner alleged
that he came to know only lately that Citytrust had outstanding tax liabilities for
1984 in the amount of P56,588,740.91 representing deficiency income and
business taxes covered by Demand/Assessment Notice No. FAS-1-84-003291-
003296.

Thereafter, the Court of Tax Appeals issued a resolution denying the motion.
The tax court ruled that since that matter was not raised in the pleadings, the
same cannot be considered, invoking therefor the salutary purpose of the
omnibus motion rule which is to obviate multiplicity of motions and to discourage
dilatory pleadings.

Petitioner eventually elevated the case to this Court, maintaining that said
respondent court erred in affirming the grant of the claim for refund of Citytrust,
considering that the bureau's findings of deficiency income and business tax
liabilities against private respondent for the year 1984 bars such payment.

ISSUE:

Rule on the contention of the petitioner.

HELD (Dry Run):

The contention of the petitioner is correct. The deficiency assessment,

although not yet final, created a doubt as to and constitutes a challenge against
the truth and accuracy of the facts stated in said return which, by itself and
without unquestionable evidence, cannot be the basis for the grant of the refund.
Moreover, to grant the refund without determination of the proper assessment
and the tax due would inevitably result in multiplicity of proceedings or suits.
Thus, it is legally appropriate that the issue of the deficiency tax assessment
against Citytrust be resolved jointly with its claim for tax refund, to determine
once and for all in a single proceeding the true and correct amount of tax due or
refundable.

FURTHER DISCUSSIONS:

The Court of Tax Appeals erred in denying petitioner's supplemental motion

for reconsideration bringing to said court's attention the existence of the
deficiency income and business tax assessment against Citytrust. The fact of
such deficiency assessment is intimately related to and inextricably intertwined
with the right of respondent bank to claim for a tax refund for the same year. To
award such refund despite the existence of that deficiency assessment is an
absurdity and a polarity in conceptual effects. Herein private respondent cannot
be entitled to refund and at the same time be liable for a tax deficiency
assessment for the same year.
 63

The grant of a refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return which,
by itself and without unquestionable evidence, cannot be the basis for the grant
of the refund.

Moreover, to grant the refund without determination of the proper assessment

and the tax due would inevitably result in multiplicity of proceedings or suits. If
the deficiency assessment should subsequently be upheld, the Government will
be forced to institute anew a proceeding for the recovery of erroneously refunded
taxes which recourse must be filed within the prescriptive period of ten years
after discovery of the falsity, fraud or omission in the false or fraudulent return
involved. This would necessarily require and entail additional efforts and
expenses on the part of the Government, impose a burden on and a drain of
government funds, and impede or delay the collection of much-needed revenue
for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it

is both logically necessary and legally appropriate that the issue of the
deficiency tax assessment against Citytrust be resolved jointly with its claim for
tax refund, to determine once and for all in a single proceeding the true and
correct amount of tax due or refundable.

CIR V. CA, CTA, AND A. SORIANO CORPORATION

January 20, 1999

 Redemption of Shares of Stocks

FACTS:

Sometime in the 1930s, Don Andres Soriano formed the corporation "A.
Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization
divided into 10,000 common shares at a par value of P100/share. In 1937, Don
Andres subscribed to 4,963 shares of the 5,000 shares originally issued.

On September 12, 1945, ANSCOR's authorized capital stock was increased to

P2,500,000.00 divided into 25,000 common shares with the same par value of
the additional 15,000 shares, only 10,000 was issued which were all
subscribed by Don Andres, after the other stockholders waived in favor of the
former their pre-emptive rights to subscribe to the new issues. This increased his
subscription to 14,963 common shares. A month later, Don Andres transferred
1,250 shares each to his two sons, Jose and Andres, Jr., as their initial
investments in ANSCOR.
 64

Stock dividend declarations by ANSCOR were made between 1947 and 1963.
On December 30, 1964 Don Andres died. As of that date, the records revealed
that he has a total shareholdings of 92,577 shares. In December 1966, stock
dividends worth 46,290 shares were received by the Don Andres estate from
ANSCOR. It increased its accumulated shareholdings to 138,867 common
shares.

By January 2, 1968, ANSCOR reclassified its existing 300,000 common

shares into 150,000 common and 150,000 preferred shares.

On March 31, 1968 the estate of Don Andres exchanged 11,140 of its
common shares, for preferred shares, thus reducing its (the estate) common
shares to 127,727.

On June 30, 1968, ANSCOR redeemed 28,000 common shares from the Don
Andres' estate. About a year later, ANSCOR again redeemed 80,000 common
shares from the Don Andres' estate, further reducing the latter's common
shareholdings to 19,727. As stated in the Board Resolutions, ANSCOR's
business purpose for both redemptions of stocks is to partially retire said stocks
as treasury shares in order to reduce the company's foreign exchange
remittances in case cash dividends are declared.

In 1973, after examining ANSCOR's books of account and records, Revenue

examiners issued a report proposing that ANSCOR be assessed for deficiency
tax.

Subsequently, ANSCOR filed a petition for review with the CTA assailing the
tax assessments on the redemptions and exchange of stocks.

ISSUES:

Was the redemption made by ANSCOR of the 28,000 and 80,000 common
shares from the estate of Andres taxable transactions?

HELD (Dry Run):

Yes. Redemption is repurchase, a reacquisition of stock by a corporation

which issued the stock in exchange for property. The redemption converts into
money the stock dividends which become a realized profit or gain and
consequently, the stockholder's separate property. As realized income, the
proceeds of the redeemed stock dividends can be reached by income taxation
regardless of the existence of any business purpose for the redemption.

FURTHER DISCUSSIONS:

Redemption
 65

Redemption is repurchase, a reacquisition of stock by a corporation which

issued the stock in exchange for property, whether or not the acquired stock is
cancelled, retired or held in the treasury. Essentially, the corporation gets back
some of its stock, distributes cash or property to the shareholder in payment for
the stock, and continues in business as before. The redemption of stock
dividends previously issued is used as a veil for the constructive distribution of
cash dividends. In the instant case, there is no dispute that ANSCOR redeemed
shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000
common shares). But where did the shares redeemed come from? If its source is
the original capital subscriptions upon establishment of the corporation or from
initial capital investment in an existing enterprise, its redemption to the
concurrent value of acquisition may not invite the application of Sec. 83(b) under
the 1939 Tax Code, as it is not income but a mere return of capital. On the
contrary, if the redeemed shares are from stock dividend declarations other than
as initial capital investment, the proceeds of the redemption is additional wealth,
for it is not merely a return of capital but a gain thereon.

It is not the stock dividends but the proceeds of its redemption that may be
deemed as taxable dividends. Here, it is undisputed that at the time of the last
redemption, the original common shares owned by the estate were only 25,247.5
This means that from the total of 108,000 shares redeemed from the estate, the
balance of 82,752.5 (108,000 less 25,247.5) must have come from stock
dividends.

The three elements in the imposition of income tax are: (1) there must be gain
or and profit, (2) that the gain or profit is realized or received, actually or
constructively, and (3) it is not exempted by law or treaty from income tax. Any
business purpose as to why or how the income was earned by the taxpayer is
not a requirement. Income tax is assessed on income received from any property,
activity or service that produces the income because the Tax Code stands as an
indifferent neutral party on the matter of where income comes
from.

The redemption converts into money the stock dividends which become a
realized profit or gain and consequently, the stockholder's separate property.
Profits derived from the capital invested cannot escape income tax. As realized
income, the proceeds of the redeemed stock dividends can be reached by income
taxation regardless of the existence of any business purpose for the redemption.
Otherwise, to rule that the said proceeds are exempt from income tax when the
redemption is supported by legitimate business reasons would defeat the very
purpose of imposing tax on income.

After considering the manner and the circumstances by which the issuance
and redemption of stock dividends were made, there is no other conclusion but
that the proceeds thereof are essentially considered equivalent to a distribution
of taxable dividends.
 66

Examinee’s Note: The “main reviewer”, while citing this case, states that an
exchange of common with preferred shares is a taxable transaction. After digest,
the Examinee, however, finds that it is not a taxable transaction. Thus, along the
review, take note of any present rule that supports the “main reviewer”. In the
absence of such a rule, follow the rule hereunder if encountered with similar
facts.

Exchange of Common with Preferred Shares

Exchange is an act of taking or giving one thing for another involving

reciprocal transfer and is generally considered as a taxable transaction. The
exchange of common stocks with preferred stocks, or preferred for common or a
combination of either for both, may not produce a recognized gain or loss, so long
as the provisions of Section 83 (b) are not applicable. This is true in a trade
between two (2) persons as well as a trade between a stockholder and a
corporation. In general, this trade must be parts of merger, transfer to controlled
corporation, corporate acquisitions or corporate reorganizations. No taxable gain
or loss may be recognized on exchange of property, stock or securities related to
reorganizations.

Both the Tax Court and the Court of Appeals found that ANSCOR reclassified
its shares into common and preferred, and that parts of the common shares of
the Don Andres estate were exchanged for preferred shares. Thereafter, Don
Andres estate remained as corporate subscriber except that its subscriptions
now include preferred shares. There was no change in its proportional interest
after the exchange. There was no cash flow. Both stocks had the same par
value. Under the facts herein, any difference in their market value would be
immaterial at the time of exchange because no income is yet realized — it was a
mere corporate paper transaction. It would have been different, if the exchange
transaction resulted into a flow of wealth, in which case income tax may be
imposed.

Reclassification of shares does not always bring any substantial alteration in

the subscriber's proportional interest. But the exchange is different — there
would be a shifting of the balance of stock features, like priority in dividend
declarations or absence of voting rights. Yet neither the reclassification nor
exchange per se, yields realize income for tax purposes. A common stock
represents the residual ownership interest in the corporation. It is a basic class
of stock ordinarily and usually issued without extraordinary rights or privileges
and entitles the shareholder to a pro rata division of profits. Preferred stocks are
those which entitle the shareholder to some priority on dividends and asset
distribution.

Both shares are part of the corporation's capital stock. Both stockholders are
no different from ordinary investors who take on the same investment risks.
Preferred and common shareholders participate in the same venture, willing to
share in the profits and losses of the enterprise. Moreover, under the doctrine of
 67

equality of shares — all stocks issued by the corporation are presumed equal
with the same privileges and liabilities, provided that the Articles of Incorporation
is silent on such differences.

In this case, the exchange of shares, without more, produces no realized

income to the subscriber. There is only a modification of the subscriber's rights
and privileges — which is not a flow of wealth for tax purposes. The issue of
taxable dividend may arise only once a subscriber disposes of his entire interest
and not when there is still maintenance of proprietary interest.

TALUSAN V. TAYAG
April 4, 2001

 Real Estate Taxes; Notice of Public Auction

FACTS:

Elias Emperial was the registered owner of a condominium at Unit No. 5,

Baden #4105, Europa Condominium Villas, Baguio City. He used the said
property as a vacation house. Emperial has known address at Emperial at 145
Ermin Garcia Street, Cubao, Quezon City.

On December 7, 1981, Emperial sold the subject property to Antonio Talusan

and Celia Talusan, the herein petitioners. The sale was purportedly evidenced
by a Deed of Sale which, however, had not and thenceforth never been
registered with the Register of Deeds.

On October 15 On October 15, 1985, Juan D. Hernandez, the City Treasurer

of Baguio City, wrote a letter to the former owner Elias Imperial informing him
that the above described property would be sold at public auction on December
9, 1985 to satisfy the delinquent real estate taxes. Hernandez sent the notice to
the known address of Emperial at 145 Ermin Garcia Street, Cubao, Quezon City.

On December 9, 1985, Hernandez sold the property at a public auction due to

nonpayment of delinquent real estate taxes thereon without any notice to the
petitioners. The property was sold to Respondent Herminigildo Tayag.

According to petitioners, the notice of public auction should have been sent to
the address appearing in the tax roll or property records of the City of Baguio.
That address is Unit No. 5, Baden #4105, Europa Condominium Villas, Baguio
City.

Thus, petitioners filed a Complaint seeking the annulment of the auction sale.
They cited irregularities in the proceedings and noncompliance with statutory
requirements.
 68

ISSUE:

Should the auction sale of the subject condominium unit be annulled on the
grounds of lack of personal notice to the petitioners of the sale or public auction
of the subject property?

HELD (Dry Run):

No. Since the Deed of Sale executed between Emperial, the registered owner
of the property, and the petitioners was not registered with the Register of
Deeds, the City Treasurer cannot be faulted for sending the notice of public
auction to the known address of Emperial. For purposes of real property
taxation, the registered owner of a property is deemed the taxpayer and, hence,
the only one entitled to a notice of tax delinquency and the resultant proceedings
relative to an auction sale. Petitioners, who allegedly acquired the property
through an unregistered deed of sale, are not entitled to such notice, because
they are not the registered owners.

FURTHER DISCUSSIONS:

In this regard, we note that unlike land registration proceedings which are in
rem, cases involving an auction sale of land for the collection of delinquent taxes
are in personam. Thus, notice by publication, though sufficient in proceedings in
rem, does not as a rule satisfy the requirement of proceedings in personam. As
such, mere publication of the notice of delinquency would not suffice, considering
that the procedure in tax sales is in personam. It was, therefore, still incumbent
upon the city treasurer to send the notice of tax delinquency directly to the
taxpayer in order to protect the interests of the latter.

In the present case, the notice of delinquency was sent by registered mail to
the permanent address of the registered owner in Manila. In that notice, the city
treasurer of Baguio City directed him to settle the charges immediately and to
protect his interest in the property. Under the circumstances, we hold that the
notice sent by registered mail adequately protected the rights of the taxpayer,
who was the registered owner of the condominium unit.

For purposes of the real property tax, the registered owner of the property is
deemed the taxpayer. Hence, only the registered owner is entitled to a notice of
tax delinquency and other proceedings relative to the tax sale. Not being
registered owners of the property, petitioners cannot claim to have been deprived
of such notice. In fact, they were not entitled to it.

Petitioners also contend that the registered owner was not given personal
notice of the public auction. They cite Section 73 of PD 464, the pertinent portion
of which is reproduced hereunder:
 69

Copy of the notices shall forthwith be sent either by

registered mail or by messenger, or through messenger, or
through the barrio captain, to the delinquent taxpayer, at the
address shown in the tax rolls or property tax records of the
municipality or city where the property is located, or at his
residence, if known to said treasurer or barrio captain.

According to petitioners, the notice of public auction should have been sent to
the address appearing in the tax roll or property records of the City of Baguio.
That address is Unit No. 5, Baden #4105, Europa Condominium Villas, Baguio
City; not the known address or residence of the registered owner at 145 Ermin
Garcia Street, Cubao, Quezon City. They contend that notice may be sent to the
residence of the taxpayer, only when the tax roll does not show any address of
the property.

The above-cited provision, however, shows that the determination of the

taxpayer’s address to which the notice may be sent is the treasurer’s
discretionary prerogative. In this case, the city treasurer deemed it best to send
the notice of public auction to the residence of the taxpayer. The former validly
exercised this option, inasmuch as the address of the latter was known to him.
Moreover, it was more practical and favorable to the registered owner that the
notice of delinquency be sent to his permanent residence in Manila, because he
was using the subject condominium unit merely as a vacation house and not as
a residence.

This Court in Pecson v. Court of Appeals made a clear and categorical ruling
on the matter, when it declared as follows:

Under the said provisions of law, notices of the sale of the

public auction may be sent to the delinquent taxpayer, either (I)
at the address as shown in the tax rolls or property tax record
cards of the municipality or city where the property is located
or (ii) at his residence, if known to such treasurer or barrio
captain.

To reiterate, for purposes of the collection of real property taxes, the registered
owner of the property is considered the taxpayer. Although petitioners have been
in possession of the subject premises by virtue of an unregistered deed of sale,
such transaction has no binding effect with respect to third persons who have no
knowledge of it.

The importance of registration and its binding effect is stated in Section 51 of

the Property Registration Decree or PD 1529, which reads:

"Sec. 51. Conveyance and other dealings by registered owner. -

An owner of registered land may convey, mortgage, lease,
charge or otherwise deal with the same in accordance with
 70

existing laws. He may use such forms, deeds, mortgages,

leases or other voluntary instrument as are sufficient in law.
But no deed, mortgage, lease or other voluntary
instrument, except a will purporting to convey or effect
registered land, shall take effect as a conveyance or bind
the land, but shall operate only as a contract between
the parties and as evidence of authority to the Registry
of Deeds to make registration.

The act of registration shall be the operative act to

convey or affect the land insofar as third persons are
concerned, and in all cases under this Decree, the registration
shall be made in the Office of the Register of Deeds for the
province or the city where the land lies."

Thus, insofar as third persons are concerned, it is the registration of the deed
of sale that can validly transfer or convey a person’s interest in a property. In the
absence of registration, the registered owner whose name appears on the
certificate of title is deemed the taxpayer to whom the notice of auction sale
should be sent. Petitioners, therefore, cannot claim to be taxpayers. For this
reason, the annulment of the auction sale may not be invoked successfully.

Likewise, we cannot help but point out the fact that petitioners brought this
misfortune upon themselves. They neither registered the Deed of Sale after its
execution nor moved for the consolidation of ownership of title to the property in
their name. Worse, they failed to pay the real property taxes due. Although they
had been in possession of the property since 1981, they did not take the
necessary steps to protect and legitimize their interest.

For purposes of real property taxation, the registered owner of a property is

deemed the taxpayer and, hence, the only one entitled to a notice of tax
delinquency and the resultant proceedings relative to an auction sale.
Petitioners, who allegedly acquired the property through an unregistered deed of
sale, are not entitled to such notice, because they are not the registered owners.
Moral lessons: real property buyers must register their purchases as soon as
possible and, equally important, they must pay their taxes on time.

CIR V. CA, CTA and PAJONAR

March 22, 2000

 Allowable Deductions from Gross Estate of a Decedent In Order to

Arrive at the Value of Net Estate
 71

FACTS:

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during

the second World War, was a part of the infamous Death March by reason of
which he suffered shock and became insane. His sister Josefina Pajonar became
the guardian over his person, while his property was placed under the
guardianship of the Philippine National Bank (PNB) by the Regional Trial Court in
Special Proceedings No. 1254. He died on January 10, 1988.

The PNB filed an accounting of the decedent's property under guardianship

valued at P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did
not file an estate tax return, instead it advised Pedro Pajonar's heirs to execute
an extrajudicial settlement and to pay the taxes on his estate.

On December 19, 1988, pursuant to a second assessment by the BIR for

deficiency estate tax, the estate of Pedro Pajonar paid estate tax in the amount of
P1,527,790.98. Josefina Pajonar, in her capacity as administratrix and heir of
Pedro Pajonar's estate, filed a protest on January 11, 1989 with the BIR praying
that the estate tax payment in the amount of P1,527,790.98, or at least some
portion of it, be returned to the heirs.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to

refund Josefina Pajonar the amount of P252,585.59, representing erroneously
paid estate tax for the year 1988. Among the deductions from the gross estate
allowed by the CTA were the amounts of P60,753 representing the notarial fee
for the Extrajudicial Settlement and the amount of P50,000 as the attorney's fees
in Special Proceedings No. 1254 for guardianship.

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for
reconsideration of the CTA's May 6, 1993 decision asserting, among others, that
the notarial fee for the Extrajudicial Settlement and the attorney's fees in the
guardianship proceedings are not deductible expenses.

ISSUE:

May the notarial fee paid for the extrajudicial settlement in the amount of
P60,753 and the attorney's fees in the guardianship proceedings in the amount
of P50,000 be allowed as deductions from the gross estate of decedent in order
to arrive at the value of the net estate?

HELD (Dry Run):

Yes. Deduction is limited to such administration expenses as are actually

and necessarily incurred in the collection of the assets of the estate, payment of
the debts, and distribution of the remainder among those entitled thereto. The
notarial fee paid for the extrajudicial settlement is a deductible expense since
such settlement effected a distribution of Pedro Pajonar's estate to his lawful
 72

heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of
Pedro Pajonar's property during his lifetime should also be considered as a
deductible administration expense. PNB provided a detailed accounting of
decedent's property and gave advice as to the proper settlement of the latter's
estate, acts which contributed towards the collection of decedent's assets and
the subsequent settlement of the estate.

FURTHER DISCUSSIONS:

This Court adopts the view under American jurisprudence that expenses
incurred in the extrajudicial settlement of the estate should be allowed as a
deduction from the gross estate. "There is no requirement of formal
administration. It is sufficient that the expense be a necessary contribution
toward the settlement of the case."

The attorney's fees of P50,000.00, which were already incurred but not yet
paid, refers to the guardianship proceeding filed by PNB, as guardian over the
ward of Pedro Pajonar, docketed as Special Proceeding No. 1254 in the RTC
(Branch XXXI) of Dumaguete City.

Attorney's fees in order to be deductible from the gross estate must be

essential to the collection of assets, payment of debts or the distribution of the
property to the persons entitled to it. The services for which the fees are charged
must relate to the proper settlement of the estate. In this case, the guardianship
proceeding was necessary for the distribution of the property of the late Pedro
Pajonar to his rightful heirs.

PNB was appointed as guardian over the assets of the late Pedro Pajonar,
who, even at the time of his death, was incompetent by reason of insanity. The
expenses incurred in the guardianship proceeding was but a necessary expense
in the settlement of the decedent's estate. Therefore, the attorney's fee incurred
in the guardianship proceedings amounting to P50,000.00 is a reasonable and
necessary business expense deductible from the gross estate of the decedent.

Anent the contention of respondent that the attorney's fees of P50,000.00

incurred in the guardianship proceeding should not be deducted from the Gross
Estate, We consider the same unmeritorious. Attorney's fees are allowable
deductions if incurred for the settlement of the estate. It is noteworthy to point
that PNB was appointed the guardian over the assets of the deceased.
Necessarily the assets of the deceased formed part of his gross estate.
Accordingly, all expenses incurred in relation to the estate of the deceased will
be deductible for estate tax purposes provided these are necessary and ordinary
expenses for administration of the settlement of the estate.

Although the Tax Code specifies "judicial expenses of the testamentary or

intestate proceedings," there is no reason why expenses incurred in the
administration and settlement of an estate in extrajudicial proceedings should
 73

not be allowed. However, deduction is limited to such administration expenses

as are actually and necessarily incurred in the collection of the assets of the
estate, payment of the debts, and distribution of the remainder among those
entitled thereto. Such expenses may include executor's or administrator's fees,
attorney's fees, court fees and charges, appraiser's fees, clerk hire, costs of
preserving and distributing the estate and storing or maintaining it, brokerage
fees or commissions for selling or disposing of the estate, and the like. Deductible
attorney's fees are those incurred by the executor or administrator in the
settlement of the estate or in defending or prosecuting claims against or due the
estate. (Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981 Edition,
p. 176).

It is clear then that the extrajudicial settlement was for the purpose of
payment of taxes and the distribution of the estate to the heirs. The execution of
the extrajudicial settlement necessitated the notarization of the same. Hence the
Contract of Legal Services of March 28, 1988 entered into between respondent
Josefina Pajonar and counsel was presented in evidence for the purpose of
showing that the amount of P60,753.00 was for the notarization of the
Extrajudicial Settlement. It follows then that the notarial fee of P60,753.00 was
incurred primarily to settle the estate of the deceased Pedro Pajonar. Said
amount should then be considered an administration expenses actually and
necessarily incurred in the collection of the assets of the estate, payment of
debts and distribution of the remainder among those entitled thereto. Thus, the
notarial fee of P60,753 incurred for the Extrajudicial Settlement should be
allowed as a deduction from the gross estate.

Attorney's fees, on the other hand, in order to be deductible from the gross
estate must be essential to the settlement of the estate.

The amount of P50,000.00 was incurred as attorney's fees in the

guardianship proceedings in Spec. Proc. No. 1254. Petitioner contends that said
amount are not expenses of the testamentary or intestate proceedings as the
guardianship proceeding was instituted during the lifetime of the decedent when
there was yet no estate to be settled.

Again, this contention must fail.

The guardianship proceeding in this case was necessary for the distribution
of the property of the deceased Pedro Pajonar. As correctly pointed out by
respondent CTA, the PNB was appointed guardian over the assets of the
deceased, and that necessarily the assets of the deceased formed part of his
gross estate.

It is clear therefore that the attorney's fees incurred in the guardianship

proceeding in Spec. Proc. No. 1254 were essential to the distribution of the
property to the persons entitled thereto. Hence, the attorney's fees incurred in the
 74

guardianship proceedings in the amount of P50,000.00 should be allowed as a

deduction from the gross estate of the decedent.

Judicial expenses are expenses of administration. Administration expenses,

as an allowable deduction from the gross estate of the decedent for purposes of
arriving at the value of the net estate, have been construed to include all
expenses essential to the collection of the assets, payment of debts or the
distribution of the property to the persons entitled to it. In other words, the
expenses must be essential to the proper settlement of the estate. Expenditures
incurred for the individual benefit of the heirs, devisees or legatees are not
deductible. Thus, in Lorenzo v. Posadas the Court construed the phrase "judicial
expenses of the testamentary or intestate proceedings" as not including the
compensation paid to a trustee of the decedent's estate when it appeared that
such trustee was appointed for the purpose of managing the decedent's real
estate for the benefit of the testamentary heir. In another case, the Court
disallowed the premiums paid on the bond filed by the administrator as an
expense of administration since the giving of a bond is in the nature of a
qualification for the office, and not necessary in the settlement of the estate.
Neither may attorney's fees incident to litigation incurred by the heirs in
asserting their respective rights be claimed as a deduction from the gross estate.

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement
is clearly a deductible expense since such settlement effected a distribution of
Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to
PNB for acting as the guardian of Pedro Pajonar's property during his lifetime
should also be considered as a deductible administration expense. PNB provided
a detailed accounting of decedent's property and gave advice as to the proper
settlement of the latter's estate, acts which contributed towards the collection of
decedent's assets and the subsequent settlement of the estate.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is

AFFIRMED. The notarial fee for the extrajudicial settlement and the attorney's
fees in the guardianship proceedings are allowable deductions from the gross
estate of Pedro Pajonar.

CIR V. ENRON SUBIC POWER CORPORATION

January 19, 2009/ Corona, J.

EN BANC

 Formal Letter of Demand and Assessment Notice

FACTS:
 75

Enron, a domestic corporation registered with the Subic Bay Metropolitan

Authority as a freeport enterprise, filed its annual income tax return for the year
1996 on April 12, 1997. Subsequently, the Bureau of Internal Revenue, through
a preliminary five-day letter, informed it of a proposed assessment of an alleged
P2,880,817.25 deficiency income tax. Enron disputed the proposed deficiency
assessment in its first protest letter.

On May 26, 1999, Enron received from the CIR a formal assessment notice
(this notice is the subject matter of this case) requiring it to pay the alleged
deficiency income tax of P2,880,817.25 for the taxable year 1996. Enron
protested this deficiency tax assessment.

Enron argued before the CTA that the deficiency tax assessment disregarded
the provisions of Section 228 of the National Internal Revenue Code by not
providing the legal and factual bases of the assessment.

In a decision dated September 12, 2001, the CTA granted Enron’s petition
and ordered the cancellation of its deficiency tax assessment for the year 1996.
The CTA reasoned that the assessment notice sent to Enron failed to comply with
the requirements of a valid written notice under Section 228 of the NIRC.

ISSUE:

Was the CTA correct in ordering the cancellation of Enron’s deficiency tax
assessment?

HELD (Dry Run):

Yes, the CTA was correct in ordering the cancellation of the deficiency tax
assessment. The formal letter of demand calling for payment of the taxpayer’s
deficiency tax or taxes shall state the fact, the law, rules and regulations
or jurisprudence on which the assessment is based, otherwise the formal
letter of demand and the notice of assessment shall be void. In the
present case, the CIR merely issued a formal assessment and indicated therein
the supposed tax, surcharge, interest and compromise penalty due thereon. The
Revenue Officers of the CIR in the issuance of the Final Assessment Notice did
not provide Enron with the written bases of the law and facts on which the
subject assessment is based. The CIR did not bother to explain how it arrived at
such an assessment. More so, he failed to mention the specific provision of the
Tax Code or rules and regulations which were not complied with by Enron.

FURTHER DISCUSSIONS:

A notice of assessment is a declaration of deficiency taxes issued to a

taxpayer who fails to respond to a Pre-Assessment Notice (PAN) within the
prescribed period of time, or whose reply to the PAN was found to be without
merit. The Notice of Assessment shall inform the taxpayer of this fact, and that
 76

the report of investigation submitted by the Revenue Officer conducting the audit
shall be given due course.

The formal letter of demand calling for payment of the taxpayer’s deficiency
tax or taxes shall state the fact, the law, rules and regulations or
jurisprudence on which the assessment is based, otherwise the formal
letter of demand and the notice of assessment shall be void.

Section 228 of the NIRC provides that the taxpayer shall be informed in
writing of the law and the facts on which the assessment is made. Otherwise,
the assessment is void. To implement the provisions of Section 228 of the NIRC,
RR No. 12-99 was enacted. Section 3.1.4 of the revenue regulation reads:

3.1.4. Formal Letter of Demand and Assessment Notice. – The

formal letter of demand and assessment notice shall be issued
by the Commissioner or his duly authorized representative.
The letter of demand calling for payment of the
taxpayer’s deficiency tax or taxes shall state the facts,
the law, rules and regulations, or jurisprudence on
which the assessment is based, otherwise, the formal
letter of demand and assessment notice shall be void.
The same shall be sent to the taxpayer only by registered mail
or by personal delivery.

It is clear from the foregoing that a taxpayer must be informed in writing of

the legal and factual bases of the tax assessment made against him. The use of
the word “shall” in these legal provisions indicates the mandatory nature of the
requirements laid down therein. We note the CTA’s findings:

In [this] case, [the CIR] merely issued a formal assessment

and indicated therein the supposed tax, surcharge, interest
and compromise penalty due thereon. The Revenue Officers of
the CIR in the issuance of the Final Assessment Notice did not
provide Enron with the written bases of the law and facts on
which the subject assessment is based. The CIR did not bother
to explain how it arrived at such an assessment. More so, he
failed to mention the specific provision of the Tax Code or rules
and regulations which were not complied with by Enron.

Both the CTA and the CA concluded that the deficiency tax assessment
merely itemized the deductions disallowed and included these in the gross
income. It also imposed the preferential rate of 5% on some items categorized by
Enron as costs. The legal and factual bases were, however, not indicated.

The CIR insists that an examination of the facts shows that Enron was
properly apprised of its tax deficiency. During the pre-assessment stage, the CIR
advised Enron’s representative of the tax deficiency, informed it of the proposed
 77

tax deficiency assessment through a preliminary five-day letter and furnished

Enron a copy of the audit working paper allegedly showing in detail the legal
and factual bases of the assessment. The CIR argues that these steps sufficed to
inform Enron of the laws and facts on which the deficiency tax assessment was
based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of

Enron, as well as the preliminary five-day letter, were not valid substitutes for
the mandatory notice in writing of the legal and factual bases of the assessment.
These steps were mere perfunctory discharges of the CIR’s duties in correctly
assessing a taxpayer. The requirement for issuing a preliminary or final notice,
as the case may be, informing a taxpayer of the existence of a deficiency tax
assessment is markedly different from the requirement of what such notice must
contain. Just because the CIR issued an advice, a preliminary letter during the
pre-assessment stage and a final notice, in the order required by law, does not
necessarily mean that Enron was informed of the law and facts on which the
deficiency tax assessment was made.

The law requires that the legal and factual bases of the assessment be stated
in the formal letter of demand and assessment notice. Thus, such cannot be
presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR
No. 12-99 would be rendered nugatory. The alleged “factual bases” in the
advice, preliminary letter and “audit working papers” did not suffice. There was
no going around the mandate of the law that the legal and factual bases of the
assessment be stated in writing in the formal letter of demand accompanying the
assessment notice.

CIR V. HANTEX TRADING CO., INC.

March 31, 2005

 Best Evidence Obtainable Under the NIRC

FACTS:

Being engaged in the sale of plastic products, the respondent imports

synthetic resin and other chemicals for the manufacture of its products. For this
purpose, it is required to file an Internal Revenue Declaration (Consumption
Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs
Code.

Sometime in October 1989, the chief of Counter-Intelligence Division of the

Economic Intelligence and Investigation Bureau (EIIB), received confidential
information that the respondent had imported synthetic resin amounting to
P115,599,018.00 but only declared P45,538,694.57. According to the informer,
 78

based on photocopies of 77 Consumption Entries furnished by another informer,

the 1987 importations of the respondent were understated in its accounting
records.

Thereafter, a request was made to the Collection Division, Port of Manila, to

authenticate the machine copies of the import entries supplied by the informer.
However, the Collection Division could not authenticate the machine copies of the
import entries, since the original copies of the said entries filed with the Bureau
of Customs had apparently been eaten by termites.

Thereafter, the EIIB Commissioner Almonte transmitted the entire docket of

the case to the BIR and recommended the collection of the total tax assessment
from the respondent.

On February 12, 1992, the BIR sent a letter to the respondent demanding
payment of its tax liability due for 1987 within ten (10) days from notice, on pain
of the collection tax due via a warrant of distraint and levy and/or judicial
action.

The petitioner maintains that these import entries were admissible as

secondary evidence under the best evidence obtainable rule, since they were
duly authenticated by the Bureau of Customs officials who processed the
documents and released the cargoes after payment of the duties and taxes due.
Further, the petitioner points out that under the best evidence obtainable rule,
the tax return is not important in computing the tax deficiency.

The petitioner avers that the best evidence obtainable rule under Section 16 of
the 1977 NIRC (Examinee: now Section 6 [B], NIRC), as amended, legally cannot
be equated to the best evidence rule under the Rules of Court; nor can the best
evidence rule, being procedural law, be made strictly operative in the
interpretation of the best evidence obtainable rule which is substantive in
character. The petitioner posits that the CTA is not strictly bound by technical
rules of evidence, the reason being that the quantum of evidence required in the
said court is merely substantial evidence.

ISSUE:

Is the December 10, 1991 final assessment of the petitioner against the
respondent for deficiency income tax and sales tax for the latter’s 1987
importation of resins and calcium bicarbonate based on competent evidence?

HELD (Dry Run):

No. The best evidence obtainable under the National Internal Revenue Code
does not include mere photocopies of records or documents. The petitioner, in
making a preliminary and final tax deficiency assessment against a taxpayer,
cannot anchor the said assessment on mere machine copies of records or
 79

documents. Mere photocopies of the Consumption Entries have no probative

weight if offered as proof of the contents thereof. The reason for this is that such
copies are mere scraps of paper and are of no probative value as basis for any
deficiency income or business taxes against a taxpayer.

FURTHER DISCUSSIONS:

Central to the second issue is Section 16 of the NIRC of 1977, as amended,

which provides that the Commissioner of Internal Revenue has the power to
make assessments and prescribe additional requirements for tax administration
and enforcement. Among such powers are those provided in paragraph (b)
thereof, which we quote:

(b) Failure to submit required returns, statements, reports and other

documents. – When a report required by law as a basis for the assessment
of any national internal revenue tax shall not be forthcoming within the
time fixed by law or regulation or when there is reason to believe that any
such report is false, incomplete or erroneous, the Commissioner shall
assess the proper tax on the best evidence obtainable.

In case a person fails to file a required return or other document at the

time prescribed by law, or willfully or otherwise files a false or fraudulent
return or other document, the Commissioner shall make or amend the
return from his own knowledge and from such information as he can
obtain through testimony or otherwise, which shall be prima facie correct
and sufficient for all legal purposes.

This provision applies when the Commissioner of Internal Revenue

undertakes to perform her administrative duty of assessing the proper tax
against a taxpayer, to make a return in case of a taxpayer’s failure to file one, or
to amend a return already filed in the BIR.

The petitioner may avail herself of the best evidence or other information or
testimony by exercising her power or authority under paragraphs (1) to (4) of
Section 7 of the NIRC:

(1) To examine any book, paper, record or other data which may be
relevant or material to such inquiry;

(2) To obtain information from any office or officer of the national and local
governments, government agencies or its instrumentalities, including the
Central Bank of the Philippines and government owned or controlled
corporations;

(3) To summon the person liable for tax or required to file a return, or any
officer or employee of such person, or any person having possession,
custody, or care of the books of accounts and other accounting records
 80

containing entries relating to the business of the person liable for tax, or
any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons
and to produce such books, papers, records, or other data, and to give
testimony;

(4) To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry;

The "best evidence" envisaged in Section 16 of the 1977 NIRC, as amended,

includes the corporate and accounting records of the taxpayer who is the subject
of the assessment process, the accounting records of other taxpayers engaged in
the same line of business, including their gross profit and net profit sales. Such
evidence also includes data, record, paper, document or any evidence gathered
by internal revenue officers from other taxpayers who had personal transactions
or from whom the subject taxpayer received any income; and record, data,
document and information secured from government offices or agencies, such as
the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the
Tariff and Customs Commission.

The law allows the BIR access to all relevant or material records and data in
the person of the taxpayer. It places no limit or condition on the type or form of
the medium by which the record subject to the order of the BIR is kept. The
purpose of the law is to enable the BIR to get at the taxpayer’s records in
whatever form they may be kept. Such records include computer tapes of the
said records prepared by the taxpayer in the course of business. In this era of
developing information-storage technology, there is no valid reason to immunize
companies with computer-based, record-keeping capabilities from BIR scrutiny.
The standard is not the form of the record but where it might shed light on the
accuracy of the taxpayer’s return.

We agree with the contention of the petitioner that the best evidence
obtainable may consist of hearsay evidence, such as the testimony of third
parties or accounts or other records of other taxpayers similarly circumstanced
as the taxpayer subject of the investigation, hence, inadmissible in a regular
proceeding in the regular courts. Moreover, the general rule is that administrative
agencies such as the BIR are not bound by the technical rules of evidence. It can
accept documents which cannot be admitted in a judicial proceeding where the
Rules of Court are strictly observed. It can choose to give weight or disregard
such evidence, depending on its trustworthiness.

However, the best evidence obtainable under Section 16 of the 1977 NIRC, as
amended, does not include mere photocopies of records/documents. The
petitioner, in making a preliminary and final tax deficiency assessment against a
taxpayer, cannot anchor the said assessment on mere machine copies of
records/documents. Mere photocopies of the Consumption Entries have no
probative weight if offered as proof of the contents thereof. The reason for this is
 81

that such copies are mere scraps of paper and are of no probative value as basis
for any deficiency income or business taxes against a taxpayer. Indeed, in
United States v. Davey, the U.S. Court of Appeals (2nd Circuit) ruled that where
the accuracy of a taxpayer’s return is being checked, the government is entitled
to use the original records rather than be forced to accept purported copies which
present the risk of error or tampering.

In Collector of Internal Revenue v. Benipayo, the Court ruled that the

assessment must be based on actual facts. The rule assumes more importance
in this case since the xerox copies of the Consumption Entries furnished by the
informer of the EIIB were furnished by yet another informer. While the EIIB tried
to secure certified copies of the said entries from the Bureau of Customs, it was
unable to do so because the said entries were allegedly eaten by termites. The
Court can only surmise why the EIIB or the BIR, for that matter, failed to secure
certified copies of the said entries from the Tariff and Customs Commission or
from the National Statistics Office which also had copies thereof. It bears
stressing that under Section 1306 of the Tariff and Customs Code, the
Consumption Entries shall be the required number of copies as prescribed by
regulations. The Consumption Entry is accomplished in sextuplicate copies and
quadruplicate copies in other places. In Manila, the six copies are distributed to
the Bureau of Customs, the Tariff and Customs Commission, the Declarant
(Importer), the Terminal Operator, and the Bureau of Internal Revenue.
Inexplicably, the Commissioner and the BIR personnel ignored the copy of the
Consumption Entries filed with the BIR and relied on the photocopies supplied by
the informer of the EIIB who secured the same from another informer. The BIR, in
preparing and issuing its preliminary and final assessments against the
respondent, even ignored the records on the investigation made by the District
Revenue officers on the respondent’s importations for 1987.

The original copies of the Consumption Entries were of prime importance to

the BIR. This is so because such entries are under oath and are presumed to be
true and correct under penalty of falsification or perjury. Admissions in the said
entries of the importers’ documents are admissions against interest and
presumptively correct.

In fine, then, the petitioner acted arbitrarily and capriciously in relying on

and giving weight to the machine copies of the Consumption Entries in fixing the
tax deficiency assessments against the respondent.

The rule is that in the absence of the accounting records of a taxpayer, his tax
liability may be determined by estimation. The petitioner is not required to
compute such tax liabilities with mathematical exactness. Approximation in the
calculation of the taxes due is justified. To hold otherwise would be tantamount
to holding that skillful concealment is an invincible barrier to proof. However, the
rule does not apply where the estimation is arrived at arbitrarily and
capriciously.
 82

However, the prima facie correctness of a tax assessment does not apply
upon proof that an assessment is utterly without foundation, meaning it is
arbitrary and capricious. Where the BIR has come out with a "naked
assessment," i.e., without any foundation character, the determination of the tax
due is without rational basis. In such a situation, the U.S. Court of Appeals ruled
that the determination of the Commissioner contained in a deficiency notice
disappears. Hence, the determination by the CTA must rest on all the evidence
introduced and its ultimate determination must find support in credible evidence.

Based on the letter of the petitioner to the respondent dated December 10,
1993, the tax deficiency assessment in question was based on the findings of
the agents of the EIIB which was based, in turn, on the photocopies of the
Consumption Entries.

In fine, the petitioner based her finding that the 1987 importation of the
respondent was underdeclared in the amount of P105,761,527.00 on the
worthless machine copies of the Consumption Entries. Aside from such copies,
the petitioner has no other evidence to prove that the respondent imported goods
costing P105,761,527.00.

CIR V. MAGSAYSAY LINES, INC.

July 28, 2006

 VAT

FACTS:

Pursuant to a government program of privatization, National Development

Company (NDC) decided to sell to private enterprise five (5) of its ships.

The vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay "a
value added tax of 10% on the value of the vessels." On 3 June 1988, private
respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the vessels.
The bid was approved and a Notice of Award was issued to Magsaysay Lines.

In January of 1989, private respondents through counsel received VAT Ruling

No. 568-88 dated 14 December 1988 from the BIR, holding that the sale of the
vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a
VAT-registered enterprise, and thus its transactions incident to its normal VAT
registered activity of leasing out personal property including sale of its own
assets that are movable, tangible objects which are appropriable or transferable
are subject to the 10% VAT.
 83

ISSUE:

Was the sale of the vessels subject to VAT?

HELD (Dry Run):

No, the sale of the vessels was not subject to VAT, because the transaction
was not made by the NDC in the course of trade or business. Under the NIRC, for
any sale, barter or exchange of goods or services be subject to VAT, the same
must be made in the course of trade or business. In the present case, the sale
was merely an isolated transaction and an involuntary act on the part of the
NDC pursuant to the declared policy of Government for privatization.

FURTHER DISCUSSIONS:

A brief reiteration of the basic principles governing VAT is in order. VAT is

ultimately a tax on consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage. It is the end user of consumer
goods or services which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or services who in
turn may credit their own VAT liability (or input VAT) from the VAT payments
they receive from the final consumer (or output VAT). The final purchase by the
end consumer represents the final link in a production chain that itself involves
several transactions and several acts of consumption. The VAT system assures
fiscal adequacy through the collection of taxes on every level of consumption, yet
assuages the manufacturers or providers of goods and services by enabling
them to pass on their respective VAT liabilities to the next link of the chain until
finally the end consumer shoulders the entire tax liability.

The tax is levied only on the sale, barter or exchange of goods or services by
persons who engage in such activities, in the course of trade or business.
These transactions outside the course of trade or business may invariably
contribute to the production chain, but they do so only as a matter of accident or
incident. As the sales of goods or services do not occur within the course of trade
or business, the providers of such goods or services would hardly, if at all, have
the opportunity to appropriately credit any VAT liability as against their own
accumulated VAT collections since the accumulation of output VAT arises in the
first place only through the ordinary course of trade or business.

The sale of the vessels was not in the ordinary course of trade or business.

In Imperial v. Collector of Internal Revenue, the term "carrying on

business" does not mean the performance of a single disconnected act, but
means conducting, prosecuting and continuing business by performing
progressively all the acts normally incident thereof; while "doing business"
conveys the idea of business being done, not from time to time, but all the time.
[J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH
 84

ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is usually done

in the management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761,
764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that "course

of business" or "doing business" connotes regularity of activity. In the instant
case, the sale was an isolated transaction. The sale which was involuntary and
made pursuant to the declared policy of Government for privatization could no
longer be repeated or carried on with regularity. It should be emphasized that
the normal VAT-registered activity of NDC is leasing personal property.

Any sale, barter or exchange of goods or services not in the course of

trade or business is not subject to VAT.

CIR V. PASCOR REALTY AND DEVELOPMENT CORPORATION

June 29, 1999

 An Assessment is Not Necessary Before Criminal Charges for Tax

Evasion May Be Instituted

FACTS:

It appears that by virtue of a letter of authority, then BIR Commissioner Ong

authorized Revenue Officers Thomas Que, Sonia Estorco and Emmanuel
Savellano to examine the books of accounts and other accounting records of
Pascor Realty and Development Corporation (PRDC) for the years ending 1986
and 1987. The said examination resulted in a recommendation for the issuance
of an assessment in the amounts of P7,498,434.65 and P3,015,236.35 for the
years 1986 and 1987, respectively.

On March 1, 1995, the Commissioner of Internal Revenue filed a criminal

complaint before the Department of Justice against the PRDC, its President
Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the
total amount of P 10,513,67. The BIR examiners' Joint Affidavit, which was
attached to the Criminal Complaint, contained some details of the tax liabilities
of private respondents.

Private respondents PRDC, et. al. filed with the CIR an Urgent Request for
Reconsideration/Reinvestigation disputing the tax assessment and tax liability.

In a letter dated May 17, 1995, the CIR denied the urgent request for
reconsideration/reinvestigation of the private respondents on the ground that no
formal assessment has as yet been issued by the Commissioner.
 85

Private respondents then elevated the Decision of the CIR dated May 17,
1995 to the Court of Tax Appeals on a petition for review. The CIR filed a Motion
to Dismiss the petition on the ground that the CTA has no jurisdiction over the
subject matter of the petition, as there was no formal assessment issued against
the petitioners. The CTA denied the said motion to dismiss.

The CIR filed this petition on June 7, 1996, alleging as grounds that:

Respondent Court of Tax Appeals acted with grave abuse of discretion and
without jurisdiction in considering the affidavit/report of the revenue officer and
the indorsement of said report to the secretary of justice as assessment which
may be appealed to the Court of Tax Appeals.

ISSUES:

1. Can the Joint Affidavit of the revenue officers and the indorsement of said
report to the secretary of justice be considered as an assessment which may be
appealed to the Court of Tax Appeals?

2. Is an assessment is necessary before criminal charges for tax evasion may be

instituted?

HELD (Dry Run):

1. No. An assessment must be sent to and received by a taxpayer, and must

demand payment of the taxes described therein within a specific period. In the
present case, the revenue officers' Affidavit merely contained a computation of
respondents' tax liability. It did not state a demand or a period for payment and
it was addressed to the justice secretary, not to the taxpayers. Hence, it cannot
be considered an assessment.

2. No, an assessment is not necessary before criminal charges may be

instituted. Section 222 of the National Internal Revenue Code states that in
cases where a false or fraudulent return is submitted, proceedings in court may
be commenced without an assessment.

FURTHER DISCUSSIONS:

Petitioner argues that the filing of the criminal complaint with the Department
of Justice cannot in any way be construed as a formal assessment of private
respondents' tax liabilities. This position is based on Section 205 of the National
Internal Revenue Code (NIRC), which provides that remedies for the collection of
deficient taxes may be by either civil or criminal action. Likewise, petitioner cites
Section 223(a) of the same Code, which states that in case of failure to file a
return, the tax may be assessed or a proceeding in court may be begun without
assessment.
 86

We agree with petitioner. Neither the NIRC nor the regulations governing the
protest of assessments provide a specific definition or form of an assessment.
However, the NIRC defines the specific functions and effects of an assessment.
To consider the affidavit attached to the Complaint as a proper assessment is to
subvert the nature of an assessment and to set a bad precedent that will
prejudice innocent taxpayers.

True, as pointed out by the private respondents, an assessment informs the

taxpayer that he or she has tax liabilities. But not all documents coming from the
BIR containing a computation of the tax liability can be deemed assessments.

To start with, an assessment must be sent to and received by a taxpayer,

and must demand payment of the taxes described therein within a specific
period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due,
in case the taxpayer fails to pay deficiency tax within the time prescribed for its
payment in the notice of assessment. Likewise, an interest of 20 percent per
annum, or such higher rates as may be prescribed by rules and regulations, is to
be collected form the date prescribed for its payment until the full payment.

The issuance of an assessment is vital in determining, the period of limitation

regarding its proper issuance and the period within which to protest it. Section
203 of the NIRC provides that internal revenue taxes must be assessed within
three years from the last day within which to file the return. Section 222, on the
other hand, specifies a period of ten years in case a fraudulent return with intent
to evade was submitted or in case of failure to file a return. Also, Section 228 of
the same law states that said assessment may be protested only within thirty
days from receipt thereof. Necessarily, the taxpayer must be certain that a
specific document constitutes an assessment. Otherwise, confusion would arise
regarding the period within which to make an assessment or to protest the same,
or whether interest and penalty may accrue thereon.

It should also be stressed that the said document is a notice duly sent to the
taxpayer. Indeed, an assessment is deemed made only when the collector of
internal revenue releases, mails or sends such notice to the taxpayer.

In the present case, the revenue officers' Affidavit merely contained a

computation of respondents' tax liability. It did not state a demand or a period
for payment. Worse, it was addressed to the justice secretary, not to the
taxpayers.

Respondents maintain that an assessment, in relation to taxation, is simply

understood' to mean:

A notice to the effect that the amount therein stated is due as tax
and a demand for payment thereof.
 87

Fixes the liability of the taxpayer and ascertains the facts and
furnishes the data for the proper presentation of tax rolls.

Even these definitions fail to advance private respondents' case. That the BIR
examiners' Joint Affidavit attached to the Criminal Complaint contained some
details of the tax liabilities of private respondents does not ipso facto make it an
assessment. The purpose of the Joint Affidavit was merely to support and
substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to
be a notice of the tax due and a demand to the private respondents for payment
thereof.

The fact that the Complaint itself was specifically directed and sent to the
Department of Justice and not to private respondents shows that the intent of
the commissioner was to file a criminal complaint for tax evasion, not to issue an
assessment. Although the revenue officers recommended the issuance of an
assessment, the commissioner opted instead to file a criminal case for tax
evasion. What private respondents received was a notice from the DOJ that a
criminal case for tax evasion had been filed against them, not a notice that the
Bureau of Internal Revenue had made an assessment.

In addition, what private respondents sent to the commissioner was a motion

for a reconsideration of the tax evasion charges filed, not of an assessment, as
shown thus:

This is to request for reconsideration of the tax evasion

charges against my client, PASCOR Realty and Development
Corporation and for the same to be referred to the Appellate
Division in order to give my client the opportunity of a fair and
objective hearing.

Assessment Not Necessary Before Filing of Criminal Complaint

Private respondents maintain that the filing of a criminal complaint must be

preceded by an assessment. This is incorrect, because Section 222 of the NIRC
specifically states that in cases where a false or fraudulent return is submitted
or in cases of failure to file a return such as this case, proceedings in court may
be commenced without an assessment. Furthermore, Section 205 of the same
Code clearly mandates that the civil and criminal aspects of the case may be
pursued simultaneously. In Ungab v. Cusi, petitioner therein sought the
dismissal of the criminal Complaints for being premature, since his protest to the
CTA had not yet been resolved. The Court held that such protests could not stop
or suspend the criminal action which was independent of the resolution of the
protest in the CTA. This was because the commissioner of internal revenue had,
in such tax evasion cases, discretion on whether to issue an assessment or to
file a criminal case against the taxpayer or to do both.
 88

To reiterate, said Section 222 states that an assessment is not necessary

before a criminal charge can be filed. This is the general rule. Private
respondents failed to show that they are entitled to an exception. Moreover, the
criminal charge need only be supported by a prima facie showing of failure to file
a required return. This fact need not be proven by an assessment.

The issuance of an assessment must be distinguished from the filing of a

complaint. Before an assessment is issued, there is, by practice, a pre-
assessment notice sent to the taxpayer. The taxpayer is then given a chance to
submit position papers and documents to prove that the assessment is
unwarranted. If the commissioner is unsatisfied, an assessment signed by him
or her is then sent to the taxpayer informing the latter specifically and clearly
that an assessment has been made against him or her. In contrast, the criminal
charge need not go through all these. The criminal charge is filed directly with
the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed
against him, not that the commissioner has issued an assessment. It must be
stressed that a criminal complaint is instituted not to demand payment, but to
penalize the taxpayer for violation of the Tax Code.

2011 ONWARD

FORT BONIFACIO DEVELOPMENT CORPORATION V. CIR

September 4, 2012/ Del Castillo, J.

EN BANC

 Transitional Input Tax

FACTS:

Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly registered

domestic corporation engaged in the development and sale of real property.

On February 8, 1995, by virtue of RA 7227 and Executive Order No. 40,

dated December 8, 1992, petitioner purchased from the national government a
portion of the Fort Bonifacio reservation, now known as the Fort Bonifacio Global
City (Global City). No taxes were paid in the acquisition of the Global City
property.

On January 1, 1996, RA 7716 restructured the Value-Added Tax (VAT)

system by amending certain provisions of the old National Internal Revenue
 89

Code (NIRC). RA 7716 extended the coverage of VAT to real properties held
primarily for sale to customers or held for lease in the ordinary course of trade or
business.

On September 19, 1996, petitioner submitted to the Bureau of Internal

Revenue (BIR) Revenue District No. 44, Taguig and Pateros, an inventory of all its
real properties, the book value of which aggregated P 71,227,503,200. Based on
this value, petitioner claimed that it is entitled to a transitional input tax credit of
P 5,698,200,256, pursuant to Section 105 of the old NIRC.

In October 1996, petitioner started selling Global City lots to interested

buyers.

For the first quarter of 1997, petitioner generated a total amount of P

3,685,356,539.50 from its sales and lease of lots, on which the output VAT
payable was P 368,535,653.95. Petitioner paid the output VAT by making cash
payments to the BIR totalling P 359,652,009.47 and crediting its unutilized input
tax credit on purchases of goods and services of P 8,883,644.48.

Realizing that its transitional input tax credit was not applied in computing its
output VAT for the first quarter of 1997, petitioner on November 17, 1998 filed
with the BIR a claim for refund of the amount of P 359,652,009.47 erroneously
paid as output VAT for the said period. The petitioner stated that the book value
of its real properties is P 71,227,503,200. Based on this value, petitioner claimed
that it is entitled to a transitional input tax credit of P 5,698,200,256, pursuant to
Section 105 of the old NIRC.

Petitioner’s Arguments

Petitioner claims that it is entitled to recover the amount of P 359,652,009.47

erroneously paid as output VAT for the first quarter of 1997 since its transitional
input tax credit of P 5,698,200,256 is more than sufficient to cover its output VAT
liability for the said period.

Petitioner assails the pronouncement of the CA that prior payment of taxes is

required to avail of the 8% transitional input tax credit. Petitioner contends that
there is nothing in Section 105 of the old NIRC to support such conclusion.

Petitioner further argues that RR 7-95, which limited the 8% transitional input
tax credit to the value of the improvements on the land, is invalid because it goes
against the express provision of Section 105 of the old NIRC, in relation to
Section 100 of the same Code, as amended by RA 7716.
 90

Respondents’ Arguments

Respondents, on the other hand, maintain that petitioner is not entitled to a

transitional input tax credit because no taxes were paid in the acquisition of the
Global City property. Respondents assert that prior payment of taxes is inherent
in the nature of a transitional input tax. Regarding RR 7-95, respondents insist
that it is valid because it was issued by the Secretary of Finance, who is
mandated by law to promulgate all needful rules and regulations for the
implementation of Section 105 of the old NIRC.

ISSUE:

Is the petitioner entitled to a refund of P 359,652,009.47 erroneously paid as

output VAT for the first quarter of 1997?

HELD (Dry Run):

Yes, the petitioner is entitled to a refund. Prior payment of taxes is not

required for a taxpayer to avail of the transitional input tax credit. All that is
required is for the taxpayer to file a beginning inventory with the BIR and in case
of the petitioner, that inventory includes not only the value of the improvements
on its real properties but should include the value of such properties as well.
Transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning
inventory of goods, materials and supplies. During that period of transition from
non-VAT to VAT status, the transitional input tax credit serves to alleviate the
impact of the VAT on the taxpayer.

Since based on the book value of all its real properties, which was P
71,227,503,200, it is entitled to a transitional input tax credit of P
5,698,200,256, petitioner is entitled to the refund of P 359,652,009.47 it paid as
output VAT.

FURTHER DISCUSSIONS:

Prior payment of taxes is not required for a taxpayer to avail of the 8%

transitional input tax credit.

Section 105 of the old NIRC reads:

SEC. 105. Transitional input tax credits. – A person who

becomes liable to value-added tax or any person who elects to
 91

be a VAT-registered person shall, subject to the filing of an

inventory as prescribed by regulations, be allowed input tax on
his beginning inventory of goods, materials and supplies
equivalent to 8% of the value of such inventory or the actual
value-added tax paid on such goods, materials and supplies,
whichever is higher, which shall be creditable against the
output tax. (Emphasis supplied.)

Examinee’s Note: The present pertinent provision of the Tax Code

is provided below. Just understand the case as resolved by the
Supreme Court using the old provision bearing in mind the present
provision. As you read this case, focus on how transitional input tax
works.

SEC. 111. Transitional/ Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes

liable to value-added tax or any person who elects to be a
VAT-registered person shall, subject to the filing of an
inventory according to rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the
Commissioner, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent to two
percent (2%) of the value of such inventory or the actual
value-added tax paid on such goods, materials and supplies,
whichever is higher, which shall be creditable against the
output tax.

(B) Presumptive Input Tax Credits. -

Persons or firms engaged in the processing of sardines,

mackerel and milk, and in manufacturing refined sugar,
cooking oil and packed noodle based instant meals, shall be
allowed a presumptive input tax, creditable against the
output tax, equivalent to four percent (4%) of the gross value
in money of their purchases of primary agricultural products
which are used as inputs to their production.

"As used in this Subsection, the term 'processing' shall

mean pasteurization, canning and activities which through
physical or chemical process alter the exterior texture or form
or inner substance of a product in such manner as to prepare
 92

it for special use to which it could not have been put in its
original form or condition." (As amended by R. A. 9337,
November 1, 2005) (Examinee’s Note ends here)

Contrary to the view of the CTA and the CA, there is nothing in the above-
quoted provision to indicate that prior payment of taxes is necessary for the
availment of the 8% transitional input tax credit. Obviously, all that is required is
for the taxpayer to file a beginning inventory with the BIR.

To require prior payment of taxes, as proposed in the Dissent is not only

tantamount to judicial legislation but would also render nugatory the provision in
Section 105 of the old NIRC that the transitional input tax credit shall be "8% of
the value of [the beginning] inventory or the actual [VAT] paid on such goods,
materials and supplies, whichever is higher" because the actual VAT (now 12%)
paid on the goods, materials, and supplies would always be higher than the 8%
(now 2%) of the beginning inventory which, following the view of Justice Carpio,
would have to exclude all goods, materials, and supplies where no taxes were
paid.

Clearly, limiting the value of the beginning inventory only to goods, materials,
and supplies, where prior taxes were paid, was not the intention of the law.
Otherwise, it would have specifically stated that the beginning inventory
excludes goods, materials, and supplies where no taxes were paid. As retired
Justice Consuelo Ynares-Santiago has pointed out in her Concurring Opinion in
the earlier case of Fort Bonifacio:

If the intent of the law were to limit the input tax to cases
where actual VAT was paid, it could have simply said that the
tax base shall be the actual value-added tax paid. Instead, the
law as framed contemplates a situation where a transitional
input tax credit is claimed even if there was no actual payment
of VAT in the underlying transaction. In such cases, the tax
base used shall be the value of the beginning inventory of
goods, materials and supplies.

Moreover, prior payment of taxes is not required to avail of the transitional

input tax credit because it is not a tax refund per se but a tax credit. Tax credit is
not synonymous to tax refund. Tax refund is defined as the money that a
taxpayer overpaid and is thus returned by the taxing authority. Tax credit, on
the other hand, is an amount subtracted directly from one’s total tax liability. It
is any amount given to a taxpayer as a subsidy, a refund, or an incentive to
encourage investment. Thus, unlike a tax refund, prior payment of taxes is not a
 93

prerequisite to avail of a tax credit. In fact, in Commissioner of Internal Revenue

v. Central Luzon Drug Corp., we declared that prior payment of taxes is not
required in order to avail of a tax credit. Pertinent portions of the Decision read:

While a tax liability is essential to the availment or use of any tax credit, prior
tax payments are not. On the contrary, for the existence or grant solely of such
credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is
in fact replete with provisions granting or allowing tax credits, even though no
taxes have been previously paid.

In this case, when petitioner realized that its transitional input tax credit was
not applied in computing its output VAT for the 1st quarter of 1997, it filed a
claim for refund to recover the output VAT it erroneously or excessively paid for
the 1st quarter of 1997. In filing a claim for tax refund, petitioner is simply
applying its transitional input tax credit against the output VAT it has paid.
Hence, it is merely availing of the tax credit incentive given by law to first time
VAT taxpayers. As we have said in the earlier case of Fort Bonifacio, the
provision on transitional input tax credit was enacted to benefit first time VAT
taxpayers by mitigating the impact of VAT on the taxpayer. Thus, contrary to the
view of Justice Carpio, the granting of a transitional input tax credit in favor of
petitioner, which would be paid out of the general fund of the government, would
be an appropriation authorized by law, specifically Section 105 of the old NIRC.

The purpose behind the transitional input tax credit is not confined to the
transition from sales tax to VAT.

There is hardly any constricted definition of "transitional" that will limit its
possible meaning to the shift from the sales tax regime to the VAT regime.
Indeed, it could also allude to the transition one undergoes from not being a VAT-
registered person to becoming a VAT-registered person. Such transition does not
take place merely by operation of law, E.O. No. 273 or Rep. Act No. 7716 in
particular. It could also occur when one decides to start a business. Section 105
states that the transitional input tax credits become available either to (1) a
person who becomes liable to VAT; or (2) any person who elects to be VAT-
registered. The clear language of the law entitles new trades or businesses to
avail of the tax credit once they become VAT-registered. The transitional input
tax credit, whether under the Old NIRC or the New NIRC, may be claimed by a
newly-VAT registered person such as when a business as it commences
operations. If we view the matter from the perspective of a starting entrepreneur,
greater clarity emerges on the continued utility of the transitional input tax credit.
 94

Following the theory of the CTA, the new enterprise should be able to claim
the transitional input tax credit because it has presumably paid taxes, VAT in
particular, in the purchase of the goods, materials and supplies in its beginning
inventory. Consequently, as the CTA held below, if the new enterprise has not
paid VAT in its purchases of such goods, materials and supplies, then it should
not be able to claim the tax credit. However, it is not always true that the
acquisition of such goods, materials and supplies entail the payment of taxes on
the part of the new business. In fact, this could occur as a matter of course by
virtue of the operation of various provisions of the NIRC, and not only on account
of a specially legislated exemption.

Let us cite a few examples drawn from the New NIRC. If the goods or
properties are not acquired from a person in the course of trade or business, the
transaction would not be subject to VAT under Section 105. The sale would be
subject to capital gains taxes under Section 24 (D), but since capital gains is a
tax on passive income it is the seller, not the buyer, who generally would
shoulder the tax.

If the goods or properties are acquired through donation, the acquisition

would not be subject to VAT but to donor’s tax under Section 98 instead. It is the
donor who would be liable to pay the donor’s tax, and the donation would be
exempt if the donor’s total net gifts during the calendar year does not exceed P
100,000.00.

If the goods or properties are acquired through testate or intestate succession,

the transfer would not be subject to VAT but liable instead for estate tax under
Title III of the New NIRC. If the net estate does not exceed P 200,000.00, no
estate tax would be assessed.

The interpretation proffered by the CTA would exclude goods and properties
which are acquired through sale not in the ordinary course of trade or business,
donation or through succession, from the beginning inventory on which the
transitional input tax credit is based. This prospect all but highlights the ultimate
absurdity of the respondents’ position. Again, nothing in the Old NIRC (or even
the New NIRC) speaks of such a possibility or qualifies the previous payment of
VAT or any other taxes on the goods, materials and supplies as a pre-requisite
for inclusion in the beginning inventory.

It is apparent that the transitional input tax credit operates to benefit newly
VAT-registered persons, whether or not they previously paid taxes in the
acquisition of their beginning inventory of goods, materials and supplies. During
that period of transition from non-VAT to VAT status, the transitional input tax
 95

credit serves to alleviate the impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to remit a significant portion of
the income it derived from its sales as output VAT. The transitional input tax
credit mitigates this initial diminution of the taxpayer's income by affording the
opportunity to offset the losses incurred through the remittance of the output VAT
at a stage when the person is yet unable to credit input VAT payments.

In view of the foregoing, we find petitioner entitled to the 8% transitional input

tax credit provided in Section 105 of the old NIRC. The fact that it acquired the
Global City property under a tax-free transaction makes no difference as prior
payment of taxes is not a pre-requisite.

Section 4.105-1 of RR 7-95 is inconsistent with Section 105 of the old

NIRC

As regards Section 4.105-1 of RR 7-95 which limited the 8% transitional input

tax credit to the value of the improvements on the land, the same contravenes
the provision of Section 105 of the old NIRC, in relation to Section 100 of the
same Code, as amended by RA 7716, which defines "goods or properties," to wit:

SEC. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of
tax. – There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to 10% of the
gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor.

(1) The term "goods or properties" shall mean all tangible and
intangible objects which are capable of pecuniary estimation
and shall include:

(A) Real properties held primarily for sale to customers or held

for lease in the ordinary course of trade or business;

In fact, in our Resolution dated October 2, 2009, in the related case of Fort
Bonifacio, we ruled that Section 4.105-1 of RR 7-95, insofar as it limits the
transitional input tax credit to the value of the improvement of the real properties,
is a nullity.

To be valid, an administrative rule or regulation must conform, not contradict,

the provisions of the enabling law. An implementing rule or regulation cannot
modify, expand, or subtract from the law it is intended to implement. Any rule
that is not consistent with the statute itself is null and void.
 96

As we see it then, the 8% transitional input tax credit should not be limited to
the value of the improvements on the real properties but should include the value
of the real properties as well.

In this case, since petitioner is entitled to a transitional input tax credit of P

5,698,200,256, which is more than sufficient to cover its output VAT liability for
the first quarter of 1997, a refund of the amount of P359,652,009.47 erroneously
paid as output VAT for the said quarter is in order.

CAGAYAN ELECTRIC POWER AND LIGHT CO., INC. V. CITY OF CAGAYAN

DE ORO
November 14, 2012/ Carpio, J.

 Local Government Units’ Power to Tax

FACTS:

On January 10, 2005, the Sangguniang Panlungsod of Cagayan de Oro (City

Council) passed Ordinance No. 9503-2005 imposing a tax on the lease or rental
of electric and/or telecommunication posts, poles or towers by pole owners to
other pole users at ten percent (10%) of the annual rental income derived from
such lease or rental.

On September 30, 2005, appellant CEPALCO, purportedly on pure question of

law, filed a petition for declaratory relief assailing the validity of Ordinance No.
9503-2005 before the Regional Trial Court of Cagayan de Oro City on the ground
that the tax imposed by the disputed ordinance is in reality a tax on income
which appellee City of Cagayan de Oro may not impose, the same being
expressly prohibited by Section 133(a) of Republic Act No. 7160 (R.A. 7160)
otherwise known as the Local Government Code (LGC) of 1991. CEPALCO
argues that, assuming the City Council can enact the assailed ordinance, it is
nevertheless exempt from the imposition by virtue of Republic Act No. 9284 (R.A.
9284) providing for its franchise.

ISSUE:

Is the subject ordinance an imposition of an income tax or a business tax?

HELD (Dry Run):

 97

The ordinance is an imposition of a business tax. Business is defined by

Section 131(d) of the Local Government Code as “trade or commercial activity
regularly engaged in as a means of livelihood or with a view to profit.” In relation
to Section 131(d), Section 143(h) of the Local Government Code provides that the
city may impose taxes, fees, and charges on any business which is not specified
in Section 143(a) to (g) and which the sanggunian concerned may deem proper to
tax.

FURTHER DISCUSSIONS:

Failure to Exhaust Administrative Remedies

Ordinance No. 9503-2005 is a local revenue measure. As such, the Local

Government Code applies.

SEC. 187. Procedure for Approval and Effectivity of Tax

Ordinances and Revenue Measures; Mandatory Public
Hearings. ‒ The procedure for approval of local tax ordinances
and revenue measures shall be in accordance with the
provisions of this Code: Provided, That public hearings shall be
conducted for the purpose prior to the enactment thereof:
Provided, further, That any question on the constitutionality or
legality of tax ordinances or revenue measures may be raised
on appeal within thirty (30) days from the effectivity thereof to
the Secretary of Justice who shall render a decision within
sixty (60) days from the date of receipt of the appeal: Provided,
however, That such appeal shall not have the effect of
suspending the effectivity of the ordinance and the accrual and
payment of the tax, fee, or charge levied therein: Provided,
finally, That within thirty (30) days after receipt of the decision
or the lapse of the sixty-day period without the Secretary of
Justice acting upon the appeal, the aggrieved party may file
appropriate proceedings with a court of competent jurisdiction.

SEC. 188. Publication of Tax Ordinances and Revenue

Measures.

‒ Within ten (10) days after their approval, certified true copies
of all provincial, city, and municipal tax ordinances or revenue
measures shall be published in full for three (3) consecutive
days in a newspaper of local circulation: Provided, however,
That in provinces, cities and municipalities where there are no
 98

newspapers of local circulation, the same may be posted in at

least two (2) conspicuous and publicly accessible places.

Ordinance No. 9503-2005 took effect on 19 February 2005. CEPALCO filed

its petition for declaratory relief before the Regional Trial Court on 30 September
2005, clearly beyond the 30-day period provided in Section 187. CEPALCO did
not file anything before the Secretary of Justice.

CEPALCO ignored our ruling in Reyes v. Court of Appeals on the mandatory

nature of the statutory periods:

Clearly, the law requires that the dissatisfied taxpayer who questions the
validity or legality of a tax ordinance must file his appeal to the Secretary of
Justice, within 30 days from effectivity thereof. In case the Secretary decides the
appeal, a period also of 30 days is allowed for an aggrieved party to go to court.
But if the Secretary does not act thereon, after the lapse of 60 days, a party
could already proceed to seek relief in court. These three separate periods are
clearly given for compliance as a prerequisite before seeking redress in a
competent court. Such statutory periods are set to prevent delays as well as
enhance the orderly and speedy discharge of judicial functions. For this reason
the courts construe these provisions of statutes as mandatory.

A municipal tax ordinance empowers a local government unit to impose taxes.

The power to tax is the most effective instrument to raise needed revenues to
finance and support the myriad activities of local government units for the
delivery of basic services essential to the promotion of the general welfare and
enhancement of peace, progress, and prosperity of the people. Consequently,
any delay in implementing tax measures would be to the detriment of the public.
It is for this reason that protests over tax ordinances are required to be done
within certain time frames. In the instant case, it is our view that the failure of
petitioners to appeal to the Secretary of Justice within 30 days as required by
Sec. 187 of R.A. 7160 is fatal to their cause.

As in Reyes, CEPALCO’s failure to appeal to the Secretary of Justice within

the statutory period of 30 days from the effectivity of the ordinance should have
been fatal to its cause. However, we relax the application of the rules in view of
the more substantive matters.

City of Cagayan de Oro’s Power to Create Sources of Revenue vis-a-vis

CEPALCO’s Claim of Exemption

Section 5, Article X of the 1987 Constitution provides that “[e]ach local

government unit shall have the power to create its own sources of revenues and
to levy taxes, fees, and charges subject to such guidelines and limitations as the
 99

Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local government.” The
Local Government Code supplements the Constitution with Sections 151 and
186:

SEC. 151. Scope of Taxing Powers. ‒ Except as otherwise

provided in this Code, the city may levy the taxes, fees and
charges which the province or municipality may impose:
Provided, however, That the taxes, fees and charges levied and
collected by highly urbanized and independent component
cities shall accrue to them and distributed in accordance with
the provisions of this Code. The rates of taxes that the city may
levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the
rates of professional and amusement taxes.

SEC. 186. Power to Levy Other Taxes, Fees or Charges. ‒

Local government units may exercise the power to levy taxes,
fees or charges on any base or subject not otherwise
specifically enumerated herein or taxed under the provisions of
the National Internal Revenue Code, as amended, or other
applicable laws: Provided, That the taxes, fees, or charges
shall not be unjust, excessive, oppressive, confiscatory or
contrary to declared national policy: Provided, further, That the
ordinance levying such taxes, fees, or charges shall not be
enacted without any prior public hearing conducted for the
purpose.

Although CEPALCO does not question the authority of the Sangguniang

Panlungsod of Cagayan de Oro to impose a tax or to enact a revenue measure,
CEPALCO insists that Ordinance No. 9503-2005 is an imposition of an income
tax which is prohibited by Section 133(a) of the Local Government Code.
Unfortunately for CEPALCO, we agree with the ruling of the trial and appellate
courts that Ordinance No. 9503-2005 is a tax on business. CEPALCO’s act of
leasing for a consideration the use of its posts, poles or towers to other pole
users falls under the Local Government Code’s definition of business.

Business is defined by Section 131(d) of the Local Government Code as “trade

or commercial activity regularly engaged in as a means of livelihood or with a
view to profit.” In relation to Section 131(d), Section 143(h) of the Local
Government Code provides that the city may impose taxes, fees, and charges on
any business which is not specified in Section 143(a) to (g) and which the
sanggunian concerned may deem proper to tax.
 100

In contrast to the express statutory provisions on the City of Cagayan de

Oro’s power to tax, CEPALCO’s claim of tax exemption of the income from its
poles relies on a strained interpretation. Section 1 of R.A. No. 9284 added
Section 9 to R.A. No. 3247, CEPALCO’s franchise:

SEC. 9. Tax Provisions. ‒ The grantee, its successors or

assigns, shall be subject to the payment of all taxes, duties,
fees or charges and other impositions applicable to private
electric utilities under the National Internal Revenue Code
(NIRC) of 1997, as amended, the Local Government Code and
other applicable laws: Provided, That nothing herein shall be
construed as repealing any specific tax exemptions, incentives,
or privileges granted under any relevant law: Provided, further,
That all rights, privileges, benefits and exemptions accorded to
existing and future private electric utilities by their respective
franchises shall likewise be extended to the grantee.

The grantee shall file the return with the city or province
where its facility is located and pay the taxes due thereon to
the Commissioner of Internal Revenue or his duly authorized
representative in accordance with the NIRC and the return
shall be subject to audit by the Bureau of Internal Revenue.

The Local Government Code withdrew tax exemption privileges previously

given to natural or juridical persons, and granted local government units the

power to impose franchise tax, thus:

SEC. 137. Franchise Tax. ‒ Notwithstanding any exemption

granted by any law or other special law, the province may
impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross
annual receipts for the preceding calendar year based on the
incoming receipt, or realized, within its territorial jurisdiction.

SEC. 193. Withdrawal of Tax Exemption Privileges. ‒ Unless

otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and nonprofit
 101

hospitals and educational institutions, are hereby withdrawn

upon the effectivity of this Code.

SEC. 534. Repealing Clause. ‒.

(f) All general and special laws, acts, city charters, decrees,
executive orders, proclamations and administrative regulations,
or part or parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified
accordingly.

It is hornbook doctrine that tax exemptions are strictly construed against the
claimant. For this reason, tax exemptions must be based on clear legal
provisions. The separate opinion in PLDT v. City of Davao is applicable to the
present case, thus:

Tax exemptions must be clear and unequivocal. A taxpayer

claiming a tax exemption must point to a specific provision of
law conferring on the taxpayer, in clear and plain terms,
exemption from a common burden. Any doubt whether a tax
exemption exists is resolved against the taxpayer. Tax
exemptions cannot arise by mere implication, much less by an
implied re-enactment of a repealed tax exemption clause.

CEPALCO’s claim of exemption under the “in lieu of all taxes” clause must fail
in light of Section 193 of the Local Government Code as well as Section 9 of its
own franchise.

Ordinance No. 9503-2005’s Compliance with the Local Government Code

CEPALCO is mistaken when it states that a city can impose a tax up to only
one-half of what the province or municipality may impose. A more circumspect
reading of the Local Government Code could have prevented this error. Section
151 of the Local Government Code states that, subject to certain exceptions, a
city may exceed by “not more than 50%” the tax rates allowed to provinces and
municipalities. A province may impose a franchise tax at a rate “not exceeding
50% of 1% of the gross annual receipts.” Following Section 151, a city may
impose a franchise tax of up to 0.0075 (or 0.75%) of a business’ gross annual
receipts for the preceding calendar year based on the incoming receipt, or
realized, within its territorial jurisdiction. A municipality may impose a business
tax at a rate not exceeding “two percent of gross sales or receipts.” Following
Section 151, a city may impose a business tax of up to 0.03 (or 3%) of a
business’ gross sales or receipts of the preceding calendar year.
 102

SEC. 151. Scope of Taxing Powers. ‒ Except as otherwise

provided in this Code, the city may levy the taxes, fees and
charges which the province or municipality may impose:
Provided, however, That the taxes, fees and charges levied and
collected by highly urbanized and independent component
cities shall accrue to them and distributed in accordance with
the provisions of this Code.

The rates of taxes that the city may levy may exceed the
maximum rates allowed for the province or municipality by not
more than fifty percent (50%) except the rates of professional
and amusement taxes.

CEPALCO also erred when it equates Section 137’s “gross annual receipts”
with Ordinance No. 9503-2005’s “annual rental income.” Section 2 of Ordinance
No. 9503-2005 imposes “a tax on the lease or rental of electric and/or
telecommunication posts, poles or towers by pole owners to other pole users at
the rate of ten (10) percent of the annual rental income derived therefrom,” and
not on CEPALCO’s gross annual receipts. Thus, although the tax rate of 10% is
definitely higher than that imposable by cities as franchise or business tax, the
tax base of annual rental income of “electric and/or telecommunication posts,
poles or towers by pole owners to other pole users” is definitely smaller than that
used by cities in the computation of franchise or business tax. In effect,
Ordinance No. 9503-2005 wants a slice of a smaller pie.

However, we disagree with the City of Cagayan de Oro’s submission that

Ordinance No. 9503-2005 is not subject to the limits imposed by Sections 143
and 151 of the Local Government Code.

SEC. 151. Scope of Taxing Powers. - Except as otherwise

provided in this Code, the city, may levy the taxes, fees, and
charges which the province or municipality may impose:
Provided, however, That the taxes, fees and charges levied and
collected by highly urbanized and independent component
cities shall accrue to them and distributed in accordance with
the provisions of this Code. The rates of taxes that the city may
levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the
rates of professional and amusement taxes.

143 (h) On any business, not otherwise specified in the

preceding paragraphs, which the sanggunian concerned may
deem proper to tax: Provided, That on any business subject to
 103

the excise, value-added or percentage tax under the National

Internal Revenue Code, as amended, the rate of tax shall not
exceed two percent (2%) of gross sales or receipts of the
preceding calendar year. The sanggunian concerned may
prescribe a schedule of graduated tax rates but in no case to
exceed the rates prescribed herein.

The City of Cagayan de Oro’s imposition of a tax on the lease of poles falls
under Section 143(h), as the lease of poles is CEPALCO’s separate line of
business which is not covered by paragraphs (a) to (g) of Section 143. The
treatment of the lease of poles as a separate line of business is evident in
Section 4(a) of Ordinance No. 9503-2005. The City of Cagayan de Oro required
CEPALCO to apply for a separate business permit.

More importantly, because “any person, who in the course of trade or

business x x x leases goods or properties x x x shall be subject to the value
added tax,” the imposable tax rate should not exceed two percent of gross
receipts of the lease of poles of the preceding calendar year. Section 143(h)
states that “on any business subject to value-added tax under the National
Internal Revenue Code, as amended, the rate of tax shall not exceed two percent
(2%) of gross sales or receipts of the preceding calendar year” from the lease of
goods or properties. Hence, the 10% tax rate imposed by Ordinance No. 9503-
2005 clearly violates Section 143(h) of the Local Government Code.

Finally, in view of the lack of a separability clause, we declare void the

entirety of Ordinance No. 9503-2005. Any payment made by reason of the tax
imposed by Ordinance No. 9503-2005 should, therefore, be refunded to
CEPALCO. Our ruling, however, is made without prejudice to the enactment by
the City of Cagayan de Oro of a tax ordinance that complies with the limits set
by the Local Government Code.

UNITED INTERNATIONAL PICTURES AB V. CIR

October 11, 2012/ Peralta, J.

 Option to Carry Over

FACTS:

On April 15, 1999, petitioner filed with the Bureau of Internal Revenue its
Corporation Annual Income Tax Return for the calendar year ended December
31, 1998 reflecting, among others, a net taxable income from operations in the
 104

sum of P24,961,200.00, an income tax liability of P8,486,808.00, but with an

excess income tax payment in the amount of P4,325,152.00 arising from
quarterly income tax payments and creditable taxes withheld at source,
computed as follows:

Gross Income ------------------------------------------------P 42,905,466.00

Less: Deductions -----------------------------------------------17,944,266.00

Taxable Income ----------------------------------------------P 24,961,200.00

Tax Due --------------------------------------------------------P 8,468,808.00

Less: Tax Credits/Payments ----------------------------------12,811,960.00

Tax Overpayment -------------------------------------------P 4,325,152.00

Petitioner opted to carry-over as tax credit to the succeeding taxable year the
said overpayment by putting an “x” mark on the corresponding box.

On April 17, 2000, petitioner filed its Corporation Annual Income Tax Return
for the calendar year ended December 31, 1999 wherein it reported, among
others, a taxable income in the amount of P7,071,651.00, an income tax due of
P2,333,645.00, but with an excess income tax payment in the amount of
P9,309,292.00, detailed as follows:

Gross Income -------------------------------------P 25,240,148.00

Less: Deductions ------------------------------------18,168,497.00

Taxable Income ------------------------------------P 7,071,651.00

Tax Due ---------------------------------------------P 2,333,645.00

Less: Tax Credits/Payments

a. Prior Years Excess Credits -------------P 4,325,152.00

b. Creditable Tax Withheld ------------------7,317,785.00 11,642,937.00

Tax Overpayment --------------------- P 9,309,292.00

On the face of the 1999 return, petitioner indicated its option by putting an “x”
mark on the box “To be refunded.”
 105

On April 28, 2000, petitioner filed with the BIR an administrative claim for
refund in the amount of P9,309,292.00. As respondent did not act on petitioner’s
claim, the latter filed a petition for review before the Court of Tax Appeals (CTA)
to toll the running of the two-year prescriptive period.

On September 12, 2001, the CTA rendered a Decision denying petitioner’s

claim for refund for taxable year 1998. It reasoned that since petitioner opted to
carry over the 1998 tax overpayment as tax credit to the succeeding taxable
year, the same cannot be refunded pursuant to Section 76 of the National
Internal Revenue Code (NIRC) of 1997.

ISSUES:

Is the petitioner perpetually barred to refund its tax overpayment for taxable
year 1998 since it opted to carry-over its excess tax?

HELD (Dry Run):

Yes. Once a corporation exercises the option to carry-over, such option is

irrevocable “for that taxable period.” Having chosen to carry-over the excess
quarterly income tax, the corporation cannot thereafter choose to apply for a cash
refund or for the issuance of a tax credit certificate for the amount representing
such overpayment. The phrase “for that taxable period” merely identifies the
excess income tax, subject of the option, by referring to the taxable period when
it was acquired by the taxpayer. In the present case, the excess income tax
credit, which the petitioner opted to carry over, was acquired during the taxable
year 1998. The option to carry over its 1998 excess income tax credit is
irrevocable; it cannot later on opt to apply for a refund of the very same 1998
excess income tax credit.

FURTHER DISCUSSIONS:

Petitioner asserts that there is nothing in the law which perpetually prohibits
the refund of carried over excess tax. It maintains that the option to carry-over is
irrevocable only for the next “taxable period” where the excess tax payment was
carried over.

Section 76 of the NIRC of 1997 states –

Section 76. Final Adjustment Return. – Every

corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the
preceding calendar or fiscal year. If the sum of the quarterly
tax payments made during the said taxable year is not equal to
 106

the total tax due on the entire taxable income of that year, the
corporation shall either:

A. Pay the balance of tax still due; or

B. Carry-over the excess credit; or
C. Be credited or refunded with the excess amount paid,
as the case may be.

In case the corporation is entitled to a tax credit or refund of

the excess estimated quarterly income taxes paid, the excess
amount shown on its final adjustment return may be carried
over and credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable
years. Once the option to carry-over and apply the excess
quarterly income tax against income due for the taxable
quarters of the succeeding taxable years has been made,
such option shall be considered irrevocable for that
taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed
therefore.

From the aforequoted provision, it is clear that once a corporation exercises

the option to carry-over, such option is irrevocable “for that taxable period.”
Having chosen to carry-over the excess quarterly income tax, the corporation
cannot thereafter choose to apply for a cash refund or for the issuance of a tax
credit certificate for the amount representing such overpayment.

To avoid confusion, this Court has properly explained the phrase “for that
taxable period” in Commissioner of Internal Revenue v. Bank of the Philippine
Islands. In said case, the Court held that the phrase merely identifies the excess
income tax, subject of the option, by referring to the “taxable period when it
was acquired by the taxpayer.” Thus:

Section 76 remains clear and unequivocal. Once the

carry-over option is taken, actually or constructively, it
becomes irrevocable. It mentioned no exception or
qualification to the irrevocability rule. Hence, the controlling
factor for the operation of the irrevocability rule is that the
taxpayer chose an option; and once it had already done so, it
could no longer make another one. Consequently, after the
taxpayer opts to carry-over its excess tax credit to the following
taxable period, the question of whether or not it actually gets to
 107

apply said tax credit is irrelevant. Section 76 of the NIRC of

1997 is explicit in stating that once the option to carry over has
been made, “no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor.” The last sentence of
Section 76 of the NIRC of 1997 reads: “Once the option to carry
over and apply the excess quarterly income tax against income
tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered
irrevocable for that taxable period and no application for
tax refund or issuance of a tax credit certificate shall be
allowed therefore.” The phrase “for that taxable period”
merely identifies the excess income tax, subject of the
option, by referring to the taxable period when it was
acquired by the taxpayer. In the present case, the excess
income tax credit, which BPI opted to carry over, was acquired
by the said bank during the taxable year 1998. The option of
BPI to carry over its 1998 excess income tax credit is
irrevocable; it cannot later on opt to apply for a refund of the
very same 1998 excess income tax credit.

The Court of Appeals mistakenly understood the phrase “for

that taxable period” as a prescriptive period for the
irrevocability rule x x x. The evident intent of the legislature, in
adding the last sentence to Section 76 of the NIRC of 1997, is
to keep the taxpayer from flip flopping on its options, and avoid
confusion and complication as regards said taxpayer’s excess
tax credit. The interpretation of the Court of Appeals only
delays the flip-flopping to the end of each succeeding taxable
period.

Plainly, petitioner’s claim for refund for 1998 should be denied as its option to
carry over has precluded it from claiming the refund of the excess 1998 income
tax payment.

CITY OF IRIGA V. CAMARINES SUR III ELECTRIC COOPERATIVE, INC.

September 5, 2012/ Perlas-Bernabe, J.

 Franchise Tax
 Jurisdiction of the Court of Tax Appeals
 Situs of Taxation
 108

FACTS:

CASURECO III is an electric cooperative duly organized and existing by virtue

of Presidential Decree (PD) 269, as amended, and registered with the National
Electrification Administration (NEA). It is engaged in the business of electric
power distribution to various end-users and consumers within the City of Iriga
and the municipalities of Nabua, Bato, Baao, Buhi, Bula and Balatan of the
Province of Camarines Sur, otherwise known as the "Rinconada area."

Sometime in 2003, petitioner City of Iriga required CASURECO III to submit a

report of its gross receipts for the period 1997-2002 to serve as the basis for the
computation of franchise taxes, fees and other charges. The latter complied and
was subsequently assessed taxes.

On January 7, 2004, petitioner made a final demand on CASURECO III to pay

the franchise taxes due for the period 1998-2003 and real property taxes due for
the period 1995-2003. CASURECO III, however, refused to pay said taxes on the
ground that it is an electric cooperative provisionally registered with the
Cooperative Development Authority (CDA), and therefore exempt from the
payment of local taxes.

On March 15, 2004, petitioner filed a complaint for collection of local taxes
against CASURECO III before the RTC, citing its power to tax under the Local
Government Code (LGC) and the Revenue Code of Iriga City.

ISSUE:

Is an electric cooperative registered under PD 269 but not under RA 6938

liable for the payment of local franchise taxes?

HELD (Dry Run):

Yes. On January 1, 1992, the LGC took effect, and Section 193 thereof
withdrew tax exemptions or incentives previously enjoyed by all persons,
whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational institutions. Since
the respondent did not opt to register with the CDA, as provided under R. A.
6938, its exemption from franchise taxes was withdrawn upon the effectivity of
the Local Government Code.

FURTHER DISCUSSIONS:
 109

Proper Mode of Appeal from the Decision of the Regional Trial

Court involving local taxes

RA 9282, which took effect on April 23, 2004, expanded the jurisdiction of the
Court of Tax Appeals (CTA) to include, among others, the power to review by
appeal decisions, orders or resolutions of the Regional Trial Courts in local tax
cases originally decided or resolved by them in the exercise of their original or
appellate jurisdiction.

Considering that RA 9282 was already in effect when the RTC rendered its
decision on February 7, 2005, CASURECO III should have filed its appeal, not
with the CA, but with the CTA Division in accordance with the applicable law
and the rules of the CTA. Resort to the CA was, therefore, improper, rendering its
decision null and void for want of jurisdiction over the subject matter. A void
judgment has no legal or binding force or efficacy for any purpose or at any
place. Hence, the fact that petitioner's motion for reconsideration from the CA
Decision was belatedly filed is inconsequential, because a void and non-existent
decision would never have acquired finality.

The foregoing procedural lapses would have been sufficient to dismiss the
instant petition outright and declare the decision of the RTC final. However, the
substantial merits of the case compel us to dispense with these lapses and
instead, exercise the Court’s power of judicial review.

CASURECO III is not exempt from payment of franchise tax

PD 269, which took effect on August 6, 1973, granted electric cooperatives

registered with the NEA, like CASURECO III, several tax privileges, one of which
is exemption from the payment of "all national government, local government and
municipal taxes and fees, including franchise, filing, recordation, license or
permit fees or taxes."

On March 10, 1990, Congress enacted into law RA 6938, otherwise known
as the "Cooperative Code of the Philippines," and RA 6939 creating the CDA. The
latter law vested the power to register cooperatives solely on the CDA, while the
former provides that electric cooperatives registered with the NEA under PD 269
which opt not to register with the CDA shall not be entitled to the benefits and
privileges under the said law.

On January 1, 1992, the LGC took effect, and Section 193 thereof withdrew
tax exemptions or incentives previously enjoyed by "all persons, whether natural
or juridical, including government-owned or controlled corporations, except local
 110

water districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions."

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The

Secretary, Department of Interior and Local Government, the Court held that the
tax privileges granted to electric cooperatives registered with NEA under PD 269
were validly withdrawn and only those registered with the CDA under RA 6938
may continue to enjoy the tax privileges under the Cooperative Code.

Therefore, CASURECO III can no longer invoke PD 269 to evade payment of

local taxes. Moreover, its provisional registration with the CDA which granted it
exemption for the payment of local taxes was extended only until May 4, 1992.
Thereafter, it can no longer claim any exemption from the payment of local taxes,
including the subject franchise tax.

Indisputably, petitioner has the power to impose local taxes. The power of
the local government units to impose and collect taxes is derived from the
Constitution itself which grants them "the power to create its own sources of
revenues and to levy taxes, fees and charges subject to such guidelines and
limitation as the Congress may provide." This explicit constitutional grant of
power to tax is consistent with the basic policy of local autonomy and
decentralization of governance. With this power, local government units have the
fiscal mechanisms to raise the funds needed to deliver basic services to their
constituents and break the culture of dependence on the national government.
Thus, consistent with these objectives, the LGC was enacted granting the local
government units, like petitioner, the power to impose and collect franchise tax,
to wit:

SEC. 137. Franchise Tax. - Notwithstanding any exemption

granted by any law or other special law, the province may
impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross
annual receipts for the preceding calendar year based on the
incoming receipt, or realized, within its territorial jurisdiction.

SEC. 151. Scope of Taxing Powers. - Except as otherwise

provided in this Code, the city, may levy the taxes, fees, and
charges which the province or municipality may impose:
Provided, however, That the taxes, fees and charges levied and
collected by highly urbanized and independent component
cities shall accrue to them and distributed in accordance with
the provisions of this Code. The rates of taxes that the city may
 111

levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the
rates of professional and amusement taxes.

Taking a different tack, CASURECO III maintains that it is exempt from

payment of franchise tax because of its nature as a non-profit cooperative, as
contemplated in PD 269, and insists that only entities engaged in business, and
not non-profit entities like itself, are subject to the said franchise tax.

The Court is not persuaded.

In National Power Corporation v. City of Cabanatuan, the Court declared that

"a franchise tax is „a tax on the privilege of transacting business in the state and
exercising corporate franchises granted by the state." It is not levied on the
corporation simply for existing as a corporation, upon its property or its income,
but on its exercise of the rights or privileges granted to it by the government. "It is
within this context that the phrase tax on businesses enjoying a franchise in
Section 137 of the LGC should be interpreted and understood."

Thus, to be liable for local franchise tax, the following requisites should
concur: (1) that one has a "franchise" in the sense of a secondary or special
franchise; and (2) that it is exercising its rights or privileges under this franchise
within the territory of the pertinent local government unit.

There is a confluence of these requirements in the case at bar. By virtue of PD

269, NEA granted CASURECO III a franchise to operate an electric light and
power service for a period of fifty (50) years from June 6, 1979, and it is
undisputed that CASURECO III operates within Iriga City and the Rinconada
area. It is, therefore, liable to pay franchise tax notwithstanding its non-profit
nature.

CASURECO III is liable for franchise tax on gross receipts within Iriga
City and Rinconada area

CASURECO III further argued that its liability to pay franchise tax, if any,
should be limited to gross receipts received from the supply of the electricity
within the City of Iriga and not those from the Rinconada area.

Again, the Court is not convinced.

It should be stressed that what the petitioner seeks to collect from

CASURECO III is a franchise tax, which as defined, is a tax on the exercise of a
 112

privilege. As Section 137 of the LGC provides, franchise tax shall be based on
gross receipts precisely because it is a tax on business, rather than on persons
or property. Since it partakes of the nature of an excise tax the situs of taxation
is the place where the privilege is exercised, in this case in the City of Iriga,
where CASURECO III has its principal office and from where it operates,
regardless of the place where its services or products are delivered. Hence,
franchise tax covers all gross receipts from Iriga City and the Rinconada area.

The Court reiterates that a franchise tax is a tax levied on the exercise by an
entity of the rights or privileges granted to it by the government. In the absence of
a clear and subsisting legal provision granting it tax exemption, a franchise
holder, though non-profit in nature, may validly be assessed franchise tax by a
local government unit.

WESTERN MINDANAO POWER CORPORATION V. CIR

June 3, 2012/ Sereno, J.

 Printing of the Word “Zero-Rated” on the VAT Invoices or Official

Receipts
 Principle of Legislative Approval of Administrative Interpretation by
Reenactment

FACTS:

Petitioner WMPC is a domestic corporation engaged in the production and sale

of electricity. It is registered with the Bureau of Internal Revenue (BIR) as a VAT
taxpayer. Petitioner alleges that it sells electricity solely to the National Power
Corporation (NPC), which is in turn exempt from the payment of all forms of
taxes, duties, fees and imposts, pursuant to Section 13 1 of Republic Act (R.A.) No.
6395.

In view thereof and pursuant to Section 108(B) (3) of the National Internal
Revenue Code (NIRC), petitioner’s power generation services to NPC is zero-
rated.

Under Section 112(A) of the NIRC, a VAT-registered taxpayer may, within two
years after the close of the taxable quarter, apply for the issuance of a tax credit
or refund of creditable input tax due or paid and attributable to zero-rated or
effectively zero-rated sales. Hence, on 20 June 2000 and 13 June 2001, WMPC
filed with the Commissioner of Internal Revenue (CIR) applications for a tax
credit certificate of its input VAT covering the taxable 3 rd and 4th quarters of 1999

1
 113

(amounting to P3,675,026.67) and all the taxable quarters of 2000 (amounting to

P5,649,256.81).

The CIR filed its Comment on the CTA Petition, arguing that WMPC was not
entitled to the latter’s claim for a tax refund in view of its failure to comply with
the invoicing requirements under Section 113 of the NIRC in relation to Section
4.108-1 of RR 7-95, which provides:

SECTION 4. 108-1. Invoicing Requirements — All VAT-

registered persons shall, for every sale or lease of goods or
properties or services, issue duly registered receipts or sales or
commercial invoices which must show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or nature
of service;
4. the name, TIN, business style, if any, and address of the
VAT-registered purchaser, customer or client;
5. the word “zero rated” imprinted on the invoice covering
zero-rated sales; and
6. the invoice value or consideration.

In the case of sale of real property subject to VAT and where

the zonal or market value is higher than the actual
consideration, the VAT shall be separately indicated in the
invoice or receipt.

Only VAT-registered persons are required to print their TIN

followed by the word “VAT” in their invoice or receipts and this
shall be considered as a “VAT Invoice.” All purchases covered
by invoices other than “VAT” Invoice" shall not give rise to any
input tax.

If the taxable person is also engaged in exempt operations,

he should issue separate invoices or receipts for the taxable
and exempt operations. A “VAT Invoice” shall be issued only for
sales of goods, properties or services subject to VAT imposed in
Sections 100 and 102 of the Code.

The invoice or receipt shall be prepared at least in duplicate,

the original to be given to the buyer and the duplicate to be
retained by the seller as part of his accounting records.
(Underscoring supplied.)

WMPC countered that the invoicing and accounting requirements laid down in
RR 7-95 were merely “compliance requirements,” which were not indispensable
to establish the claim for refund of excess and unutilized input VAT. Also, Section
 114

113 of the NIRC prevailing at the time the sales transactions were made did not
expressly state that failure to comply with all the invoicing requirements would
result in the disallowance of a tax credit refund. The express requirement – that
“the term ‘zero-rated sale’ shall be written or printed prominently” on the VAT
invoice or official receipt for sales subject to zero percent (0%) VAT – appeared in
Section 113 of the NIRC only after it was amended by Section 11 of R.A. 9337.
This amendment cannot be applied retroactively, considering that it took effect
only on 1 July 2005, or long after petitioner filed its claim for a tax refund, and
considering further that the RR 7-95 is punitive in nature. Further, since there
was no statutory requirement for imprinting the phrase “zero-rated” on official
receipts prior to 1 July 2005, the RR 7-95 constituted undue expansion of the
scope of the legislation it sought to implement.
 
ISSUE:

Did the CTA En Banc seriously err in dismissing the claim of petitioner for a
refund or tax credit on input tax on the ground that the latter’s Official Receipts
do not contain the phrase “zero-rated”?

HELD (Dry Run):

No. Under the NIRC, a creditable input tax should be evidenced by a VAT
invoice or official receipt, which may only be considered as such when it
complies with the requirements of RR 7-95 which requires, among others, that if
the sale is subject to zero percent (0%) value-added tax, the term ‘zero-rated sale’
shall be written or printed prominently on the invoice or receipt. RR 7-95, which
took effect on 1 January 1996, proceeds from the rule-making authority granted
to the Secretary of Finance by the NIRC for the efficient enforcement of the same
Tax Code and its amendments.

FURTHER DISCUSSIONS:

Being a derogation of the sovereign authority, a statute granting tax

exemption is strictly construed against the person or entity claiming the
exemption. When based on such statute, a claim for tax refund partakes of the
nature of an exemption. Hence, the same rule of strict interpretation against the
taxpayer-claimant applies to the claim.

In the present case, petitioner’s claim for a refund or tax credit of input VAT is
anchored on Section 112(A) of the NIRC, viz:

Section 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales. - any VAT-

registered person, whose sales are zero-rated or effectively
zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the
 115

issuance of a tax credit certificate or refund of creditable input

tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been applied
against output tax: Provided, however, That in the case of zero-
rated sales under Section 106(A)(2)(a)(1), (2) and (B) and
Section 108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale
and also in taxable or exempt sale of goods of properties or
services, and the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis
of the volume of sales.

Thus, a taxpayer engaged in zero-rated or effectively zero-rated sale may

apply for the issuance of a tax credit certificate, or refund of creditable input tax
due or paid, attributable to the sale.

In a claim for tax refund or tax credit, the applicant must prove not only
entitlement to the grant of the claim under substantive law. It must also show
satisfaction of all the documentary and evidentiary requirements for an
administrative claim for a refund or tax credit. Hence, the mere fact that
petitioner’s application for zero-rating has been approved by the CIR does not, by
itself, justify the grant of a refund or tax credit. The taxpayer claiming the refund
must further comply with the invoicing and accounting requirements mandated
by the NIRC, as well as by revenue regulations implementing them.

Under the NIRC, a creditable input tax should be evidenced by a VAT invoice
or official receipt, which may only be considered as such when it complies with
the requirements of RR 7-95, particularly Section 4.108-1. This section requires,
among others, that “(i)f the sale is subject to zero percent (0%) value-added tax,
the term ‘zero-rated sale’ shall be written or printed prominently on the invoice or
receipt.”

We are not persuaded by petitioner’s argument that RR 7-95 constitutes

undue expansion of the scope of the legislation it seeks to implement on the
ground that the statutory requirement for imprinting the phrase “zero-rated” on
VAT official receipts appears only in Republic Act No. 9337. This law took effect
on 1 July 2005, or long after petitioner had filed its claim for a refund.

RR 7-95, which took effect on 1 January 1996, proceeds from the rule-making
authority granted to the Secretary of Finance by the NIRC for the efficient
enforcement of the same Tax Code and its amendments. In Panasonic
Communications Imaging Corporation of the Philippines v. Commissioner of
 116

Internal Revenue, we ruled that this provision is “reasonable and is in accord

with the efficient collection of VAT from the covered sales of goods and services.”

Moreover, we have held in Kepco Philippines Corporation v. Commissioner of

Internal Revenue that the subsequent incorporation of Section 4.108-1 of RR 7-
95 in Section 113 (B) (2) (c) of R.A. 9337 actually confirmed the validity of the
imprinting requirement on VAT invoices or official receipts – a case falling under
the principle of legislative approval of administrative interpretation by
reenactment.

In fact, this Court has consistently held as fatal the failure to print the word
“zero-rated” on the VAT invoices or official receipts in claims for a refund or credit
of input VAT on zero-rated sales, even if the claims were made prior to the
effectivity of R.A. 9337. Clearly then, the present Petition must be denied.

CIR V. PILIPINAS SHELL PETROLEUM CORPORATION

April 25, 2012/ Villarama, Jr., J.

 Excise Taxes

FACTS:

Respondent is engaged in the business of processing, treating and refining

petroleum for the purpose of producing marketable products and the subsequent
sale thereof.

On July 18, 2002, respondent filed with the Bureau of Internal Revenue a
formal claim for refund or tax credit in the total amount of P28,064,925.15,
representing excise taxes it allegedly paid on sales and deliveries of gas and fuel
oils to various international carriers during the period October to December 2001.

Respondent maintains that since petroleum products sold to qualified

international carriers are exempt from excise tax, no taxes should be imposed on
the article, to which goods the tax attaches, whether in the hands of the said
international carriers or the petroleum manufacturer or producer. As these excise
taxes have been erroneously paid taxes, they can be recovered under Sec. 229 of
the NIRC.

Respondent further contends that requiring it to shoulder the burden of excise

taxes on petroleum products sold to international carriers would effectively
defeat the principle of international comity upon which the grant of tax exemption
on aviation fuel used in international flights was founded. If the excise taxes
paid by respondent are not allowed to be refunded or credited based on the
 117

exemption provided in Sec. 135 (a), respondent avers that the manufacturers or
oil companies would then be constrained to shift the tax burden to international
carriers in the form of addition to the selling price.

Sec. 135 (a) of the NIRC provides:

Section 135. Petroleum Products Sold to International Carriers

and Exempt Entities or Agencies. - Petroleum products sold to
the following are exempt from excise tax:

(a) International carriers of Philippine or foreign registry on their

use or consumption outside the Philippines: Provided, That the
petroleum products sold to these international carriers shall be
stored in a bonded storage tank and may be disposed of only
in accordance with the rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the
Commissioner;

(b) Exempt entities or agencies covered by tax treaties,

conventions and other international agreements for their use of
consumption: Provided, however, That the country of said
foreign international carrier or exempt entities or agencies
exempts from similar taxes petroleum products sold to
Philippine carriers, entities or agencies; and

(c) Entities which are by law exempt from direct and indirect
taxes.

ISSUE:

Is the respondent as a manufacturer or producer of petroleum products

exempt from the payment of excise tax on such petroleum products it sold to
international carriers?

HELD:

FURTHER DISCUSSIONS:

In the previous cases decided by this Court involving excise taxes on

petroleum products sold to international carriers, what was only resolved is the
question of who is the proper party to claim the refund of excise taxes paid on
petroleum products if such tax was either paid by the international carriers
themselves or incorporated into the selling price of the petroleum products sold to
 118

them. We have ruled in the said cases that the statutory taxpayer, the local
manufacturer of the petroleum products who is directly liable for the payment of
excise tax on the said goods, is the proper party to seek a tax refund. Thus, a
foreign airline company who purchased locally manufactured petroleum products
for use in its international flights, as well as a foreign oil company who likewise
bought petroleum products from local manufacturers and later sold these to
international carriers, have no legal personality to file a claim for tax refund or
credit of excise taxes previously paid by the local manufacturers even if the latter
passed on to the said buyers the tax burden in the form of additional amount in
the price.

Excise taxes, as the term is used in the NIRC, refer to taxes applicable to
certain specified goods or articles manufactured or produced in the Philippines
for domestic sales or consumption or for any other disposition and to things
imported into the Philippines. These taxes are imposed in addition to the value-
added tax (VAT).

Respondent claims it is entitled to a tax refund because those petroleum

products it sold to international carriers are not subject to excise tax, hence the
excise taxes it paid upon withdrawal of those products were erroneously or
illegally collected and should not have been paid in the first place. Since the
excise tax exemption attached to the petroleum products themselves, the
manufacturer or producer is under no duty to pay the excise tax thereon.

We disagree.

Respondent’s locally manufactured petroleum products are clearly subject to

excise tax under Sec. 148. Hence, its claim for tax refund may not be predicated
on Sec. 229 of the NIRC allowing a refund of erroneous or excess payment of tax.
Respondent’s claim is premised on what it determined as a tax exemption
"attaching to the goods themselves," which must be based on a statute granting
tax exemption, or "the result of legislative grace." Such a claim is to be construed
strictissimi juris against the taxpayer, meaning that the claim cannot be made to
rest on vague inference. Where the rule of strict interpretation against the
taxpayer is applicable as the claim for refund partakes of the nature of an
exemption, the claimant must show that he clearly falls under the exempting
statute.

The exemption from excise tax payment on petroleum products under Sec.
135 (a) is conferred on international carriers who purchased the same for their
use or consumption outside the Philippines. The only condition set by law is for
these petroleum products to be stored in a bonded storage tank and may be
 119

disposed of only in accordance with the rules and regulations to be prescribed

by the Secretary of Finance, upon recommendation of the Commissioner.

In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue this

Court held that petitioner manufacturer who sold its oxygen and acetylene gases
to NPC, a tax-exempt entity, cannot claim exemption from the payment of sales
tax simply because its buyer NPC is exempt from taxation. The Court explained
that the percentage tax on sales of merchandise imposed by the Tax Code is due
from the manufacturer and not from the buyer.

Respondent attempts to distinguish this case from Philippine Acetylene Co.,

Inc. on grounds that what was involved in the latter is a tax on the transaction
(sales) and not excise tax which is a tax on the goods themselves, and that the
exemption sought therein was anchored merely on the tax-exempt status of the
buyer and not a specific provision of law exempting the goods sold from the
excise tax. But as already stated, the language of Sec. 135 indicates that the tax
exemption mentioned therein is conferred on specified buyers or consumers of
the excisable articles or goods (petroleum products). Unlike Sec. 134 which
explicitly exempted the article or goods itself (domestic denatured alcohol)
without due regard to the tax status of the buyer or purchaser, Sec. 135 exempts
from excise tax petroleum products which were sold to international carriers and
other tax-exempt agencies and entities.

Considering that the excise taxes attaches to petroleum products "as soon as
they are in existence as such," there can be no outright exemption from the
payment of excise tax on petroleum products sold to international carriers. The
sole basis then of respondent’s claim for refund is the express grant of excise tax
exemption in favor of international carriers under Sec. 135 (a) for their purchases
of locally manufactured petroleum products. Pursuant to our ruling in Philippine
Acetylene, a tax exemption being enjoyed by the buyer cannot be the basis of a
claim for tax exemption by the manufacturer or seller of the goods for any tax
due to it as the manufacturer or seller. The excise tax imposed on petroleum
products under Sec. 148 is the direct liability of the manufacturer who cannot
thus invoke the excise tax exemption granted to its buyers who are international
carriers.

In Maceda v. Macaraig, Jr., the Court specifically mentioned excise tax as an

example of an indirect tax where the tax burden can be shifted to the buyer:

On the other hand, "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 the oil
 120

companies pay to the Bureau of Internal Revenue 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."

An excise tax is basically an indirect tax. Indirect taxes are

those that are demanded, in the first instance, from, or are
paid by, one person in the expectation and intention that he
can shift the burden to someone else. Stated elsewise, indirect
taxes are taxes wherein the liability for the payment of the tax
falls on one person but the burden thereof can be shifted or
passed on to another person, such as when the tax is imposed
upon goods before reaching the consumer who ultimately pays
for it. When the seller passes on the tax to his buyer, he, in
effect, shifts the tax burden, not the liability to pay it, to the
purchaser as part of the price of goods sold or services
rendered.

Further, in Maceda v. Macaraig, Jr., the Court ruled that because of the tax
exemptions privileges being enjoyed by NPC under existing laws, the tax burden
may not be shifted to it by the oil companies who shall pay for fuel oil taxes on
oil they supplied to NPC. Thus:

In view of all the foregoing, the Court rules and declares

that 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. Because, however, the NPC has been exempted from both
direct and indirect taxation, the NPC must be held exempted
from absorbing the economic burden of indirect taxation. 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 they could 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 that
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
 121

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.

Because an excise tax is a tax on the manufacturer and not on the purchaser,
and there being no express grant under the NIRC of exemption from payment of
excise tax to local manufacturers of petroleum products sold to international
carriers, and absent any provision in the Code authorizing the refund or crediting
of such excise taxes paid, the Court holds that Sec. 135 (a) should be construed
as prohibiting the shifting of the burden of the excise tax to the international
carriers who buys petroleum products from the local manufacturers. Said
provision thus merely allows the international carriers to purchase petroleum
products without the excise tax component as an added cost in the price fixed by
the manufacturers or distributors/sellers. Consequently, the oil companies which
sold such petroleum products to international carriers are not entitled to a refund
of excise taxes previously paid on the goods.

ACCENTURE, INC. V. CIR

July 11, 2012/ Sereno, J.

 Zero-Rated Transactions

RULING:

Recipient of services must be doing business outside the Philippines for the
transactions to qualify as zero-rated

Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code,
which allows the refund of unutilized input VAT earned from zero-rated or
effectively zero-rated sales. The provision reads:

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-

registered person, whose sales are zero-rated or effectively
zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been
 122

applied against output tax: Provided, however, That in the case

of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and
Section 108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale
and also in taxable or exempt sale of goods of properties or
services, and the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis
of the volume of sales.

Section 108(B) referred to in the foregoing provision provides:

SEC. 108. Value-added Tax on Sale of Services and Use or

Lease of Properties. -

(B) Transactions Subject to Zero Percent (0%) Rate. – The

following services performed in the Philippines by VAT-
registered persons shall be subject to zero percent (0%) rate:

(1) Processing, manufacturing or repacking goods for other

persons doing business outside the Philippines which goods
are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);

(2) Services other than those mentioned in the preceding

paragraph rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person
not engaged in business who is outside the Philippines when
the services are performed, the consideration for which is paid
for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
 123

We rule that the recipient of the service must be doing business outside the
Philippines for the transaction to qualify for zero-rating under Section 108(B) of
the Tax Code.

In Amex we ruled that the place of performance and/or consumption of the

service is immaterial. In Burmeister, the Court found that, although the place of
the consumption of the service does not affect the entitlement of a transaction to
zero-rating, the place where the recipient conducts its business does.

Accenture has failed to establish that the recipients of its services do

business outside the Philippines. Hence, the petition must be denied.

CIR V. PETRON CORPORATION

March 21, 2012/ Sereno, J.

 Tax Credit Certificates

FACTS:

During the period covering the taxable years 1995 to 1998, petitioner (herein
respondent Petron) had been an assignee of several Tax Credit Certificates
(TCCs) from various BOI-registered entities for which petitioner utilized in the
payment of its excise tax liabilities for the taxable years 1995 to 1998. The
transfers and assignments of the said TCCs were approved by the Department
of Finance’s One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center
(DOF Center), composed of representatives from the appropriate government
agencies, namely, the Department of Finance (DOF), the Board of Investments
(BOI), the Bureau of Customs (BOC) and the Bureau of Internal Revenue (BIR).

On January 30, 2002, CIR issued the assailed Assessment against Petron for
deficiency excise taxes for the taxable years 1995 to 1998, in the total amount of
P 739,003,036.32, inclusive of surcharges and interests, based on the ground
that the TCCs utilized by Petron in its payment of excise taxes have been
cancelled by the DOF for having been fraudulently issued and transferred,
pursuant to its EXCOM Resolution No. 03-05-99.

In the case at bar, the CIR disputes the ruling of the CTA En Banc, which
found Petron to have had no participation in the fraudulent procurement and
transfer of the TCCs. Petitioner believes that there was substantial evidence to
support its allegation of a fraudulent transfer of the TCCs to Petron. The CIR
further contends that respondent was not a qualified transferee of the TCCs,
 124

because the latter did not supply petroleum products to the companies that were
the assignors of the subject TCCs.

The CIR bases its contentions on the DOF’s post-audit findings stating that,
for the periods covering 1995 to 1998, Petron did not deliver fuel and other
petroleum products to the companies (the transferor companies) that had
assigned the subject TCCs to respondent. Petitioner further alleges that the
findings indicate that the transferor companies could not have had such a high
volume of export sales declared to the Center and made the basis for the
issuance of the TCCs assigned to Petron. Thus, the CIR impugns the CTA En
Banc ruling that respondent was a transferee in good faith and for value of the
subject TCCs.

QUESTIONS:

1. What is a tax credit certificate?

2. Rule on the legal basis of the CIR to assess excise taxes for the taxable
years 1995 to 1998 on the respondent.

HELD (Dry Run):

1. Tax Credit Certificate means a certification, duly issued to the taxpayer

named therein, by the Commissioner or his duly authorized representative,
reduced in a BIR Accountable Form in accordance with the prescribed
formalities, acknowledging that the grantee-taxpayer named therein is legally
entitled a tax credit, the money value of which may be used in payment or in
satisfaction of any of his internal revenue tax liability (except those excluded), or
may be converted as a cash refund, or may otherwise be disposed of in the
manner and in accordance with the limitations, if any, as may be prescribed by
the provisions of regulations.

2. The CIR has no legal basis to assess excise taxes for the taxable year
1995-1998, for such taxes were already paid by the respondent using the
assigned tax credit certificates.

Petron is a transferee in good faith and for value of the subject TCCs. TCCs
are valid and effective from their issuance and are not subject to a post-audit as
a suspensive condition for their validity and the transferee has the right to rely
on the validity and effectivity of the TCCs that were assigned to it.

FURTHER DISCUSSIONS:
 125

Under Article 39 (j) of the Omnibus Investment Code of 1987, tax credits are
granted to entities registered with the Bureau of Investment (BOI) and are given
for taxes and duties paid on raw materials used for the manufacture of their
export products.

A TCC is defined under Section 1 of Revenue Regulation (RR) No. 5-2000,

issued by the BIR on 15 August 2000, as follows:

B. Tax Credit Certificate — means a certification, duly issued to

the taxpayer named therein, by the Commissioner or his duly
authorized representative, reduced in a BIR Accountable Form
in accordance with the prescribed formalities, acknowledging
that the grantee-taxpayer named therein is legally entitled a
tax credit, the money value of which may be used in payment
or in satisfaction of any of his internal revenue tax liability
(except those excluded), or may be converted as a cash refund,
or may otherwise be disposed of in the manner and in
accordance with the limitations, if any, as may be prescribed
by the provisions of these Regulations.

RR 5-2000 prescribes the regulations governing the manner of issuance of

TCCs and the conditions for their use, revalidation and transfer. Under the said
regulation, a TCC may be used by the grantee or its assignee in the payment of
its direct internal revenue tax liability. It may be transferred in favor of an
assignee subject to the following conditions: 1) the TCC transfer must be with
prior approval of the Commissioner or the duly authorized representative; 2) the
transfer of a TCC should be limited to one transfer only; and 3) the transferee
shall strictly use the TCC for the payment of the assignee’s direct internal
revenue tax liability and shall not be convertible to cash. A TCC is valid only for
10 years subject to the following rules: (1) it must be utilized within five (5) years
from the date of issue; and (2) it must be revalidated thereafter or be otherwise
considered invalid.

The processing of a TCC is entrusted to a specialized agency called the "One-

Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center" ("Center"),
created on 07 February 1992 under Administrative Order (A.O.) No. 226. Its
purpose is to expedite the processing and approval of tax credits and duty
drawbacks. The Center is composed of a representative from the DOF as its
chairperson; and the members thereof are representatives of the Bureau of
Investment (BOI), Bureau of Customs (BOC) and Bureau of Internal Revenue
(BIR), who are tasked to process the TCC and approve its application as
payment of an assignee’s tax liability.
 126

A TCC may be assigned through a Deed of Assignment, which the assignee

submits to the Center for its approval. Upon approval of the deed, the Center will
issue a DOF Tax Debit Memo (DOF-TDM), which will be utilized by the assignee
to pay the latter’s tax liabilities for a specified period. Upon surrender of the TCC
and the DOF-TDM, the corresponding Authority to Accept Payment of Excise
Taxes (ATAPET) will be issued by the BIR Collection Program Division and will be
submitted to the issuing office of the BIR for acceptance by the Assistant
Commissioner of Collection Service. This act of the BIR signifies its acceptance of
the TCC as payment of the assignee’s excise taxes.

Thus, it is apparent that a TCC undergoes a stringent process of verification

by various specialized government agencies before it is accepted as payment of
an assignee’s tax liability.

Not finding merit in the CIR’s contention, we affirm the ruling of the CTA En
Banc finding that Petron is a transferee in good faith and for value of the subject
TCCs.

From the records, we observe that the CIR had no allegation that there was a
deviation from the process for the approval of the TCCs, which Petron used as
payment to settle its excise tax liabilities for the years 1995 to 1998.

The CIR quotes the CTA Second Division and urges us to affirm the latter’s
Decision, which found Petron to have participated in the fraudulent issuance and
transfer of the TCCs. However, any merit in the position of petitioner on this
issue is negated by the Joint Stipulation it entered into with Petron in the
proceedings before the said Division. As correctly noted by the CTA En Banc,
herein parties jointly stipulated before the Second Division in CTA Case No. 6423
as follows:

13. That petitioner (Petron) did not participate in the

procurement and issuance of the TCCs, which TCCs were
transferred to Petron and later utilized by Petron in payment of
its excise taxes.

This stipulation of fact by the CIR amounts to an admission and, having been
made by the parties in a stipulation of facts at pretrial, is treated as a judicial
admission. Under Section 4, Rule 129 of the Rules of Court, a judicial admission
requires no proof. The Court cannot lightly set it aside, especially when the
opposing party relies upon it and accordingly dispenses with further proof of the
fact already admitted. The exception provided in Rule 129, Section 4 is that an
admission may be contradicted only by a showing that it was made through a
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palpable mistake, or that no such admission was made. In this case, however,
exception to the rule does not exist.

The CIR claims that Petron was not an innocent transferee for value, because
the TCCs assigned to respondent were void. Petitioner based its allegations on
the post-audit report of the DOF, which declared that the subject TCCs were
obtained through fraud and, thus, had no monetary value. The CIR adds that the
TCCs were subject to a post-audit by the Center to complete the payment of the
excise tax liability to which they were applied. Petitioner further contends that
the Liability Clause of the TCCs makes the transferee or assignee solidarily
liable with the original grantee for any fraudulent act pertinent to their
procurement and transfer. The CIR assails the contrary ruling of the CTA En
Banc, which confined the solidary liability only to the original grantee of the
TCCs. Thus, petitioner believes that the correct interpretation of the Liability
Clause in the TCCs makes Petron and the transferor companies or the original
grantee solidarily liable for any fraudulent act or violation of the pertinent laws
relating to the transfers of the TCCs.

We are not persuaded by the CIR’s position on this matter.

The Liability Clause of the TCCs reads:

Both the TRANSFEROR and the TRANSFEREE shall be

jointly and severally liable for any fraudulent act or violation of
the pertinent laws, rules and regulations relating to the
transfer of this TAX CREDIT CERTIFICATE.

The scope of this solidary liability, as stated in the TCCs, was clarified by
this Court in Shell, as follows:

The above clause to our mind clearly provides only for the
solidary liability relative to the transfer of the TCCs from the
original grantee to a transferee. There is nothing in the above
clause that provides for the liability of the transferee in the
event that the validity of the TCC issued to the original grantee
by the Center is impugned or where the TCC is declared to
have been fraudulently procured by the said original grantee.
Thus, the solidary liability, if any, applies only to the sale of
the TCC to the transferee by the original grantee. Any fraud or
breach of law or rule relating to the issuance of the TCC by the
Center to the transferor or the original grantee is the latter's
responsibility and liability. The transferee in good faith and for
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value may not be unjustly prejudiced by the fraud committed

by the claimant or transferor in the procurement or issuance of
the TCC from the Center. It is not only unjust but well-nigh
violative of the constitutional right not to be deprived of one's
property without due process of law. Thus, a re-assessment of
tax liabilities previously paid through TCCs by a transferee in
good faith and for value is utterly confiscatory, more so when
surcharges and interests are likewise assessed.

A transferee in good faith and for value of a TCC who has

relied on the Center's representation of the genuineness and
validity of the TCC transferred to it may not be legally required
to pay again the tax covered by the TCC which has been
belatedly declared null and void, that is, after the TCCs have
been fully utilized through settlement of internal revenue tax
liabilities. Conversely, when the transferee is party to the fraud
as when it did not obtain the TCC for value or was a party to or
has knowledge of its fraudulent issuance, said transferee is
liable for the taxes and for the fraud committed as provided for
by law. (Emphasis supplied.)

We also find that the post-audit report, on which the CIR based its
allegations, does not have the effect of a suspensive condition that would
determine the validity of the TCCs.

We held in Petron v. CIR (Petron), which is on all fours with the instant case,
that TCCs are valid and effective from their issuance and are not subject to a
post-audit as a suspensive condition for their validity. Our ruling in Petron finds
guidance from our earlier ruling in Shell, which categorically states that a TCC is
valid and effective upon its issuance and is not subject to a post-audit. The
implication on the instant case of the said earlier ruling is that Petron has the
right to rely on the validity and effectivity of the TCCs that were assigned to it. In
finally determining their effectivity in the settlement of respondent’s excise tax
liabilities, the validity of those TCCs should not depend on the results of the
DOF’s post-audit findings. We held thus in Petron:

Moreover, if the TCCs are considered to be subject to post-audit as a

suspensive condition, the very purpose of the TCC would be defeated as there
would be no guarantee that the TCC would be honored by the government as
payment for taxes. No investor would take the risk of utilizing TCCs if these were
subject to a post-audit that may invalidate them, without prescribed grounds or
limits as to the exercise of said post-audit.
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The inescapable conclusion is that the TCCs are not subject to post-audit as a
suspensive condition, and are thus valid and effective from their issuance.

In addition, Shell and Petron recognized an exception that holds the

transferee/assignee liable if proven to have been a party to the fraud or to have
had knowledge of the fraudulent issuance of the subject TCCs. As earlier
mentioned, the parties entered into a joint stipulation of facts stating that Petron
did not participate in the procurement or issuance of those TCCs. Thus, we affirm
the CTA En Banc’s ruling that respondent was an innocent transferee for value
thereof.

On the issue of estoppel, petitioner contends that the TCCs, which the Center
had continually approved as payment for respondent’s excise tax liabilities, were
subsequently found to be void. Thus, the CIR insists that the government is not
estopped from collecting from Petron the excise tax liabilities that had accrued to
the latter as a result of the voidance of these TCCs. Petitioner argues that the
State should not be prejudiced by the neglect or omission of government
employees entrusted with the collection of taxes.

We are not persuaded by the CIR’s argument.

We recognize the well-entrenched principle that estoppel does not apply to the
government, especially on matters of taxation. Taxes are the nation’s lifeblood
through which government agencies continue to operate and with which the
State discharges its functions for the welfare of its constituents. As an exception,
however, this general rule cannot be applied if it would work injustice against an
innocent party.

SILKAIR (SINGAPORE) PTE. LTD. V. CIR

January 25, 2012/ Villarama, Jr., J.

 Excise Taxes

FACTS:

Petitioner Silkair (Singapore) Pte. Ltd. is a foreign corporation duly licensed by

the Securities and Exchange Commission (SEC) to do business in the Philippines
as an on-line international carrier operating the Cebu-Singapore-Cebu and
Davao-Singapore-Davao routes. In the course of its international flight
operations, petitioner purchased aviation fuel from Petron Corporation (Petron)
from July 1, 1998 to December 31, 1998, paying the excise taxes thereon in the
 130

sum of P5,007,043.39. The payment was advanced by Singapore Airlines, Ltd.

on behalf of petitioner.

On October 20, 1999, petitioner filed an administrative claim for refund in the
amount of P5,007,043.39 representing excise taxes on the purchase of jet fuel
from Petron, which it alleged to have been erroneously paid. The claim is based
on Section 135 (a) and (b) of the 1997 Tax Code, which provides:

SEC. 135. Petroleum Products Sold to International Carriers

and Exempt Entities or Agencies.– Petroleum products sold to
the following are exempt from excise tax:

(a) International carriers of Philippine or foreign

registry on their use or consumption outside the Philippines:
Provided, That the petroleum products sold to these
international carriers shall be stored in a bonded storage
tank and may be disposed of only in accordance with the rules
and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner;

(b) Exempt entities or agencies covered by tax treaties,

conventions and other international agreements for their
use or consumption: Provided, however, That the country of
said foreign international carrier or exempt entities or agencies
exempts from similar taxes petroleum products sold to
Philippine carriers, entities or agencies.

Petitioner also invoked Article 4(2) of the Air Transport Agreement between
the Government of the Republic of the Philippines and the Government of the
Republic of Singapore (Air Transport Agreement between RP and Singapore)
which reads:

ART. 4

2. Fuel, lubricants, spare parts, regular equipment and aircraft

stores introduced into, or taken on board aircraft in the territory
of one Contracting Party by, or on behalf of, a designated
airline of the other Contracting Party and intended solely for
use in the operation of the agreed services shall, with the
exception of charges corresponding to the service performed, be
exempt from the same customs duties, inspection fees and
other duties or taxes imposed in the territory of the first
 131

Contracting Party, even when these supplies are to be used on

the parts of the journey performed over the territory of the
Contracting Party in which they are introduced into or taken on
board. The materials referred to above may be required to be
kept under customs supervision and control.

ISSUE:

Rule on the legal personality of the petitioner to file the administrative claim
for refund of excise taxes.

HELD (Dry Run):

The petitioner has no legal personality to file the administrative claim,

because it is not the statutory taxpayer.

The proper party to question, or seek a refund of, an indirect tax is the
statutory taxpayer, the person on whom the tax is imposed by law and who paid
the same even if he shifts the burden thereof to another. Section 130 (A) (2) of the
NIRC provides that unless otherwise specifically allowed, the return shall be
filed and the excise tax paid by the manufacturer or producer before removal of
domestic products from place of production. Thus, Petron Corporation, not Silkair,
is the statutory taxpayer which is entitled to claim a refund based on Section
135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between
RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is not a tax but part of the price
which Silkair had to pay as a purchaser.

FURTHER DISCUSSIONS:

The core issue presented is the legal personality of petitioner to file an

administrative claim for refund of excise taxes alleged to have been erroneously
paid to its supplier of aviation fuel here in the Philippines.

In three previous cases involving the same parties, this Court has already
settled the issue of whether petitioner is the proper party to seek the refund of
excise taxes paid on its purchase of aviation fuel from a local
manufacturer/seller. Following the principle of stare decisis, the present petition
must therefore be denied.
 132

Excise taxes, which apply to articles manufactured or produced in the

Philippines for domestic sale or consumption or for any other disposition and to
things imported into the Philippines, is basically an indirect tax. While the tax is
directly levied upon the manufacturer/importer upon removal of the taxable
goods from its place of production or from the customs custody, the tax, in
reality, is actually passed on to the end consumer as part of the transfer value or
selling price of the goods, sold, bartered or exchanged. In early cases, we have
ruled that for indirect taxes (such as valued-added tax or VAT), the proper party
to question or seek a refund of the tax is the statutory taxpayer, the person on
whom the tax is imposed by law and who paid the same even when he shifts the
burden thereof to another. Thus, in Contex Corporation v. Commissioner of
Internal Revenue, we held that while it is true that petitioner corporation should
not have been liable for the VAT inadvertently passed on to it by its supplier
since their transaction is a zero-rated sale on the part of the supplier, the
petitioner is not the proper party to claim such VAT refund. Rather, it is the
petitioner’s suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.

In the first Silkair case decided on February 6, 2008, this Court categorically
declared:

The proper party to question, or seek a refund of, an indirect

tax is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the
burden thereof to another. Section 130 (A) (2) of the NIRC
provides that "[u]nless otherwise specifically allowed, the
return shall be filed and the excise tax paid by the
manufacturer or producer before removal of domestic products
from place of production." Thus, Petron Corporation, not
Silkair, is the statutory taxpayer which is entitled to
claim a refund based on Section 135 of the NIRC of 1997
and Article 4(2) of the Air Transport Agreement between
RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden

of the tax, the additional amount billed to Silkair for jet fuel is
not a tax but part of the price which Silkair had to pay as a
purchaser.

Just a few months later, the decision in the second Silkair case was
promulgated, reiterating the rule that in the refund of indirect taxes such as
excise taxes, the statutory taxpayer is the proper party who can claim the
 133

refund. We also clarified that petitioner Silkair, as the purchaser and end-
consumer, ultimately bears the tax burden, but this does not transform its status
into a statutory taxpayer.

The person entitled to claim a tax refund is the statutory taxpayer. Section
22(N) of the NIRC defines a taxpayer as "any person subject to tax." In
Commissioner of Internal Revenue v. Procter and Gamble Phil. Mfg. Corp., the
Court ruled that:

‘A "person liable for tax" has been held to be a "person

subject to tax" and properly considered a "taxpayer." The terms
"liable for tax" and "subject to tax" both connote a legal
obligation or duty to pay a tax.’

The excise tax is due from the manufacturers of the

petroleum products and is paid upon removal of the products
from their refineries. Even before the aviation jet fuel is
purchased from Petron, the excise tax is already paid by
Petron. Petron, being the manufacturer, is the "person subject to
tax." In this case, Petron, which paid the excise tax upon
removal of the products from its Bataan refinery, is the "person
liable for tax." Petitioner is neither a "person liable for tax" nor
"a person subject to tax." There is also no legal duty on the part
of petitioner to pay the excise tax; hence, petitioner cannot be
considered the taxpayer.

Even if the tax is shifted by Petron to its customers and even

if the tax is billed as a separate item in the aviation delivery
receipts and invoices issued to its customers, Petron remains
the taxpayer because the excise tax is imposed directly
on Petron as the manufacturer. Hence, Petron, as the
statutory taxpayer, is the proper party that can claim
the refund of the excise taxes paid to the BIR.

Petitioner’s contention that the CTA and CA rulings would put to naught the
exemption granted under Section 135 (b) of the 1997 Tax Code and Article 4 of
the Air Transport Agreement is not well-taken. Since the supplier herein involved
is also Petron, our pronouncement in the second Silkair case, relative to the
contractual undertaking of petitioner to submit a valid exemption certificate for
the purpose, is relevant. We thus noted:
 134

The General Terms & Conditions for Aviation Fuel Supply (Supply Contract)
signed between petitioner (buyer) and Petron (seller) provide:

"11.3 If Buyer is entitled to purchase any Fuel sold pursuant to

the Agreement free of any taxes, duties or charges, Buyer
shall timely deliver to Seller a valid exemption
certificate for such purchase." (Emphasis supplied)

This provision instructs petitioner to timely submit a valid exemption

certificate to Petron in order that Petron will not pass on the excise tax to
petitioner. As correctly suggested by the CTA, petitioner should invoke its tax
exemption to Petron before buying the aviation jet fuel. Petron, however, remains
the statutory taxpayer on those excise taxes.

Revenue Regulations No. 3-2008 (RR 3-2008) provides that "subject to the
subsequent filing of a claim for excise tax credit/refund or product
replenishment, all manufacturers of articles subject to excise tax under Title VI of
the NIRC of 1997, as amended, shall pay the excise tax that is otherwise due on
every removal thereof from the place of production that is intended for
exportation or sale/delivery to international carriers or to tax-exempt
entities/agencies." The Department of Finance and the BIR recognize the tax
exemption granted to international carriers but they consistently adhere to the
view that manufacturers of articles subject to excise tax are the statutory
taxpayers that are liable to pay the tax, thus, the proper party to claim any tax
refunds.

The above observation remains pertinent to this case because the very same
provision in the General Terms and Conditions for Aviation Fuel Supply Contract
also appears in the documentary evidence submitted by petitioner before the
CTA. Except for its bare allegation of being "placed in a very complicated
situation" because Petron, "for fear of being assessed by Respondent, will not
allow the withdrawal and delivery of the petroleum products without Petitioner’s
pre-payment of the excise taxes," petitioner has not demonstrated that it dutifully
complied with its contractual undertaking to timely submit to Petron a valid
certificate of exemption so that Petron may subsequently file a claim for excise
tax credit/refund pursuant to Revenue Regulations No. 3-2008 (RR 3-2008). It
was indeed premature for petitioner to assert that the denial of its claim for tax
refund nullifies the tax exemption granted to it under Section 135 (b) of the 1997
Tax Code and Article 4 of the Air Transport Agreement.

In the third Silkair case decided last year, the Court called the attention to the
consistent rulings in the previous two Silkair cases that petitioner as the
 135

purchaser and end-consumer of the aviation fuel is not the proper party to claim
for refund of excise taxes paid thereon. The situation clearly called for the
application of the doctrine, stare decisis et non quieta movere. Follow past
precedents and do not disturb what has been settled. Once a case has been
decided one way, any other case involving exactly the same point at issue, as in
the case at bar, should be decided in the same manner. The Court thus finds no
cogent reason to deviate from those previous rulings on the same issues herein
raised.

RIZAL COMMERCIAL BANKING CORPORATION V. CIR

September 7, 2011/ Mendoza, J.

 Withholding Tax System

FACTS:

Note: The NIRC provision cited in this case comes from the NIRC of 1993. Just
absorb the principles in this case while considering the present NIRC.

Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation

engaged in general banking operations. It seasonably filed its Corporation
Annual Income Tax Returns for Foreign Currency Deposit Unit for the calendar
years 1994 and 1995.

Subsequently, on January 27, 2000, RCBC received a Formal Letter of

Demand together with Assessment Notices from the BIR.

RCBC, however, refused to pay the following assessments for deficiency

onshore tax.

Particulars 1994 1995 Total

Deficiency Final Tax on FCDU Onshore Income

Basic P 34,429,503.10 P 81,508,718.20 P 115,938,221.30

Interest 40,277,802.26 79,052,291.08 119,330,093.34

Sub Total P 74,707,305.36 P 160,561,009.28 P 235,268,314.64

As regards the deficiency FCDU onshore tax, RCBC contended that because
the onshore tax was collected in the form of a final withholding tax, it was the
 136

borrower, constituted by law as the withholding agent, that was primarily liable
for the remittance of the said tax.

On December 15, 2004, the First Division of the Court of Tax Appeals (CTA-
First Division) promulgated its Decision. It upheld the assessment for deficiency
final tax on FCDU onshore income for 1994 and 1995 and ordered RCBC to pay
the following amounts plus 20% delinquency tax.

Unsatisfied, RCBC filed its Motion for Reconsideration on January 21, 2005,
arguing that it was the payor-borrower as withholding tax agent, and not RCBC,
who was liable to pay the final tax on FCDU.

ISSUE:

Is the petitioner, as payee-bank, liable for deficiency onshore tax, which is

mandated by law to be collected at source in the form of a final withholding tax?

HELD (Dry Run):

Yes. In the operation of the withholding tax system, the withholding agent is
merely a tax collector and not a taxpayer. The liability of the withholding agent is
independent from that of the taxpayer. The former cannot be made liable for the
tax due because it is the latter who earned the income subject to withholding tax.
RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on
the payor-borrower as the withholding agent. As such, it is liable for payment of
deficiency onshore tax on interest income derived from foreign currency loans.

FURTHER DISCUSSIONS:

Liability for Deficiency Onshore Withholding Tax

RCBC is convinced that it is the payor-borrower, as withholding agent, who is

directly liable for the payment of onshore tax, citing Section 2.57(A) of Revenue
Regulations No. 2-98 which states:

(A) Final Withholding Tax. — Under the final withholding tax

system the amount of income tax withheld by the withholding
agent is constituted as a full and final payment of the income
tax due from the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to
withhold the tax or in case of under withholding, the
 137

deficiency tax shall be collected from the

payor/withholding agent. The payee is not required to file an
income tax return for the particular income. (Emphasis
supplied)

The petitioner is mistaken.

In Chamber of Real Estate and Builders’ Associations, Inc. v. The Executive

Secretary, the Court has explained that the purpose of the withholding tax
system is three-fold: (1) to provide the taxpayer with a convenient way of paying
his tax liability; (2) to ensure the collection of tax, and (3) to improve the
government’s cash flow. Under the withholding tax system, the payor is the
taxpayer upon whom the tax is imposed, while the withholding agent simply acts
as an agent or a collector of the government to ensure the collection of taxes.

It is, therefore, indisputable that the withholding agent is merely a tax

collector and not a taxpayer, as elucidated by this Court in the case of
Commissioner of Internal Revenue v. Court of Appeals, to wit:

In the operation of the withholding tax system, the

withholding agent is the payor, a separate entity acting no
more than an agent of the government for the collection of the
tax in order to ensure its payments; the payer is the taxpayer –
he is the person subject to tax imposed by law; and the payee
is the taxing authority. In other words, the withholding agent is
merely a tax collector, not a taxpayer. Under the withholding
system, however, the agent-payor becomes a payee by fiction
of law. His (agent) liability is direct and independent from
the taxpayer, because the income tax is still imposed on
and due from the latter. The agent is not liable for the
tax as no wealth flowed into him – he earned no income.
The Tax Code only makes the agent personally liable for the
tax arising from the breach of its legal duty to withhold as
distinguished from its duty to pay tax since:

"the government’s cause of action against the

withholding agent is not for the collection of income tax,
but for the enforcement of the withholding provision of
Section 53 of the Tax Code, compliance with which is
imposed on the withholding agent and not upon the taxpayer."
(Emphases supplied)
 138

Based on the foregoing, the liability of the withholding agent is independent

from that of the taxpayer. The former cannot be made liable for the tax due
because it is the latter who earned the income subject to withholding tax. The
withholding agent is liable only insofar as he failed to perform his duty to
withhold the tax and remit the same to the government. The liability for the tax,
however, remains with the taxpayer because the gain was realized and received
by him.

While the payor-borrower can be held accountable for its negligence in

performing its duty to withhold the amount of tax due on the transaction, RCBC,
as the taxpayer and the one which earned income on the transaction, remains
liable for the payment of tax as the taxpayer shares the responsibility of making
certain that the tax is properly withheld by the withholding agent, so as to avoid
any penalty that may arise from the non-payment of the withholding tax due.

RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame
on the payor-borrower as the withholding agent. As such, it is liable for payment
of deficiency onshore tax on interest income derived from foreign currency loans,
pursuant to Section 24(e)(3) of the National Internal Revenue Code of 1993:

Sec. 24.Rates of tax on domestic corporations.

(e) Tax on certain incomes derived by domestic corporations

(3) Tax on income derived under the Expanded Foreign

Currency Deposit System. – Income derived by a depository
bank under the expanded foreign currency deposit system from
foreign currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial banks
including branches of foreign banks that may be authorized by
the Central Bank to transact business with foreign currency
depository system units and other depository banks under the
expanded foreign currency deposit system shall be exempt
from all taxes, except taxable income from such transactions as
may be specified by the Secretary of Finance, upon
recommendation of the Monetary Board to be subject to the
usual income tax payable by banks: Provided, That interest
income from foreign currency loans granted by such
depository banks under said expanded system to
residents (other than offshore banking units in the
Philippines or other depository banks under the
 139

expanded system) shall be subject to a 10% tax.

(Emphasis supplied)

As a final note, this Court has consistently held that findings and conclusions
of the CTA shall be accorded the highest respect and shall be presumed valid, in
the absence of any clear and convincing proof to the contrary. The CTA, as a
specialized court dedicated exclusively to the study and resolution of tax
problems, has developed an expertise on the subject of taxation. As such, its
decisions shall not be lightly set aside on appeal, unless this Court finds that the
questioned decision is not supported by substantial evidence or there is a
showing of abuse or improvident exercise of authority on the part of the Tax
Court.

DIAZ V. SECRETARY OF FINANCE

July 19, 2011/ Abad, J.

EN BANC

 Imposition of VAT on Tollway Operators

FACTS:

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol filed this petition for
declaratory relief assailing the validity of the impending imposition of value-
added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of
tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they
have an interest as regular users of tollways in stopping the BIR action.

Petitioners allege that the BIR attempted during the administration of

President Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition
was deferred, however, in view of the consistent opposition of Diaz and other
sectors to such move. But, upon President Benigno C. Aquino III’s assumption of
office in 2010, the BIR revived the idea and would impose the challenged tax on
toll fees beginning August 16, 2010 unless judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of "sale of services" that are subject
to VAT; that a toll fee is a "user’s tax," not a sale of services; that to impose VAT
on toll fees would amount to a tax on public service; and that, since VAT was
 140

never factored into the formula for computing toll fees, its imposition would
violate the non-impairment clause of the constitution.

ISSUES:

1. Is the government unlawfully expanding VAT coverage by including tollway

operators and tollway operations in the terms "franchise grantees" and "sale of
services" under Section 108 of the Code?

2. Is the imposition of VAT on tollway operators amounts to a tax on tax?

HELD (Dry Run):

1. No, the government is not unlawfully expanding VAT coverage.

The term “franchise grantees” includes tollway operators. The word

"franchise" broadly covers government grants of a special right to do an act or
series of acts of public concern. The construction, operation, and maintenance of
toll facilities on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state.

As regards tollway operations, they are included in the term sale of services
under the National Internal Revenue Code. When a tollway operator takes a toll
fee from a motorist, the fee is in effect for the latter’s use of the tollway facilities
over which the operator enjoys private proprietary rights that its contract and the
law recognize. In this sense, the tollway operator is a service provider who allow
others to use their properties or facilities for a fee.

2. No. Fees paid by the public to tollway operators for use of the tollways, are
not taxes in any sense. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund public
expenditures. Toll fees, on the other hand, are collected by private tollway
operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways. Hence, the imposition
of the VAT cannot be a tax on tax.

FURTHER DISCUSSIONS:

One. The relevant law in this case is Section 108 of the NIRC, as amended.
VAT is levied, assessed, and collected, according to Section 108, on the gross
receipts derived from the sale or exchange of services as well as from the use or
 141

lease of properties. The third paragraph of Section 108 defines "sale or exchange
of services" as follows:

The phrase ‘sale or exchange of services’ means the

performance of all kinds of services in the Philippines for others
for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors;
stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real;
warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for
hire and other domestic common carriers by land relative to
their transport of goods or cargoes; common carriers by air and
sea relative to their transport of passengers, goods or cargoes
from one place in the Philippines to another place in the
Philippines; sales of electricity by generation companies,
transmission, and distribution companies; services of franchise
grantees of electric utilities, telephone and telegraph, radio and
television broadcasting and all other franchise grantees except
those under Section 119 of this Code and non-life insurance
companies (except their crop insurances), including surety,
fidelity, indemnity and bonding companies; and similar
services regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental faculties.
(Underscoring supplied)

It is plain from the above that the law imposes VAT on "all kinds of services"
rendered in the Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive. By qualifying "services" with
the words "all kinds," Congress has given the term "services" an all-
encompassing meaning. The listing of specific services are intended to illustrate
how pervasive and broad is the VAT’s reach rather than establish concrete limits
to its application. Thus, every activity that can be imagined as a form of "service"
 142

rendered for a fee should be deemed included unless some provision of law
especially excludes it.

Now, do tollway operators render services for a fee? Presidential Decree (P.D.)
1112 or the Toll Operation Decree establishes the legal basis for the services that
tollway operators render. Essentially, tollway operators construct, maintain, and
operate expressways, also called tollways, at the operators’ expense. Tollways
serve as alternatives to regular public highways that meander through populated
areas and branch out to local roads. Traffic in the regular public highways is for
this reason slow-moving. In consideration for constructing tollways at their
expense, the operators are allowed to collect government-approved fees from
motorists using the tollways until such operators could fully recover their
expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for
the latter’s use of the tollway facilities over which the operator enjoys private
proprietary rights that its contract and the law recognize. In this sense, the
tollway operator is no different from the following service providers under Section
108 who allow others to use their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension

houses, inns, resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes,

including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or
cargoes; and

7. Common carriers by air and sea relative to their transport of

passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines.

It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds
of services" rendered for a fee "regardless of whether or not the performance
 143

thereof calls for the exercise or use of the physical or mental faculties." This
means that "services" to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of
human knowledge and skills.

And not only do tollway operators come under the broad term "all kinds of
services," they also come under the specific class described in Section 108 as "all
other franchise grantees" who are subject to VAT, "except those under Section
119 of this Code."

Tollway operators are franchise grantees and they do not belong to

exceptions (the low-income radio and/or television broadcasting companies with
gross annual incomes of less than P10 million and gas and water utilities) that
Section 119 spares from the payment of VAT. The word "franchise" broadly
covers government grants of a special right to do an act or series of acts of public
concern.

Petitioners of course contend that tollway operators cannot be considered

"franchise grantees" under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that the "franchise grantees" it
speaks of are those who hold legislative franchises. Petitioners give no reason,
and the Court cannot surmise any, for making a distinction between franchises
granted by Congress and franchises granted by some other government agency.
The latter, properly constituted, may grant franchises. Indeed, franchises
conferred or granted by local authorities, as agents of the state, constitute as
much a legislative franchise as though the grant had been made by Congress
itself. The term "franchise" has been broadly construed as referring, not only to
authorizations that Congress directly issues in the form of a special law, but also
to those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress.

Tollway operators are, owing to the nature and object of their business,
"franchise grantees." The construction, operation, and maintenance of toll
facilities on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state. Indeed, Congress
granted special franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the North and
South Luzon Expressways. Apart from Congress, tollway franchises may also be
granted by the TRB, pursuant to the exercise of its delegated powers under P.D.
1112. The franchise in this case is evidenced by a "Toll Operation Certificate."
 144

Petitioners contend that the public nature of the services rendered by tollway
operators excludes such services from the term "sale of services" under Section
108 of the Code. But, again, nothing in Section 108 supports this contention. The
reverse is true. In specifically including by way of example electric utilities,
telephone, telegraph, and broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies rendering public service for a fee
to the imposition of VAT. Businesses of a public nature such as public utilities
and the collection of tolls or charges for its use or service is a franchise.

Nor can petitioners cite as binding on the Court statements made by certain
lawmakers in the course of congressional deliberations of the would-be law. As
the Court said in South African Airways v. Commissioner of Internal Revenue,
"statements made by individual members of Congress in the consideration of a
bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law." The congressional will is ultimately
determined by the language of the law that the lawmakers voted on.
Consequently, the meaning and intention of the law must first be sought "in the
words of the statute itself, read and considered in their natural, ordinary,
commonly accepted and most obvious significations, according to good and
approved usage and without resorting to forced or subtle construction."

Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on
toll fees is tantamount to taxing a tax. Actually, petitioners base this argument
on the following discussion in Manila International Airport Authority (MIAA) v.
Court of Appeals:

No one can dispute that properties of public dominion

mentioned in Article 420 of the Civil Code, like "roads, canals,
rivers, torrents, ports and bridges constructed by the State,"
are owned by the State. The term "ports" includes seaports and
airports. The MIAA Airport Lands and Buildings constitute a
"port" constructed by the State. Under Article 420 of the Civil
Code, the MIAA Airport Lands and Buildings are properties of
public dominion and thus owned by the State or the Republic of
the Philippines.

The operation by the government of a tollway does not

change the character of the road as one for public use.
Someone must pay for the maintenance of the road, either the
public indirectly through the taxes they pay the government, or
only those among the public who actually use the road through
the toll fees they pay upon using the road. The tollway system
 145

is even a more efficient and equitable manner of taxing the

public for the maintenance of public roads.

The charging of fees to the public does not determine the

character of the property whether it is for public dominion or
not. Article 420 of the Civil Code defines property of public
dominion as "one intended for public use." Even if the
government collects toll fees, the road is still "intended for
public use" if anyone can use the road under the same terms
and conditions as the rest of the public. The charging of fees,
the limitation on the kind of vehicles that can use the road, the
speed restrictions and other conditions for the use of the road
do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as

the landing fees MIAA charges to airlines, constitute the bulk of
the income that maintains the operations of MIAA. The
collection of such fees does not change the character of MIAA
as an airport for public use. Such fees are often termed user’s
tax. This means taxing those among the public who actually
use a public facility instead of taxing all the public including
those who never use the particular public facility. A user’s tax
is more equitable – a principle of taxation mandated in the
1987 Constitution." (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to
a "user’s tax" must also pertain to tollway fees. But the main issue in the MIAA
case was whether or not Parañaque City could sell airport lands and buildings
under MIAA administration at public auction to satisfy unpaid real estate taxes.
Since local governments have no power to tax the national government, the Court
held that the City could not proceed with the auction sale. MIAA forms part of the
national government although not integrated in the department framework."
Thus, its airport lands and buildings are properties of public dominion beyond
the commerce of man under Article 420(1) of the Civil Code and could not be sold
at public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees
was made, not to establish a rule that tollway fees are user’s tax, but to make
the point that airport lands and buildings are properties of public dominion and
that the collection of terminal fees for their use does not make them private
properties. Tollway fees are not taxes. Indeed, they are not assessed and
collected by the BIR and do not go to the general coffers of the government.
 146

It would of course be another matter if Congress enacts a law imposing a

user’s tax, collectible from motorists, for the construction and maintenance of
certain roadways. The tax in such a case goes directly to the government for the
replenishment of resources it spends for the roadways. This is not the case here.
What the government seeks to tax here are fees collected from tollways that are
constructed, maintained, and operated by private tollway operators at their own
expense under the build, operate, and transfer scheme that the government has
adopted for expressways. Except for a fraction given to the government, the toll
fees essentially end up as earnings of the tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways,
are not taxes in any sense. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund public
expenditures. Toll fees, on the other hand, are collected by private tollway
operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure
them a reasonable margin of income. Although toll fees are charged for the use of
public facilities, therefore, they are not government exactions that can be
properly treated as a tax. Taxes may be imposed only by the government under
its sovereign authority, toll fees may be demanded by either the government or
private individuals or entities, as an attribute of ownership.

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax

due to the nature of VAT as an indirect tax. In indirect taxation, a distinction is
made between the liability for the tax and burden of the tax. The seller who is
liable for the VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is transferred is not the
seller’s liability but merely the burden of the VAT.

Thus, the seller remains directly and legally liable for payment of the VAT,
but the buyer bears its burden since the amount of VAT paid by the former is
added to the selling price. Once shifted, the VAT ceases to be a tax and simply
becomes part of the cost that the buyer must pay in order to purchase the good,
property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway

user, but on the tollway operator. Under Section 105 of the Code, VAT is imposed
on any person who, in the course of trade or business, sells or renders services
for a fee. In other words, the seller of services, who in this case is the tollway
operator, is the person liable for VAT. The latter merely shifts the burden of VAT
to the tollway user as part of the toll fees.
 147

VAT is assessed against the tollway operator’s gross receipts and not
necessarily on the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable for the VAT.
The shifted VAT burden simply becomes part of the toll fees that one has to pay
in order to use the tollways.

CIR V. MIRANT (PHILIPPINES) OPERATIONS, CORPORATION

G.R. No. 171742 June 15, 2011/ Mendoza, J.

 Option to Carry Over

FACTS:

Mirant is a corporation duly organized and existing under and by virtue of the
laws of the Republic of the Philippines, with principal office at Bo. Ibabang Pulo,
Pagbilao Grande Island, Pagbilao, Quezon.

On April 17, 2000 Mirant filed its income tax return for the taxable year 1999.

Gross Income P (320,895,462.00)

Less: Deductions 60,978,614.00

Net Loss P (381,874,076.00)

   

Income Tax Due P ---

Less: 32,263,388.00
(Prior Year's Excess Credits)

Creditable Tax Withheld

First Three Quarters 16,363,405.00

Fourth Quarter ---

 148

Tax Overpayment P 48,626,793.00

Mirant indicated the excess amount of P 48,626,793.00 as "To be carried

over as tax credit next year/quarter."

On April 10, 2001, it filed with the BIR its income tax return for the calendar
year ending December 31, 2000, reflecting a net loss of P 56,901,850.00 and
unutilized tax credits of P 87,345,116.00, computed as follows:

Gross Income P(4,080,541.00)

Less: Deductions 52,821,309.00
Net Loss P (56,901,850.00)
   
Income Tax Due P ---
Less: 48,626,793.00
Prior Year's Excess Credits
Creditable Tax Withheld  
First Three Quarters 25,336,971.00
Fourth Quarter 13,381,352.00
Tax Overpayment P  87,345,116.00

On September 20, 2001, Mirant wrote the BIR a letter claiming a refund
of P 87,345,116.00.

ISSUE:

Can Mirant claim for a tax refund or for the issuance of a tax credit certificate
of its unutilized tax credits for the taxable year 1999 in the total amount of P
48,626,793.00?

HELD (Dry Run):

No, because once exercised, the option to carry over is irrevocable. When
Mirant filed its income tax return on April 17, 2000, it indicated that the excess
amount of P 48,626,793.00 is to be carried over as tax credit next
year/quarter. Section 76 of the NIRC of 1997 is explicit in stating that once the
option to carry over has been made, no application for tax refund or issuance of
a tax credit certificate shall be allowed therefor.

FURTHER DISCUSSIONS:
 149

Once exercised, the option to carry over is irrevocable.

Section 76 of the National Internal Revenue Code (Presidential Decree No.

1158, as amended) provides:

SEC. 76. -  Final Adjustment Return. - Every corporation

liable to tax under Section 27 shall file a final adjustment
return covering the total taxable income for the preceding
calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal to the
total tax due on the entire taxable income of that year, the
corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the

case may be.

In case the corporation is entitled to a tax credit or refund of the

excess estimated quarterly income taxes paid, the excess
amount shown on its final adjustment return may be carried
over and credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable
years. Once the option to carry-over and apply the
excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has
been made, such option shall be considered irrevocable
for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be
allowed therefor.  (Underscoring and emphasis supplied.)

The last sentence of Section 76 is clear in its mandate. Once a corporation

exercises the option to carry-over and apply the excess quarterly income tax
against the tax due for the taxable quarters of the succeeding taxable years,
such option is irrevocable for that taxable period. Having chosen to carry-over the
excess quarterly income tax, the corporation cannot thereafter choose to apply for
a cash refund or for the issuance of a tax credit certificate for the amount
representing such overpayment.
 150

Once the option to carry-over and apply the excess quarterly income tax
against income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that taxable
period and no application for tax refund or issuance of a tax credit certificate
shall be allowed therefor.

Hence, the controlling factor for the operation of the irrevocability rule is that
the taxpayer chose an option; and once it had already done so, it could no longer
make another one. Consequently, after the taxpayer opts to carry-over its
excess tax credit to the following taxable period, the question of whether or not it
actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997
is explicit in stating that once the option to carry over has been made, "no
application for tax refund or issuance of a tax credit certificate shall be allowed
therefor."

PAGCOR V. BIR
March 15, 2011/ Peralta, J.

EN BANC

 PAGCOR’s Exemption from Corporate Income Tax was Withdrawn

 PAGCOR is Exempted from the Payment of Indirect Taxes, such as VAT

FACTS:

PAGCOR was created on January 1, 1977.

To consolidate the laws pertaining to the franchise and powers of PAGCOR,

P.D. No. 1869 was issued. Section 13 thereof reads as follows:

Sec. 13. Exemptions. —

(1) Customs Duties, taxes and other imposts on importations. - All

importations of equipment, vehicles, automobiles, boats, ships,
barges, aircraft and such other gambling paraphernalia, including
accessories or related facilities, for the sole and exclusive use of the
casinos, the proper and efficient management and administration
thereof and such other clubs, recreation or amusement places to be
established under and by virtue of this Franchise shall be exempt
from the payment of duties, taxes and other imposts, including all
kinds of fees, levies, or charges of any kind or nature.
 151

Vessels and/or accessory ferry boats imported or to be imported by

any corporation having existing contractual arrangements with the
Corporation, for the sole and exclusive use of the casino or to be
used to service the operations and requirements of the casino, shall
likewise be totally exempt from the payment of all customs duties,
taxes and other imposts, including all kinds of fees, levies,
assessments or charges of any kind or nature, whether National or
Local.

(2) Income and other taxes. - (a) Franchise Holder: No tax of any
kind or form, income or otherwise, as well as fees, charges, or levies
of whatever nature, whether National or Local, shall be assessed
and collected under this Franchise from the Corporation; nor shall
any form of tax or charge attach in any way to the earnings of the
Corporation, except a Franchise Tax of five percent (5%)of the gross
revenue or earnings derived by the Corporation from its operation
under this Franchise. Such tax shall be due and payable quarterly
to the National Government and shall be in lieu of all kinds of taxes,
levies, fees or assessments of any kind, nature or description,
levied, established, or collected by any municipal, provincial or
national government authority.

(b) Others: The exemption herein granted for earnings derived

from the operations conducted under the franchise,
specifically from the payment of any tax, income or otherwise,
as well as any form of charges, fees or levies, shall inure to
the benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or
operator has any contractual relationship in connection with
the operations of the casino(s) authorized to be conducted
under this Franchise and to those receiving compensation or
other remuneration from the Corporation as a result of
essential facilities furnished and/or technical services
rendered to the Corporation or operator.

The fee or remuneration of foreign entertainers contracted by the

Corporation or operator in pursuance of this provision shall be free
of any tax.

(3) Dividend Income. − Notwithstanding any provision of law to the

contrary, in the event the Corporation should declare a cash
dividend income corresponding to the participation of the private
 152

sector shall, as an incentive to the beneficiaries, be subject only to a

final flat income rate of ten percent (10%) of the regular income tax
rates. The dividend income shall not in such case be considered as
part of the beneficiaries' taxable income; provided, however, that
such dividend income shall be totally exempted from income or other
form of taxes if invested within six (6) months from the date the
dividend income is received in the following:

(a) operation of the casino(s) or investments in any affiliate

activity that will ultimately redound to the benefit of the
Corporation; or any other corporation with whom the
Corporation has any existing arrangements in connection with
or related to the operations of the casino(s);

(b) Government bonds, securities, treasury notes, or

government debentures; or

(c) BOI-registered or export-oriented corporation(s).

On January 1, 1998, R.A. No. 8424, otherwise known as the National

Internal Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424
provides that government-owned and controlled corporations (GOCCs) shall pay
corporate income tax, except petitioner PAGCOR, the Government Service and
Insurance Corporation, the Social Security System, the Philippine Health
Insurance Corporation, and the Philippine Charity Sweepstakes Office.

With the enactment of R.A. No. 9337 on May 24, 2005, certain sections of the
National Internal Revenue Code of 1997 were amended. The particular
amendment that is at issue in this case is Section 1 of R.A. No. 9337, which
amended Section 27 (c) of the National Internal Revenue Code of 1997 by
excluding PAGCOR from the enumeration of GOCCs that are exempt from
payment of corporate income tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or

Instrumentalities. - The provisions of existing special general
laws to the contrary notwithstanding, all corporations,
agencies, or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), and the
Philippine Charity Sweepstakes Office (PCSO), shall pay such
rate of tax upon their taxable income as are imposed by this
 153

Section upon corporations or associations engaged in similar

business, industry, or activity.

Thereafter, respondent BIR issued Revenue Regulations (RR) No. 16-2005,

specifically identifying PAGCOR as one of the franchisees subject to 10% VAT
imposed under Section 108 of the National Internal Revenue Code of 1997.

ISSUES:

1. Is RA 9337, Section 1 (c), withdrawing the petitioner’s exemption from

corporate income tax, null and void ab initio for being repugnant to the equal
protection clause under the Constitution?

2. Is RA 9337, Section 1 (c), withdrawing the petitioner’s exemption from

corporate income tax, null and void ab initio for being repugnant to the non-
impairment clause embodied in the Constitution?

3. Is RR 16-2005, imposing VAT on PAGCOR, null and void ab initio?

HELD (Dry Run):

1. No. PAGCOR cannot find support in the equal protection clause of the
Constitution, as the legislative records of the Bicameral Conference Meeting
dated October 27, 1997 show that PAGCOR’s exemption from payment of
corporate income tax, as provided in the National Internal Revenue Code of
1997, was not made pursuant to a valid classification based on substantial
distinctions and the other requirements of a reasonable classification by
legislative bodies, so that the law may operate only on some, and not all, without
violating the equal protection clause. The legislative records show that the basis
of the grant of exemption to PAGCOR from corporate income tax was PAGCOR’s
own request to be exempted.

2. No. PAGCOR was granted a franchise to operate and maintain gambling

activities within the territorial jurisdiction of the Republic of the Philippines. A
franchise partakes the nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution. In fact, under Section 11, Article XII of the
Constitution, PAGCOR’s franchise is subject to amendment, alteration or repeal
by Congress such as the amendment under Section 1 of R.A. No. 9377.

3. Yes, RR 16-2005 imposing VAT on PAGCOR is null and void ab initio, for
being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that
petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal
 154

of petitioner's exemption from the payment of corporate income tax. In case of

discrepancy between the basic law and a rule or regulation issued to implement
said law, the basic law prevails, because the said rule or regulation cannot go
beyond the terms and provisions of the basic law.

FURTHER DISCUSSIONS:

After a careful study of the positions presented by the parties, this Court
finds the petition partly meritorious.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National
Internal Revenue Code of 1977, petitioner is no longer exempt from corporate
income tax as it has been effectively omitted from the list of GOCCs that are
exempt from it. Petitioner argues that such omission is unconstitutional, as it is
violative of its right to equal protection of the laws under Section 1, Article III of
the Constitution:

Sec. 1. No person shall be deprived of life, liberty, or property

without due process of law, nor shall any person be denied the
equal protection of the laws.

In City of Manila v. Laguio, Jr., this Court expounded the meaning and scope
of equal protection, thus:

Equal protection requires that all persons or things similarly

situated should be treated alike, both as to rights conferred
and responsibilities imposed. Similar subjects, in other words,
should not be treated differently, so as to give undue favor to
some and unjustly discriminate against others. The guarantee
means that no person or class of persons shall be denied the
same protection of laws which is enjoyed by other persons or
other classes in like circumstances. The "equal protection of the
laws is a pledge of the protection of equal laws." It limits
governmental discrimination. The equal protection clause
extends to artificial persons but only insofar as their property is
concerned.

Legislative bodies are allowed to classify the subjects of legislation. If the

classification is reasonable, the law may operate only on some and not all of the
people without violating the equal protection clause. The classification must, as
an indispensable requisite, not be arbitrary. To be valid, it must conform to the
following requirements:
 155

1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.

3) It must not be limited to existing conditions only.

4) It must apply equally to all members of the class.

It is not contested that before the enactment of R.A. No. 9337, petitioner was
one of the five GOCCs exempted from payment of corporate income tax as shown
in R.A. No. 8424, Section 27 (c) of which, reads:

(c) Government-owned or Controlled Corporations, Agencies or

Instrumentalities. - The provisions of existing special or general
laws to the contrary notwithstanding, all corporations, agencies
or instrumentalities owned and controlled by the Government,
except the Government Service and Insurance Corporation
(GSIS), the Social Security System (SSS), the Philippine Health
Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO), and the Philippine Amusement and
Gaming Corporation (PAGCOR), shall pay such rate of tax upon
their taxable income as are imposed by this Section upon
corporations or associations engaged in similar business,
industry, or activity.

In this case, PAGCOR failed to prove that it is still exempt from the payment of
corporate income tax, considering that Section 1 of R.A. No. 9337 amended
Section 27 (c) of the National Internal Revenue Code of 1997 by omitting
PAGCOR from the exemption. The legislative intent, as shown by the discussions
in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate
income tax; hence, the omission or removal of PAGCOR from exemption from the
payment of corporate income tax. It is a basic precept of statutory construction
that the express mention of one person, thing, act, or consequence excludes all
others as expressed in the familiar maxim expressio unius est exclusio alterius.
Thus, the express mention of the GOCCs exempted from payment of corporate
income tax excludes all others. Not being excepted, petitioner PAGCOR must be
regarded as coming within the purview of the general rule that GOCCs shall pay
corporate income tax, expressed in the maxim: exceptio firmat regulam in casibus
non exceptis.

PAGCOR cannot find support in the equal protection clause of the

Constitution, as the legislative records of the Bicameral Conference Meeting
 156

dated October 27, 1997, of the Committee on Ways and Means, show that
PAGCOR’s exemption from payment of corporate income tax, as provided in
Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997,
was not made pursuant to a valid classification based on substantial
distinctions and the other requirements of a reasonable classification by
legislative bodies, so that the law may operate only on some, and not all, without
violating the equal protection clause. The legislative records show that the basis
of the grant of exemption to PAGCOR from corporate income tax was PAGCOR’s
own request to be exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void
ab initio for violating the non-impairment clause of the Constitution. Petitioner
avers that laws form part of, and is read into, the contract even without the
parties expressly saying so. Petitioner states that the private parties/investors
transacting with it considered the tax exemptions, which inure to their benefit, as
the main consideration and inducement for their decision to transact/invest with
it. Petitioner argues that the withdrawal of its exemption from corporate income
tax by R.A. No. 9337 has the effect of changing the main consideration and
inducement for the transactions of private parties with it; thus, the amendatory
provision is violative of the non-impairment clause of the Constitution.

Petitioner’s contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the

Constitution, which provides that no law impairing the obligation of contracts
shall be passed. The non-impairment clause is limited in application to laws that
derogate from prior acts or contracts by enlarging, abridging or in any manner
changing the intention of the parties. There is impairment if a subsequent law
changes the terms of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the enforcement of
the rights of the parties.

As regards franchises, Section 11, Article XII of the Constitution provides that
no franchise or right shall be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common
good so requires.

In Manila Electric Company v. Province of Laguna, the Court held that a

franchise partakes the nature of a grant, which is beyond the purview of the
non-impairment clause of the Constitution. The pertinent portion of the case
states:
 157

While the Court has, not too infrequently, 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 in nature. Contractual tax exemptions,
in the real sense of the term and where the non-impairment
clause of the Constitution can rightly be invoked, are those
agreed to by the taxing authority in contracts, such as those
contained in government bonds or debentures, lawfully entered
into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and
waives its governmental immunity. Truly, tax exemptions of
this kind may not be revoked without impairing the obligations
of contracts. These contractual tax exemptions, however, are
not to be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant which is
beyond the purview of the non-impairment clause of the
Constitution. Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the
1973 Constitutions, is explicit 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.

In this case, PAGCOR was granted a franchise to operate and maintain

gambling casinos, clubs and other recreation or amusement places, sports,
gaming pools, i.e., basketball, football, lotteries, etc., whether on land or sea,
within the territorial jurisdiction of the Republic of the Philippines. Under Section
11, Article XII of the Constitution, PAGCOR’s franchise is subject to amendment,
alteration or repeal by Congress such as the amendment under Section 1 of R.A.
No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section
27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from corporate
income tax, which may affect any benefits to PAGCOR’s transactions with
private parties, is not violative of the non-impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision
subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337.
Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to VAT.
R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the
 158

payment of corporate income tax, which was already addressed above by this
Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT
pursuant to Section 7 (k) thereof, which reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby

further amended to read as follows:

Section 109. Exempt Transactions. - (1) Subject to the

provisions of Subsection (2) hereof, the following transactions
shall be exempt from the value-added tax:

(k) Transactions which are exempt under international

agreements to which the Philippines is a signatory or under
special laws, except Presidential Decree No. 529.

Petitioner is exempt from the payment of VAT, because PAGCOR’s charter,

P.D. No. 1869, is a special law that grants petitioner exemption from taxes.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424
has been thoroughly and extensively discussed in Commissioner of Internal
Revenue v. Acesite (Philippines) Hotel Corporation. Acesite was the owner and
operator of the Holiday Inn Manila Pavilion Hotel. It leased a portion of the
hotel’s premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from
its rental income and sale of food and beverages to PAGCOR from January 1996
to April 1997. Acesite tried to shift the said taxes to PAGCOR by incorporating it
in the amount assessed to PAGCOR. However, PAGCOR refused to pay the taxes
because of its tax-exempt status. PAGCOR paid only the amount due to Acesite
minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount of
P30,152,892.02 to the Commissioner of Internal Revenue, fearing the legal
consequences of its non-payment. In May 1998, Acesite sought the refund of the
amount it paid as VAT on the ground that its transaction with PAGCOR was
subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled
that PAGCOR and Acesite were both exempt from paying VAT, thus:

PAGCOR is exempt from payment of indirect taxes.

It is undisputed that P.D. 1869, the charter creating

PAGCOR, grants the latter an exemption from the payment of
taxes. Section 13 of P.D. 1869 pertinently provides:
 159

Sec. 13. Exemptions. —

(2) Income and other taxes. - (a) Franchise Holder: No tax of

any kind or form, income or otherwise, as well as fees, charges
or levies of whatever nature, whether National or Local, shall
be assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any
way to the earnings of the Corporation, except a Franchise Tax
of five (5%) percent of the gross revenue or earnings derived by
the Corporation from its operation under this Franchise. Such
tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies,
fees or assessments of any kind, nature or description, levied,
established or collected by any municipal, provincial, or
national government authority.

(b) Others: The exemptions herein granted for earnings derived

from the operations conducted under the franchise specifically
from the payment of any tax, income or otherwise, as well as
any form of charges, fees or levies, shall inure to the benefit of
and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the
casino(s) authorized to be conducted under this Franchise and
to those receiving compensation or other remuneration from the
Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the
Corporation or operator.

Petitioner contends that the above tax exemption refers only

to PAGCOR's direct tax liability and not to indirect taxes, like
the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR

a blanket exemption to taxes with no distinction on whether the
taxes are direct or indirect. We are one with the CA ruling that
PAGCOR is also exempt from indirect taxes, like VAT, as
follows:
 160

Under the above provision [Section 13 (2) (b) of P.D. 1869],

the term "Corporation" or operator refers to PAGCOR. Although
the law does not specifically mention PAGCOR's exemption
from indirect taxes, PAGCOR is undoubtedly exempt from such
taxes because the law exempts from taxes persons or entities
contracting with PAGCOR in casino operations. Although,
differently worded, the provision clearly exempts PAGCOR from
indirect taxes. In fact, it goes one step further by granting tax
exempt status to persons dealing with PAGCOR in casino
operations. The unmistakable conclusion is that PAGCOR is not
liable for the P30, 152,892.02 VAT and neither is Acesite as the
latter is effectively subject to zero percent rate under Sec. 108
B (3), R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with

PAGCOR, the legislature clearly granted exemption also from indirect taxes. It
must be noted that the indirect tax of VAT, as in the instant case, can be shifted
or passed to the buyer, transferee, or lessee of the goods, properties, or services
subject to VAT. Thus, by extending the tax exemption to entities or
individuals dealing with PAGCOR in casino operations, it is exempting
PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said
tax.

It is true that VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is computed as 1/11 of
such value, or charged as an additional 10% to the value. Verily, the seller or
lessor has the option to follow either way in charging its clients and customer. In
the instant case, Acesite followed the latter method, that is, charging an
additional 10% of the gross sales and rentals. Be that as it may, the use of either
method, and in particular, the first method, does not denigrate the fact that
PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Acesite.

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by
Acesite, the latter is not liable for the payment of it as it is exempt in this
particular transaction by operation of law to pay the indirect tax. Such exemption
falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended
(now Sec. 108 [b] [3] of R.A. 8424), which provides:
 161

Section 102. Value-added tax on sale of services.- (a) Rate

and base of tax - There shall be levied, assessed and collected,
a value-added tax equivalent to 10% of gross receipts derived
by any person engaged in the sale of services x x x; Provided,
that the following services performed in the Philippines by VAT
registered persons shall be subject to 0%.

(3) Services rendered to persons or entities whose exemption

under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of
such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869
and the extension of such exemption to entities or individuals dealing with
PAGCOR in casino operations are best elucidated from the 1987 case of
Commissioner of Internal Revenue v. John Gotamco &Sons, Inc., where the
absolute tax exemption of the World Health Organization (WHO) upon an
international agreement was upheld. We held in said case that the exemption of
contractee WHO should be implemented to mean that the entity or person exempt
is the contractor itself who constructed the building owned by contractee WHO,
and such does not violate the rule that tax exemptions are personal because the
manifest intention of the agreement is to exempt the contractor so that no
contractor's tax may be shifted to the contractee WHO. Thus, the proviso in P.D.
1869, extending the exemption to entities or individuals dealing with PAGCOR in
casino operations, is clearly to proscribe any indirect tax, like VAT, that may be
shifted to PAGCOR.

It is settled rule that in case of discrepancy between the basic law and a rule
or regulation issued to implement said law, the basic law prevails, because the
said rule or regulation cannot go beyond the terms and provisions of the basic
law. RR No. 16-2005, therefore, cannot go beyond the provisions of R.A. No.
9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded
its authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence,
the said regulatory provision is hereby nullified.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act

No. 9337, amending Section 27 (c) of the National Internal Revenue Code of
1997, by excluding petitioner Philippine Amusement and Gaming Corporation
from the enumeration of government-owned and controlled corporations
exempted from corporate income tax is valid and constitutional, while BIR
Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is
 162

null and void for being contrary to the National Internal Revenue Code of 1997,
as amended by Republic Act No. 9337.

CHINA BANKING CORPORATION V. CIR

February 27, 2013/Peralta, J.

 Gross Receipts Tax

FACTS:

For the four quarters of 1996, petitioner paid P93,119,433.50 as gross

receipts tax (GRT on its income from the interests on loan investments,
commissions, service and collection charges, foreign exchange profit and other
operating earnings.

In computing its taxable gross receipts, petitioner included the 20% final
withholding tax on its passive interest income, hereunder summarized as
follows:

Date of Filing
Return/Payment Taxable Gross Receipts
1996 Exhs. of Tax to the BIR Gross Receipts Tax Paid

1st qtr. A 22-Apr-96 P 534,500,491.61 P 24,055,944.08

2nd qtr. A-1 22-Jul-96 582,985,457.89 26,394,956.47

3rd qtr. A-2 21-Oct-96 427,801,196.81 18,427,999.31

4th qtr. A-3 20-Jan-97 552,378,276.18 24,240,533.64

Total: P 2,097,665,422.49 P 93,119,433.50

 163

On January 30, 1996, the Court of Tax Appeals (CTA) rendered a Decision
entitled Asian Bank Corporation v. Commissioner of Internal Revenue, wherein it
ruled that the 20% final withholding tax on a bank’s passive interest income
should not form part of its taxable gross receipts.

On the strength of the aforementioned decision, petitioner filed with

respondent a claim for refund on of the alleged overpaid GRT for the four (4)
quarters of 1996 in the aggregate amount of P6,646,829.67, detailed as follows:

Gross Receipts Corrected Gross Excess GRT

1996 Tax Paid Receipts Tax Payment

1st qtr. P 24,055,944.08 P 22,114,548.10 P 1,941,395.99

2nd qtr. 26,394,956.45 25,050,429.40 1,344,527.06

3rd qtr. 18,427,999.33 17,087,138.98 1,340,860.34

4th qtr. 24,240,533.64 22,219,487.36 2,021,046.28

Total: P 93,119,433.50 P 86,471,603.84 P 6,646,829.67

Petitioner avers that the 20% final tax withheld on its passive income should
not be included in the computation of its taxable gross receipts.

ISSUE:

Should the 20% final tax withheld on a bank’s passive income be included in
the computation of the GRT?

HELD (Dry Run):

Yes. Gross receipts comprise the entire receipts without any deduction. Thus,
the 20% final withholding tax should form part of the bank’s total gross receipts
for purposes of computing the GRT.

FURTHER DISCUSSIONS:
 164

Petitioner avers that the 20% final tax withheld on its passive income should
not be included in the computation of its taxable gross receipts. It insists that the
CA erred in ruling that it failed to show the legal basis for its claimed tax refund
or credit, since Section 4 (e) of RR No. 12-80 categorically provides for the
exclusion of the amount of taxes withheld from the computation of gross receipts
for GRT purposes.

We do not agree.

In a catena of cases, this Court has already resolved the issue of whether the
20% final withholding tax should form part of the total gross receipts for
purposes of computing the GRT.

In China Banking Corporation v. Court of Appeals, we ruled that the amount

of interest income withheld, in payment of the 20% final withholding tax, forms
part of the bank’s gross receipts in computing the GRT on banks.

The tax court also held in Far East Bank and Standard Chartered Bank that
the exclusion of the final withholding tax from gross receipts operates as a tax
exemption which the law must expressly grant. No law provides for such
exemption. In addition, the tax court pointed out that Section 7(c) of Revenue
Regulations No. 17-84 had already superseded Section 4(e) of Revenue
Regulations No. 12-80.

Notably, this Court, in the same case, held that under RR Nos. 12-80 and 17-
84, the Bureau of Internal Revenue (BIR) has consistently ruled that the term
gross receipts do not admit of any deduction. It emphasized that interest earned
by banks, even if subject to the final tax and excluded from taxable gross
income, forms part of its gross receipt for GRT purposes. The interest earned
refers to the gross interest without deduction, since the regulations do not
provide for any deduction.

Further, in Commissioner of Internal Revenue v. Solidbank Corporation, this

Court held that "gross receipts" refer to the total, as opposed to the net, income.
These are, therefore, the total receipts before any deduction for the expenses of
management.

In Commissioner of Internal Revenue v. Bank of Commerce, we again

adhered to the ruling that the term "gross receipts" must be understood in its
plain and ordinary meaning. In this case, we ruled that gross receipts should be
interpreted as the whole amount received as interest, without deductions;
 165

otherwise, if deductions were to be made from gross receipts, it would be

considered as "net receipts." The Court ratiocinated as follows:

The word "gross" must be used in its plain and ordinary meaning. It is
defined as "whole, entire, total, without deduction." A common definition is
"without deduction." Gross is the antithesis of net. Indeed, in China Banking
Corporation v. Court of Appeals, the Court defined the term in this wise:

As commonly understood, the term "gross receipts" means the entire receipts
without any deduction. Deducting any amount from the gross receipts changes
the result, and the meaning, to net receipts. Any deduction from gross receipts is
inconsistent with a law that mandates a tax on gross receipts, unless the law
itself makes an exception. As explained by the Supreme Court of Pennsylvania in
Commonwealth of Pennsylvania v. Koppers Company, Inc. –

Highly refined and technical tax concepts have been developed by the
accountant and legal technician primarily because of the impact of federal
income tax legislation. However, this in no way should affect or control the
normal usage of words in the construction of our statutes; Under the ordinary
basic methods of handling accounts, the term gross receipts, in the absence of
any statutory definition of the term, must be taken to include the whole total
gross receipts without any deductions.

Again, in Commissioner of Internal Revenue v. Bank of the Philippine Islands,

this Court ruled that "the legislative intent to apply the term in its ordinary
meaning may also be surmised from a historical perspective of the levy on gross
receipts. From the time the gross receipts tax on banks was first imposed in
1946 under R.A. No. 39 and throughout its successive reenactments, the
legislature has not established a definition of the term ‘gross receipts.’ Absent a
statutory definition of the term, the BIR had consistently applied it in its ordinary
meaning, i.e., without deduction. On the presumption that the legislature is
familiar with the contemporaneous interpretation of a statute given by the
administrative agency tasked to enforce the statute, subsequent legislative
reenactments of the subject levy sans a definition of the term ‘gross receipts’
reflect that the BIR’s application of the term carries out the legislative purpose."

In sum, all the aforementioned cases are one in saying that "gross receipts"
comprise "the entire receipts without any deduction." Clearly, then, the 20% final
withholding tax should form part of petitioner’s total gross receipts for purposes
of computing the GRT.
 166

Also worth noting is the fact that petitioner’s reliance on Section 4 (e) of RR
12-80 is misplaced as the same was already superseded by a more recent
issuance, RR No. 17-84.

This fact was elucidated on by the Court in the case of Commissioner of

Internal Revenue v. Citytrust Investment Phils. Inc., where it held that RR No. 12-
80 had already been superseded by RR No. 17-84, viz.:

Revenue Regulations No. 12-80, issued on November 7, 1980, had been

superseded by Revenue Regulations No. 17-84 issued on October 12, 1984.
Section 4 (e) of Revenue Regulations No. 12-80 provides that only items of income
actually received shall be included in the tax base for computing the GRT. On the
other hand, Section 7 (c) of Revenue Regulations No. 17-84 includes all interest
income in computing the GRT, thus:

Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit

Substitutes. –

(a) The interest earned on Philippine Currency bank deposits and yield
from deposit substitutes subjected to the withholding taxes in accordance
with these regulations need not be included in the gross income in
computing the depositor’s investor’s income tax liability.

(b) Only interest paid or accrued on bank deposits, or yield from deposit
substitutes declared for purposes of imposing the withholding taxes in
accordance with these regulations shall be allowed as interest expense
deductible for purposes of computing taxable net income of the payor.

(c) If the recipient of the above-mentioned items of income are financial

institutions, the same shall be included as part of the tax base upon which
the gross receipt tax is imposed.

Revenue Regulations No. 17-84 categorically states that if the recipient of the
above-mentioned items of income are financial institutions, the same shall be
included as part of the tax base upon which the gross receipts tax is imposed.

Significantly, the Court even categorically stated in the aforementioned case

that there is an implied repeal of Section 4 (e). It held that there exists a disparity
between Section 4 (e) of RR No. 12-80, which imposes the GRT only on all items
of income actually received (as opposed to their mere accrual) and Section 7 (c) of
RR No. 17-84, which includes all interest income (whether actual or accrued) in
computing the GRT. Plainly, RR No. 17-84, which requires interest income,
 167

whether actually received or merely accrued, to form part of the bank’s taxable
gross receipts, should prevail.

All told, petitioner failed to point to any specific provision of law allowing the
deduction, exemption or exclusion from its taxable gross receipts, of the amount
withheld as final tax. Besides, the exclusion sought by petitioner of the 20% final
tax on its passive income from the taxpayer’s tax base constitutes a tax
exemption, which is highly disfavored. A governing principle in taxation states
that tax exemptions are to be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority and should be granted only by clear
and unmistakable terms.

PELIZLOY REALTY V. THE PROVINCE OF BENGUET

APRIL 10, 2013/ Leonen, J.

 Amusement Tax, Percentage Tax

FACTS:

Pelizloy Realty Corporation (“Pelizloy”) owns Palm Grove Resort which is

designed for recreation and which has facilities like swimming pools, a spa and
function halls.

The Province of Benguet approved a provincial tax ordinance. The ordinance

levied a ten percent (10%) amusement tax on gross receipts from admissions to
“resorts, swimming pools, bath houses, hot springs and tourist spots.”

It was Pelizloy's position that the tax ordinance’ imposition of a 10%

amusement tax on gross receipts from admission fees for resorts, swimming
pools, bath houses, hot springs, and tourist spots is an ultra vires act on the part
of the Province of Benguet.

Pelizloy argued that the imposition is in violation of the limitation on the

taxing powers of local government units (LGUs) under Section 133 (i) of the LGC
which provides as follows:

“Section 133. Common Limitations on the Taxing Powers of

Local Government Units. – Unless otherwise provided herein,
the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of
the following:
 168

(i) Percentage or value-added tax (VAT) on sales, barters or

exchanges or similar transactions on goods or services except
as otherwise provided herein.”

The Province of Benguet anchored the validity of its ordinance on Sec. 140 of
the Local Government Code. It argued that the phrase ‘other places of
amusement’ in Section 140 (a) of the LGC encompasses resorts, swimming pools,
bath houses, hot springs, and tourist spots. It provides as follows:

“Sec. 140. Amusement Tax. – (a) The province may levy an

amusement tax to be collected from the proprietors, lessees, or
operators of theaters, cinemas, concert halls, circuses, boxing
stadia, and other places of amusement.”

ISSUES:

1. May a province levy percentage taxes?

2. May the Province of Benguet levy an amusement tax from the proprietors,
lessees, or operators of resorts, swimming pools, bath houses, hot springs,
and tourist spots?
HELD (Dry Run):

1. As a rule, no, except when the Local Government Code provides otherwise.
As an exception, the province may levy amusement tax, which is a percentage
tax, to be collected from the proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia, and other places of amusement.

2. No. The phrase “other places of amusement” does not include resorts,
swimming pools, bath houses, hot springs and tourist spots. They are not of the
same class as theaters, cinemas, concert halls, circuses, and boxing stadia
under the principle of ejusdem generis. The taxing power granted to the local
government units should be construed in strictissimi juris.

FURTHER DISCUSSIONS:

The province may only levy an amusement tax to be collected from the
proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses,
boxing stadia, and other places of amusement (Sec. 140 [a], LGC).

The phrase “other places of amusement” does not include resorts, swimming
pools, bath houses, hot springs and tourist spots.

Under the principle of ejusdem generis, “where a general word or phrase

follows an enumeration of particular and specific words of the same class or
where the latter follow the former, the general word or phrase is to be construed
 169

to include, or to be restricted to persons, things or cases akin to, resembling, or of

the same kind or class as those specifically mentioned.”

Thus, resorts, swimming pools, bath houses, hot springs and tourist spots do
not belong to the same category or class as theaters, cinemas, concert halls,
circuses, and boxing stadia. It follows that they cannot be considered as among
the ‘other places of amusement’ contemplated by Section 140 of the LGC and
which may properly be subject to amusement taxes.

As a rule, the province may not levy percentage taxes. Sec. 133 (i) of the Local
Government Code provides as follows:

Section 133. Common Limitations on the Taxing Powers of Local

Government Units. – Unless otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges

or similar transactions on goods or services except as otherwise provided
herein.

But there is an exception, that is, when the Local Government Code provides
otherwise. Section 140 of the LGC provides:

SECTION 140. Amusement Tax - (a) The province may levy an

amusement tax to be collected from the proprietors, lessees, or operators of
theaters, cinemas, concert halls, circuses, boxing stadia, and other places
of amusement at a rate of not more than thirty percent (30%) of the gross
receipts from admission fees.

It is settled that a municipal corporation unlike a sovereign state is clothed

with no inherent power of taxation. The charter or statute must plainly show an
intent to confer that power or the municipality, cannot assume it. And the power
when granted is to be construed in strictissimi juris. Any doubt or ambiguity
arising out of the term used in granting that power must be resolved against the
municipality. Inferences, implications, deductions – all these – have no place in
the interpretation of the taxing power of a municipal corporation.

Therefore, the power of a province to tax is limited to the extent that such
power is delegated to it either by the Constitution or by statute. Section 5, Article
X of the 1987 Constitution is clear on this point:
 170

Section 5. Each local government unit shall have the power to create its
own sources of revenues and to levy taxes, fees and charges subject to
such guidelines and limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local governments.

Per Section 5, Article X of the 1987 Constitution, “the power to tax is no longer
vested exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges.” Nevertheless, such authority is
“subject to such guidelines and limitations as the Congress may provide”.

In conformity with Section 3, Article X of the 1987 Constitution, Congress

enacted Republic Act No. 7160, otherwise known as the Local Government Code
of 1991. Book II of the LGC governs local taxation and fiscal matters. Relevant
provisions of Book II of the LGC establish the parameters of the taxing powers of
LGUS found below. First, Section 130 provides for the following fundamental
principles governing the taxing powers of LGUs:

1. Taxation shall be uniform in each LGU.

2. Taxes, fees, charges and other impositions shall:

a. be equitable and based as far as practicable on the

taxpayer's ability to pay;
b. be levied and collected only for public purposes;
c. not be unjust, excessive, oppressive, or confiscatory;
d. not be contrary to law, public policy, national economic
policy, or in the restraint of trade.

3. The collection of local taxes, fees, charges and other impositions shall in no
case be let to any private person.
4. The revenue collected pursuant to the provisions of the LGC shall inure
solely to the benefit of, and be subject to the disposition by, the LGU
levying the tax, fee, charge or other imposition unless otherwise
specifically provided by the LGC.
5. Each LGU shall, as far as practicable, evolve a progressive system of
taxation.

In Commissioner of Internal Revenue v. Citytrust Investment Phils. Inc., the

Supreme Court defined percentage tax as a “tax measured by a certain
percentage of the gross selling price or gross value in money of goods sold,
bartered or imported; or of the gross receipts or earnings derived by any person
engaged in the sale of services.” Also, Republic Act No. 8424, otherwise known
as the National Internal Revenue Code (NIRC), in Section 125, Title V,16 lists
amusement taxes as among the (other) percentage taxes which are levied
regardless of whether or not a taxpayer is already liable to pay value-added tax
(VAT). Amusement taxes are fixed at a certain percentage of the gross receipts
 171

incurred by certain specified establishments. Thus, applying the definition in CIR

v. Citytrust and drawing from the treatment of amusement taxes by the NIRC,
amusement taxes are percentage taxes.

The purpose of the rule on ejusdem generis is to give effect to both the
particular and general words, by treating the particular words as indicating the
class and the general words as including all that is embraced in said class,
although not specifically named by the particular words. This is justified on the
ground that if the lawmaking body intended the general terms to be used in their
unrestricted sense, it would have not made an enumeration of particular subjects
but would have used only general terms.

FIRST LEPANTO TAISHO INSURANCE CORPORATION V. CIR

April 10, 2013/Mendoza, J.

 For Taxation Purposes, a Director is Considered an Employee

FACTS:

Petitioner is a non-life insurance corporation. On December 29, 1999, CIR

issued internal revenue tax assessments for deficiency withholding tax on
compensation. Petitioner contended that it was not liable to pay Withholding Tax
on Compensation on the P500,000.00 Director’s Bonus to their directors,
specifically, Rodolfo Bausa, Voltaire Gonzales, Felipe Yap, and Catalino
Macaraig, Jr., because they were not employees.

ISSUE:

Is the petitioner liable for deficiency withholding taxes on compensation on

directors’ bonuses?

HELD (Dry Run):

Yes, because for taxation purposes, a director is considered an employee.

FURTHER DISCUSSIONS:

For taxation purposes, a director is considered an employee under Section 5

of Revenue Regulation No. 12-86, to wit:

An individual, performing services for a corporation,

whether as an officer and director or merely as a director
whose duties are confined to attendance at and participation in
the meetings of the Board of Directors, is an employee.
 172

The non-inclusion of the names of some of petitioner’s directors in the

company’s Alpha List does not ipso facto create a presumption that they are not
employees of the corporation, because the imposition of withholding tax on
compensation hinges upon the nature of work performed by such individuals in
the company. Moreover, contrary to petitioner’s attestations, Revenue Regulation
No. 2-98, specifically, Section 2.57.2. A (9) thereof, cannot be applied to this case
as the latter is a later regulation while the accounting books examined were for
taxable year 1997.

The Court likewise holds the imposition of delinquency interest under Section
249 (c) (3) of the 1997 NIRC to be proper, because failure to pay the deficiency
tax assessed within the time prescribed for its payment justifies the imposition of
interest at the rate of twenty percent (20%) per annum, which interest shall be
assessed and collected from the date prescribed for its payment until full
payment is made.

METRO MANILA SHOPPING MECCA CORP. V. TOLEDO

June 5, 2013/ Perlas-Bernabe, J.

 Claim for Tax Refund/Credit under the Local Government Code

FACTS:

Sometime in October 2001, Toledo, as Treasurer of respondent City of Manila,

assessed petitioners for their fourth quarter local business taxes pursuant to
Section 21 of City Ordinance No. 7794. Consequently, petitioners paid the total
assessed amount of P5,104,281.26 under protest.

Petitioners informed the Office of the City Treasurer of Manila of the nature of
the foregoing payment, assailing as well the unconstitutionality of Section 21 of
the Manila Revenue Code. Petitioners’ protest was however denied.

Petitioners filed a case with the Regional Trial Court of Manila against
respondents, reiterating their claim that Section 21 of the Manila Revenue Code
is null and void. Accordingly, they sought the refund of the amount of local
business taxes they previously paid to the City.

For their part, respondents filed a Motion to Dismiss.

 173

Consequently, respondents filed their Answer. Notably, in their Motion to

Dismiss and Answer, respondents averred that petitioners failed to file any
written claim for tax refund or credit with the Office of the City Treasurer of
Manila.

Petitioners sent respondents a Request for Admissions & Interrogatories,

which inter alia requested the admission of the fact that the former filed a
written protest with the latter. Respondents did not respond to the said Request
for Admission.

ISSUE:

Are the petitioners entitled to a tax refund/credit?

HELD (Dry Run):

No, because they failed to prove that they have filed a written claim for
refund with the local treasurer.

FURTHER DISCUSSIONS:

Respondents’ Petition for Review with the CTA Division

Petitioners argue that the CTA Division erred in extending the reglementary
period within which respondents may file their Petition for Review, considering
that Section 3, Rule 833 of the Revised Rules of the CTA (RRCTA) is silent on
such matter.

Petitioners’ arguments fail to persuade.

Although the RRCTA does not explicitly sanction extensions to file a petition
for review with the CTA, Section 1, Rule 736 thereof reads that in the absence of
any express provision in the RRCTA, Rules 42, 43, 44 and 46 of the Rules of
Court may be applied in a suppletory manner.

In particular, Section 937 of Republic Act No. 9282 makes reference to the
procedure under Rule 42 of the Rules of Court. In this light, Section 1 of Rule
4238 states that the period for filing a petition for review may be extended upon
motion of the concerned party. Thus, in City of Manila v. Coca-Cola Bottlers
Philippines, Inc., the Court held that the original period for filing the petition for
review may be extended for a period of fifteen (15) days, which for the most
compelling reasons, may be extended for another period not exceeding fifteen
(15) days. In other words, the reglementary period provided under Section 3,
Rule 8 of the RRCTA is extendible and as such, CTA Division’s grant of
respondents’ motion for extension falls squarely within the law.
 174

Petitioners’ claim for tax refund/credit

A perusal of Section 196 of the LGC reveals that in order to be entitled to a

refund/credit of local taxes, the following procedural requirements must concur:

First, the taxpayer concerned must file a written claim for

refund/credit with the local treasurer; and

Second, the case or proceeding for refund has to be filed within

two (2) years from the date of the payment of the tax, fee, or
charge or from the date the taxpayer is entitled to a refund or
credit.

Records disclose that while the case or proceeding for refund was filed by
petitioners within two (2) years from the time of payment, they, however, failed
to prove that they have filed a written claim for refund with the local treasurer
considering that such fact – although subject of their Request for Admission
which respondents did not reply to – had already been controverted by the latter
in their Motion to Dismiss and Answer.

To elucidate, the scope of a request for admission filed pursuant to Rule 26 of

the Rules of Court and a party’s failure to comply with the same are respectively
detailed in Sections 1 and 2 thereof, to wit:

SEC. 1. Request for admission. – At any time after issues

have been joined, a party may file and serve upon any other
party a written request for the admission by the latter of the
genuineness of any material and relevant document described
in and exhibited with the request or of the truth of any material
and relevant matter of fact set forth in the request. Copies of
the documents shall be delivered with the request unless
copies have already been furnished.

SEC. 2. Implied admission. – Each of the matters of which

an admission is requested shall be deemed admitted unless,
within a period designated in the request, which shall not be
less than fifteen (15) days after service thereof, or within such
further time as the court may allow on motion, the party to
whom the request is directed files and serves upon the party
requesting the admission a sworn statement either denying
specifically the matters of which an admission is requested or
setting forth in detail the reasons why he cannot truthfully
either admit or deny those matters.
 175

Objections to any request for admission shall be submitted to the court by the
party requested within the period for and prior to the filing of his sworn
statement as contemplated in the preceding paragraph and his compliance
therewith shall be deferred until such objections are resolved, which resolution
shall be made as early as practicable.

Based on the foregoing, once a party serves a request for admission

regarding the truth of any material and relevant matter of fact, the party to
whom such request is served is given a period of fifteen (15) days within which
to file a sworn statement answering the same. Should the latter fail to file and
serve such answer, each of the matters of which admission is requested shall be
deemed admitted.

The exception to this rule is when the party to whom such request for
admission is served had already controverted the matters subject of such
request in an earlier pleading. Otherwise stated, if the matters in a request for
admission have already been admitted or denied in previous pleadings by the
requested party, the latter cannot be compelled to admit or deny them anew. In
turn, the requesting party cannot reasonably expect a response to the request
and thereafter, assume or even demand the application of the implied admission
rule in Section 2, Rule 26. The rationale behind this exception had been
discussed in the case of CIR v. Manila Mining Corporation, citing Concrete
Aggregates Corporation v. CA, where the Court held as follows:

As Concrete Aggregates Corporation v. Court of Appeals

holds, admissions by an adverse party as a mode of discovery
contemplates of interrogatories that would clarify and tend to
shed light on the truth or falsity of the allegations in a pleading,
and does not refer to a mere reiteration of what has already
been alleged in the pleadings; otherwise, it constitutes an utter
redundancy and will be a useless, pointless process which
petitioner should not be subjected to.

Petitioner controverted in its Answers the matters set forth

in respondent’s Petitions for Review before the CTA – the
requests for admission being mere reproductions of the matters
already stated in the petitions. Thus, petitioner should not be
required to make a second denial of those matters it already
denied in its Answers. (Emphasis and underscoring supplied;
citations omitted)

Likewise, in the case of Limos v. Odones, the Court explained:

 176

A request for admission is not intended to merely reproduce or

reiterate the allegations of the requesting party’s pleading but
should set forth relevant evidentiary matters of fact described
in the request, whose purpose is to establish said party’s
cause of action or defense.

Unless it serves that purpose, it is pointless, useless and a

mere redundancy. (Emphasis and underscoring supplied)

Records show that petitioners filed their Request for Admission with the RTC
and also served the same on respondents, requesting that the fact that they filed
a written claim for refund with the City Treasurer of Manila be admitted.
Respondents, however, did not – and in fact, need not – reply to the same
considering that they have already stated in their Motion to Dismiss and Answer
that petitioners failed to file any written claim for tax refund or credit. In this
regard, respondents are not deemed to have admitted the truth and veracity of
petitioners’ requested fact. Indeed, it is hornbook principle that a claim for a tax
refund/credit is in the nature of a claim for an exemption and the law is
construed in strictissimi juris against the one claiming it and in favor of the
taxing authority. Consequently, as petitioners have failed to prove that they have
complied with the procedural requisites stated under Section 196 of the LGC,
their claim for local tax refund/credit must be denied.

COJUANGCO V. REPUBLIC
November 27, 2012/ Velasco, J.

EN BANC

 Publication of a Law
 Cause or Object of a Contract
 Coconut Levy Funds Partake of the Nature of Taxes

FACTS:
Coconut levy funds were generated by virtue of statutory enactments
imposed on the coconut farmers requiring the payment of prescribed amounts.
PD No. 276 provides that a levy, initially, of P15.00 per 100 kilograms of copra
resecada or its equivalent in other coconut products, shall be imposed on every
one hundred kilos of copra resecada, or its equivalent delivered to, and/or
purchased by, copra exporters, oil millers, desiccators and other end-users. The
levy shall be paid by such copra exporters, oil millers, desiccators and other end
 177

users. It was the Philippine Coconut Authority which was empowered to collect a
levy.

The proceeds from the levy shall be deposited with the Philippine National
Bank or any other government bank to the account of the Coconut Consumers
Stabilization Fund, as a separate trust fund which shall not form part of the
general fund of the government.

P.D. No. 755 authorized PCA to utilize the funds to acquire a commercial bank
and deposit such levy collections in said bank interest free.

Apropos the intended acquisition of a commercial bank for the purpose stated
earlier, it would appear that FUB (later, UCPB) was the bank of choice which
Pedro Cojuangco’s group (collectively, “Pedro Cojuangco”) had control of. The
plan, then, was for PCA to buy all of Pedro Cojuangco’s shares in FUB. However,
as later events unfolded, a simple direct sale from the seller (Pedro) to PCA did
not ensue as it was made to appear that petitioner Eduardo Cojuangco had the
exclusive option to acquire the former’s FUB controlling interests. Emerging from
this elaborate, circuitous arrangement were two deeds. The first one was simply
denominated as Agreement, dated May 1975, entered into by and between
petitioner Eduardo Cojuangco and Pedro Cojuangco in which the former was
purportedly accorded the option to buy 72.2% of FUB’s outstanding capital stock,
or 137,866 shares (the “option shares,” for brevity), at PhP 200 per share.

The second but related contract, dated May 25, 1975, was denominated as
Agreement for the Acquisition of a Commercial Bank for the Benefit of the
Coconut Farmers of the Philippines. It had PCA, for itself and for the benefit of
the coconut farmers, purchase from Cojuangco the shares of stock subject of the
First Agreement for PhP200.00 per share. As additional consideration for PCA’s
buy-out of what Cojuangco would later claim to be his exclusive and personal
option, it was stipulated that, from PCA, Cojuangco shall receive equity in FUB
amounting to 10%, or 7.22%, of the 72.2%, or fully paid shares. It was further
stipulated that Cojuangco would act as bank president for an extendible period
of 5 years.

Under paragraph #8 of the second agreement, PCA agreed to expeditiously

distribute the FUB shares purchased to such “coconut farmers holding registered
COCOFUND receipts” on equitable basis.

Shortly after the execution of the PCA – Cojuangco Agreement, President

Marcos issued, on July 29, 1975, P.D. No. 755
 178

Section 1 of P.D. No. 755 incorporated, by reference, the “Agreement for the
Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers”
executed by the PCA. Particularly, Section 1 states:

Section 1. Declaration of National Policy. It is hereby declared that the policy

of the State is to provide readily available credit facilities to the coconut farmers
at preferential rates; that this policy can be expeditiously and efficiently realized
by the implementation of the “Agreement for the Acquisition of a Commercial
Bank for the benefit of the Coconut Farmers” executed by the Philippine Coconut
Authority, the terms of which “Agreement” are hereby incorporated by reference;
and that the Philippine Coconut Authority is hereby authorized to distribute, for
free, the shares of stock of the bank it acquired to the coconut farmers under
such rules and regulations it may promulgate.

It bears to stress at this point that the PCA-Cojuangco Agreement referred to

above in Section 1 of P.D. 755 was not reproduced or attached as an annex to
the same law.

ISSUES:

1. May the agreement between the PCA and Eduardo Cojuangco dated May
25, 1975 be accorded the status of a law?

2. Do you agree that the agreement between the PCA and Eduardo Cojuangco
was not a valid contract because there was no consideration involved?

3. Do you agree that Eduardo Cojuangco is entitled to the UCPB shares?

HELD (Dry Run):

1. No. Although the agreement between the PCA and Eduardo Cojuangco
was incorporated by reference by P.D. No. 755, it was not reproduced or
attached as an annex to the same law. As such, it was not included when the
Decree was published. There having no publication of that agreement, it cannot
be accorded the status of a law.

2. No. The transfer of the subject UCPB shares is supported by valuable

consideration which was the exercise by Eduardo Cojuangco of his personal and
exclusive option to acquire the Option Shares and for his transfer of such shares
to the coconut farmers. Eduardo Cojuangco enjoys the presumption of
consideration which makes the agreement valid. The presumption of a valid
consideration cannot be discarded on a simple claim of absence of consideration,
especially when the contract itself states that such consideration was given.
 179

3. I do not agree that Eduardo Cojuangco is entitled to the UCPB shares.

The coconut levy funds were exacted for a special public purpose and partake of
the nature of taxes. Consequently, any use or transfer of the funds that directly
benefits private individuals should be invalidated.

FURTHER DISCUSSIONS OF ANSWER TO QUESTION NO. 1:

Section 1 of P.D. No. 755 incorporated, by reference, the “Agreement for the
Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers”
executed by the PCA. Particularly, Section 1 states:

Section 1. Declaration of National Policy. It is hereby

declared that the policy of the State is to provide readily
available credit facilities to the coconut farmers at preferential
rates; that this policy can be expeditiously and efficiently
realized by the implementation of the “Agreement for the
Acquisition of a Commercial Bank for the benefit of the Coconut
Farmers” executed by the Philippine Coconut Authority, the
terms of which “Agreement” are hereby incorporated by
reference; and that the Philippine Coconut Authority is hereby
authorized to distribute, for free, the shares of stock of the
bank it acquired to the coconut farmers under such rules and
regulations it may promulgate.

It bears to stress at this point that the PCA-Cojuangco Agreement referred to

above in Section 1 of P.D. 755 was not reproduced or attached as an annex to
the same law. And it is well-settled that laws must be published to be valid.

In fact, publication is an indispensable condition for the effectivity of a law.

Tañada v. Tuvera said as much:

Publication of the law is indispensable in every case. We

note at this point the conclusive presumption that every person
knows the law, which of course presupposes that the law has
been published if the presumption is to have any legal
justification at all. It is no less important to remember that
Section 6 of the Bill of Rights recognizes “the right of the people
to information on matters of public concern,” and this certainly
applies to, among others, and indeed especially, the legislative
enactments of the government.

We hold therefore that all statutes, including those of local

application and private laws, shall be published as a condition
for their effectivity, which shall begin fifteen days after
 180

publication unless a different effectivity date is fixed by the

legislature.

Covered by this rule are presidential decrees and executive

orders promulgated by the President in the exercise of
legislative powers whenever the same are validly delegated by
the legislature, or, at present, directly conferred by the
Constitution. Administrative rules and regulations must also be
published if their purpose is to enforce or implement existing
law pursuant also to a valid delegation.

We even went further in Tañada to say that: Laws must come out in the open
in the clear light of the sun instead of skulking in the shadows with their dark,
deep secrets. Mysterious pronouncements and rumored rules cannot be
recognized a binding unless their existence and contents are confirmed by a
valid publication intended to make full disclosure and give proper notice to the
people. The furtive law is like a scabbarded saber that cannot feint, parry or cut
unless the naked blade is drawn.

The publication, as further held in Tañada, must be of the full text of the law
since the purpose of publication is to inform the public of the contents of the law.
Mere referencing the number of the presidential decree, its title or whereabouts
and its supposed date of effectivity would not satisfy the publication
requirement.

FURTHER DISCUSSIONS OF ANSWER TO QUESTION NO. 2:

The Court finds as inconclusive the evidence relied upon by Sandiganbayan

to support its ruling that the PCA-Cojuangco Agreement is devoid of sufficient
consideration. We shall explain.

Rule 131, Section 3(r) of the Rules of Court states:

Sec. 3. Disputable presumptions.— The following

presumptions are satisfactory if uncontradicted, but may be
contradicted and overcome by other evidence:

(r) That there was a sufficient consideration for a contract;

The Court had the occasion to explain the reach of the above provision in
Surtida v. Rural Bank of Malinao (Albay), Inc., to wit:
 181

Under Section 3, Rule 131 of the Rules of Court, the

following are disputable presumptions: (1) private transactions
have been fair and regular; (2) the ordinary course of business
has been followed; and (3) there was sufficient consideration
for a contract. A presumption may operate against an
adversary who has not introduced proof to rebut it. The effect
of a legal presumption upon a burden of proof is to create the
necessity of presenting evidence to meet the legal presumption
or the prima facie case created thereby, and which if no proof
to the contrary is presented and offered, will prevail. The
burden of proof remains where it is, but by the presumption,
the one who has that burden is relieved for the time being from
introducing evidence in support of the averment, because the
presumption stands in the place of evidence unless rebutted.
The presumption that a contract has sufficient consideration
cannot be overthrown by the bare uncorroborated and self-
serving assertion of petitioners that it has no consideration. To
overcome the presumption of consideration, the alleged lack of
consideration must be shown by preponderance of evidence.
Petitioners failed to discharge this burden.

The assumption that ample consideration is present in a contract is further

elucidated in Pentacapital Investment Corporation v. Mahinay:

Under Article 1354 of the Civil Code, it is presumed that

consideration exists and is lawful unless the debtor proves the
contrary. Moreover, under Section 3, Rule 131 of the Rules of
Court, the following are disputable presumptions: (1) private
transactions have been fair and regular; (2) the ordinary course
of business has been followed; and (3) there was sufficient
consideration for a contract. A presumption may operate
against an adversary who has not introduced proof to rebut it.
The effect of a legal presumption upon a burden of proof is to
create the necessity of presenting evidence to meet the legal
presumption or the prima facie case created thereby, and
which, if no proof to the contrary is presented and offered, will
prevail. The burden of proof remains where it is, but by the
presumption, the one who has that burden is relieved for the
time being from introducing evidence in support of the
averment, because the presumption stands in the place of
evidence unless rebutted.
 182

The rule then is that the party who stands to profit from a declaration of the
nullity of a contract on the ground of insufficiency of consideration–– which
would necessarily refer to one who asserts such nullity––has the burden of
overthrowing the presumption offered by the aforequoted Section 3(r). Obviously
then, the presumption contextually operates in favor of Cojuangco and against
the Republic, as plaintiff a quo, which then had the burden to prove that indeed
there was no sufficient consideration for the Second Agreement. The
Sandiganbayan’s stated observation, therefore, that based on the wordings of
the Second Agreement, Cojuangco had no personal and exclusive option to
purchase the FUB shares from Pedro Cojuangco had really little to commend
itself for acceptance. This, as opposed to the fact that such sale and purchase
agreement is memorialized in a notarized document whereby both Eduardo
Cojuangco, Jr. and Pedro Cojuangco attested to the correctness of the provisions
thereof, among which was that Eduardo had such option to purchase. A
notarized document, Lazaro v. Agustin teaches, “generally carries the
evidentiary weight conferred upon it with respect to its due execution, and
documents acknowledged before a notary public have in their favor the
disputable presumption of regularity.”

In Samanilla v. Cajucom, the Court clarified that the presumption of a valid

consideration cannot be discarded on a simple claim of absence of consideration,
especially when the contract itself states that consideration was given:

This presumption appellants cannot overcome by a simple

assertion of lack of consideration. Especially may not the
presumption be so lightly set aside when the contract itself
states that consideration was given, and the same has been
reduced into a public instrument will all due formalities and
solemnities as in this case.

A perusal of the PCA-Cojuangco Agreement disclosed an express statement of

consideration for the transaction:

NOW, THEREFORE, for and in consideration of the foregoing

premises and the other terms and conditions hereinafter
contained, the parties hereby declare and affirm that their
principal contractual intent is (1) to ensure that the coconut
farmers own at least 60% of the outstanding capital stock of
the Bank, and (2) that the SELLER shall receive compensation
for exercising his personal and exclusive option to acquire the
Option Shares, for transferring such shares to the coconut
farmers at the option price of P200 per share, and for
 183

performing the management services required of him

hereunder.

4. As compensation for exercising his personal and

exclusive option to acquire the Option Shares and for
transferring such shares to the coconut farmers, as well as for
performing the management services required of him, SELLER
shall receive equity in the Bank amounting, in the aggregate, to
95,304 fully paid shares in accordance with the procedure set
forth in paragraph 6 below.

Applying Samanilla to the case at bar, the express and positive declaration
by the parties of the presence of adequate consideration in the contract makes
conclusive the presumption of sufficient consideration in the PCA Agreement.
Moreover, the option to purchase shares and management services for UCPB
was already availed of by petitioner Cojuangco for the benefit of the PCA. The
exercise of such right resulted in the execution of the PC-ECJ Agreement, which
fact is not disputed. The document itself is incontrovertible proof and hard
evidence that petitioner Cojuangco had the right to purchase the subject FUB
(now UCPB) shares. Res ipsa loquitur. The Sandiganbayan, however, pointed to
the perceived “lack of any pecuniary value or advantage to the government of the
said option, which could compensate for the generous payment to him by PCA of
valuable shares of stock, as stipulated in the May 25, 1975 Agreement between
him and the PCA.”

Inadequacy of the consideration, however, does not render a contract

void under Article 1355 of the Civil Code:

Art. 1355. Except in cases specified by law, lesion or

inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influence.

Alsua-Betts v. Court of Appeals is instructive that lack of ample consideration

does not nullify the contract:

Inadequacy of consideration does not vitiate a contract

unless it is proven which in the case at bar was not, that there
was fraud, mistake or undue influence. (Article 1355, New Civil
Code). We do not find the stipulated price as so inadequate to
shock the court’s conscience, considering that the price paid
was much higher than the assessed value of the subject
properties and considering that the sales were effected by a
 184

father to her daughter in which case filial love must be taken

into account.

Vales v. Villa elucidates why a bad transaction cannot serve as basis for
voiding a contract:

Courts cannot follow one every step of his life and extricate
him from bad bargains, protect him from unwise investments,
relieve him from one-sided contracts, or annul the effects of
foolish acts. Men may do foolish things, make ridiculous
contracts, use miserable judgment, and lose money by them –
indeed, all they have in the world; but not for that alone can
the law intervene and restore. There must be, in addition, a
violation of law, the commission of what the law knows as an
actionable wrong, before the courts are authorized to lay hold
of the situation and remedy it.

While consideration is usually in the form of money or property, it need not be

monetary. This is clear from Article 1350 which reads:

Art. 1350. In onerous contracts the cause is understood to

be, for each contracting party, the prestation or promise of a
thing or service by the other; in remuneratory ones, the service
or benefit which is remunerated; and in contracts of pure
beneficence, the mere liability of the benefactor.

The Court rules that the transfer of the subject UCPB shares is clearly
supported by valuable consideration.

FURTHER DISCUSSIONS OF ANSWER TO QUESTION NO. 3:

The coconut levy funds were exacted for a special public purpose.
Consequently, any use or transfer of the funds that directly benefits private
individuals should be invalidated.

The issue of whether or not taxpayers’ money, or funds and property

acquired through the imposition of taxes may be used to benefit a private
individual is once again posed. Preliminarily, the instant case inquires whether
the coconut levy funds, and accordingly, the UCPB shares acquired using the
coconut levy funds are public funds. Indeed, the very same issue took center
stage, discussed and was directly addressed in COCOFED v. Republic. And
there is hardly any question about the subject funds’ public and special
character. The following excerpts from COCOFED v. Republic, citing Republic v.
 185

COCOFED and related cases, settle once and for all this core, determinative
issue:

Indeed, We have hitherto discussed, the coconut levy was imposed

in the exercise of the State’s inherent power of taxation. As We wrote
in Republic v. COCOFED:

Indeed, 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 its definition, a tax has three elements,
namely: a) it is an enforced proportional contribution from
persons and properties; b) it is imposed by the State by virtue
of its sovereignty; and c) it is levied for the support of the
government. The coconut levy funds fall squarely into these
elements for the following reasons:

(a) They were generated by virtue of statutory enactments

imposed on the coconut farmers requiring the payment of
prescribed amounts. Thus, PD No. 276, which created the
(CCSF), mandated the following:

“a. A levy, initially, of P15.00 per 100 kilograms of

copra resecada or its equivalent in other coconut
products, shall be imposed on every first sale, in
accordance with the mechanics established under RA
6260, effective at the start of business hours on August
10, 1973.

“The proceeds from the levy shall be deposited with

the Philippine National Bank or any other government
bank to the account of the Coconut Consumers
Stabilization Fund, as a separate trust fund which shall
not form part of the general fund of the government.”

The coco levies were further clarified in amendatory laws,

specifically PD No. 961 and PD No. 1468 – in this wise:

“The Authority (PCA) is hereby empowered to impose

and collect a levy, to be known as the Coconut
Consumers Stabilization Fund Levy, on every one
hundred kilos of copra resecada, or its equivalent …
delivered to, and/or purchased by, copra exporters, oil
 186

millers, desiccators and other end-users of copra or its

equivalent in other coconut products. The levy shall be
paid by such copra exporters, oil millers, desiccators
and other endusers of copra or its equivalent in other
coconut products under such rules and regulations as
the Authority may prescribe. Until otherwise prescribed
by the Authority, the current levy being collected shall
be continued.”

Like other tax measures, they were not voluntary payments

or donations by the people. They were enforced contributions
exacted on pain of penal sanctions.

(b) The coconut levies were imposed pursuant to the laws

enacted by the proper legislative authorities of the State.
Indeed, the CCSF was collected under PD No. 276, ….”

(c) They were clearly imposed for a public purpose. There is

absolutely no question that they were collected to advance the
government’s avowed policy of protecting the coconut industry.
This Court takes judicial notice of the fact that the coconut
industry is one of the great economic pillars of our nation, and
coconuts and their by products occupy a leading position
among the country’s export products;

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, which is so affected with public interest as to be within the police
power of the State. Even if the money is allocated for a special purpose and
raised by special means, it is still public in character. In Cocofed v. PCGG, the
Court observed that certain agencies or enterprises “were organized and
financed with revenues derived from coconut levies imposed under a succession
of law of the late dictatorship … with deposed Ferdinand Marcos and his cronies
as the suspected authors and chief beneficiaries of the resulting coconut industry
monopoly.” The Court continued: “…. It cannot be denied that the coconut
industry is one of the major industries supporting the national economy. It is,
therefore, the State’s concern to make it a strong and secure source not only of
the livelihood of a significant segment of the population, but also of export
earnings the sustained growth of which is one of the imperatives of economic
stability.
 187

The following parallel doctrinal lines from Pambansang Koalisyon ng mga

Samahang Magsasaka at Manggagawa sa Niyugan (PKSMMN) v. Executive
Secretary55 came next:

The Court was satisfied that the coco-levy funds were raised pursuant to law
to support a proper governmental purpose. They were raised with the use of the
police and taxing powers of the State for the benefit of the coconut industry and
its farmers in general. The COA reviewed the use of the funds. The Bureau of
Internal Revenue (BIR) treated them as public funds and the very laws governing
coconut levies recognize their public character.

The Court has also recently declared that the coco-levy funds are in the
nature of taxes and can only be used for public purpose. Taxes are enforced
proportional contributions from persons and property, levied by the State by
virtue of its sovereignty for the support of the government and for all its public
needs. Here, the coco-levy funds were imposed pursuant to law, namely, R.A.
6260 and P.D. 276. The funds were collected and managed by the PCA, an
independent government corporation directly under the President. And, as the
respondent public officials pointed out, the pertinent laws used the term levy,
which means to tax, in describing the exaction.

Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not
raise money to boost the government’s general funds but to provide means for
the rehabilitation and stabilization of a threatened industry, the coconut
industry, which is so affected with public interest as to be within the police
power of the State. The funds sought to support the coconut industry, one of the
main economic backbones of the country, and to secure economic benefits for the
coconut farmers and far workers. The subject laws are akin to the sugar liens
imposed by Sec. 7(b) of P.D. 388, and the oil price stabilization funds under P.D.
1956, as amended by E.O. 137.

From the foregoing, it is at once apparent that any property acquired by

means of the coconut levy funds, such as the subject UCPB shares, should be
treated as public funds or public property, subject to the burdens and restrictions
attached by law to such property. COCOFED v. Republic, delved into such
limitations, thusly:

We have ruled time and again that taxes are imposed only
for a public purpose. “They cannot be used for purely private
purposes or for the exclusive benefit of private persons.” When
a law imposes taxes or levies from the public, with the intent to
give undue benefit or advantage to private persons, or the
promotion of private enterprises, that law cannot be said to
 188

satisfy the requirement of public purpose. In Gaston v. Republic

Planters Bank, the petitioning sugar producers, sugarcane
planters and millers sought the distribution of the shares of
stock of the Republic Planters Bank (RPB), alleging that they
are the true beneficial owners thereof. In that case, the
investment, i.e., the purchase of RPB, was funded by the
deduction of PhP 1.00 per picul from the sugar proceeds of the
sugar producers pursuant to P.D. No. 388. In ruling against the
petitioners, the Court held that to rule in their favor would
contravene the general principle that revenues received from
the imposition of taxes or levies “cannot be used for purely
private purposes or for the exclusive benefit of private persons.”
The Court amply reasoned that the sugar stabilization fund is
to “be utilized for the benefit of the entire sugar industry, and
all its components, stabilization of the domestic market
including foreign market, the industry being of vital importance
to the country’s economy and to national interest.”

Needless to stress, courts do not, as they cannot, allow by judicial fiat the
conversion of special funds into a private fund for the benefit of private
individuals. In the same vein, We cannot subscribe to the idea of what appears
to be an indirect – if not exactly direct – conversion of special funds into private
funds, i.e., by using special funds to purchase shares of stocks, which in turn
would be distributed for free to private individuals. Even if these private
individuals belong to, or are a part of the coconut industry, the free distribution
of shares of stocks purchased with special public funds to them, nevertheless
cannot be justified. The ratio in Gaston, as articulated below, applies mutatis
mutandis to this case:

The stabilization fees in question are levied by the State … for a special
purpose – that of “financing the growth and development of the sugar industry
and all its components, stabilization of the domestic market including the foreign
market.” The fact that the State has taken possession of moneys pursuant to law
is sufficient to constitute them as state funds even though they are held for a
special purpose….

That the fees were collected from sugar producers [etc.], and that the funds
were channeled to the purchase of shares of stock in respondent Bank do not
convert the funds into a trust fund for their benefit nor make them the beneficial
owners of the shares so purchased. It is but rational that the fees be collected
from them since it is also they who are benefited from the expenditure of the
funds derived from it.
 189

In this case, the coconut levy funds were being exacted from copra exporters,
oil millers, desiccators and other end-users of copra or its equivalent in other
coconut products.57 Likewise so, the funds here were channeled to the purchase
of the shares of stock in UCPB. Drawing a clear parallelism between Gaston and
this case, the fact that the coconut levy funds were collected from the persons or
entities in the coconut industry, among others, does not and cannot entitle them
to be beneficial owners of the subject funds – or more bluntly, owners thereof in
their private capacity. Parenthetically, the said private individuals cannot own
the UCPB shares of stocks so purchased using the said special funds of the
government.

As the coconut levy funds partake of the nature of taxes and can only be used
for public purpose, and importantly, for the purpose for which it was exacted,
i.e., the development, rehabilitation and stabilization of the coconut industry,
they cannot be used to benefit––whether directly or indirectly–– private
individuals, be it by way of a commission, or as the subject Agreement
interestingly words it, compensation. Consequently, Cojuangco cannot stand to
benefit by receiving, in his private capacity, 7.22% of the FUB shares without
violating the constitutional caveat that public funds can only be used for public
purpose. Accordingly, the 7.22% FUB (UCPB) shares that were given to
Cojuangco shall be returned to the Government, to be used “only for the benefit
of all coconut farmers and for the development of the coconut industry.”

The ensuing are the underlying rationale for declaring, as unconstitutional,

provisions that convert public property into private funds to be used ultimately
for personal benefit:

… not only were the laws unconstitutional for decreeing the

distribution of the shares of stock for free to the coconut
farmers and therefore negating the public purposed declared
by P.D. No. 276, i.e., to stabilize the price of edible oil and to
protect the coconut industry. They likewise reclassified the
coconut levy fund as private fund, to be owned by private
individuals in their private capacities, contrary to the original
purpose for the creation of such fund. To compound the
situation, the offending provisions effectively removed the
coconut levy fund away from the cavil of public funds which
normally can be paid out only pursuant to an appropriation
made by law. The conversion of public funds into private
assets was illegally allowed, in fact mandated, by these
provisions. Clearly therefore, the pertinent provisions of P.D.
Nos. 755, 961 and 1468 are unconstitutional for violating
 190

Article VI, Section 29 (3) of the Constitution. In this context, the

distribution by PCA of the UCPB shares purchased by means of
the coconut levy fund – a special fund of the government – to
the coconut farmers is, therefore, void.

It is precisely for the foregoing that impels the Court to strike down as
unconstitutional the provisions of the PCA-Cojuangco Agreement that allow
petitioner Cojuangco to personally and exclusively own public funds or property,
the disbursement of which We so greatly protect if only to give light and meaning
to the mandates of the Constitution.

As heretofore amply discussed, taxes are imposed only for a public purpose.
They must, therefore, be used for the benefit of the public and not for the
exclusive profit or gain of private persons. Otherwise, grave injustice is inflicted
not only upon the Government but most especially upon the citizenry– the
taxpayers––to whom We owe a great deal of accountability.

In this case, out of the 72.2% FUB (now UCPB) shares of stocks PCA
purchased using the coconut levy funds, the May 25, 1975 Agreement between
the PCA and Cojuangco provided for the transfer to the latter, by way of
compensation, of 10% of the shares subject of the agreement, or a total of 7.22%
fully paid shares. In sum, Cojuangco received public assets – in the form of FUB
(UCPB) shares with a value then of ten million eight hundred eighty-six thousand
pesos (PhP 10,886,000) in 1975, paid by coconut levy funds. In effect, Cojuangco
received the aforementioned asset as a result of the PCA-Cojuangco Agreement,
and exclusively benefited himself by owning property acquired using solely
public funds. Cojuangco, no less, admitted that the PCA paid, out of the CCSF,
the entire acquisition price for the 72.2% option shares. This is in clear violation
of the prohibition, which the Court seeks to uphold.

We, therefore, affirm, on this ground, the decision of the Sandiganbayan

nullifying the shares of stock transfer to Cojuangco. Accordingly, the UCPB
shares of stock representing the 7.22% fully paid shares subject of the instant
petition, with all dividends declared, paid or issued thereon, as well as any
increments thereto arising from, but not limited to, the exercise of pre-emptive
rights, shall be reconveyed to the Government of the Republic of the Philippines,
which as We previously clarified, shall “be used only for the benefit of all coconut
farmers and for the development of the coconut industry.”

1. Sec. 1 of P.D. No. 755 did not validate the Agreement between PCA and
defendant Eduardo M. Cojuangco, Jr. dated May 25, 1975 nor did it give the
Agreement the binding force of a law because of the non-publication of the said
Agreement.
 191

2. The Agreement between PCA and defendant Eduardo M. Cojuangco, Jr.

dated May 25, 1975 is a valid contract for having the requisite consideration
under Article 1318 of the Civil Code.

3. The transfer by PCA to defendant Eduardo M. Cojuangco, Jr. of 14,400

shares of stock of FUB (later UCPB) from the “Option Shares” and the additional
FUB shares subscribed and paid by PCA, consisting of

a. Fifteen Thousand Eight Hundred Eighty-Four (15,884) shares out of the

authorized but unissued shares of the bank, subscribed and paid by PCA;

b. Sixty Four Thousand Nine Hundred Eighty (64,980) shares of the increased
capital stock subscribed and paid by PCA; and

c. Stock dividends declared pursuant to paragraph 5 and paragraph 11 (iv)

(d) of the PCA-Cojuangco Agreement dated May 25, 1975. or the so-called
"Cojuangco-UCPB shares"

is declared unconstitutional, hence null and void.

4. The above-mentioned shares of stock of the FUB/UCPB transferred to

defendant Cojuangco are hereby declared conclusively owned by the Republic of
the Philippines to be used only for the benefit of all coconut farmers and for the
development of the coconut industry, and ordered reconveyed to the Government.

5. The UCPB shares of stock of the alleged fronts, nominees and dummies of
defendant Eduardo M. Cojuangco, Jr. which form part of the 72.2% shares of the
FUB/UCPB paid for by the PCA with public funds later charged to the coconut
levy funds, particularly the CCSF, belong to the plaintiff Republic of the
Philippines as their true and beneficial owner.

DIAGEO PHILIPPINES, INC. V. CIR

November 12, 2012/ Perlas-Bernabe, J.

 Excise Taxes
 Indirect Taxes

FACTS:

Petitioner Diageo Philippines, Inc. (Diageo) is a domestic corporation primarily

engaged in the business of importing, exporting, manufacturing, marketing,
distributing, buying and selling, by wholesale, all kinds of beverages and liquors
 192

and in dealing in any material, article, or thing required in connection with or

incidental to its principal business. It is registered with the Bureau of Internal
Revenue (BIR) as an excise tax taxpayer. For the period November 1, 2003 to
December 31, 2004, Diageo purchased raw alcohol from its supplier for use in
the manufacture of its beverage and liquor products.

The supplier imported the raw alcohol and paid the related excise taxes
thereon before the same were sold to the petitioner. The purchase price for the
raw alcohol included, among others, the excise taxes paid by the supplier in the
total amount of P12,007,528.83.

Within two (2) years from the time the supplier paid the subject excise taxes,
Diageo filed with the BIR Large Taxpayer’s Audit and Investigation Division II
applications for tax refund/issuance of tax credit certificates corresponding to
the excise taxes which its supplier paid but passed on to it as part of the
purchase price of the subject raw alcohol invoking Section 130(D) of the Tax
Code.

However, due to the failure of the respondent Commissioner of Internal

Revenue (CIR) to act upon Diageo’s claims, the latter was constrained to timely
file a petition for review before the CTA. On December 27, 2005, the CIR filed its
Answer assailing Diageo’s lack of legal personality to institute the claim for
refund because it was not the one that paid the alleged excise taxes but its
supplier.

ISSUE:

Rule on the contention of the CIR.

HELD (Dry Run):

The contention of the CIR is meritorious. Diageo has no legal personality to

institute the claim for refund, because under the law, it is not the statutory
taxpayer. The proper party to question, or seek a refund of, an indirect tax is the
statutory taxpayer, the person on whom the tax is imposed by law and who paid
the same even if he shifts the burden thereof to another. Thus, the supplier
remains the statutory taxpayer even if Diageo, the purchaser, actually shoulders
the burden of tax.

FURTHER DISCUSSIONS:

Excise taxes partake of the nature of

indirect taxes.
 193

Diageo bases its claim for refund on Section 130 of the Tax Code which
reads:

Section 130.Filing of Return and Payment of Excise Tax on

Domestic Products. –

(A) Persons Liable to File a Return, Filing of Return on Removal

and Payment of Tax.-

(1) Persons Liable to File a Return. – Every person liable to pay

excise tax imposed under this Title shall file a separate return
for each place of production setting forth, among others, the
description and quantity or volume of products to be removed,
the applicable tax base and the amount of tax due thereon;
Provided however, That in the case of indigenous petroleum,
natural gas or liquefied natural gas, the excise tax shall be
paid by the first buyer, purchaser or transferee for local sale,
barter or transfer, while the excise tax on exported products
shall be paid by the owner, lessee, concessionaire or operator
of the mining claim. Should domestic products be removed from
the place of production without the payment of the tax, the
owner or person having possession thereof shall be liable for
the tax due thereon.

(D) Credit for Excise tax on Goods Actually Exported.- When

goods locally produced or manufactured are removed and
actually exported without returning to the Philippines, whether
so exported in their original state or as ingredients or parts of
any manufactured goods or products, any excise tax paid
thereon shall be credited or refunded upon submission of the
proof of actual exportation and upon receipt of the
corresponding foreign exchange payment: Provided, That the
excise tax on mineral products, except coal and coke, imposed
under Section 151 shall not be creditable or refundable even if
the mineral products are actually exported.

A reading of the foregoing provision, however, reveals that contrary to the

position of Diageo, the right to claim a refund or be credited with the excise taxes
belongs to its supplier. The phrase “any excise tax paid thereon shall be credited
or refunded” requires that the claimant be the same person who paid the excise
tax.
 194

In Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue, the Court

has categorically declared that “[t]he proper party to question, or seek a refund
of, an indirect tax is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the burden thereof to
another.”

Excise taxes imposed under Title VI of the Tax Code are taxes on property
which are imposed on “goods manufactured or produced in the Philippines for
domestic sales or consumption or for any other disposition and to things
imported.” Though excise taxes are paid by the manufacturer or producer before
removal of domestic products from the place of production or by the owner or
importer before the release of imported articles from the customshouse, the same
partake of the nature of indirect taxes when it is passed on to the subsequent
purchaser.

Indirect taxes are defined as those wherein the liability for the payment of the
tax falls on one person but the burden thereof can be shifted to another person.
When the seller passes on the tax to his buyer, he, in effect, shifts the tax
burden, not the liability to pay it, to the purchaser as part of the price of goods
sold or services rendered.

Accordingly, when the excise taxes paid by the supplier were passed on to
Diageo, what was shifted is not the tax per se but an additional cost of the goods
sold. Thus, the supplier remains the statutory taxpayer even if Diageo, the
purchaser, actually shoulders the burden of tax.

The statutory taxpayer is the proper

party to claim refund of indirect
taxes.

As defined in Section 22(N) of the Tax Code, a taxpayer means any person
subject to tax. He is, therefore, the person legally liable to file a return and pay
the tax as provided for in Section 130(A). As such, he is the person entitled to
claim a refund.

Relevant is Section 204(C) of the Tax Code which provides:

Section 204. Authority of the Commissioner to Compromise,

Abate, and Refund or Credit Taxes.- The Commissioner may -

(C) Credit or refund taxes erroneously or illegally received or

penalties imposed without authority, refund the value of
 195

internal revenue stamps when they are returned in good

condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use
and refined their value upon proof of destruction. No credit or
refund of taxes or penalties shall be allowed unless the
taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of the
tax or penalty: Provided, however, that a return filed showing
an overpayment shall be considered as a written claim for
credit or refund.

Pursuant to the foregoing, the person entitled to claim a tax refund is the
statutory taxpayer or the person liable for or subject to tax. In the present case, it
is not disputed that the supplier of Diageo imported the subject raw alcohol,
hence, it was the one directly liable and obligated to file a return and pay the
excise taxes under the Tax Code before the goods or products are removed from
the customshouse. It is, therefore, the statutory taxpayer as contemplated by law
and remains to be so, even if it shifts the burden of tax to Diageo. Consequently,
the right to claim a refund, if legally allowed, belongs to it and cannot be
transferred to another, in this case Diageo, without any clear provision of law
allowing the same.

Unlike the law on Value Added Tax which allows the subsequent purchaser
under the tax credit method to refund or credit input taxes passed on to it by a
supplier, no provision for excise taxes exists granting non-statutory taxpayer like
Diageo to claim a refund or credit. It should also be stressed that when the
excise taxes were included in the purchase price of the goods sold to Diageo, the
same was no longer in the nature of a tax but already formed part of the cost of
the goods.

Finally, statutes granting tax exemptions are construed strictissimi juris

against the taxpayer and liberally in favor of the taxing authority. A claim of tax
exemption must be clearly shown and based on language in law too plain to be
mistaken. Unfortunately, Diageo failed to meet the burden of proof that it is
covered by the exemption granted under Section 130(J)) of the Tax Code.

In sum, Diageo, not being the party statutorily liable to pay excise taxes and
having failed to prove that it is covered by the exemption granted under Section
130(D) of the Tax Code, is not the proper party to claim a refund or credit of the
excise taxes paid on the ingredients of its exported locally produced liquor.
 196

GULF AIR COMPANY, PHILIPPINE BRANCH V. CIR

September 19, 2012/ Mendoza, J.

Examinee’s Note (As of November 18, 2013): The

following pertinent provisions are involved in this
case:

1. Section 118(A) of the NIRC. Take note that this

provision, as cited in this case, has already been
amended as of this date. Please refer to your codal
provision.

2. Revenue Regulations No. 6-66. This regulation, as

discussed in this case, has already been superseded
by Revenue Regulations No. 15-2002.

3. Revenue Regulations No. 15-2002 (took effect on

October 26, 2002). The Examinee supposes, that as
far as the definition of gross receipts for purposes of
computing percentage taxes on international carriers
is concerned, this regulation has not yet been
amended or superseded as of this date.

Thus, in studying this case digest, concentrate on

the definition of gross receipts as discussed herein as
well as on the principle of legislative approval by re-
enactment. Be careful.

 Definition of Gross Receipts for Purposes of Computing Percentage

Taxes on International Carriers
 Principle of Legislative Approval by Re-Enactment

FACTS:

Petitioner Gulf Air Company Philippine Branch is a branch of Gulf Air

Company, a foreign corporation duly organized in accordance with the laws of
the Kingdom of Bahrain.

Gulf Air made a claim for refund of percentage taxes for the first, second and
fourth quarters of year 2000.

After its submission of several documents, Gulf Air received its Preliminary
Assessment Notice for deficiency percentage tax amounting to P 32,745,141.93.
 197

On the same day, Gulf Air also received a letter denying its claim for tax credit or
refund of excess percentage tax remittance for the first, second and fourth
quarters of 2000, and requesting the immediate settlement of the deficiency tax
assessment.

On June 30, 2004, the Deputy Commissioner, Officer-in-Charge of the Large

Taxpayers Service of the BIR, denied Gulf Air’s written protest for lack of factual
and legal basis and requested the immediate payment of the P 33,864,186.62
deficiency percentage tax assessment.

Aggrieved, Gulf Air filed a petition for review with the CTA. On March 21,
2007, the Second Division of the CTA dismissed the petition, finding that
Revenue Regulations No. 6-66 was the applicable rule providing that gross
receipts should be computed based on the cost of the single one-way fare as
approved by the Civil Aeronautics Board (CAB). It ruled that Revenue
Regulations No. 15-2002, allowing the use of the net net rate in determining the
gross receipts, could not be given any or a retroactive effect. Thus, the CTA
affirmed the decision of the BIR.

Gulf Air elevated the case to the CTA En Banc which promulgated its Decision
on January 30, 2008 dismissing the petition and affirming the decision of the
CTA in Division. It found that Revenue Regulations No. 6-66 was the applicable
rule because the period involved in the assessment covered the first, second and
fourth quarters of 2000 and the amended percentage tax returns were filed on
October 25, 2001. Revenue Regulations No. 15-2002, which took effect on
October 26, 2002, could not be given retroactive effect because it was declarative
of a new right as it provided a different rule in determining gross receipts.

ISSUE:

Should gross receipts, be based on the "net net" amount – the amount actually
received, derived, collected, and realized by Gulf Air Company from passengers,
cargo and excess baggage?

HELD (Dry Run):

No. Revenue Regulations No. 6-66 mandates that the gross receipts shall be
computed on the cost of the single one way fare as approved by the Civil
Aeronautics Board. This means that gross receipts should not be based
on the amount actually received, derived, collected, and realized by Gulf Air
Company from passengers, cargo and excess baggage. Although Revenue
 198

Regulations No. 15-2002 expressly superseded Revenue Regulations No. 6-66,

the latter was the prevailing rule during the taxable period involved in this case.

FURTHER DISCUSSIONS:

Gulf Air questions the validity of Revenue Regulations No. 6-66, claiming that
it is not a correct interpretation of Section 118(A) of the NIRC, and insisting that
the gross receipts should be based on the "net net" amount – the amount actually
received, derived, collected, and realized by the petitioner from passengers,
cargo and excess baggage. It further argues that the CAB approved fares are
merely notional and not reflective of the actual revenue or receipts derived by it
from its business as an international air carrier.

Gulf Air also insists that its construction of "gross receipts" to mean the "net
net" amount actually received, rather than the CAB approved rates as mandated
by Revenue Regulations No. 6-66, has been validated by the issuance of
Revenue Regulations No. 15-2002 which expressly superseded the former.

Finally, Gulf Air contends that because the definition of gross receipts under
the questioned regulations is contrary to that given under the other sections of
the NIRC on value-added tax and percentage taxes, the legislative intention was
to collect the percentage tax based solely on the actual receipts derived and
collected by the taxpayer. Given that Revenue Regulations No. 6-66 allegedly
conflicts with Section 118 of the NIRC as well as with the other sections on
percentage tax, it concludes that the former was effectively repealed, amended
or modified by the NIRC.

Section 118(A) of the NIRC states that:

Sec. 118. Percentage Tax on International Carriers. –

(A) International air carriers doing business in the

Philippines shall pay a tax of three percent (3%) of their
quarterly gross receipts.

Pursuant to this, the Secretary of Finance promulgated Revenue Regulations

No. 15-2002, which prescribes that "gross receipts" for the purpose of
determining Common Carrier’s Tax shall be the same as the tax base for
calculating Gross Philippine Billings Tax. Section 5 of the same provides for the
computation of "Gross Philippine Billings":

Sec. 5. Determination of Gross Philippine Billings. –

 199

(a) In computing for "Gross Philippine Billings," there shall be

included the total amount of gross revenue derived from
passage of persons, excess baggage, cargo and/or mail,
originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue
and the place of payment of the passage documents.

The gross revenue for passengers whose tickets are sold in the
Philippines shall be the actual amount derived for
transportation services, for a first class, business class or
economy class passage, as the case may be, on its continuous
and uninterrupted flight from any port or point in the
Philippines to its final destination in any port or point of a
foreign country, as reflected in the remittance area of the tax
coupon forming an integral part of the plane ticket. For this
purpose, the Gross Philippine Billings shall be determined by
computing the monthly average net fare of all the tax coupons
of plane tickets issued for the month per point of final
destination, per class of passage (i.e., first class, business
class, or economy class) and per classification of passenger
(i.e., adult, child or infant) and multiplied by the corresponding
total number of passengers flown for the month as declared in
the flight manifest.

For tickets sold outside the Philippines, the gross revenue for
passengers for first class, business class or economy class
passage, as the case may be, on a continuous and
uninterrupted flight from any port of point in the Philippines to
final destination in any port or point of a foreign country shall
be determined using the locally available net fares applicable
to such flight taking into consideration the seasonal fare rate
established at the time of the flight, the class of passage
(whether first class, business class, economy class or non-
revenue), the classification of passenger (whether adult, child
or infant), the date of embarkation, and the place of final
destination. Correspondingly, the Gross Philippine Billing for
tickets sold outside the Philippines shall be determined in the
manner as provided in the preceding paragraph.

Passage documents revalidated, exchanged and/or endorsed

to another on-line international airline shall be included in the
 200

taxable base of the carrying airline and shall be subject to

Gross Philippine Billings tax if the passenger is lifted/boarded
on an aircraft from any port or point in the Philippines towards
a foreign destination.

The gross revenue on excess baggage which originated from

any port or point in the Philippines and destined to any part of
a foreign country shall be computed based on the actual
revenue derived as appearing on the official receipt or any
similar document for the said transaction.

The gross revenue for freight or cargo and mail shall be

determined based on the revenue realized from the carriage
thereof. The amount realized for freight or cargo shall be based
on the amount appearing on the airway bill after deducting
therefrom the amount of discounts granted which shall be
validated using the monthly cargo sales reports generated by
the IATA Cargo Accounts Settlement System (IATA CASS) for
airway bills issued through their cargo agents or the monthly
reports prepared by the airline themselves or by their general
sales agents for direct issues made. The amount realized for
mails shall, on the other hand, be determined based on the
amount as reflected in the cargo manifest of the carrier.

This expressly repealed Revenue Regulations No. 6-66 that stipulates a

different manner of calculating the gross receipts:

Sec. 5. Gross Receipts, how determined. – The total amount of

gross receipts derived from passage of persons, excess
baggage, freight or cargo, including, mail cargo, originating
from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of
payment of the ticket, shall be subject to the common carrier’s
percentage tax (Sec. 192, Tax Code). The gross receipts shall be
computed on the cost of the single one way fare as approved
by the Civil Aeronautics Board on the continuous and
uninterrupted flight of passengers, excess baggage, freight or
cargo, including mail, as reflected on the plane manifest of the
carrier.

Tickets revalidated, exchanged and/or indorsed to another

international airline are subject to percentage tax if lifted from
 201

a passenger boarding a plane in a port or point in the

Philippines.

In case of a flight that originates from the Philippines but

transhipment of passenger takes place elsewhere on another
airline, the gross receipts reportable for Philippine tax purposes
shall be the portion of the cost of the ticket corresponding to the
leg of the flight from port of origin to the point of transhipment.

In case of passengers, the taxable base shall be gross receipts

less 25% thereof.

There is no doubt that prior to the issuance of Revenue Regulations No. 15-
2002 which became effective on October 26, 2002, the prevailing rule then for
the purpose of computing common carrier’s tax was Revenue Regulations No. 6-
66. While the petitioner’s interpretation has been vindicated by the new rules
which compute gross revenues based on the actual amount received by the
airline company as reflected on the plane ticket, this does not change the fact
that during the relevant taxable period involved in this case, it was Revenue
Regulations No. 6-66 that was in effect.

Although Gulf Air does not dispute that Revenue Regulations No. 6-66 was
the applicable rule covering the taxable period involved, it puts in issue the
wisdom of the said rule as it pertains to the definition of gross receipts.

Gulf Air is reminded that rules and regulations interpreting the tax code and
promulgated by the Secretary of Finance, who has been granted the authority to
do so by Section 244 of the NIRC, "deserve to be given weight and respect by the
courts in view of the rule-making authority given to those who formulate them
and their specific expertise in their respective fields.

As such, absent any showing that Revenue Regulations No. 6-66 is

inconsistent with the provisions of the NIRC, its stipulations shall be upheld and
applied accordingly. This is in keeping with our primary duty of interpreting and
applying the law. Regardless of our reservations as to the wisdom or the
perceived ill-effects of a particular legislative enactment, the court is without
authority to modify the same as it is the exclusive province of the law-making
body to do so. As aptly stated in Saguiguit v. People,

Even with the best of motives, the Court can only interpret
and apply the law and cannot, despite doubts about its
wisdom, amend or repeal it. Courts of justice have no right to
 202

encroach on the prerogatives of lawmakers, as long as it has

not been shown that they have acted with grave abuse of
discretion. And while the judiciary may interpret laws and
evaluate them for constitutional soundness and to strike them
down if they are proven to be infirm, this solemn power and
duty does not include the discretion to correct by reading into
the law what is not written therein.

Moreover, the validity of the questioned rules can be

sustained by the application of the principle of legislative
approval by re-enactment. Under the aforementioned legal
concept, "where a statute is susceptible of the meaning placed
upon it by a ruling of the government agency charged with its
enforcement and the Legislature thereafter re-enacts the
provisions without substantial change, such action is to some
extent confirmatory that the ruling carries out the legislative
purpose." Thus, there is tacit approval of a prior executive
construction of a statute which was re-enacted with no
substantial changes.

In this case, Revenue Regulations No. 6-66 was promulgated to enforce the
provisions of Title V, Chapter I (Tax on Business) of Commonwealth Act No. 466
(National Internal Revenue Code of 1939), under which Section 192, pertaining to
the common carrier’s tax, can be found:

Sec. 192. Percentage tax on carriers and keepers of garages. –

Keepers of garages, transportation contractors, persons who

transport passenger or freight for hire, and common carriers by
land, air, or water, except owners of bancas, and owners of
animal-drawn two-wheeled vehicles, shall pay a tax equivalent
to two per centum of their monthly gross receipts.

This provision has, over the decades, been substantially reproduced with
every amendment of the NIRC, up until its recent reincarnation in Section 118 of
the NIRC.

The legislature is presumed to have full knowledge of the existing revenue

regulations interpreting the aforequoted provision of law and, with its
subsequent substantial re-enactment, there is a presumption that the lawmakers
have approved and confirmed the rules in question as carrying out the legislative
purpose. Hence, it can be concluded that with the continued duplication of the
 203

NIRC provision on common carrier’s tax, the law-making body was aware of the
existence of Revenue Regulations No. 6-66 and impliedly endorsed its
interpretation of the NIRC and its definition of gross receipts.

Although the Court commiserates with Gulf Air in its predicament, it is left
with no choice but to uphold the validity of Revenue Regulations No. 6-66 and
apply it to the case at bench, thus upholding the ruling of the CTA. There is no
cause to reverse the decision of the tax court. As a specialized court dedicated
exclusively to the study and resolution of tax issues, the CTA has developed an
expertise on the subject of taxation. The Court cannot be compelled to set aside
its decisions, unless there is a finding that the questioned decision is not
supported by substantial evidence or there is a showing of abuse or improvident
exercise of authority. Therefore, its findings are accorded the highest respect and
are generally conclusive upon this court, in the absence of grave abuse of
discretion or palpable error.

On a final note, it is incumbent on the Court to emphasize that tax refunds

partake the nature of tax exemptions which are a derogation of the power of
taxation of the State. Consequently, they are construed strictly against a
taxpayer and liberally in favor of the State such that he who claims a refund or
exemption must justify it by words too plain to be mistaken and too categorical to
be misinterpreted. Regrettably, the petitioner in the case at bench failed to
unequivocally prove that it is entitled to a refund.

NIPPON EXPRESS (PHILIPPINES) CORPORATION V. CIR

March 13, 2013/ Mendoza, J.

 120+30-Day Period

FACTS:

Petitioner Nippon Express (Philippines) Corporation (petitioner) is a corporation

duly organized and registered with the Securities and Exchange Commission. It
is also a value-added tax (VAT)-registered entity. For the year 2001, it regularly
filed its amended quarterly VAT returns. On April 24, 2003, it filed an
administrative claim for refund of P20,345,824.29 representing excess input tax
attributable to its effectively zero-rated sales in 2001.

Pending review by the BIR, on April 25, 2003, petitioner filed a petition for
review with the CTA, requesting for the issuance of a tax credit certificate in the
amount of P20,345,824.29.
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ISSUES:

Whether or not the Court of Tax Appeals has no jurisdiction to entertain the
case.

HELD (Dry Run):

The Court of Tax Appeals has no jurisdiction to entertain the case.

The law provides that upon the filing of the application for the issuance of a
tax credit certificate or refund of creditable input tax, the Commissioner shall
grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete
documents in support of the application. In case of full or partial denial of the
claim for tax refund or tax credit, or the failure on the part of the Commissioner to
act on the application within the said period, the taxpayer may, within thirty (30)
days from the receipt of the decision denying the claim or after the expiration of
the one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals. The 120+30-day period is mandatory and
jurisdictional.

In the present case, petitioner failed to wait for the lapse of the requisite 120-
day period or the denial of its claim by the CIR before elevating the case to the
CTA. As its judicial claim was filed in contravention with the 120+ 30-day
period, the CTA did not acquire jurisdiction over the case.

FURTHER DISCUSSIONS:

The provision in question is Section 112(D) (now subparagraph C) of the NIRC:

(Note: The Examinee used subparagraph C)

Sec. 112. Refunds or Tax Credits of Input Tax

(C) Period within which Refund or Tax Credit of Input Taxes

shall be Made. - In proper cases, the Commissioner shall grant
a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application
filed in accordance with Subsection (A) hereof.

In case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on
 205

the application within the period prescribed above, the

taxpayer affected may, within thirty (30) days from the receipt
of the decision denying the claim or after the expiration of the
one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.

A simple reading of the abovequoted provision reveals that the taxpayer may
appeal the denial or the inaction of the CIR only within thirty (30) days from
receipt of the decision denying the claim or the expiration of the 120-day period
given to the CIR to decide the claim. Because the law is categorical in its
language, there is no need for further interpretation by the courts and non-
compliance with the provision cannot be justified.

Moreover, contrary to petitioner’s position, the 120+30-day period is indeed

mandatory and jurisdictional, as recently ruled in Commissioner of Internal
Revenue v. San Roque Power Corporation. Thus, failure to observe the said
period before filing a judicial claim with the CTA would not only make such
petition premature, but would also result in the non-acquisition by the CTA of
jurisdiction to hear the said case.

Because the 120+30 day period is jurisdictional, the issue of whether

petitioner complied with the said time frame may be broached at any stage, even
on appeal. Well-settled is the rule that the question of jurisdiction over the
subject matter can be raised at any time during the proceedings.

Jurisdiction cannot be waived because it is conferred by law and is not

dependent on the consent or objection or the acts or omissions of the parties or
any one of them. Consequently, the fact that the CIR failed to immediately
express its objection to the premature filing of the petition for review before the
CTA is of no moment.

As to petitioner’s contention that it relied on the previous decisions of the CTA

on the matter, the Court finds it apt to quote its ruling in San Roque:

Pursuant to the ruling of the Court in San Roque, the 120+30-day period is
mandatory and jurisdictional from the time of the effectivity of Republic Act (R.A.)
No. 8424 or the Tax Reform Act of 1997. The Court, however, took into
consideration the issuance by the BIR of Ruling No. DA-489-03, which expressly
stated that the taxpayer need not wait for the lapse of the 120-day period before
seeking judicial relief. Because taxpayers cannot be faulted for relying on this
declaration by the BIR, the Court deemed it reasonable to allow taxpayers to file
its judicial claim even before the expiration of the 120-day period. This exception
 206

is to be observed from the issuance of the said ruling on December 10, 2003 up
until its reversal by Aichi on October 6, 2010. In the landmark case of Aichi, this
Court made a definitive statement that the failure of a taxpayer to wait for the
decision of the CIR or the lapse of the 120-day period will render the filing of the
judicial claim with the CTA premature. As a consequence, its promulgation once
again made it clear to the taxpayers that the 120+ 30-day period must be
observed.

As laid down in San Roque, judicial claims filed from January 1, 1998 until
the present should strictly adhere to the 120+ 30-day period referred to in
Section 112 of the NIRC. The only exception is the period from December 10,
2003 until October 6, 2010, during which, judicial claims may be filed even
before the expiration of the 120-day period granted to the CIR to decide on the
claim for refund.

Based on the foregoing discussion and the ruling in San Roque, the petition
must fail because the judicial claim of petitioner was filed on April 25, 2003, only
one day after it submitted its administrative claim to the CIR. Petitioner failed to
wait for the lapse of the requisite 120-day period or the denial of its claim by the
CIR before elevating the case to the CTA by a petition for review. As its judicial
claim was filed during which strict compliance with the 120+ 30-day period was
required, the Court cannot but declare that the filing of the petition for review
with the CTA was premature and that the CTA had no jurisdiction to hear the
case.

Consolidated Petitions

CIR V. SAN ROQUE POWER CORPORATION

G.R. No. 187485/ February 12, 2013/ Carpio, J.

TAGANITO MINING CORPORATION V. CIR

G. R. No. 196113

PHILEX MINING CORPORATION V. CIR

G.R. No. 197156

EN BANC

x-------------------------x
 207

 120+30-Day Period
 VAT

FIRST CASE: CIR v. San Roque Power Corporation (G.R. No. 187485)

FACTS:

San Roque is a domestic corporation duly organized and existing under and
by virtue of the laws of the Philippines. It was incorporated in October 1997 to
design, construct, erect, assemble, own, commission and operate power-
generating plants and related facilities pursuant to and under contract with the
Government of the Republic of the Philippines.

As a seller of services, San Roque is duly registered with the BIR with
TIN/VAT No. 005-017-501. It is likewise registered with the Board of
Investments ("BOI") on a preferred pioneer status, to engage in the design,
construction, erection, assembly, as well as to own, commission, and operate
electric power-generating plants and related activities.

On October 11, 1997, San Roque entered into a Power Purchase Agreement
("PPA") with the National Power Corporation to develop hydro-potential of the
Lower Agno River and generate additional power and energy for the Luzon
Power Grid, by building the San Roque Multi-Purpose Project located in San
Manuel, Pangasinan.

On the construction and development of the San Roque Multi- Purpose Project
which comprises of the dam, spillway and power plant, San Roque allegedly
incurred, excess input VAT in the amount of P559,709,337.54 for taxable year
2001 which it declared in its Quarterly VAT Returns filed for the same year. San
Roque duly filed with the BIR separate claims for refund, in the total amount of
P559,709,337.54, representing unutilized input taxes as declared in its VAT
returns for taxable year 2001.

On March 28, 2003, San Roque filed with the BIR on even date, separate
amended claims for refund in the aggregate amount of P560,200,283.14.

CIR’s inaction on the subject claims led to the filing by San Roque of the
Petition for Review with the Court of Tax Appeals in Division on April 10, 2003.

ISSUE:

Rule on the petition filed by San Roque Power Corporation.

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HELD (Dry Run):

The petition filed San Roque Power Corporation must fail.

The law provides that upon the filing of the application for the issuance of a
tax credit certificate or refund of creditable input tax, the Commissioner shall
grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete
documents in support of the application. In case of full or partial denial of the
claim for tax refund or tax credit, or the failure on the part of the Commissioner to
act on the application within the said period, the taxpayer may, within thirty (30)
days from the receipt of the decision denying the claim or after the expiration of
the one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals. The 120+30-day period is mandatory and
jurisdictional.

In the present case, San Roque failed to wait for the lapse of the requisite
120-day period or the denial of its claim by the CIR before elevating the case to
the CTA. As its judicial claim was filed in contravention with the 120+ 30-day
period, the CTA did not acquire jurisdiction over the case.

FURTHER DISCUSSIONS FOR THE SAN ROQUE CASE:

For ready reference, the following are the provisions of the Tax Code
applicable to the present cases:

Section 105:

Persons Liable. — Any person who, in the course of trade

or business, sells, barters, exchanges, leases goods or
properties, renders services, and any person who imports
goods shall be subject to the value-added tax (VAT)
imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of

tax may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services. This rule
shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of
Republic Act No. 7716.

Section 110(B):
 209

Sec. 110. Tax Credits. —

(B) Excess Output or Input Tax. — If at the end of any taxable

quarter the output tax exceeds the input tax, the excess shall
be paid by the VAT-registered person. If the input tax
exceeds the output tax, the excess shall be carried over
to the succeeding quarter or quarters: [Provided, That the
input tax inclusive of input VAT carried over from the previous
quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT: Provided, however,
That any input tax attributable to zero-rated sales by a
VAT-registered person may at his option be refunded or
credited against other internal revenue taxes, subject to
the provisions of Section 112.

Section 112:

Sec. 112. Refunds or Tax Credits of Input Tax. —

(A) Zero-Rated or Effectively Zero-Rated Sales.— Any VAT-

registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under
Section 106(A)(2) (a)(1), (2) and (B) and Section 108(B)(1) and
(2), the acceptable foreign currency exchange proceeds thereof
had been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of
goods or properties or services, and the amount of creditable
input tax due or paid cannot be directly and entirely attributed
to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.

(B) Capital Goods.- A VAT — registered person may apply for

the issuance of a tax credit certificate or refund of input taxes
paid on capital goods imported or locally purchased, to the
 210

extent that such input taxes have not been applied against
output taxes. The application may be made only within two (2)
years after the close of the taxable quarter when the
importation or purchase was made.

(C) Cancellation of VAT Registration. — A person whose

registration has been cancelled due to retirement from or
cessation of business, or due to changes in or cessation of
status under Section 106(C) of this Code may, within two (2)
years from the date of cancellation, apply for the issuance of a
tax credit certificate for any unused input tax which may be
used in payment of his other internal revenue taxes

(D) Period within which Refund or Tax Credit of Input Taxes

shall be Made. — In proper cases, the Commissioner shall
grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from
the date of submission of complete documents in support
of the application filed in accordance with Subsection (A) and
(B) hereof.

In case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal
the decision or the unacted claim with the Court of Tax
Appeals.

(E) Manner of Giving Refund. — Refunds shall be made upon

warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of being
countersigned by the Chairman, Commission on Audit, the
provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, that refunds under this paragraph
shall be subject to post audit by the Commission on Audit.

Section 229:

Recovery of Tax Erroneously or Illegally Collected. — No suit or

proceeding shall be maintained in any court for the recovery of
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any national internal revenue tax hereafter alleged to have

been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, or of
any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the

expiration of two (2) years from the date of payment of the
tax or penalty regardless of any supervening cause that may
arise after payment: Provided, however, That the Commissioner
may, even without a written claim therefor, refund or credit any
tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously
paid.

On 10 April 2003, a mere 13 days after it filed its amended administrative

claim with the Commissioner on 28 March 2003, San Roque filed a Petition for
Review with the CTA. From this we gather two crucial facts: first, San Roque did
not wait for the 120-day period to lapse before filing its judicial claim; second,
San Roque filed its judicial claim more than four (4) years before the Atlas
doctrine, which was promulgated by the Court on 8 June 2007.

Clearly, San Roque failed to comply with the 120-day waiting period, the time
expressly given by law to the Commissioner to decide whether to grant or deny
San Roque’s application for tax refund or credit. It is indisputable that
compliance with the 120-day waiting period is mandatory and jurisdictional.
The waiting period, originally fixed at 60 days only, was part of the provisions of
the first VAT law, Executive Order No. 273, which took effect on 1 January 1988.
The waiting period was extended to 120 days effective 1 January 1998 under
RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in
our statute books for more than fifteen (15) years before San Roque filed
its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory

provision of law. It violates the doctrine of exhaustion of administrative remedies
and renders the petition premature and thus without a cause of action, with the
effect that the CTA does not acquire jurisdiction over the taxpayer’s petition.
 212

San Roque’s failure to comply with the 120-day mandatory period renders
its petition for review with the CTA void. Article 5 of the Civil Code provides,
"Acts executed against provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity." There is no law authorizing
the petition’s validity.

San Roque cannot also claim being misled, misguided or confused by the
Atlas doctrine because San Roque filed its petition for review with the CTA
more than four years before Atlas was promulgated. The Atlas doctrine did
not exist at the time San Roque failed to comply with the 120- day period. Thus,
San Roque cannot invoke the Atlas doctrine as an excuse for its failure to wait
for the 120-day period to lapse. In any event, the Atlas doctrine merely stated
that the two-year prescriptive period should be counted from the date of payment
of the output VAT, not from the close of the taxable quarter when the sales
involving the input VAT were made. The Atlas doctrine does not interpret,
expressly or impliedly, the 120+30 day periods.

In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which
was the law cited by the Court in Atlas as the applicable provision of the law did
not yet provide for the 30-day period for the taxpayer to appeal to the CTA from
the decision or inaction of the Commissioner. Thus, the Atlas doctrine cannot
be invoked by anyone to disregard compliance with the 30-day
mandatory and jurisdictional period. Also, the difference between the Atlas
doctrine on one hand, and the Mirant doctrine on the other hand, is a mere 20
days. The Atlas doctrine counts the two-year prescriptive period from the date of
payment of the output VAT, which means within 20 days after the close of the
taxable quarter. The output VAT at that time must be paid at the time of filing of
the quarterly tax returns, which were to be filed "within 20 days following the
end of each quarter."

At the time San Roque filed its petition for review with the CTA, the 120+30
day mandatory periods were already in the law. Section 112(C) expressly grants
the Commissioner 120 days within which to decide the taxpayer’s claim. The
law is clear, plain, and unequivocal: "the Commissioner shall grant a refund or
issue the tax credit certificate for creditable input taxes within one hundred
twenty (120) days from the date of submission of complete documents."
Following the verba legis doctrine, this law must be applied exactly as worded
since it is clear, plain, and unequivocal.

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal
to the CTA the decision or inaction of the Commissioner, thus:
 213

x x x the taxpayer affected may, within thirty (30) days

from the receipt of the decision denying the claim or
after the expiration of the one hundred twenty day-
period, appeal the decision or the unacted claim with the Court
of Tax Appeals.

SECOND CASE: Taganito Mining Corporation v. CIR (G.R. No. 196113)

The Facts:

Petitioner, Taganito Mining Corporation, is a corporation duly organized and

existing under and by virtue of the laws of the Philippines.

Taganito is a VAT-registered entity. Likewise, Taganito is registered with the

Board of Investments (BOI) as an exporter of beneficiated nickel silicate and
chromite ores.

Taganito filed all its Monthly VAT Declarations and Quarterly Vat Returns for
the period January 1, 2005 to December 31, 2005.

On November 14, 2006, Taganito filed with the CIR, a letter dated November
13, 2006 claiming a tax credit/refund of its supposed input VAT amounting to
P8,365,664.38 for the period covering January 1, 2005 to December 31, 2005.

As the statutory period within which to file a claim for refund for said input
VAT is about to lapse without action on the part of the CIR, Taganito filed a
petition for review with the CTA on February 14, 2007.

ISSUE:

Rule on the petition filed by Taganito Mining Corporation.

HELD (Dry Run):

The petition filed Taganito Mining Corporation will prosper. Although a

taxpayer must wait for the decision of the Commissioner of Internal Revenue
within 120 days from the filing of the application for the issuance of a tax credit
certificate or refund of creditable input tax or until such period lapsed without
any action on the part of the latter before he could filed his judicial claim before
the CTA, Taganito cannot be faulted for filing his claim prematurely on February
14, 2007 or less than 120 days since he filed his application on November 14,
 214

2006, because he relied on an erroneous interpretation by the Commissioner on

a difficult question of law.

Jurisprudence dictates that where the Commissioner, through a general

interpretative rule, misleads all taxpayers into filing prematurely judicial claims
with the CTA, he cannot be allowed to later on question the CTA’s assumption of
jurisdiction over such claim since equitable estoppel has set in as expressly
authorized under Section 246 of the Tax Code.

FURTHER DISCUSSIONS FOR THE TAGANITO CASE:

Like San Roque, Taganito also filed its petition for review with the CTA
without waiting for the 120-day period to lapse. Taganito filed a Petition for
Review on 14 February 2007 with the CTA.

However, Taganito can invoke BIR Ruling No. DA-489-03 dated 10 December
2003, which expressly ruled that the "taxpayer-claimant need not wait for
the lapse of the 120-day period before it could seek judicial relief with
the CTA by way of Petition for Review." Taganito filed its judicial claim after
the issuance of BIR Ruling No. DA-489-03 but before the adoption of the Aichi
doctrine. Thus, Taganito is deemed to have filed its judicial claim with the CTA
on time.

BIR Ruling No. DA-489-03 dated 10 December 2003

BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel
under Section 246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states
that the "taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA by way of Petition
for Review." Prior to this ruling, the BIR held, as shown by its position in the
Court of Appeals, that the expiration of the 120-day period is mandatory and
jurisdictional before a judicial claim can be filed.

There is no dispute that the 120-day period is mandatory and jurisdictional,

and that the CTA does not acquire jurisdiction over a judicial claim that is filed
before the expiration of the 120-day period. There are, however, two exceptions
to this rule. The first exception is if the Commissioner, through a specific ruling,
misleads a particular taxpayer to prematurely file a judicial claim with the CTA.
Such specific ruling is applicable only to such particular taxpayer. The second
exception is where the Commissioner, through a general interpretative rule
issued under Section 4 of the Tax Code, misleads all taxpayers into filing
prematurely judicial claims with the CTA. In these cases, the Commissioner
 215

cannot be allowed to later on question the CTA’s assumption of jurisdiction over

such claim since equitable estoppel has set in as expressly authorized under
Section 246 of the Tax Code.

Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly

grants to the Commissioner the power to interpret tax laws, thus:

Sec. 4. Power of the Commissioner To Interpret Tax Laws

and To Decide Tax Cases. — The power to interpret the
provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal

revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.

Since the Commissioner has exclusive and original jurisdiction to

interpret tax laws, taxpayers acting in good faith should not be made to suffer
for adhering to general interpretative rules of the Commissioner interpreting tax
laws, should such interpretation later turn out to be erroneous and be reversed
by the Commissioner or this Court. Indeed, Section 246 of the Tax Code
expressly provides that a reversal of a BIR regulation or ruling cannot adversely
prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior
to its reversal. Section 246 provides as follows:

Sec. 246. Non-Retroactivity of Rulings. — Any revocation,

modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or any
of the rulings or circulars promulgated by the Commissioner
shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to
the taxpayers, except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material

facts from his return or any document required of him by the
Bureau of Internal Revenue;
 216

(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

(c) Where the taxpayer acted in bad faith.

Thus, a general interpretative rule issued by the Commissioner may be relied

upon by taxpayers from the time the rule is issued up to its reversal by the
Commissioner or this Court. Section 246 is not limited to a reversal only by the
Commissioner because this Section expressly states, "Any revocation,
modification or reversal" without specifying who made the revocation,
modification or reversal. Hence, a reversal by this Court is covered under Section
246.

Taxpayers should not be prejudiced by an erroneous interpretation by the

Commissioner, particularly on a difficult question of law. The abandonment of
the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult question of
law. The abandonment of the Atlas doctrine did not result in Atlas, or other
taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This Court
is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule
issued by the Commissioner, like the reversal of a specific BIR ruling under
Section 246, should also apply prospectively.

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general
interpretative rule applicable to all taxpayers or a specific ruling applicable only
to a particular taxpayer.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all
taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on
10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010,
where this Court held that the 120+30 day periods are mandatory and
jurisdictional.

However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four
reasons: first, it is admittedly an erroneous interpretation of the law; second,
prior to its issuance, the BIR held that the 120-day period was mandatory and
jurisdictional, which is the correct interpretation of the law; third, prior to its
issuance, no taxpayer can claim that it was misled by the BIR into filing a
 217

judicial claim prematurely; and fourth, a claim for tax refund or credit, like a
claim for tax exemption, is strictly construed against the taxpayer.

San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because
it filed its judicial claim prematurely on 10 April 2003, before the issuance of
BIR Ruling No. DA-489-03 on 10 December 2003. To repeat, San Roque cannot
claim that it was misled by the BIR into filing its judicial claim prematurely
because BIR Ruling No. DA-489-03 was issued only after San Roque filed its
judicial claim. At the time San Roque filed its judicial claim, the law as applied
and administered by the BIR was that the Commissioner had 120 days to act on
administrative claims. This was in fact the position of the BIR prior to the
issuance of BIR Ruling No. DA-489-03. Indeed, San Roque never claimed the
benefit of BIR Ruling No. DA-489-03 or RMC 49-03, whether in this Court,
the CTA, or before the Commissioner.

Philex’s situation is not a case of premature filing of its judicial claim but of
late filing, indeed very late filing. BIR Ruling No. DA-489-03 allowed premature
filing of a judicial claim, which means non-exhaustion of the 120-day period for
the Commissioner to act on an administrative claim. Philex cannot claim the
benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim
prematurely but filed it long after the lapse of the 30-day period following the
expiration of the 120-day period. In fact, Philex filed its judicial claim 426
days after the lapse of the 30-day period.

Taganito, however, filed its judicial claim with the CTA on 14 February 2007,
after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly,
Taganito can claim that in filing its judicial claim prematurely without waiting for
the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03. Thus,
Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the
filing of its judicial claim from the vice of prematurity.

THIRD CASE: Philex Mining Corporation v. CIR (G.R. No. 197156)

The Facts:

Philex is a corporation duly organized and existing under the laws of the
Republic of the Philippines, which is principally engaged in the mining business.
 218

On October 21, 2005, Philex filed its Original VAT Return for the third quarter
of taxable year 2005 and Amended VAT Return for the same quarter on
December 1, 2005.

On March 20, 2006, Philex filed its claim for refund/tax credit of the amount
of P23,956,732.44 with the One Stop Shop Center of the Department of Finance.
However, due to the CIR’s failure to act on such claim, on October 17, 2007,
pursuant to Sections 112 and 229 of the NIRC of 1997, as amended, Philex filed
a Petition for Review.

ISSUE:

Rule on the petition filed by Philex.

HELD (Dry Run):

The petition filed by Philex must fail.

The law provides that upon the filing of the application for the issuance of a
tax credit certificate or refund of creditable input tax, the Commissioner shall
grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete
documents in support of the application. In case of full or partial denial of the
claim for tax refund or tax credit, or the failure on the part of the Commissioner to
act on the application within the said period, the taxpayer may, within thirty (30)
days from the receipt of the decision denying the claim or after the expiration of
the one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals. The 120+30-day period is mandatory and
jurisdictional.

In the present case, Philex failed to file his judicial claim with the CTA within
30 days after the lapse of the 120-day period. Since he filed his administrative
claim on March 20, 2006 and the Commissioner failed to act on or before July
17, 2006, Philex had until 17 August 2006, the last day of the 30-day period, to
file its judicial claim. Philex filed its Petition for Review with the CTA only on
October 17, 2007. Thus, Philex was late by one year and 61 days in filing its
judicial claim.

FURTHER DISCUSSIONS:

Philex filed on October 21, 2005 its original VAT Return for the third quarter of
taxable year 2005. The close of the third taxable quarter in 2005 is September
 219

30, 2005, which is the reckoning date in computing the two-year prescriptive
period under Section 112(A).

Philex filed on March 20, 2006 its administrative claim for refund or credit;

Philex filed on October 17, 2007 its Petition for Review with the CTA.

Philex timely filed its administrative claim on 20 March 2006, within the two-
year prescriptive period. Even if the two-year prescriptive period is computed
from the date of payment of the output VAT under Section 229, Philex still filed
its administrative claim on time. Thus, the Atlas doctrine is immaterial in
this case. The Commissioner had until 17 July 2006, the last day of the 120-
day period, to decide Philex’s claim.

Since the Commissioner did not act on Philex’s claim on or before 17 July
2006, Philex had until 17 August 2006, the last day of the 30-day period, to file
its judicial claim.

The CTA En Banc held that August 17, 2006 was indeed the last day
for Philex to file its judicial claim. However, Philex filed its Petition for
Review with the CTA only on October 17, 2007, or four hundred twenty-six (426)
days after the last day of filing. In short, Philex was late by one year and 61
days in filing its judicial claim. As the CTA EB correctly found:

Evidently, the Petition for Review in C.T.A. Case No.

7687 was filed 426 days late. Thus, the Petition for Review
in C.T.A. Case No. 7687 should have been dismissed on the
ground that the Petition for Review was filed way beyond the
30-day prescribed period; thus, no jurisdiction was acquired by
the CTA Division.

Unlike San Roque and Taganito, Philex’s case is not one of premature filing
but of late filing. In any event, whether governed by jurisprudence before,
during, or after the Atlas case, Philex’s judicial claim will have to be
rejected because of late filing. Whether the two-year prescriptive period is
counted from the date of payment of the output VAT following the Atlas doctrine,
or from the close of the taxable quarter when the sales attributable to the input
VAT were made following the Mirant and Aichi doctrines, Philex’s judicial claim
was indisputably filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim.
The inaction of the Commissioner on Philex’s claim during the 120-day period
 220

is, by express provision of law, "deemed a denial" of Philex’s claim. Philex had
30 days from the expiration of the 120-day period to file its judicial claim with
the CTA. Philex’s failure to do so rendered the "deemed a denial" decision of the
Commissioner final and inappealable. The right to appeal to the CTA from a
decision or "deemed a denial" decision of the Commissioner is merely a statutory
privilege, not a constitutional right. The exercise of such statutory privilege
requires strict compliance with the conditions attached by the statute for its
exercise. Philex failed to comply with the statutory conditions and must thus
bear the consequences.

FURTHER DISCUSSIONS FOR THE THREE CASES:

Prescriptive Periods under Section 112(A) and (C)

There are three compelling reasons why the 30-day period need not
necessarily fall within the two-year prescriptive period, as long as the
administrative claim is filed within the two-year prescriptive period.

First, Section 112(A) clearly, plainly, and unequivocally provides that

the taxpayer "may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of the creditable input tax due or paid to
such sales." In short, the law states that the taxpayer may apply with the
Commissioner for a refund or credit "within two (2) years," which
means at anytime within two years. Thus, the application for refund or
credit may be filed by the taxpayer with the Commissioner on the last day
of the two-year prescriptive period and it will still strictly comply with the
law. The two-year prescriptive period is a grace period in favor of the
taxpayer and he can avail of the full period before his right to apply for a
tax refund or credit is barred by prescription.

Second, Section 112(C) provides that the Commissioner shall decide the
application for refund or credit "within one hundred twenty (120) days
from the date of submission of complete documents in support of the
application filed in accordance with Subsection (A)." The reference in
Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the
application in Section 112(A) is the administrative claim that the
Commissioner must decide within the 120-day period. In short, the two-
year prescriptive period in Section 112(A) refers to the period within which
the taxpayer can file an administrative claim for tax refund or credit.
Stated otherwise, the two-year prescriptive period does not refer to
 221

the filing of the judicial claim with the CTA but to the filing of the
administrative claim with the Commissioner. As held in Aichi, the
"phrase ‘within two years apply for the issuance of a tax credit or refund’
refers to applications for refund/credit with the CIR and not to
appeals made to the CTA."

Third, if the 30-day period, or any part of it, is required to fall within
the two-year prescriptive period (equivalent to 730 days), then the
taxpayer must file his administrative claim for refund or credit within the
first 610 days of the two-year prescriptive period. Otherwise, the filing
of the administrative claim beyond the first 610 days will result in
the appeal to the CTA being filed beyond the two-year prescriptive
period.

Section 112(A) and (C) must be interpreted according to its clear, plain, and
unequivocal language. The taxpayer can file his administrative claim for refund
or credit at anytime within the two-year prescriptive period. If he files his claim
on the last day of the two-year prescriptive period, his claim is still filed on time.
The Commissioner will have 120 days from such filing to decide the claim. If the
Commissioner decides the claim on the 120th day, or does not decide it on that
day, the taxpayer still has 30 days to file his judicial claim with the CTA.

"Excess" Input VAT and "Excessively" Collected Tax

The input VAT is not "excessively" collected as understood under Section 229
because at the time the input VAT is collected the amount paid is correct
and proper. The input VAT is a tax liability of, and legally paid by, a VAT-
registered seller of goods, properties or services used as input by another VAT-
registered person in the sale of his own goods, properties, or services. This tax
liability is true even if the seller passes on the input VAT to the buyer as part of
the purchase price. The second VAT-registered person, who is not legally liable
for the input VAT, is the one who applies the input VAT as credit for his own
output VAT. If the input VAT is in fact "excessively" collected as understood
under Section 229, then it is the first VAT-registered person - the taxpayer who is
legally liable and who is deemed to have legally paid for the input VAT - who can
ask for a tax refund or credit under Section 229 as an ordinary refund or credit
outside of the VAT System. In such event, the second VAT-registered taxpayer
will have no input VAT to offset against his own output VAT.

In a claim for refund or credit of "excess" input VAT under Section 110(B) and
Section 112(A), the input VAT is not "excessively" collected as understood under
Section 229. At the time of payment of the input VAT the amount paid is the
 222

correct and proper amount. Under the VAT System, there is no claim or issue that
the input VAT is "excessively" collected, that is, that the input VAT paid is more
than what is legally due. The person legally liable for the input VAT cannot claim
that he overpaid the input VAT by the mere existence of an "excess" input VAT.
The term "excess" input VAT simply means that the input VAT available as credit
exceeds the output VAT, not that the input VAT is excessively collected because it
is more than what is legally due. Thus, the taxpayer who legally paid the input
VAT cannot claim for refund or credit of the input VAT as "excessively" collected
under Section 229.

Under Section 229, the prescriptive period for filing a judicial claim for refund
is two years from the date of payment of the tax "erroneously, illegally,
excessively or in any manner wrongfully collected." The prescriptive period is
reckoned from the date the person liable for the tax pays the tax. Thus, if the
input VAT is in fact "excessively" collected, that is, the person liable for the tax
actually pays more than what is legally due, the taxpayer must file a judicial
claim for refund within two years from his date of payment. Only the person
legally liable to pay the tax can file the judicial claim for refund. The
person to whom the tax is passed on as part of the purchase price has
no personality to file the judicial claim under Section 229.

Under Section 110(B) and Section 112(A), the prescriptive period for filing a
judicial claim for "excess" input VAT is two years from the close of the taxable
quarter when the sale was made by the person legally liable to pay the output
VAT. This prescriptive period has no relation to the date of payment of the
"excess" input VAT. The "excess" input VAT may have been paid for more than
two years but this does not bar the filing of a judicial claim for "excess" VAT
under Section 112(A), which has a different reckoning period from Section 229.
Moreover, the person claiming the refund or credit of the input VAT is not the
person who legally paid the input VAT. Such person seeking the VAT refund or
credit does not claim that the input VAT was "excessively" collected from him, or
that he paid an input VAT that is more than what is legally due. He is not the
taxpayer who legally paid the input VAT.

As its name implies, the Value-Added Tax system is a tax on the value added
by the taxpayer in the chain of transactions. For simplicity and efficiency in tax
collection, the VAT is imposed not just on the value added by the taxpayer, but
on the entire selling price of his goods, properties or services. However, the
taxpayer is allowed a refund or credit on the VAT previously paid by those who
sold him the inputs for his goods, properties, or services. The net effect is that the
 223

taxpayer pays the VAT only on the value that he adds to the goods, properties,
or services that he actually sells.

Under Section 110(B), a taxpayer can apply his input VAT only against his
output VAT. The only exception is when the taxpayer is expressly "zero-rated or
effectively zero-rated" under the law, like companies generating power through
renewable sources of energy. Thus, a non zero-rated VAT-registered taxpayer
who has no output VAT because he has no sales cannot claim a tax refund or
credit of his unused input VAT under the VAT System. Even if the taxpayer has
sales but his input VAT exceeds his output VAT, he cannot seek a tax refund or
credit of his "excess" input VAT under the VAT System. He can only carry-over
and apply his "excess" input VAT against his future output VAT. If such
"excess" input VAT is an "excessively" collected tax, the taxpayer should be able
to seek a refund or credit for such "excess" input VAT whether or not he has
output VAT. The VAT System does not allow such refund or credit. Such "excess"
input VAT is not an "excessively" collected tax under Section 229. The "excess"
input VAT is a correctly and properly collected tax. However, such "excess" input
VAT can be applied against the output VAT because the VAT is a tax imposed
only on the value added by the taxpayer. If the input VAT is in fact "excessively"
collected under Section 229, then it is the person legally liable to pay the input
VAT, not the person to whom the tax was passed on as part of the purchase
price and claiming credit for the input VAT under the VAT System, who can file
the judicial claim under Section 229.

Any suggestion that the "excess" input VAT under the VAT System is an
"excessively" collected tax under Section 229 may lead taxpayers to file a claim
for refund or credit for such "excess" input VAT under Section 229 as an ordinary
tax refund or credit outside of the VAT System. Under Section 229, mere
payment of a tax beyond what is legally due can be claimed as a refund or
credit. There is no requirement under Section 229 for an output VAT or
subsequent sale of goods, properties, or services using materials subject to input
VAT.

From the plain text of Section 229, it is clear that what can be refunded or
credited is a tax that is "erroneously, illegally, excessively or in any manner
wrongfully collected." In short, there must be a wrongful payment because
what is paid, or part of it, is not legally due. As the Court held in Mirant, Section
229 should "apply only to instances of erroneous payment or illegal
collection of internal revenue taxes." Erroneous or wrongful payment
includes excessive payment because they all refer to payment of taxes not
legally due. Under the VAT System, there is no claim or issue that the "excess"
 224

input VAT is "excessively or in any manner wrongfully collected." In fact, if the

"excess" input VAT is an "excessively" collected tax under Section 229, then the
taxpayer claiming to apply such "excessively" collected input VAT to offset his
output VAT may have no legal basis to make such offsetting.

Effectivity and Scope of the Atlas, Mirant and Aichi Doctrines

The Atlas doctrine, which held that claims for refund or credit of input VAT
must comply with the two-year prescriptive period under Section 229, should be
effective only from its promulgation on 8 June 2007 until its
abandonment on 12 September 2008 in Mirant. The Atlas doctrine was
limited to the reckoning of the two-year prescriptive period from the date of
payment of the output VAT. Prior to the Atlas doctrine, the two-year prescriptive
period for claiming refund or credit of input VAT should be governed by Section
112(A) following the verba legis rule. The Mirant ruling, which abandoned the
Atlas doctrine, adopted the verba legis rule, thus applying Section 112(A) in
computing the two-year prescriptive period in claiming refund or credit of input
VAT.

The Atlas doctrine has no relevance to the 120+30 day periods under Section
112(C) because the application of the 120+30 day periods was not in issue in
Atlas. The application of the 120+30 day periods was first raised in Aichi, which
adopted the verba legis rule in holding that the 120+30 day periods are
mandatory and jurisdictional. The language of Section 112(C) is plain, clear, and
unambiguous. When Section 112(C) states that "the Commissioner shall grant a
refund or issue the tax credit within one hundred twenty (120) days from the
date of submission of complete documents," the law clearly gives the
Commissioner 120 days within which to decide the taxpayer’s claim. Resort to
the courts prior to the expiration of the 120-day period is a patent violation of the
doctrine of exhaustion of administrative remedies, a ground for dismissing the
judicial suit due to prematurity. Philippine jurisprudence is awash with cases
affirming and reiterating the doctrine of exhaustion of administrative remedies.
Such doctrine is basic and elementary.

When Section 112(C) states that "the taxpayer affected may, within thirty (30)
days from receipt of the decision denying the claim or after the expiration of the
one hundred twenty-day period, appeal the decision or the unacted claim with
the Court of Tax Appeals," the law does not make the 120+30 day periods
optional just because the law uses the word "may." The word "may" simply
means that the taxpayer may or may not appeal the decision of the
Commissioner within 30 days from receipt of the decision, or within 30 days
from the expiration of the 120-day period. Certainly, by no stretch of the
 225

imagination can the word "may" be construed as making the 120+30 day
periods optional, allowing the taxpayer to file a judicial claim one day after filing
the administrative claim with the Commissioner.

The old rule that the taxpayer may file the judicial claim, without waiting for
the Commissioner’s decision if the two-year prescriptive period is about to expire,
cannot apply because that rule was adopted before the enactment of the 30-day
period. The 30-day period was adopted precisely to do away with the old
rule, so that under the VAT System the taxpayer will always have 30
days to file the judicial claim even if the Commissioner acts only on the
120th day, or does not act at all during the 120-day period. With the 30-
day period always available to the taxpayer, the taxpayer can no longer file a
judicial claim for refund or credit of input VAT without waiting for the
Commissioner to decide until the expiration of the 120-day period.

To repeat, a claim for tax refund or credit, like a claim for tax exemption, is
construed strictly against the taxpayer. One of the conditions for a judicial claim
of refund or credit under the VAT System is compliance with the 120+30 day
mandatory and jurisdictional periods. Thus, strict compliance with the 120+30
day periods is necessary for such a claim to prosper, whether before, during, or
after the effectivity of the Atlas doctrine, except for the period from the issuance
of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the
Aichi doctrine was adopted, which again reinstated the 120+30 day periods as
mandatory and jurisdictional.

WHEREFORE, the Court hereby (1) GRANTS the petition of the

Commissioner of Internal Revenue in G.R. No. 187485 to DENY the
P483,797,599.65 tax refund or credit claim of San Roque Power Corporation; (2)
GRANTS the petition of Taganito Mining Corporation in G.R. No. 196113 for a tax
refund or credit of P8,365,664.38; and (3) DENIES the petition of Philex Mining
Corporation in G.R. No. 197156 for a tax refund or credit of P23,956,732.44.

PHILIPPINE AIRLINES, INC. V. CIR

July 1, 2013/ Perlas-Bernabe, J.

 Excise Tax
 PAL’s Exemption from Indirect Taxes

FACTS:
 226

For the period July 24 to 28, 2004, Caltex sold 804,370 liters of imported Jet
A-1 fuel to PAL for the latter's domestic operations. Consequently, on July 26, 27,
28 and 29, 2004, Caltex electronically filed with the Bureau of Internal Revenue
(BIR) its Excise Tax Returns for Petroleum Products, declaring the amounts of
P1,232,798.80, P686,767.10, P623,422.90 and P433,904.10, respectively, or a
total amount of P2,975,892.90, as excise taxes due thereon.

On August 3, 2004, PAL received from Caltex an Aviation Billing Invoice for
the purchased aviation fuel in the amount of US$313,949.54, reflecting the
amount of US$52,669.33 as the related excise taxes on the transaction.

On October 29, 2004, PAL, through a letter-request dated October 15, 2004
addressed to respondent Commissioner of Internal Revenue (CIR), sought a
refund of the excise taxes passed on to it by Caltex. It hinged its tax refund claim
on its operating franchise, i.e., Presidential Decree No. 1590 issued on June 11,
1978 (PAL’s franchise), which conferred upon it certain tax exemption privileges
on its purchase and/or importation of aviation gas, fuel and oil, including those
which are passed on to it by the seller and/or importer thereof. Further, PAL
asserted that it had the legal personality to file the aforesaid tax refund claim.

Due to the CIR’s inaction, PAL filed a Petition for Review with the CTA on July
25, 2006. In its Answer, the CIR averred that since the excise taxes were paid
by Caltex, PAL had no cause of action.

ISSUE:

Will the tax refund claim of PAL of the excise taxes passed on to it by Caltex
prosper?

HELD (Dry Run):

Yes, the tax refund claim of PAL will prosper. PAL’s franchise grants it an
exemption from both direct and indirect taxes on its purchase of petroleum
products. PAL’s payment of either the basic corporate income tax or franchise
tax, whichever is lower, shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges, except only real property tax.
The phrase “in lieu of all other taxes” includes but is not limited to taxes that are
“directly due from or imposable upon the purchaser or the seller, producer,
manufacturer, or importer of said petroleum products but are billed or passed on
the grantee either as part of the price or cost thereof or by mutual agreement or
other arrangement.”
 227

FURTHER DISCUSSIONS:

PAL’s legal personality to file a claim for refund of excise taxes

The CIR argues that PAL has no personality to file the subject tax refund
claim because it is not the statutory taxpayer. As basis, it relies on the Silkair
ruling which enunciates that the proper party to question, or to seek a refund of
an indirect tax, is the statutory taxpayer, or the person on whom the tax is
imposed by law and who paid the same, even if the burden to pay such was
shifted to another.

PAL counters that the doctrine laid down in Silkair is inapplicable, asserting
that it has the legal personality to file the subject tax refund claim on account of
its tax exemption privileges under its legislative franchise which covers both
direct and indirect taxes. In support thereof, it cites the case of Maceda v.
Macaraig, Jr.

The Court agrees with PAL.

Under Section 129 of the National Internal Revenue Code (NIRC), as

amended, excise taxes are imposed on two (2) kinds of goods, namely: (a) goods
manufactured or produced in the Philippines for domestic sales or consumption
or for any other disposition; and (b) things imported.

With respect to the first kind of goods, Section 130 of the NIRC states that,
unless otherwise specifically allowed, the taxpayer obligated to file the return
and pay the excise taxes due thereon is the manufacturer/producer. On the
other hand, with respect to the second kind of goods, Section 131 of the NIRC
states that the taxpayer obligated to file the return and pay the excise taxes due
thereon is the owner or importer, unless the imported articles are exempt from
excise taxes and the person found to be in possession of the same is other than
those legally entitled to such tax exemption.

While the NIRC mandates the foregoing persons to pay the applicable excise
taxes directly to the government, they may, however, shift the economic burden
of such payments to someone else – usually the purchaser of the goods – since
excise taxes are considered as a kind of indirect tax. Jurisprudence states that
indirect taxes are those which are demanded in the first instance from one
person with the expectation and intention that he can shift the economic burden
to someone else. In this regard, the statutory taxpayer can transfer to its
customers the value of the excise taxes it paid or would be liable to pay to the
government by treating it as part of the cost of the goods and tacking it on to the
selling price. Notably, this shifting process, otherwise known as “passing on,” is
largely a contractual affair between the parties. Meaning, even if the purchaser
 228

effectively pays the value of the tax, the manufacturer/producer (in case of
goods manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition) or the owner or importer (in case of
imported goods) are still regarded as the statutory taxpayers under the law. To
this end, the purchaser does not really pay the tax; rather, he only pays the
seller more for the goods because of the latter’s obligation to the government as
the statutory taxpayer.

In this relation, Section 204 (c) of the NIRC states that it is the statutory
taxpayer which has the legal personality to file a claim for refund. Accordingly,
in cases involving excise tax exemptions on petroleum products under Section
135 of the NIRC, the Court has consistently held that it is the statutory taxpayer
who is entitled to claim a tax refund based thereon and not the party who merely
bears its economic burden. For instance, in the Silkair case, Silkair (Singapore)
Pte. Ltd. (Silkair Singapore) filed a claim for tax refund based on Section 135(b)
of the NIRC as well as Article 4(2) of the Air Transport Agreement between the
Government of the Republic of the Philippines and the Government of the
Republic of Singapore. The Court denied Silkair Singapore’s refund claim since
the tax exemptions under both provisions were conferred on the statutory
taxpayer, and not the party who merely bears its economic burden. As such, it
was the Petron Corporation (the statutory taxpayer in that case) which was
entitled to invoke the applicable tax exemptions and not Silkair Singapore which
merely shouldered the economic burden of the tax. As explained in Silkair:

The proper party to question, or seek a refund of, an indirect

tax is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the
burden thereof to another. Section 130(A)(2) of the NIRC
provides that “[u]nless otherwise specifically allowed, the
return shall be filed and the excise tax paid by the
manufacturer or producer before removal of domestic products
from place of production.” Thus, Petron Corporation, not Silkair,
is the statutory taxpayer which is entitled to claim a refund
based on Section 135 of the NIRC of 1997 and Article 4(2) of
the Air Transport Agreement between RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden

of the tax, the additional amount billed to Silkair for jet fuel is
not a tax but part of the price which Silkair had to pay as a
purchaser.

However, the abovementioned rule should not apply to instances where the
law clearly grants the party, to which the economic burden of the tax is shifted,
 229

an exemption from both direct and indirect taxes. In which case, the latter must
be allowed to claim a tax refund even if it is not considered as the statutory
taxpayer under the law. Precisely, this is the peculiar circumstance which
differentiates the Maceda case from Silkair.

To elucidate, in Maceda, the Court upheld the National Power Corporation’s

(NPC) claim for a tax refund since its own charter specifically granted it an
exemption from both direct and indirect taxes, viz:

The Court rules and declares that 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. Because, however, the
NPC has been exempted from both direct and indirect taxation,
the NPC must be held exempted from absorbing the economic
burden of indirect taxation. 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
they could 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.
(Emphasis and underscoring supplied)

Notably, the Court even discussed the Maceda ruling in Silkair, highlighting
the relevance of the exemptions in NPC’s charter to its claim for tax refund:

Silkair nevertheless argues that it is exempt from indirect taxes

because the Air Transport Agreement between RP and Singapore
grants exemption "from the same customs duties, inspection fees
and other duties or taxes imposed in the territory of the first
Contracting Party." It invokes Maceda v. Macaraig, Jr. which upheld
the claim for tax credit or refund by the National Power Corporation
 230

(NPC) on the ground that the NPC is exempt even from the payment
of indirect taxes.

Silkair’s argument does not persuade. In Commissioner of

Internal Revenue v. Philippine Long Distance Telephone Company,
this Court clarified the ruling in Maceda v. Macaraig, Jr., viz:

It may be so that in Maceda vs. Macaraig, Jr., the

Court held that an exemption from "all taxes" granted to
the National Power Corporation (NPC) under its charter
includes both direct and indirect taxes. But far from
providing PLDT comfort, Maceda in fact supports the
case of herein petitioner, the correct lesson of Maceda
being that an exemption from "all taxes" excludes
indirect taxes, unless the exempting statute, like NPC’s
charter, is so couched as to include indirect tax from the
exemption. Wrote the Court:

However, the amendment under Republic

Act No. 6395 enumerated the details covered
by the exemption. Subsequently, P.D. 380,
made even more specific the details of the
exemption of NPC to cover, among others,
both direct and indirect taxes on all petroleum
products used in its operation. Presidential
Decree No. 938 [NPC’s amended charter]
amended the tax exemption by simplifying
the same law in general terms. It succinctly
exempts NPC from "all forms of taxes, duties[,]
fees…"

The use of the phrase "all forms" of taxes

demonstrates the intention of the law to give
NPC all the tax exemptions it has been
enjoying before. . .

It is evident from the provisions of P.D. No.

938 that its purpose is to maintain the tax
exemption of NPC from all forms of taxes
including indirect taxes as provided under
R.A. No. 6395 and P.D. 380 if it is to attain its
goals.
 231

The exemption granted under Section 135(b) of the NIRC of 1997

and Article 4(2) of the Air Transport Agreement between RP and
Singapore cannot, without a clear showing of legislative intent, be
construed as including indirect taxes. Statutes granting tax
exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority, and if an
exemption is found to exist, it must not be enlarged by construction.

Based on these rulings, it may be observed that the propriety of a tax refund
claim is hinged on the kind of exemption which forms its basis. If the law confers
an exemption from both direct or indirect taxes, a claimant is entitled to a tax
refund even if it only bears the economic burden of the applicable tax. On the
other hand, if the exemption conferred only applies to direct taxes, then the
statutory taxpayer is regarded as the proper party to file the refund claim.

In this case, PAL’s franchise grants it an exemption from both direct and
indirect taxes on its purchase of petroleum products. Section 13 thereof reads:

SEC. 13. In consideration of the franchise and rights hereby

granted, the grantee [PAL] shall pay to the Philippine Government
during the life of this franchise whichever of subsections (a) and (b)
hereunder will result in a lower tax:

(a) The basic corporate income tax based on the

grantee's annual net taxable income computed in
accordance with the provisions of the National Internal
Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross

revenues derived by the grantee from all sources,
without distinction as to transport or nontransport
operations; provided, that with respect to international
air-transport service, only the gross passenger, mail,
and freight revenues from its outgoing flights shall be
subject to this tax.

The tax paid by the grantee under either of the above

alternatives shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges of any kind, nature,
or description, imposed, levied, established, assessed, or collected
by any municipal, city, provincial, or national authority or
government agency, now or in the future, including but not limited to
the following:
 232

1. All taxes, duties, charges, royalties, or fees due on local

purchases by the grantee of aviation gas, fuel, and oil, whether
refined or in crude form, and whether such taxes, duties, charges,
royalties, or fees are directly due from or imposable upon the
purchaser or the seller, producer, manufacturer, or importer of said
petroleum products but are billed or passed on the grantee either as
part of the price or cost thereof or by mutual agreement or other
arrangement; provided, that all such purchases by, sales or
deliveries of aviation gas, fuel, and oil to the grantee shall be for
exclusive use in its transport and nontransport operations and other
activities incidental thereto;

2. All taxes, including compensating taxes, duties, charges,

royalties, or fees due on all importations by the grantee of aircraft,
engines, equipment, machinery, spare parts, accessories,
commissary and catering supplies, aviation gas, fuel, and oil,
whether refined or in crude form and other articles, supplies, or
materials; provided, that such articles or supplies or materials are
imported for the use of the grantee in its transport and transport
operations and other activities incidental thereto and are not locally
available in reasonable quantity, quality, or price;

Based on the above-cited provision, PAL’s payment of either the basic

corporate income tax or franchise tax, whichever is lower, shall be in lieu of all
other taxes, duties, royalties, registration, license, and other fees and charges,
except only real property tax. The phrase “in lieu of all other taxes” includes but
is not limited to taxes that are “directly due from or imposable upon the
purchaser or the seller, producer, manufacturer, or importer of said petroleum
products but are billed or passed on the grantee either as part of the price or cost
thereof or by mutual agreement or other arrangement.” In other words, in view of
PAL’s payment of either the basic corporate income tax or franchise tax,
whichever is lower, PAL is exempt from paying: (a) taxes directly due from or
imposable upon it as the purchaser of the subject petroleum products; and (b) the
cost of the taxes billed or passed on to it by the seller, producer, manufacturer, or
importer of the said products either as part of the purchase price or by mutual
agreement or other arrangement. Therefore, given the foregoing direct and
indirect tax exemptions under its franchise, and applying the principles as
abovediscussed, PAL is endowed with the legal standing to file the subject tax
refund claim, notwithstanding the fact that it is not the statutory taxpayer as
contemplated by law.

Coverage of LOI 1483.

 233

LOI 1483 amended PAL’s franchise by withdrawing the tax exemption

privilege granted to PAL on its purchase of domestic petroleum products for use
in its domestic operations. It pertinently provides:

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of

the Philippines, by virtue of the powers vested in me by the
Constitution, do hereby order and direct that the tax-exemption
privilege granted to PAL on its purchase of domestic petroleum
products for use in its domestic operations is hereby
withdrawn. (Emphasis and underscoring supplied)

On this score, the CIR contends that the purchase of the aviation fuel imported
by Caltex is a “purchase of domestic petroleum products” because the same was
not purchased abroad by PAL.

The Court disagrees.

Based on Section 13 of PAL’s franchise, PAL’s tax exemption privileges on all

taxes on aviation gas, fuel and oil may be classified into three (3) kinds, namely:

(a) all taxes due on PAL’s local purchase of aviation gas, fuel and oil;

(b) all taxes directly due from or imposable upon the purchaser or the seller,
producer, manufacturer, or importer of aviation gas, fuel and oil but are
billed or passed on to PAL; and

(c) all taxes due on all importations by PAL of aviation gas, fuel, and oil.

Viewed within the context of excise taxes, it may be observed that the first
kind of tax privilege would be irrelevant to PAL since it is not liable for excise
taxes on locally manufactured/produced goods for domestic sale or other
disposition; based on Section 130 of the NIRC, it is the manufacturer or producer,
i.e., the local refinery, which is regarded as the statutory taxpayer of the excise
taxes due on the same.

On the contrary, when the economic burden of the applicable excise taxes is
passed on to PAL, it may assert two (2) tax exemptions under the second kind of
tax privilege namely, PAL’s exemptions on (a) passed on excise tax costs due
from the seller, manufacturer/producer in case of locally manufactured/
produced goods for domestic sale (first tax exemption under the second kind of
tax privilege); and (b) passed on excise tax costs due from the importer in case of
imported aviation gas, fuel and oil (second tax exemption under the second kind
of tax privilege). The second kind of tax privilege should, in turn, be distinguished
 234

from the third kind of tax privilege which applies when PAL itself acts as the
importer of the foregoing petroleum products. In the latter instance, PAL is not
merely regarded as the party to whom the economic burden of the excise taxes is
shifted to but rather, it stands as the statutory taxpayer directly liable to the
government for the same.

In view of the foregoing, the Court observes that the phrase “purchase of
domestic petroleum products for use in its domestic operations” – which
characterizes the tax privilege LOI 1483 withdrew – refers only to PAL’s tax
exemptions on passed on excise tax costs due from the seller,
manufacturer/producer of locally manufactured/ produced goods for domestic
sale and does not, in any way, pertain to any of PAL’s tax privileges concerning
imported goods, may it be (a) PAL’s tax exemption on excise tax costs which are
merely passed on to it by the importer when it buys imported goods from the
latter (the second tax exemption under the second kind of tax privilege); or (b)
PAL’s tax exemption on its direct excise tax liability when it imports the goods
itself (the third kind of tax privilege).

Both textual and contextual analyses lead to this conclusion:

Examining its phraseology, the word “domestic,” which means “of or relating
to one’s own country” or “an article of domestic manufacture,” clearly pertains to
goods manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition as opposed to things imported. In other
words, by sheer divergence of meaning, the term “domestic petroleum products”
could not refer to goods which are imported.

The term “purchase of domestic petroleum products for use in its domestic
operations” as used in LOI 1483 could only refer to “goods manufactured or
produced in the Philippines for domestic sales or consumption or for any other
disposition,” and not to “things imported.” In this respect, it cannot be gainsaid
that PAL’s tax exemption privileges concerning imported goods remain beyond
the scope of LOI 1483 and thus, continue to subsist.

In this case, records disclose that Caltex imported aviation fuel from abroad
and merely re-sold the same to PAL, tacking the amount of excise taxes it paid or
would be liable to pay to the government on to the purchase price. Evidently, the
said petroleum products are in the nature of “things imported” and thus, beyond
the coverage of LOI 1483 as previously discussed. As such, considering the
subsistence of PAL’s tax exemption privileges over the imported goods subject of
this case, PAL is allowed to claim a tax refund on the excise taxes imposed and
due thereon.
 235

DEUTSCHE BANK AG MANILA BRANCH V. CIR

August 19, 2013/ Sereno, CJ

 Tax Treaty

FACTS:

In accordance with Section 28(A)(5) of the National Internal Revenue Code

(NIRC) of 1997, petitioner withheld and remitted to respondent on 21 October
2003 the amount of PHP 67,688,553.51, which represented the fifteen percent
(15%) branch profit remittance tax (BPRT) on its regular banking unit (RBU) net
income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior
taxable years.

Believing that it made an overpayment of the BPRT, petitioner filed with the
BIR on October 2005 an administrative claim for refund or issuance of its tax
credit certificate in the total amount of PHP 22,562,851.17. On the same date,
petitioner requested from the International Tax Affairs Division (ITAD) a
confirmation of its entitlement to the preferential tax rate of 10% under the RP-
Germany Tax Treaty.

Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall
be subject to a tax of 15% based on the total profits applied for or earmarked for
remittance without any deduction of the tax component. However, petitioner
invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty, which provides
that where a resident of the Federal Republic of Germany has a branch in the
Republic of the Philippines, this branch may be subjected to the branch profits
remittance tax withheld at source in accordance with Philippine law but shall not
exceed 10% of the gross amount of the profits remitted by that branch to the
head office.

However, the claim of petitioner for a refund was denied on the ground that
the application for a tax treaty relief was not filed with ITAD prior to the payment
by the former of its BPRT and actual remittance of its branch profits to DB
Germany, or prior to its availment of the preferential rate of ten percent (10%)
under the RP-Germany Tax Treaty provision. The court a quo held that petitioner
violated the fifteen (15) day period mandated under Section III paragraph (2) of
Revenue Memorandum Order (RMO) No. 1-2000.

ISSUE:
 236

Is the failure to strictly comply with RMO No. 1-2000 deprives persons or
corporations of the benefit of a tax treaty?

HELD (Dry Run):

No. The period of application for the availment of tax treaty relief as required
by RMO No. 1-2000 should not operate to divest entitlement to the relief as it
would constitute a violation of the duty required by good faith in complying with
a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer
to apply within the prescribed period under the administrative issuance would
impair the value of the tax treaty. At most, the application for a tax treaty relief
from the BIR should merely operate to confirm the entitlement of the taxpayer to
the relief. The obligation to comply with a tax treaty must take precedence over
the objective of RMO No. 1-2000.

FURTHER DISCUSSIONS:

By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch

in the Philippines, remitting to its head office in Germany, the benefit of a
preferential rate equivalent to 10% BPRT.

On the other hand, the BIR issued RMO No. 1-2000, which requires that any
availment of the tax treaty relief must be preceded by an application with ITAD
at least 15 days before the transaction. The Order was issued to streamline the
processing of the application of tax treaty relief in order to improve efficiency and
service to the taxpayers. Further, it also aims to prevent the consequences of an
erroneous interpretation and/or application of the treaty provisions (i.e., filing a
claim for a tax refund/credit for the overpayment of taxes or for deficiency tax
liabilities for underpayment).

The crux of the controversy lies in the implementation of RMO No. 1-2000.

Petitioner argues that, considering that it has met all the conditions under
Article 10 of the RP-Germany Tax Treaty, the CTA erred in denying its claim
solely on the basis of RMO No. 1-2000. The filing of a tax treaty relief application
is not a condition precedent to the availment of a preferential tax rate. Further,
petitioner posits that, contrary to the ruling of the CTA, Mirant is not a binding
judicial precedent to deny a claim for refund solely on the basis of
noncompliance with RMO No. 1-2000.

Respondent counters that the requirement of prior application under RMO No.
1-2000 is mandatory in character. RMO No. 1-2000 was issued pursuant to the
 237

unquestioned authority of the Secretary of Finance to promulgate rules and

regulations for the effective implementation of the NIRC. Thus, courts cannot
ignore administrative issuances which partakes the nature of a statute and have
in their favor a presumption of legality.

The CTA ruled that prior application for a tax treaty relief is mandatory, and
noncompliance with this prerequisite is fatal to the taxpayer’s availment of the
preferential tax rate.

We disagree.

A minute resolution is not a binding precedent

At the outset, this Court’s minute resolution on Mirant is not a binding

precedent. The Court has clarified this matter in Philippine Health Care
Providers, Inc. v. Commissioner of Internal Revenue as follows:

It is true that, although contained in a minute resolution, our

dismissal of the petition was a disposition of the merits of the
case. When we dismissed the petition, we effectively affirmed
the CA ruling being questioned. As a result, our ruling in that
case has already become final. When a minute resolution
denies or dismisses a petition for failure to comply with formal
and substantive requirements, the challenged decision,
together with its findings of fact and legal conclusions, are
deemed sustained. But what is its effect on other cases?

With respect to the same subject matter and the same

issues concerning the same parties, it constitutes res judicata.
However, if other parties or another subject matter (even with
the same parties and issues) is involved, the minute resolution
is not binding precedent. Thus, in CIR v. Baier-Nickel, the Court
noted that a previous case, CIR v. Baier-Nickel involving the
same parties and the same issues, was previously disposed of
by the Court thru a minute resolution dated February 17, 2003
sustaining the ruling of the CA. Nonetheless, the Court ruled
that the previous case "ha(d) no bearing" on the latter case
because the two cases involved different subject matters as
they were concerned with the taxable income of different
taxable years.
 238

Besides, there are substantial, not simply formal,

distinctions between a minute resolution and a decision. The
constitutional requirement under the first paragraph of Section
14, Article VIII of the Constitution that the facts and the law on
which the judgment is based must be expressed clearly and
distinctly applies only to decisions, not to minute resolutions. A
minute resolution is signed only by the clerk of court by
authority of the justices, unlike a decision. It does not require
the certification of the Chief Justice. Moreover, unlike decisions,
minute resolutions are not published in the Philippine Reports.
Finally, the proviso of Section 4(3) of Article VIII speaks of a
decision. Indeed, as a rule, this Court lays down doctrines or
principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified
by the Chief Justice. (Emphasis supplied)

Even if we had affirmed the CTA in Mirant, the doctrine laid down in that
Decision cannot bind this Court in cases of a similar nature. There are
differences in parties, taxes, taxable periods, and treaties involved; more
importantly, the disposition of that case was made only through a minute
resolution.

Tax Treaty vs. RMO No. 1-2000

Our Constitution provides for adherence to the general principles of

international law as part of the law of the land. The time-honored international
principle of pacta sunt servanda demands the performance in good faith of treaty
obligations on the part of the states that enter into the agreement. Every treaty in
force is binding upon the parties, and obligations under the treaty must be
performed by them in good faith. More importantly, treaties have the force and
effect of law in this jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations
in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies
that "tax conventions are drafted with a view towards the elimination of
international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the
same subject matter and for identical periods. The apparent rationale for doing
away with double taxation is to encourage the free flow of goods and services
and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign
 239

investments will only thrive in a fairly predictable and reasonable international

investment climate and the protection against double taxation is crucial in
creating such a climate."

Simply put, tax treaties are entered into to minimize, if not eliminate the
harshness of international juridical double taxation, which is why they are also
known as double tax treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make
in its legislations those modifications that may be necessary to ensure the
fulfillment of the obligations undertaken." Thus, laws and issuances must ensure
that the reliefs granted under tax treaties are accorded to the parties entitled
thereto. The BIR must not impose additional requirements that would negate the
availment of the reliefs provided for under international agreements. More so,
when the RP-Germany Tax Treaty does not provide for any pre-requisite for the
availment of the benefits under said agreement.

Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which
would indicate a deprivation of entitlement to a tax treaty relief for failure to
comply with the 15-day period. We recognize the clear intention of the BIR in
implementing RMO No. 1-2000, but the CTA’s outright denial of a tax treaty relief
for failure to strictly comply with the prescribed period is not in harmony with the
objectives of the contracting state to ensure that the benefits granted under tax
treaties are enjoyed by duly entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the
availment of tax treaty relief as required by RMO No. 1-2000 should not operate
to divest entitlement to the relief as it would constitute a violation of the duty
required by good faith in complying with a tax treaty. The denial of the availment
of tax relief for the failure of a taxpayer to apply within the prescribed period
under the administrative issuance would impair the value of the tax treaty. At
most, the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the
objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has
negative implications on international relations, and unduly discourages foreign
investors. While the consequences sought to be prevented by RMO No. 1-2000
involve an administrative procedure, these may be remedied through other
system management processes, e.g., the imposition of a fine or penalty. But we
cannot totally deprive those who are entitled to the benefit of a treaty for failure
 240

to strictly comply with an administrative issuance requiring prior application for

tax treaty relief.

Prior Application vs. Claim for Refund

Again, RMO No. 1-2000 was implemented to obviate any erroneous

interpretation and/or application of the treaty provisions. The objective of the BIR
is to forestall assessments against corporations who erroneously availed
themselves of the benefits of the tax treaty but are not legally entitled thereto, as
well as to save such investors from the tedious process of claims for a refund
due to an inaccurate application of the tax treaty provisions. However, as earlier
discussed, noncompliance with the 15-day period for prior application should not
operate to automatically divest entitlement to the tax treaty relief especially in
claims for refund.

The underlying principle of prior application with the BIR becomes moot in
refund cases, such as the present case, where the very basis of the claim is
erroneous or there is excessive payment arising from non-availment of a tax
treaty relief at the first instance. In this case, petitioner should not be faulted for
not complying with RMO No. 1-2000 prior to the transaction. It could not have
applied for a tax treaty relief within the period prescribed, or 15 days prior to the
payment of its BPRT, precisely because it erroneously paid the BPRT not on the
basis of the preferential tax rate under the RP-Germany Tax Treaty, but on the
regular rate as prescribed by the NIRC. Hence, the prior application requirement
becomes illogical. Therefore, the fact that petitioner invoked the provisions of the
RP-Germany Tax Treaty when it requested for a confirmation from the ITAD
before filing an administrative claim for a refund should be deemed substantial
compliance with RMO No. 1-2000.

CIR V. PAL
September 25, 2013/ Perez, J.

 MCIT
 PALs Franchise

FACTS:

On 16 December 16, 2003, PAL received a Formal Letter of Demand and

Details of Assessment from the Large Taxpayers Service demanding the
 241

payment of the total amount of P326,778,723.35 as minimum corporate income

tax (MCIT) for the fiscal year ending March 31, 2000.

ISSUE:

May PAL be held liable for the assessed deficiency MCIT of P 326,778,723.35
for the fiscal year ending March 31, 2000?

HELD (Dry Run):

No. According to the provisions of PAL’s franchise, its taxation shall be

governed by two fundamental rules, to wit: (1) it shall pay the Government either
the basic corporate income tax or franchise tax, whichever is lower; and (2) the
tax it pays, under either of these alternatives, shall be in lieu of all other taxes,
duties, royalties, registration, license, and other fees and charges, except only
real property tax.

Since the MCIT is neither the basic corporate income tax under the National
Internal Revenue Code nor the franchise tax imposed on PAL, MCIT falls under
“all other taxes” from which it is exempted.

FURTHER DISCUSSIONS:

Respondent’s exemption from the MCIT is already a settled matter.

Section 27 of the NIRC of 1997, as amended, provides as follows:

SEC. 27. Rates of Income Tax on Domestic Corporations. —

(A) In General. — Except as otherwise provided in this Code, an

income tax of thirty-five percent (35%) is hereby imposed upon
the taxable income derived during each taxable year from all
sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and
taxable under this Title as a corporation, organized in, or
existing under the law of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-
four percent (34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%); and effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32%).

(E) Minimum Corporate Income Tax on Domestic Corporations.

—
 242

(1) Imposition of Tax — A minimum corporate income tax of two

percent (2%) of the gross income as of the end of the taxable
year, as defined herein, is hereby imposed on a corporation
taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation
commenced its business operations, when the minimum income
tax is greater than the tax computed under Subsection(A) of this
Section for the taxable year.

Based on the foregoing, a domestic corporation must pay whichever is the

higher of: (1) the income tax under Section 27(A) of the NIRC of 1997, as
amended, computed by applying the tax rate therein to the taxable income of the
corporation; or (2) the MCIT under Section 27(E), also of the same Code,
equivalent to 2% of the gross income of the corporation. The Court would like to
underscore that although this may be the general rule in determining the income
tax due from a domestic corporation under the provisions of the NIRC of 1997, as
amended, such rule can only be applied to respondent only as to the extent
allowed by the provisions of its franchise.

Relevant thereto, PD 1590, the franchise of respondent, contains the following

pertinent provisions governing its taxation:

Section 13. In consideration of the franchise and rights hereby

granted, the grantee shall pay to the Philippine Government
during the life of this franchise whichever of subsections (a)
and (b) hereunder will result in a lower tax:

(a) The basic corporate income tax based on the grantee’s

annual net taxable income computed in accordance with the
provisions of the National Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues
derived by the grantee from all sources, without distinction as
to transport or non transport operations; provided, that with
respect to international air-transport service, only the gross
passenger, mail, and freight revenues from its outgoing flights
shall be subject to this tax.

The tax paid by the grantee under either of the above

alternatives shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges of any kind,
nature, or description, imposed, levied, established, assessed,
 243

or collected by any municipal, city, provincial, or national

authority or government agency, now or in the future, including
but not limited to the following:

The grantee, shall, however, pay the tax on its real property
in conformity with existing law.

For purposes of computing the basic corporate income tax as

provided herein, the grantee is authorized:

(a) To depreciate its assets to the extent of not more than twice
as fast the normal rate of depreciation; and

(b) To carry over as a deduction from taxable income any net

loss incurred in any year up to five years following the year of
such loss.

Section 14. The grantee shall pay either the franchise tax or the
basic corporate income tax on quarterly basis to the
Commissioner of Internal Revenue. Within sixty (60) days after
the end of each of the first three quarters of the taxable
calendar or fiscal year, the quarterly franchise or income-tax
return shall be filed and payment of either the franchise or
income tax shall be made by the grantee.

A final or an adjustment return covering the operation of the

grantee for the preceding calendar or fiscal year shall be filed
on or before the fifteenth day of the fourth month following the
close of the calendar or fiscal year. The amount of the fiscal
franchise or income tax to be paid by the grantee shall be the
balance of the total franchise or income tax shown in the final
or adjustment return after deducting therefrom the total
quarterly franchise or income taxes already paid during the
preceding first three quarters of the same taxable year.

Any excess of the total quarterly payments over the actual

annual franchise of income tax due as shown in the final or
adjustment franchise or income-tax return shall either be
refunded to the grantee or credited against the grantee’s
quarterly franchise or income-tax liability for the succeeding
taxable year or years at the option of the grantee.
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The term "gross revenue" is herein defined as the total gross

income earned by the grantee; (a) transport, nontransport, and
other services; (b) earnings realized from investments in money-
market placements, bank deposits, investments in shares of
stock and other securities, and other investments; (c) total
gains net of total losses realized from the disposition of assets
and foreign-exchange transactions; and (d) gross income from
other sources.

From the foregoing provisions, during the lifetime of the franchise of

respondent, its taxation shall be strictly governed by two fundamental rules, to
wit: (1) respondent shall pay the Government either the basic corporate income
tax or franchise tax, whichever is lower; and (2) the tax paid by respondent,
under either of these alternatives, shall be in lieu of all other taxes, duties,
royalties, registration, license, and other fees and charges, except only real
property tax.

Parenthetically, the basic corporate income tax of respondent shall be based

on its annual net taxable income, computed in accordance with the NIRC of
1997, as amended. PD 1590 also explicitly authorizes respondent, in the
computation of its basic corporate income tax, to: (1) depreciate its assets twice
as fast the normal rate of depreciation; and (2) carry over deduction from taxable
income any net loss incurred in any year up to five years following the year of
such loss.

The franchise tax, on the other hand, shall be 2% of the gross revenues
derived by respondent from all sources, whether transport or nontransport
operations. However, with respect to international air-transport service, the
franchise tax shall only be imposed on the gross passenger, mail, and freight
revenues of respondent from its outgoing flights.

Accordingly, considering the foregoing precepts, this Court had the

opportunity to finally settle this matter and categorically enunciated in
Commissioner of Internal Revenue v. Philippine Airlines, Inc., that respondent
cannot be subjected to MCIT for the following reasons:

First, Section 13(a) of [PD] 1590 refers to "basic corporate

income tax." In Commissioner of Internal Revenue v. Philippine
Airlines, Inc., the Court already settled that the "basic corporate
income tax, "under Section 13(a) of [PD] 1590, relates to the
general rate of 35% (reduced to 32% by the year 2000) as
stipulated in Section 27(A) of the NIRC of 1997.
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Section 13(a) of [PD] 1590 requires that the basic corporate

income tax be computed in accordance with the NIRC. This
means that PAL shall compute its basic corporate income tax
using the rate and basis prescribed by the NIRC of 1997 for the
said tax. There is nothing in Section 13(a) of [PD] 1590 to
support the contention of the CIR that PAL is subject to the
entire Title II of the NIRC of 1997, entitled "Tax on Income."

Second, Section 13(a) of Presidential Decree No. 1590

further provides that the basic corporate income tax of PAL
shall be based on its annual net taxable income. This is
consistent with Section 27(A) of the NIRC of 1997, which
provides that the rate of basic corporate income tax, which is
32% beginning 1 January 2000, shall be imposed on the
taxable income of the domestic corporation.

Taxable income is defined under Section 31 of the NIRC of

1997 as the pertinent items of gross income specified in the
said Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by the
same Code or other special laws.

The gross income, referred to in Section 31, is described in

Section 32 of the NIRC of 1997 as income from whatever
source, including compensation for services; the conduct of
trade or business or the exercise of profession; dealings in
property; interests; rents; royalties; dividends; annuities; prizes
and winnings; pensions; and a partner’s distributive share in
the net income of a general professional partnership.

Pursuant to the NIRC of 1997, the taxable income of a

domestic corporation may be arrived at by subtracting from
gross income deductions authorized, not just by the NIRC of
1997, but also by special laws. [PD] 1590 may be considered
as one of such special laws authorizing PAL, in computing its
annual net taxable income, on which its basic corporate income
tax shall be based, to deduct from its gross income the
following: (1) depreciation of assets at twice the normal rate;
and (2) net loss carry-over up to five years following the year of
such loss.
 246

In comparison, the 2% MCIT under Section 27 (E) of the

NIRC of 1997 shall be based on the gross income of the
domestic corporation. The Court notes that gross income, as the
basis for MCIT, is given a special definition under Section 27(E)
(4) of the NIRC of 1997, different from the general one under
Section 34 of the same Code.

According to the last paragraph of Section 27 (E) (4) of the

NIRC of 1997, gross income of a domestic corporation engaged
in the sale of service means gross receipts, less sales returns,
allowances, discounts and cost of services. "Cost of services"
refers to all direct costs and expenses necessarily incurred to
provide the services required by the customers and clients
including (a) salaries and employee benefits of personnel,
consultants, and specialists directly rendering the service; and
(b) cost of facilities directly utilized in providing the service,
such as depreciation or rental of equipment used and cost of
supplies. Noticeably, inclusions in and exclusions/deductions
from gross income for MCIT purposes are limited to those
directly arising from the conduct of the taxpayer’s business. It
is, thus, more limited than the gross income used in the
computation of basic corporate income tax.

In light of the foregoing, there is an apparent distinction

under the NIRC of 1997 between taxable income, which is the
basis for basic corporate income tax under Section 27(A); and
gross income, which is the basis for the MCIT under Section
27(E). The two terms have their respective technical meanings,
and cannot be used interchangeably. The same reasons
prevent this Court from declaring that the basic corporate
income tax, for which PAL is liable under Section 13(a) of [PD]
1590, also covers MCIT under Section 27(E) of the NIRC of
1997, since the basis for the first is the annual net taxable
income, while the basis for the second is gross income.

Third, even if the basic corporate income tax and the MCIT
are both income taxes under Section 27 of the NIRC of 1997,
and one is paid in place of the other, the two are distinct and
separate taxes.

The Court again cites Commissioner of Internal Revenue v.

Philippine Airlines, Inc., wherein it held that income tax on the
 247

passive income of a domestic corporation, under Section 27(D)

of the NIRC of 1997, is different from the basic corporate
income tax on the taxable income of a domestic corporation,
imposed by Section 27(A), also of the NIRC of 1997. Section 13
of [PD] 1590 gives PAL the option to pay basic corporate income
tax or franchise tax, whichever is lower; and the tax so paid
shall be in lieu of all other taxes, except real property tax. The
income tax on the passive income of PAL falls within the
category of "allot her taxes" from which PAL is exempted, and
which, if already collected, should be refunded to PAL.

The Court herein treats MCIT in much the same way.

Although both are income taxes, the MCIT is different from the
basic corporate income tax, not just in the rates, but also in the
bases for their computation. Not being covered by Section 13(a)
of [PD] 1590,which makes PAL liable only for basic corporate
income tax, then MCIT is included in "all other taxes" from
which PAL is exempted.

That, under general circumstances, the MCIT is paid in

place of the basic corporate income tax, when the former is
higher than the latter, does not mean that these two income
taxes are one and the same. The said taxes are merely paid in
the alternative, giving the Government the opportunity to collect
the higher amount between the two. The situation is not much
different from Section 13 of [PD] 1590, which reversely allows
PAL to pay, whichever is lower of the basic corporate income
tax or the franchise tax. It does not make the basic corporate
income tax in distinguishable from the franchise tax.

Given the fundamental differences between the basic

corporate income tax and the MCIT, presented in the preceding
discussion, it is not baseless for this Court to rule that,
pursuant to the franchise of PAL, said corporation is subject to
the first tax, yet exempted from the second.

Fourth, the evident intent of Section 13 of [PD] 1520 (sic) is

to extend to PAL tax concessions not ordinarily available to
other domestic corporations. Section 13 of [PD] 1520 (sic)
permits PAL to pay whichever is lower of the basic corporate
income tax or the franchise tax; and the tax so paid shall be in
lieu of all other taxes, except only real property tax. Hence,
 248

under its franchise, PAL is to pay the least amount of tax

possible.

Section 13 of [PD] 1520 is not unusual. A public utility is

granted special tax treatment (including tax
exceptions/exemptions) under its franchise, as an inducement
for the acceptance of the franchise and the rendition of public
service by the said public utility. In this case, in addition to
being a public utility providing air-transport service, PAL is also
the official flag carrier of the country.

The imposition of MCIT on PAL, as the CIR insists, would

result in a situation that contravenes the objective of Section 13
of [PD] 1590. In effect, PAL would not just have two, but three
tax alternatives, namely, the basic corporate income tax, MCIT,
or franchise tax. More troublesome is the fact that, as between
the basic corporate income tax and the MCIT, PAL shall be
made to pay whichever is higher, irrefragably, in violation of
the avowed intention of Section 13 of [PD] 1590 to make PAL
pay for the lower amount of tax.

Fifth, the CIR posits that PAL may not invoke in the instant
case the "in lieu of all other taxes" clause in Section 13 of [PD]
No. 1520 (sic), if it did not pay anything at all as basic
corporate income tax or franchise tax. As a result, PAL should
be made liable for "other taxes" such as MCIT. This line of
reasoning has been dubbed as the Substitution Theory, and
this is not the first time the CIR raised the same. The Court
already rejected the Substitution Theory in Commissioner of
Internal Revenue v. Philippine Airlines, Inc., to wit:

"Substitution Theory" of the CIR Untenable

A careful reading of Section 13 rebuts the argument of the

CIR that the "in lieu of all other taxes "proviso is a mere
incentive that applies only when PAL actually pays something.

It is clear that PD 1590 intended to give respondent the

option to avail itself of Subsection (a) or (b) as consideration for
its franchise. Either option excludes the payment of other taxes
and dues imposed or collected by the national or the local
government. PAL has the option to choose the alternative that
 249

results in lower taxes. It is not the fact of tax payment that

exempts it, but the exercise of its option.

Under Subsection (a), the basis for the tax rate is

respondent’s annual net taxable income, which (as earlier
discussed) is computed by subtracting allowable deductions
and exemptions from gross income. By basing the tax rate on
the annual net taxable income, PD 1590 necessarily recognized
the situation in which taxable income may result in a negative
amount and thus translate into a zero tax liability.

Notably, PAL was owned and operated by the government

at the time the franchise was last amended. It can reasonably
be contemplated that PD 1590 sought to assist the finances of
the government corporation in the form of lower taxes. When
respondent operates at a loss (as in the instant case), no taxes
are due; in this instances, it has a lower tax liability than that
provided by Subsection (b).

The fallacy of the CIR’s argument is evident from the fact

that the payment of a measly sum of one peso would suffice to
exempt PAL from other taxes, whereas a zero liability arising
from its losses would not. There is no substantial distinction
between a zero tax and a one-peso tax liability. (Emphasis
theirs)

Based on the same ratiocination, the Court finds the

Substitution Theory unacceptable in the present Petition.

(Examinee’s Note: Consider this. This is important) The

CIR alludes as well to Republic Act No. 9337, for reasons
similar to those behind the Substitution Theory. Section 22 of
Republic Act No. 9337, more popularly known as the Expanded
Value Added Tax (E-VAT) Law, abolished the franchise tax
imposed by the charters of particularly identified public
utilities, including PD 1590 of PAL. PAL may no longer exercise
its options or alternatives under Section 13 of PD 1590, and is
now liable for both corporate income tax and the 12% VAT on
its sale of services. The CIR alleges that Republic Act No. 9337
reveals the intention of the Legislature to make PAL share the
tax burden of other domestic corporations.
 250

The CIR seems to lose sight of the fact that the Petition at
bar involves the liability of PAL for MCIT for the fiscal year
ending 31 March 2001. Republic Act No. 9337, which took
effect on 1 July 2005, cannot be applied retroactively and any
amendment introduced by said statute affecting the taxation of
PAL is immaterial in the present case.

And sixth, [PD] 1590 explicitly allows PAL, in computing its

basic corporate income tax, to carry over as deduction any net
loss incurred in any year, up to five years following the year of
such loss. Therefore, [PD] 1590 does not only consider the
possibility that, at the end of a taxable period, PAL shall end
up with zero annual net taxable income (when its deductions
exactly equal its gross income), as what happened in the case
at bar, but also the likelihood that PAL shall incur net loss
(when its deductions exceed its gross income). If PAL is
subjected to MCIT, the provision in [PD] 1590 on net loss carry-
over will be rendered nugatory. Net loss carry-over is material
only in computing the annual net taxable income to be used as
basis for the basic corporate income tax of PAL; but PAL will
never be able to avail itself of the basic corporate income tax
option when it is in a net loss position, because it will always
then be compelled to pay the necessarily higher MCIT.

Consequently, the insistence of the CIR to subject PAL to

MCIT cannot be done without contravening [PD] 1520.

Between [PD] 1520, on one hand, which is a special law

specifically governing the franchise of PAL, issued on 11 June
1978; and the NIRC of 1997, on the other, which is a general
law on national internal revenue taxes, that took effect on 1
January 1998, the former prevails. The rule is that on a specific
matter, the special law shall prevail over the general law,
which shall be resorted to only to supply deficiencies in the
former. In addition, where there are two statutes, the earlier
special and the later general – the terms of the general broad
enough to include the matter provided for in the special – the
fact that one is special and the other is general creates a
presumption that the special is to be considered as remaining
an exception to the general, one as a general law of the land,
the other as the law of a particular case. It is a canon of
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statutory construction that a later statute, general in its terms

and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier
statute.

The MCIT was a new tax introduced by Republic Act No.

8424. Under the doctrine of strict interpretation, the burden is
upon the CIR to primarily prove that the new MCIT provisions of
the NIRC of 1997, clearly, expressly, and unambiguously
extend and apply to PAL, despite the latter’s existing tax
exemption. To do this, the CIR must convince the Court that the
MCIT is a basic corporate income tax, and is not covered by the
"in lieu of all other taxes" clause of [PD] 1590. Since the CIR
failed in this regard, the Court is left with no choice but to
consider the MCIT as one of "all other taxes," from which PAL is
exempt under the explicit provisions of its charter.

Based on the foregoing pronouncements, it is clear that respondent is exempt

from the MCIT imposed under Section 27(E) of the NIRC of 1997, as amended.
Thus, respondent cannot be held liable for the assessed deficiency MCIT of
P326,778,723.35 for fiscal year ending 31 March 2000.

Notably, in another case involving the same parties, the Court further
expressed that a strict interpretation of the word "pay" in Section 13 of PD 1590
would effectively render nugatory the other rights categorically conferred upon
the respondent by its franchise. Hence, there being no qualification to the
exercise of its options under Section 13, then respondent is free to choose basic
corporate income tax, even if it would have zero liability for the same in light of
its net loss position for the taxable year.

By way of, reiteration, although it appears that respondent is not completely

exempt from all forms of taxes under PD 1590 considering that Section 13 thereof
requires it to pay, either the lower amount of the basic corporate income tax or
franchise tax (which are both direct taxes), at its option, mere exercise of such
option already relieves respondent of liability for all other taxes and/or duties,
whether direct or indirect taxes. This is an expression of the same thought in Our
ruling that, to repeat, it is not the fact of tax payment that exempts it, but the
exercise of its option.