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Tax Case Digests 1st Batch

MCIAA VS MARCOS (1996)

FACTS:

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of realty taxes in accordance with Section 14 of its Charter. However, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of the City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the petitioner.

Petitioner objected to such demand for payment as baseless and unjustified because of the following reasons:

1. The aforecited Section 14 of RA 6958 which exempt it from payment of realty taxes;

2. It was also asserted that it is an instrumentality of the government performing governmental functions, citing section 133 of the Local Government Code of 1991 which puts limitations on the taxing powers of local government units.;

3. That being an instrumentality of the National Government, respondent City of Cebu has no power nor authority to impose realty taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine Amusement and Gaming Corporation (decided 1991): Local governments have no power to tax instrumentalities of the National Government.

Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the MCIAA is a government-controlled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the Local Governmental Code that took effect on January 1, 1992:

Sec. 193. Withdrawal of Tax Exemption Privilege. — 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duly registered under RA No. 6938, non-stock, and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied)

Sec. 234. Exemptions from Real Property taxes. — (c) Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations are hereby withdrawn upon the effectivity of this Code.

ISSUE:

Whether or not the petitioner MCIAA is a taxable person.

HELD:

The petitioner cannot claim that it was never a "taxable person" under its Charter. It was only exempted from the payment of real property taxes. The grant of the privilege

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only in respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real property tax.

Even if the petitioner was originally not a taxable person for purposes of real property tax, xxx it had already become even if it be conceded to be an "agency" or "instrumentality" of the Government, a taxable person for such purpose in view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment of real property taxes, which, xxx applies to the petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine Amusement and Gaming Corporation (decided 1991) is unavailing since it was decided before the effectivity of the LGC (1992). Besides, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom.

Petition is DENIED. CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC. v. ALBERTO ROMULO [G.R. 160756 March 9, 2010]

In this case, petitioner Chamber of Real Estate and Builders‘ Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding taxes.3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause because, like the MCIT, the government

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collects income tax even when the net income has not yet been determined. They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector.

Issues: 1. WON the imposition of the MCIT on domestic corporations is unconstitutional 2. WON THE Secretary of Finance has the authority to order the collection of CWT on sales of real property considered as ordinary assets 3. WON the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members of their property without due process of law Ruling: 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. 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 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

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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. 45 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 due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation's gross income. Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. 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. 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. 2. The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the rules and regulations must not override, but must remain consistent and in harmony with, the law

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they seek to apply and implement. It is well-settled that an administrative agency cannot amend an act of Congress. We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our tax laws. The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the government's cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies. Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57 (B) of RA 8424 3. Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members of their property without due process of law because, in their line of business, gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or earned. Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More importantly, the due process requirement applies to the power to tax. The CWT does not impose new taxes nor does it increase taxes. It relates entirely to the method and time of payment. Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait years and may even resort to litigation before they are granted a refund. 81 This argument is misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a method of collecting the tax. The taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts. To require the customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds

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of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system. WHEREFORE, the petition is hereby DISMISSED.

PKSMMN, et al., v. Executive Secretary

Facts:

In 1971, RA 6260 was enacted which established a Coconut Investment Fund (CI Fund) for the development of the coconut industry through capital financing. The use of the fund was expanded in 1973 to include the stabilization of the domestic market for coconut-based consumer goods and in 1974 to divert part of the funds for obtaining direct benefit to coconut farmers. After five years or in 1976, however, P.D. 961 declared the coco-levy funds private property of the farmers. P.D. 1468 reiterated this declaration in 1978. But neither presidential decree actually turned over possession or control of the funds to the farmers in their private capacity. The government continued to wield undiminished authority over the management and disposition of those funds.

ISSUE:

Whether or not the declaration of coco-levy funds private properties of the farmers is valid.

HELD:

No. 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.

Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III, Section 5 of P.D. 1468 completely ignore the fact that coco-levy funds are public funds raised through taxation. And since taxes could be exacted only for a public purpose, they cannot be declared private properties of individuals although such individuals fall within a distinct group of persons.

The Court of course grants that there is no hard-and-fast rule for determining what constitutes public purpose. It is an elastic concept that could be made to fit into modern standards. Public purpose, for instance, is no longer restricted to traditional government functions like building roads and school houses or safeguarding public health and safety. Public purpose has been construed as including the promotion of social justice. Thus, public funds may be used for relocating illegal settlers, building low-cost housing for them, and financing both urban and agrarian reforms that benefit certain poor individuals. Still, these uses relieve volatile iniquities in society and, therefore, impact on public order and welfare as a whole.

Southern Cross vs. CMAP

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―Cement is hardly an exciting subject for litigation. Still, the parties in this case have done their best to put up a spirited advocacy of their respective positions, throwing in everything including the proverbial kitchen sink. At present, the burden of passion, if not proof, has shifted to public respondents Department of Trade and Industry (DTI) and private respondent Philippine Cement Manufacturers Corporation (Philcemcor),[1] who now seek reconsideration of our Decision dated 8 July 2004 (Decision), which granted the petition of petitioner Southern Cross Cement Corporation (Southern Cross). This case, of course, is ultimately not just about cement. For respondents, it is about love of country and the future of the domestic industry in the face of foreign competition. For this Court, it is about elementary statutory construction, constitutional limitations on the executive power to impose tariffs and similar measures, and obedience to the law. Just as much was asserted in the Decision, and the same holds true with this present Resolution.‖ POWER OF PRESIDENT TO IMPOSE TARIFF RATES: Without Section 28(2), Article VI, the executive branch has no authority to impose tariffs and other similar tax levies involving the importation of foreign goods. Assuming that Section 28(2) Article VI did not exist, the enactment of the SMA by Congress would be voided on the ground that it would constitute an undue delegation of the legislative power to tax. The constitutional provision shields such delegation from constitutional infirmity, and should be recognized as an exceptional grant of legislative power to the President, rather than the affirmation of an inherent executive power. QUALIFIERS: This being the case, the qualifiers mandated by the Constitution on this presidential authority attain primordial consideration: (1) there must be a law; (2) there must be specified limits; and (3) Congress may impose limitations and restrictions on this presidential authority. POWER EXERCISED BY ALTER EGOS OF PRES: The Court recognizes that the authority delegated to the President under Section 28(2), Article VI may be exercised, in accordance with legislative sanction, by the alter egos of the President, such as department secretaries. Indeed, for purposes of the President‘s exercise of power to impose tariffs under Article VI, Section 28(2), it is generally the Secretary of Finance who acts as alter ego of the President. The SMA provides an exceptional instance wherein it is the DTI or Agriculture Secretary who is tasked by Congress, in their capacities as alter egos of the President, to impose such measures. Certainly, the DTI Secretary has no inherent power, even as alter ego of the President, to levy tariffs and imports. TARIFF COMMISSION AND DTI SEC ARE AGENTS: Concurrently, the tasking of the Tariff Commission under the SMA should be likewise construed within the same context as part and parcel of the legislative delegation of its inherent power to impose tariffs and imposts to the executive branch, subject to limitations and restrictions. In that regard, both the Tariff Commission and the DTI Secretary may be regarded as agents of Congress within their limited respective spheres, as ordained in the SMA, in the implementation of the said law which significantly draws its strength from the plenary legislative power of taxation. Indeed, even the President may be considered as an agent of Congress for the purpose of imposing safeguard measures. It is Congress, not the President, which possesses inherent powers to impose tariffs and imposts.

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Without legislative authorization through statute, the President has no power, authority or right to impose such safeguard measures because taxation is inherently legislative, not executive. When Congress tasks the President or his/her alter egos to impose safeguard measures under the delineated conditions, the President or the alter egos may be properly deemed as agents of Congress to perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law that the agent may not act beyond the specifically delegated powers or disregard the restrictions imposed by the principal. In short, Congress may establish the procedural framework under which such safeguard measures may be imposed, and assign the various offices in the government bureaucracy respective tasks pursuant to the imposition of such measures, the task assignment including the factual determination of whether the necessary conditions exists to warrant such impositions. Under the SMA, Congress assigned the DTI Secretary and the Tariff Commission their respective functions in the legislature‘s scheme of things. There is only one viable ground for challenging the legality of the limitations and restrictions imposed by Congress under Section 28(2) Article VI, and that is such limitations and restrictions are themselves violative of the Constitution. Thus, no matter how distasteful or noxious these limitations and restrictions may seem, the Court has no choice but to uphold their validity unless their constitutional infirmity can be demonstrated. What are these limitations and restrictions that are material to the present case? The entire SMA provides for a limited framework under which the President, through the DTI and Agriculture Secretaries, may impose safeguard measures in the form of tariffs and similar imposts.

POWER BELONGS TO CONGRESS: …the cited passage from Fr. Bernas actually states, ―Since the Constitution has given the President the power of control, with all its awesome implications, it is the Constitution alone which can curtail such power.‖ Does the President have such tariff powers under the Constitution in the first place which may be curtailed by the executive power of control? At the risk of redundancy, we quote Section 28(2), Article VI: ―The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.‖ Clearly the power to impose tariffs belongs to Congress and not to the President.

COMMISSIONER OF IR VS CENTRAL LUZON DRUG CORP G R 1 4 8 5 1 2 J u n e 2 6 , 2 0 0 6 FACTS: Central Luzon Drug Corporation is a retailer of medicines and other pharmaceutical products. For the period January 1995 to December 1995, pursuant to the mandate of Section 4(a) of Republic Act No. 7432, otherwise known as the Senior Citizens Act, it granted a twenty percent (20%) discount on the sale of medicines to qualified senior citizens amounting to P219,778.00. It then

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deducted the same amount from its gross income for the taxable year 1995, pursuant to Revenue Regulations No. 2-94 implementing the Senior Citizens Act, which states that the discount given to senior citizens shall be deducted by the establishment from its gross sales for value-added tax and other percentage tax purposes. For the said taxable period, Central Luzon Drug reported a net loss of P20,963.00 in its corporate income tax return, thus, it did not pay income tax for 1995. Subsequently, Central Luzon Drug filed a claim for refund in the amount of P150,193.00, claiming that according to Sec. 4(a) of the Senior Citizens Act, the amount of P219,778.00 should be applied as a tax credit. The Commissioner of Internal Revenue (CIR) was not able to decide the claim on time, hence, Central Luzon Drug filed a Petition for Review with the Court of Tax Appeals. The latter dismissed the petition, declaring that even if the law treats the 20% discount granted to senior citizens as a tax credit, the same cannot apply when there is no tax liability or the amount of the tax credit is greater than the tax due. In the latter case, the tax credit will only be to the extent of the tax liability. Also, no refund can be granted as no tax was erroneously, illegally and actually collected. Furthermore, the law does not state that a refund can be claimed by the establishment concerned as an alternative to the tax credit. Central Luzon Drug filed a Petition for Review with the Court of Appeals. The appellate court held that the 20% discount given to senior citizens which is treated as a tax credit is considered just compensation and, as such, may be carried over to the next taxable period if there is no current tax liability. ISSUE: Whether or not the 20% discount granted by Central Luzon Drug to qualified senior citizens pursuant to Sec. 4(a) of the Senior Citizens Act may be claimed as a tax credit or as a deduction from gross sales in accordance with Sec. 2(1) of Revenue Regulations No. 2-94 RULING: The Petition is DENIED. Sec. 4(a) of the Senior Citizens Act provides:

Sec. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following: (a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportations services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit.

The above provision explicitly employed the term ―tax credit.‖ Nothing in the provision suggests for it to mean a ―deduction‖ from gross sales. Thus, the 20% discount required by the law to be given to senior citizens is a tax credit, not a deduction from the gross sales of the establishment concerned. As a corollary to this, the definition of ‗tax credit‘ found in Sect. 2(1) of Revenue Regulations No. 2-94 is erroneous as it refers to tax credit as the amount representing the 20% discount that ―shall be deducted by the said establishment from their gross sales for value added tax and

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other percentage tax purposes.‖ When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount, when claimed, shall be treated as a reduction from any tax liability. The law cannot be amended by a mere regulation. Finally, for purposes of clarity, Sec. 229 of the Tax Code does not apply to cases that fall under Sec. 4 of the Senior Citizens Act because the former provision governs exclusively all kinds of refund or credit of internal revenue taxes that were erroneously or illegally imposed and collected pursuant to the Tax Code while the latter extends the tax credit benefit to the private establishments concerned even before tax payments have been made. The tax credit that is contemplated under the Senior Citizens Act is a form of just compensation, not a remedy for taxes that were erroneously or illegally assessed and collected. In the same vein, prior payment of any tax liability is not a precondition before a taxable entity can benefit from the tax credit. The credit may be availed of upon payment of the tax due, if any. Where there is no tax liability or where a private establishment reports a net loss for the period, the tax credit can be availed of and carried over to the next taxable year. CIR vs. Rosemarie Acosta 9. G.R. No. 154068 August 3, 2007 FACTS: Acosta is an employee of Intel and was assigned in a foreign country. During that period Intel withheld the taxes due and remitted them to BIR. Respondent claimed overpayment of taxes and filed petition for review with CTA. CTA dismissed the petition for failure to file a written claim for refund with the CIR a condition precedent to the filing of a petition for review with the CTA. CA reversed the decision reasoning that Acosta‟s filing of an amended return indicating an overpayment was sufficient compliance with the requirement of a written claim. ISSUE: Whether or not CTA has jurisdiction to take cognizance of respondent‟s petition for review. RULING: A party seeking an administrative rimedy must not merely initiate the prescribed administrative procedure to obtain relie but also to pursue it to its appropriate conclusion before seeking judicial intervention in order to give administrative agency an opportunity to decide the matter itself correctly and prevent unnecessary and premature resort to court action. At the time respondent filed her amended return, the 1997, NIRC was not yet in effect, hence respondent had no reason to think that the filing of an amended return would constitute the written claim required by law. CTA likewise stressed that even the date of filing of the Final Adjustment return was omitted, inadvertently or otherwise, by respondent in her petition for review. This is fatal to respondent‟s claim, for it deprived the CTA of its jurisdiction over the subject matter of the case. Finally, revenue statutes are substantive laws and in no sense must with that of remedial laws. Revenue laws are not intended to be liberally constructed

CIR vs. Solidbank

Facts: Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to P1,474,693.44. It alleged that the total included P350,807,875.15 representing gross receipts from passive income which was already subjected to

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20%final withholding tax (FWT). The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWT should not form part of its taxable gross receipts for purposes of computing the tax. Solidbank, relying on the strength of this decision, filed with the BIR a letter-request for the refund or tax credit. It also filed a petition for review with the CTA where the it ordered the refund. The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receipts because the FWT was not actually received by the bank but was directly remitted to the government. The Commissioner claims that although the FWT was not actually received by Solidbank, the fact that the amount redounded to the bank‘s benefit makes it part of the taxable gross receipts in computing the Gross Receipts Tax. Solidbank says the CA ruling is correct. Issue: Whether or not the FWT forms part of the gross receipts tax. Held: Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed. The payor, a separate entity, acts as no more than an agent of the government for the collection of tax in order to ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds constitutive of the tax base. These proceeds are either actual or constructive. Both parties agree that there is no actual receipt by the bank. What needs to be determined is if there is constructive receipt. Since the payee is the real taxpayer, the rule on constructive receipt can be rationalized. The Court applied provisions of the Civil Code on actual and constructive possession. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and legal formalities established. The withholding process is one such act. There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession by any person without any power shall be considered as acquired when ratified by the person in whose name the act of possession is executed. In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. There is thus constructive receipt. The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are tantamount to delivery, receipt or remittance. Besides, Solidbank admits that its income is subjected to a tax burden immediately upon ―receipt‖, although it claims that it derives no pecuniary benefit or advantage through the withholding process.

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There being constructive receipt, part of which is withheld, that income is included as part of the tax base on which the gross receipts tax is imposed.

CIR vs. SC Johnson

Respondent, JOHNSON AND SON, INC a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A. The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 . For the use of the trademark or technology, SC JOHNSON AND SON, INC was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to May 1993.00 On October 29, 1993, SC JOHNSON AND SON, USA filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. Respondent submits that royalties paid to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. The Internal Tax Affairs Division of the BIR ruled against SC Johnson and Son, Inc. and an appeal was filed by the former to the Court of tax appeals. The CTA ruled against CIR and ordered that a tax credit be issued in favor of SC Johnson and Son, Inc. Unpleased with the decision, the CIR filed an appeal to the CA which subsequently affirmed in toto the decision of the CTA. Hence, an appeal on certiorari was filed to the SC. THE MAIN ISSUE: WON SC JOHNSON AND SON,USA IS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.

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The concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty could not apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two taxes imposed under the two tax treaties are not paid under similar circumstances, they are not containing similar provisions on tax crediting. The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. The Philippines may impose one of three rates- 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state CIR vs. Estate of Benigno Case: COMMISSIONER OF INTERNAL REVENUE v. THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co - administrators Lorna Kapunan and Mario Luza Bautista (G.R. No. 147188) Date: September 14, 2004 Ponente: DAVIDE, JR., C.J . FACTS: Cibeles Insurance Corporation (CIC) authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million. Toda purportedly sold the property to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI). For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.CIC filed its corporate annual income tax return for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021. Toda then sold his entire shares of stocks in CIC to Le Hun T. Choa, as evidenced by a Deed of Sale of Shares of Stocks. Three and a half years later Toda died. The Bureau of Internal Revenue (BIR) sent an assessment notice and demand letter to the CIC for deficiency income tax for the year 1989. The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC,

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and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989. The Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment from the Commissioner of Internal Revenue for deficiency income tax for the year 1989. The Estate thereafter filed a letter of protest. The Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%. The Estate filed a petition for review with the CTA alleging that the Commissioner erred in holding the Estate liable for income tax deficiency. In its decision, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. Hence, the CTA declared that the Estate is not liable for deficiency income tax and, accordingly, cancelled and set aside the assessment issued by the Commissioner. Court of Appeals affirmed the decision of the CTA. ISSUE: WON respondent Estate is liable for the 1989 deficiency income tax of Cibeles Insurance Corporation. HELD: Yes. RATIO: A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when: 1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons; 2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by specific provision of law, to personally answer for his corporate action It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides: ―xxx SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for

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the fiscal years 1987, 1988 and 1989.” When the late Toda undertook and agreed ―to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989,‖ he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CIC‘s deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Toda‘s contractual undertaking, as contained in the Deed of Sale of Shares of Stock. T h e d e c i s i o n o f t h e C o u r t o f A p p e a l s i s r e v e r s e d a n d r e s p o n d e n t E s t a t e o f B e n i g n o P. To d a J r . w a s o r d e r e d t o pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989.

Commissioner of Internal Revenue v. Philippine American Accident Insurance Company, Inc., The Philippine American Assurance Company, Inc., and the Philippine American General Insurance Co., Inc. Facts: Respondent Insurance Companies (Respondents) paid under protest from August 1971 to September 1972 the Bureau of Internal Revenue the 3% tax imposed on lending investors by Section 195-A of Commonwealth Act No. 466 (CA 466), the National Internal Revenue Code applicable at the time. On 31 January 1973, Respondents sent a letter-claim to herein petitioner (CIR) seeking refund of the taxes paid, which letter-claim was unanswered, thus the filing of petitions before the CTA. Eventually, the issue reached the Supreme Court. Issue: Whether or not Respondents are subject to the 3% Percentage Tax as lending investors under CA 466.

(a) SC is asked to rule on whether or not the tax refund granted to Insurance Companies are tax exemptions and as such, cannot be allowed unless granted explicitly and categorically;

(b) CIR likewise contends that the definition of lending investors under CA 466 is broad enough to encompass insurance companies;

(c) CIR finally contends that Congress intended to tax twice insurance companies

Ruling:

(a) Interpretation of tax laws; tax exemption SC: The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him. Unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed. Where there is doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.

(b) Definition of Lending Investors SC: Plainly, insurance companies and lending investors are different enterprises in the eyes of the law. Lending investors cannot, for a consideration, hold anyone harmless from loss, damage or liability, nor provide compensation or indemnity for loss. The

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underwriting of risks is the prerogative of insurers, the great majority of which are incorporated insurance companies like Respondents. True, respondents granted mortgage and other kinds of loans. However, this was not done independently of respondents‘ insurance business. The granting of certain loans is one of several means of investment allowed to insurance companies. The CTA and the Court of Appeals found that the investment of premiums and other funds received by Respondents – through the granting of mortgage and other loans – was necessary to Respondents‘ business and hence, should not be taxed separately. Insurance companies are required by law to possess and maintain substantial legal reserves to meet their obligations to policyholders. As such, the creation of "investment income" has long been held to be generally, if not necessarily, essential to the business of insurance. The Court has also held that when a company is taxed on its main business, it is no longer taxable further for engaging in an activity or work which is merely a part of, incidental to and is necessary to its main business. Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to pay double percentage and fixed taxes. They merely tax lending investors, not lending activities.

(c) Different Tax Treatment of Insurance Companies and Lending Investors Section 182(A)(3) of CA 466 accorded different tax treatments to lending investors and insurance companies. The relevant portions of Section 182 state:

Sec. 182. Fixed taxes. – (A) On business xxx (3) Other fixed taxes. – The following fixed taxes shall be collected as follows, the amount stated being for the whole year, when not otherwise specified; xxx (dd) Lending investors –

1. In chartered cities and first class municipalities, five hundred pesos; 2. In second and third class municipalities, two hundred and fifty pesos; 3. In fourth and fifth class municipalities and municipal districts, one hundred and twenty-five pesos; Provided, That lending investors who do business as such in more than one province shall pay a tax of five hundred pesos.

xxx (gg) Banks, insurance companies, finance and investment companies doing business in the Philippines and franchise grantees, five hundred pesos. xxx (Emphasis supplied.)

The separate provisions on lending investors and insurance companies demonstrate an intention to treat these businesses differently. If Congress intended insurance companies to be taxed as lending investors, there would be no need for Section 182(A)(3)(gg). Section 182(A)(3)(dd) would have been sufficient. That insurance companies were included with banks, finance and investment companies also supports the CTA‘s conclusion that insurance companies had more in common with the latter enterprises than with lending investors. As the CTA pointed out, banks also regularly lend money at interest, but are not taxable as lending investors. We find no merit in petitioner‘s contention that Congress intended to subject respondents to two percentage taxes and two fixed taxes. Petitioner’s argument goes against the doctrine of strict interpretation of tax impositions. WHEREFORE, we DENY the instant petition and AFFIRM the Decision of 7 January 2000 of the Court of Appeals in CA-G.R. SP No. 36816. SO ORDERED.

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PAGCOR vs. BIR:

Facts:

With the passage of Republic Act No. (RA) 9337, the Philippine Amusement and Gaming Corporation (PAGCOR) has been excluded from the list of government-owned and –controlled corporations (GOCCs) that are exempt from tax under Section27(c) of the Tax Code; PAGCOR is now subject to corporate income tax. The Supreme Court (SC) held that the omission of PAGCOR from the list of tax-exempt GOCCs by RA 9337 does not violate the right to equal protection of the laws under Section 1, Article III of the Constitution, because PAGCOR‘s exemption from payment of corporate income tax was not based on classification showing substantial distinctions; rather, it was granted upon the corporation‘s own request to be exempted from corporate income tax. Legislative records likewise reveal that the legislative intention is to require PAGCOR to pay corporate income tax.

With regard to the issue that the removal of PAGCOR from the exempted list violates the non-impairment clause contained in Section 10, Article III of the Constitution — which provides that no law impairing the obligation of contracts shall be passed — the SC explained that following its previous ruling in the case of Manila Electric Company v. Province of Laguna 366 Phil. 428(1999), this does not apply. Franchises such as that granted to PAGCOR partake of the nature of a grant, and is thus beyond the purview of the non-impairment clause of the Constitution.

ISSUE:

W/N PAGCOR IS EXEMPTED FROM VAT. YES

RULING:

As regards the liability of PAGCOR to VAT, the SC finds Section 4.108-3 of Revenue Regulations No.(RR) 16-2005, which subjects PAGCOR and its licensees and franchisees to VAT, null and void for being contrary to the National Internal Revenue Code (NIRC), as amended by RA 9337. According to the SC, RA 9337 does not contain any provision that subjects PAGCOR to VAT. Instead, the SC finds support to the VAT exemption of PAGCOR under Section 109(k) of the Tax Code, which provides that transactions exempt under international agreements to which the Philippines is a signatory or under special laws [except Presidential Decree No. (PD) 529] are exempt from VAT. Considering that PAGCOR‘s charter, i.e., PD1869 — which grants PAGCOR exemption from taxes — is a special law, it is exempt from payment of VAT. Accordingly, the SC held that the BIR exceeded its authority in subjecting PAGCOR to VAT, and thus declared RR 16-05 null and void — insofar as it subjects PAGCOR to VAT — for being contrary to the NIRC, as amended by RA 9337.

PAGCOR is subject to income tax but remains exempt from the imposition of value-added tax. With the amendment by R.A. No. 9337 of Section 27 (c) of the National Internal Revenue Code of 1997 by omitting PAGCOR from the list of government corporations exempt for income tax, the legislative intent is to require PAGCOR to pay corporate income tax. However, nowhere in R.A. No. 9337 is it provided that PAGCOR can be subjected to VAT. Thus, the provision of RR No. 16-2005, which the respondent BIR issued to implement the VAT law, subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337.

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COMMISSIONER OF INTERNAL REVENUE, vs.ST. LUKE'S MEDICAL CENTER,

FACTS:

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation. On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting toP76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to P63,935,351.57 during trial in the First Division of the CTA. 4

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x." The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came from charitable purposes. St. Luke's had total revenues of P1,730,367,965 or approximately P1.73 billion from patient services in 1998.

ISSUE:

WON St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

RULING.

We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions 36 and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the definition of a "proprietary educational institution" as "any private school maintained and administered by private individuals or groups" with a government permit. "Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." The Court defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or [by] otherwise lessening the burden of government." To be a charitable institution, however, an organization must meet the substantive test of

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charity in Lung Center. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. 47

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that these operations be exclusive to charity. There is also a specific requirement that "no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person." The use of lands, buildings and improvements of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property "actually, directly and exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by providing that:

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. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated exclusively" for the promotion of social welfare.

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In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a hospital which receives approximately P1.73 billion from paying patients is not an institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for profit."

In Lung Center, this Court declared: "[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively.

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to institutions beneficial to the public and those which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

CIR vs. Mitsubishi Metal Corp, Atlas Consolidated Mining

Facts:

Atlas entered into a contract of loan and sale with Mitsubishi (licensed to do business in the Phils), whereby Mitsubishi agreed to loan $20M to Atlas for a new concentrator for copper production, and Atlas to sell copper produced from such machine for 15 years.

Mitsubishi in turn applied for a loan with the Eport-Import Bank of Japan (Eximbank) to cover the amount it would loan to Atlas.

Atlas paid interest payments to Mitsubishi pursuant to the loan totalling P13M, where P1.9M (15%) was automatically withheld pursuant to Sec. 24 and 53 and duly remitted to the government.

Atlas and Mitsubishi filed a claim for tax credit for the P1.9M with the CIR. (Mitsubishi waived its interest in favor of Atlas). CIR not having acted, petition for review with the CTA. The primary ground for the claim was that Mitsubishi was a mere agent of Eximbank and the funds came from the latter. The provision relied upon was Sec. 29 (b)(7)(A), which excludes from gross income:

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(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional financing institutions established by governments.

The CTA ruled in favor of Mitsubishi.

Issue:

Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Sec. 29 (b)(7)(A), and therefore exempt from withholding tax.

Ruling:

The loan and sales contract between Mitsubishi and Atlas does not reference Eximbank. The contract can only be interpreted as between them. There is no basis to assert that Mitsubishi was a mere agent of Eximbank.

Therefore when Mitsubishi obtained a loan from Eximbank, it did so independently, although the purpose of which was to be used for the importation of copper from Atlas. As such the Mitsubishi-Eximbank contract is separate from the Mitsubishi-Atlas contract.

It is settled that that laws granting tax exemption are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. The burden of proof lies with the party claiming exemption.

Significantly, private respondents are not even under the enumeration under Section 29 (b)(7)(A). The tax liability of a party cannot be glossed over of a supposed "broad, pragmatic analysis" without substantial supportive evidence. Even the invocation of comity is not enough (allegation that the Eximbank funds were governmental) as it would lead to Philippine corporations dealing with foreign entities, which in turn negotiate independently with their governments, to avail of tax exemption.

Kepco v. CIR [G.R. No. 179961 January 31, 2011]

Facts:

Kepco is a domestic corporation engaged in the independent production of of energy. It sells its electricity to NaPoCor, who is a VAT exempt entity. In 1999, Kepco incurred input VAT amounting to PhP 10.5 Million on its domestic purchase of goods and services used in the production and sale of electricity to Napocor.

Kepco filed an administrative claim for refund on the unutilized input taxes. The CTA denied Kepco‘s claim for refund for failure to substantiate its effectively zero-rated sales during the taxable year. The CTA held that Kepco failed to comply with the invoicing requirements. The CTA reasoned that Kepco‘s failure to comply with the requirement of imprinting the words ―zero-rated‖ on its official receipts resulted in non-entitlement to the benefit of VAT zero-rating and denial of Kepco‘s claim for refund of input tax.

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Issue:

Whether or not Kepco‘s failure to imprint the words ―zero-rated‖ on its VAT official receipts issued to NPC is fatal to its claim for refund of unutilized input tax credits.

Held:

Yes. For the effective zero rating of such services, however, the VAT-registered taxpayer must comply with invoicing requirements under Sections 113 and 237 of the 1997 NIRC as implemented by Section 4.108-1 of R.R. No. 7-95, thus:

Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –

(A) Invoicing Requirements. – A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer‘s identification number; and

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax.

(B) Accounting Requirements. – Notwithstanding the provisions of Section 233, all persons subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded.1âwphi1 The subsidiary journals shall contain such information as may be required by the Secretary of Finance.10 (Emphasis supplied)

Sec. 237. Issuance of Receipts or Sales or Commercial Invoices. – All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, however, That in the case of sales, receipts or transfers in the amount of One Hundred Pesos (P100.00) or more, or regardless of amount, where the sale or transfer is made by a person liable to value-added tax to another person also liable to value-added tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client; Provided, further, That where the purchaser is a VAT-registered person, in addition to the information herein required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in his place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to an internal revenue tax from compliance with the provisions of this Section.11

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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;

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 invoices or receipts and this shall be considered as "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. (Emphases supplied)

Also, as correctly noted by the CTA En Banc, in Kepco‘s approved Application/Certificate for Zero Rate issued by the CIR on January 19, 1999, the imprinting requirement was likewise specified, viz:

Valid only for sale of services from Jan. 19, 1999 up to December 31, 1999 unless sooner revoked.

Note: Zero-Rated Sales must be indicated in the invoice/receipt.12

Indeed, it is the duty of Kepco to comply with the requirements, including the imprinting of the words "zero-rated" in its VAT official receipts and invoices in order for its sales of electricity to NPC to qualify for zero-rating.

It must be emphasized that the requirement of imprinting the word "zero-rated" on the invoices or receipts under Section 4.108-1 of R.R. No. 7-95 is mandatory as ruled by the CTA En Banc, citing Tropitek International, Inc. v. Commissioner of Internal Revenue.13 In Kepco Philippines Corporation v. Commissioner of Internal Revenue,14the CTA En Banc explained the rationale behind such requirement in this wise:

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The imprinting of "zero-rated" is necessary to distinguish sales subject to 10% VAT, those that are subject to 0% VAT (zero-rated) and exempt sales, to enable the Bureau of Internal Revenue to properly implement and enforce the other provisions of the 1997 NIRC on VAT, namely:

1. Zero-rated sales [Sec. 106(A)(2) and Sec. 108(B)];

2. Exempt transactions [Sec. 109] in relation to Sec. 112(A);

3. Tax Credits [Sec. 110]; and

4. Refunds or tax credits of input tax [Sec. 112]

x x x

Records disclose, as correctly found by the CTA that Kepco failed to substantiate the claimed zero-rated sales ofP10,514,023.92. The wordings "zero-rated sales" were not imprinted on the VAT official receipts presented by Kepco (marked as Exhibits S to S-11) for taxable year 1999, in clear violation of Section 4.108-1 of R.R. No. 7-95 and the condition imposed under its approved Application/Certificate for Zero-rate as well.

Thus, for Kepco‘s failure to substantiate its effectively zero-rated sales for the taxable year 1999, the claimedP10,527,202.54 input VAT cannot be refunded.

Regarding Kepco‘s contention, that non-compliance with the requirement of invoicing would only subject the non-complying taxpayer to penalties of fine and imprisonment under Section 264 of the Tax Code, and not to the outright denial of the claim for tax refund or credit, must likewise fail. Section 264 categorically provides for penalties in case of "Failure or Refusal to Issue Receipts or Sales or Commercial Invoices, Violations related to the Printing of such Receipts or Invoices and Other Violations," but not to penalties for failure to comply with the requirement of invoicing. As recently held in Kepco Philippines Corporation v. Commissioner of Internal Revenue,18 "Section 264 of the 1997 NIRC was not intended to excuse the compliance of the substantive invoicing requirement needed to justify a claim for refund on input VAT payments."

The invoicing requirement is reasonable and must be strictly complied with, as it is the only way to determine the veracity of its claim. Well-settled in this jurisdiction is the fact that actions for tax refund, as in this case, are in the nature of a claim for exemption and the law is construed in strictissimi juris against the taxpayer. The pieces of evidence presented entitling a taxpayer to an exemption are also strictissimi scrutinized and must be duly proven.23

G.R. No. 179115 September 26, 2012

ASIA INTERNATIONAL AUCTIONEERS, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Facts:

AIA is a duly organized corporation operating within the Subic Special Economic Zone. It is engaged in the importation of used motor vehicles and heavy equipment which it sells to the public through auction.4

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On August 25, 2004, AIA received from the CIR a Formal Letter of Demand, dated July 9, 2004, containing an assessment for deficiency value added tax (VAT) and excise tax.

AIA claimed that it filed a protest letter dated August 29, 2004 through registered mail on August 30, 2004.6 It also submitted additional supporting documents on September 24, 2004 and November 22, 2004.7

The CIR failed to act on the protest, prompting AIA to file a petition for review before the CTA on June 20, 2005,8to which the CIR filed its Answer on July 26, 2005.9

On March 8, 2006, the CIR filed a motion to dismiss10 on the ground of lack of jurisdiction citing the alleged failure of AIA to timely file its protest which thereby rendered the assessment final and executory. The CIR denied receipt of the protest letter dated August 29, 2004 claiming that it only received the protest letter dated September 24, 2004 on September 27, 2004, three days after the lapse of the 30-day period prescribed in Section 22811 of the Tax Code.12

In opposition to the CIR‘s motion to dismiss, AIA submitted the following evidence to prove the filing and the receipt of the protest letter dated August 29, 2004: (1) the protest letter dated August 29, 2004 with attached Registry Receipt No. 3824;13 (2) a Certification dated November 15, 2005 issued by Wilfredo R. De Guzman, Postman III, of the Philippine Postal Corporation of Olongapo City, stating that Registered Letter No. 3824 dated August 30, 2004 , addressed to the CIR, was dispatched under Bill No. 45 Page 1 Line 11 on September 1, 2004 from Olongapo City to Quezon City;14 (3) a Certification dated July 5, 2006 issued by Acting Postmaster, Josefina M. Hora, of the Philippine Postal Corporation-NCR, stating that Registered Letter No. 3824 was delivered to the BIR Records Section and was duly received by the authorized personnel on September 8, 2004;15 and (4) a certified photocopy of the Receipt of Important Communication Delivered issued by the BIR Chief of Records Division, Felisa U. Arrojado, showing that Registered Letter No. 3824 was received by the BIR.16 AIA also presented Josefina M. Hora and Felisa U. Arrojado as witnesses to testify on the due execution and the contents of the foregoing documents.

On appeal to the Court of Tax Appeals, the CIR‘s motion to dismiss was granted, holding that "while a mailed letter is deemed received by the addressee in the course of the mail, still, this is merely a disputable presumption, subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter indeed was received by the addressee."18

The CTA First Division faulted AIA for failing to present the registry return card of the subject protest letter. Moreover, it noted that the text of the protest letter refers to a Formal Demand Letter dated June 9, 2004 and not the subject Formal Demand Letter dated July 9, 2004. Furthermore, it rejected AIA‘s argument that the September 24, 2004 letter merely served as a cover letter to the submission of its supporting documents pointing out that there was no mention therein of a prior separate protest letter.

The CTA En Banc affirmed the ruling of the CTA First Division holding that AIA‘s evidence was not sufficient to prove receipt by the CIR of the protest letter dated August 24, 2004.

Hence, the instant petition.

26

Apparently, , both parties discussed the legal bases for AIA‘s tax liability, unmindful of the fact that this case stemmed from the CTA‘s dismissal of AIA‘s petition for review for failure to file a timely protest, without passing upon the substantive merits of the case.

Relevantly, on January 30, 2008, AIA filed a Manifestation and Motion with Leave of the Honorable Court to Defer or Suspend Further Proceedings20 on the ground that it availed of the Tax Amnesty Program under Republic Act 948021 (RA 9480), otherwise known as the Tax Amnesty Act of 2007. On February 13, 2008, it submitted to the Court a Certification of Qualification22 issued by the BIR on February 5, 2008 stating that AIA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA 9480.

Issue/s:

With AIA‘s availment of the Tax Amnesty Program under RA 9480, the Court is tasked to first determine its effects on the instant petition.

Ruling:

A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violating a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate.23

A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.24

In 2007, RA 9480 took effect granting a tax amnesty to qualified taxpayers for all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December 31, 2005.25

The Tax Amnesty Program under RA 9480 may be availed of by any person except those who are disqualified under Section 8 thereof, to wit:

Section 8. Exceptions. — The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act:

(a) Withholding agents with respect to their withholding tax liabilities;

(b) Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government;

(c) Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt Practices Act;

(d) Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;

(e) Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and transactions, and

27

malversation of public funds and property under Chapters III and IV of Title VII of the Revised Penal Code; and

(f) Tax cases subject of final and executory judgment by the courts.(Emphasis supplied)

The CIR contends that AIA is disqualified under Section 8(a) of RA 9480 from availing itself of the Tax Amnesty Program because it is "deemed" a withholding agent for the deficiency taxes. This argument is untenable.

The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT and excise tax to the BIR under relevant provisions of the Tax Code. Hence, the argument that AIA is "deemed" a withholding agent for these deficiency taxes is fallacious.

Indirect taxes, like VAT and excise tax, are different from withholding taxes.1âwphi1 To distinguish, in indirect taxes, the incidence of taxation 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.26 On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions27and remits the same to the government. Due to this difference, the deficiency VAT and excise tax cannot be "deemed" as withholding taxes merely because they constitute indirect taxes. Moreover, records support the conclusion that AIA was assessed not as a withholding agent but, as the one directly liable for the said deficiency taxes.28

The CIR also argues that AIA, being an accredited investor/taxpayer situated at the Subic Special Economic Zone, should have availed of the tax amnesty granted under RA 939929 and not under RA 9480. This is also untenable.

RA 9399 was passed prior to the passage of RA 9480. RA 9399 does not preclude taxpayers within its coverage from availing of other tax amnesty programs available or enacted in futuro like RA 9480. More so, RA 9480 does not exclude from its coverage taxpayers operating within special economic zones. As long as it is within the bounds of the law, a taxpayer has the liberty to choose which tax amnesty program it wants to avail.

Lastly, the Court takes judicial notice of the "Certification of Qualification"30 issued by Eduardo A. Baluyut, BIR Revenue District Officer, stating that AlA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA 9480. In the absence of sufficient evidence proving that the certification was issued in excess of authority, the presumption that it was issued in the regular performance of the revenue district officer's official duty stands.31

2nd Batch

PPI vs Fertiphil

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Facts:

- Planters Products Inc. (PPI) and Fertiphil Corp. are domestic corp. engaged in the business of importation and distribution of fertilizers, pesticides and agricultural chemicals.

- By virtue of LOI No. 1465 issued by then Pres. Marcos, Fertiphil and other domestic corps paid P10.00. for every bag of fertilizer sold to Fertilizer and Pesticide Authority (FPA)

- FPA then in turn remitted the amount to PPI for its rehabilitation according to the express mandate of the LOI

- After EDSA, the imposition of P10.00 by the FPA was voluntarily stopped. - Fertiphil demanded from PPI the refund of P6,698,144.00 - PPI refused. - Fertiphil filed a case for collection and a damage suit against FPA and PPI in the

RTC. - RTC: declared the LOI as void and unconstitutional. - Trial court granted Fertiphil‘s motion for the issuance of a writ of execution

pending appeal. - PPI assailed the propriety of the execution pending appeal before the CA and

SC. - SC: ordered Fertiphil to return all the property of PPI taken in the course of

execution pending appeal or value thereof.

- After decision became final and executory, PPI moved for its execution before the trial court.

- Fertiphil moved to dismiss PPI‘s appeal to the trial court‘s decision dated Nov, 20,1991 citing as grounds the non-payment of appellate docket fees and alleged failure of PPI to prosecute the appeal within a reasonable time.

- Trial court denied the motion. Payment of the appellate docket fee is a new requirement under the 1997 Rules of Civil Procedure which was not yet applicable when PPI filed its appeal in 1992.

- CA held that although PPI filed its appeal in 1992, the 1997 Rules of Civil Procedure should be followed since it applies to actions pending and undetermined at the time of passage. Thus, due to PPI‘s failure to pay appellate docket fee, the trial court‘s decision became final and executory.

Issue:

Whether or not the 1997 Rules of Civil Procedure be applied retroactively.

Held:

Supreme Court held that as a GR: Rules of procedure apply to actions pending and undetermined at the time of their pasaage, hence retrospective in nature. But as an exception, such retroactive application is only allowed if no vested rights are impaired.

-PPI filed its appeal in 1992 and all the requirements for the perfection of appeal was the filing of the Notice of Appeal with the court which rendered the judgment. PPI complied.

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-The 1997 Rules of Civil Procedure which took effect on July 1, 1997 and which required that appellate docket and other lawful fees should be paid within the same period for perfecting an appeal. But in this case, it will not affect PPI‘s appeal which was already perfected in 1992.

G.R. No. 149110 April 9, 2003 NATIONAL POWER CORPORATION vs. CITY OF CABANATUAN

FACTS:

The City of Cabantuan assessed franchise taxes on National Power Corporation (NPC) pursuant to Ordinance No. 165-92. NPC is a government-owned and controlled corporation created under Commonwealth Act No. 120, as amended, tasked to undertake the "development of hydroelectric generations of power and the production of electricity from nuclear, geothermal and other sources, as well as, the transmission of electric power on a nationwide basis." NPC sells electric power to the residents of Cabanatuan City,

NPC, whose capital stock was subscribed and paid wholly by the Philippine Government, refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on government entities. It also contended that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees in accordance with sec. 13 of Rep. Act No. 6395. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the taxing power of the respondent city government to private entities that are engaged in trade or occupation for profit. Since it is government instrumentality, it may not be taxed by the City government citing Basco vs PAGCOR. Another contention is that the provision in the LGC, which is a general law withdrawing the exemption cannot prevail over or impliedly repeal the exemption granted by its charter which is a special law. In fact, its charter should prevail over the LGC because that the power of the local government to impose franchise tax is subordinate to petitioner's exemption from taxation which is an exercise of police power.

The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly interest. Respondent alleged that petitioner's exemption from local taxes has been repealed by section 193 of Rep. Act No. 7160.

ISSUES:

1) WON National Power Corporation is liable to pay franchise tax to the City of Cabanatuan

2) WON the enactment of the new LGC (RA 7160) has withdrawn the tax exemption granted to NPC in RA 6395

RULING:

1) NPC is liable for payment of the annual franchise tax to the city government.

a. Lifeblood Doctrine; History and importance of Local Taxation

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b. The Basco case was decided prior to the effectivity of the LGC, when no law empowering the local government units to tax instrumentalities of the National Government was in effect. However, as this Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos, In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special franchise. This is to avoid any confusion when the word franchise is used in the context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state."53 It is not levied on the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise.56 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. Verily, to determine whether the petitioner is covered by the franchise tax in question, the following requisites should concur: (1) that petitioner 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 respondent city government nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax.46 In enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an instrumentality of the national government, was subject to real property tax,

c. In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special franchise. This is to avoid any confusion when the word franchise is used in the context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state."53 It is not levied on the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise.56 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. Verily, to determine whether the petitioner is covered by the franchise tax in question, the following requisites should concur: (1) that petitioner 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 respondent city government. On the basis of its gross income and its charter, both of these requisites are fulfilled.

d) To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name,61 and can exercise all the powers of a corporation under the Corporation Code. The ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is not engaged in business.

2) The LGC provision has withdrawn NPC‘s tax exemption, citing as basis MERALCO vs Province of Laguna:

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―Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that 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 (1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to the three enumerated entities. Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding calendar based on the incoming receipts realized within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly manifested by the language used on (sic) Sections 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be not only tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used‖

ABAKADA GURO PARTY LIST et al. vs. THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR. (G.R. No. 168056, September 1, 2005)

FACTS

R.A. No. 9337 (R-VAT Law) is a consolidation of three legislative bills—House Bill Nos. 3555 and 3705, and Senate Bill No. 1950. The President signed R.A. 9337 into law on May 24, 2005 and it took effect on July 1, 2005. Thereafter, the Court issued a temporary restraining order, effective immediately, enjoining respondents from enforcing and implementing the law.

In G.R. No. 168056 Petitioners ABAKADA GURO Party List, et al. questioned the constitutionality of Sections 4 (imposing a 10% VAT on sale of goods and properties), Section 5 (imposing a 10% VAT on importation of goods) and Section 6 (imposing a 10% VAT on sale of services and use or lease of properties) of R.A. No. 9337, as they constitute abandonment by Congress of its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution. These questioned provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, under the following conditions:

(1) VAT collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds 2 4/5 %; or

(2) National government deficit as a percentage of GDP of the previous year exceeds 1 ½%.

In G.R. No. 168207, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the constitutionality of Sections 4, 5 and 6. Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12% on the ground that it amounts to an undue delegation of legislative power, the increase in the VAT rate to 12% contingent on any of the two conditions being satisfied violates

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the due process clause embodied in Article III, Section 1 of the Constitution as it imposes an unfair and additional tax burden on the people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would be returned to the original 10% if the conditions are no longer satisfied; (2) the people are unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should only be based on fiscal adequacy.

In G.R. No. 168461, the Association of Pilipinas Shell Dealers, Inc.,et al., assailed the following provisions:

1) Section 8, requiring that the input tax on depreciable goods shall be amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds P1, 000,000.00;

2) Section 8, imposing a 70% limit on the amount of input tax to be credited against the output tax; and

3) Section 12, authorizing the Government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods and properties) and 108 (sale of services and use or lease of properties) of the NIRC. Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and confiscatory.

According to petitioners, the contested sections impose limitations on the amount of input tax that may be claimed, that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process of law, and that like any other property or property right, the input tax credit may be transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-added even if there is no profit or value-added.

Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions with the government, is not based on real and substantial differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer the consequences thereof for it wipes out whatever meager margins the petitioners make.

In G.R. No. 168463, several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed a petition for certiorari questioning the constitutionality of R.A. No. 9337 in that Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power and that certain Sections inserted by the Bicameral Conference Committee which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the Constitution, which provides that all appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives.

In G.R. No. 168730, Governor Enrique T. Garcia filed a petition for certiorari and prohibition alleging unconstitutionality of the law on the ground that the limitation on the

33

creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle that tax collection and revenue should be solely allocated for public purposes and expenditures. Petitioner Garcia further claims that allowing these establishments to pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1) of the Constitution.

MAIN ISSUE

Whether or not R.A. No. 9337 is unconstitutional;

PROCEDURAL ISSUE:

Whether or not R.A. No. 9337 violates Article VI, Section 24 of the 1987 Constitution (all appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives);

SUBSTANTIVE ISSUES:

(1) Whether or not the 12% VAT rate increase impose an unfair and unnecessary additional tax burden;

(2) With regard to Sections 4, 5 and 6 of R.A. No. 9337, whether there is undue delegation of legislative power;

(3) Whether Sections 8 and 12 violate Article III, Section 1 (due process clause and equal protection clause), and Article VI, Section 28(1) (progressive system of taxation);

RULING

R.A. No. 9337 is constitutional.

PROCEDURAL ISSUE

(1) R.A. No. 9337 does not violate Article VI, Section 24 of the Constitution on Exclusive Origination of Revenue Bills.

Petitioners claim that the amendments to certain provisions of the NIRC did not at all originate from the House. The sections of the NIRC which the Senate amended are not intended to be amended by the House of Representatives in violation of Article VI, Section 24 of the Constitution, which reads: Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments.

In the present cases, it was House Bill Nos. 3555 and 3705 that initiated the move for amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions on the value-added tax but also amendments to NIRC provisions on other kinds of taxes.

What the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected

34

as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. In Tolentino vs. Secretary of Finance, the Court held, thus: it is not the law – but the revenue bill – which is required by the Constitution to "originate exclusively" in the House of Representatives. A bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. As a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute – and not only the bill which initiated the legislative process culminating in the enactment of the law – must substantially be the same as the House bill would be to deny the Senate‘s power not only to "concur with amendments" but also to "propose amendments." It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.

Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill. Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the House bills are in furtherance of the intent of the House in initiating the subject revenue bills and are germane to the subject matter and purposes of the house bills, which is to supplement our country‘s fiscal deficit, among others. Thus, the Senate acted within its power to propose those amendments.

SUBSTANTIVE ISSUES

(1) The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden.

Petitioners argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden on the people and that the 12% increase, dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to the original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not provide for a return to the 10% rate nor does it empower the President to so revert if, after the rate is increased to 12%, the VAT collection goes below the 24/5 of the GDP of the previous year or that the national government deficit as a percentage of GDP of the previous year does not exceed 1½%.

There is no basis for petitioners‘ fear of a fluctuating VAT rate because the law itself does not provide that the rate should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of judicial addition or subtraction.

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Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%). The condition set for increasing VAT rate to 12% has economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is not effective in the function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be ineffectual.

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate.

That the first condition amounts to an incentive to the President to increase the VAT collection does not render it unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue. The principle of fiscal adequacy simply means that sources of revenues must be adequate to meet government expenditures and their variations.

(2) There is no Undue Delegation of Legislative Power.

Petitioners contend in common that Sections 4, 5 and 6 of R.A. No. 9337 giving the President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation of the legislative power to tax. They allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual abdication by Congress of its exclusive power to tax because such delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which provides: The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government. They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services, which cannot be included within the purview of tariffs as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government and usually imposed on goods or merchandise imported or exported.

The principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. Thus the corollary principle of non-delegation of powers—potestas delegata non delegari potest (what has been delegated, cannot be delegated). As far as the legislature is concerned, purely legislative power, which can never be delegated, has been described as the authority to make a complete law – complete as to the time when it shall take effect and as to whom it shall be applicable – and to determine the expediency of its enactment.

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In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate; and (b) fixes a standard — the limits of which are sufficiently determinate and determinable — to which the delegate must conform in the performance of his functions. A sufficient standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be effected. The test whether or not a statute constitutes an undue delegation of legislative power is whether the statute was complete in all its terms and provisions when it left the hands of the legislature so that nothing was left to the judgment of any other appointee or delegate of the legislature (People v. Vera).

However, a distinction must be made between delegation of power to make the laws which necessarily involves discretion as to what it shall be, which constitutionally may not be done, and delegation of authority or discretion as to its execution to be exercised under and in pursuance of the law, to which no valid objection can be made. What is thus left to the administrative official is not the legislative determination of what public policy demands, but simply the ascertainment of what the facts of the case require to be done according to the terms of the law by which he is governed. The legislature may provide that a law shall take effect upon the happening of future specified contingencies leaving to some other person or body the power to determine when the specified contingency has arisen, but the legislature must prescribe sufficient standards, policies or limitations on their authority.

Therefore, under the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which contains the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. Inasmuch as the law specifically uses the word shall, the time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.

Furthermore, the Court finds no merit to the contention of petitioners that the law effectively nullified the President‘s power of control over the Secretary of Finance by mandating the fixing of the tax rate by the President ―upon the recommendation of the Secretary of Finance‖. Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds 24/5% or the national government deficit as a percentage of GDP of the previous year exceeds 1½%. If either of these two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority.

(3) There is no violation of the Due Process Clause and Equal Protection Clause.

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Petitioners argue that Section 8 and Section 12 of R.A. No. 9337 are arbitrary, oppressive, excessive and confiscatory premised on the constitutional right against deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of the Constitution. Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.

Section 8 of R.A. No. 9337 imposes a limitation on the amount of input tax that may be credited against the output tax. It states, in part: "Provided, that the input tax inclusive of the 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.". Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a portion of the input tax that has already been paid cannot now be credited against the output tax.

Petitioners‘ argument assumes that the input tax exceeds 70% of the output tax, and therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less than 70% of the output tax, then 100% of such input tax is still creditable. More importantly, the excess input tax, if any, is retained in a business‘s books of accounts and remains creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that "if the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters." In addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that such input taxes have not been applied against the output taxes. Such unused input tax may be used in payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly contend. It ends at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact that such unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under Section 112(B).

Input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three possible scenarios may arise: (1) if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid and passed on by the suppliers, then no payment is required; (2) when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to the Bureau of Internal Revenue (BIR); and (3) if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayer‘s option.

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only up to the extent of 70% of the output tax. In layman‘s term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes that is due to him on a taxable transaction. There is no retention of any tax collection because the person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such input tax to the BIR. The party directly liable for the payment

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of the tax is the seller. What only needs to be done is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output taxes.

Petitioners also argue that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered person‘s entitlement to the creditable input tax is a mere statutory privilege. The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory privileges. The state may change or take away rights, which were created by the law of the state, although it may not take away property, which was vested by virtue of such rights.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337. The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or importation of capital goods with acquisition cost of P1 Million, exclusive of the VAT component. Such spread out only poses a delay in the crediting of the input tax. Petitioners‘ argument is without basis because the taxpayer is not permanently deprived of his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to a 4-year interest-free loan to the government. In the same breath, Congress also justified its move by saying that the provision was designed to raise an annual revenue of 22.6 billion.

With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable transactions, Section 12 of R.A. No. 9337merely provided a more simplified VAT withholding system. The government in this case is constituted as a withholding agent with respect to their payments for goods and services. Prior to its amendment by Section 12, Section 114(C) of the NIRC provided for different rates of value-added taxes to be withheld. Under the present Section these different rates, except for the 10% on lease or property rights payment to nonresidents, were deleted, and a uniform rate of 5% is applied.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances." The equal protection clause does not require the universal application of the laws on all persons or things without distinction. What the clause requires is equality among equals as determined according to a valid classification. By classification is meant the grouping of persons or things similar to each other in certain particulars and different from all others in these same particulars. The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the State‘s power is entitled to presumption of validity.

(4) R.A. 9337 satisfies the standards of Uniformity and Equitability in Taxation.

Article VI, Section 28(1) of the Constitution reads in part: The rule of taxation shall be uniform and equitable. Uniformity in taxation means that all taxable articles or kinds of

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property of the same class shall be taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times.

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease of properties. These same sections also provide for a 0% rate on certain sales and transaction. The law does not make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands uniformity within the particular class.

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding P1,500,000.00. Also, basic marine and agricultural food products in their original state are still not subject to the tax, thus ensuring that prices at the grassroots level will remain accessible.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross annual sales and/or receipts not exceeding P1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing. Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum products and natural gas were reduced. Percentage tax on domestic carriers was removed. Power producers are now exempt from paying franchise tax. Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from a previous 32%. Intercorporate dividends of non-resident foreign corporations are still subject to 15% final withholding tax but the tax credit allowed on the corporation‘s domicile was increased to 20%. The Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore. Even the sale by an artist of his works or services performed for the production of such works was not spared. All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely on the consumers.

(5) There is no violation of the Progressive System of Tax Principle.

Lastly, petitioners contend that the limitation on the creditable input tax is anything but progressive. It is the smaller business with higher input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayer‘s ability to pay. Taxation is progressive when its rate goes up depending on the resources of the person affected.

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The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. The disparity lies in the income earned by a person or profit margin marked by a business, such that the higher the income or profit margin, the smaller the portion of the income or profit that is eaten by VAT. Conversely, the lower the income or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino case, thus: The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall ‗evolve a progressive system of taxation.‘ The constitutional provision has been interpreted to mean simply that ‗direct taxes are to be preferred as much as possible, indirect taxes should be minimized.‘ Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes which are regressive, which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VI, Section 28 (1).

All things considered, there is no raison d'être for the unconstitutionality of R.A. No. 9337.

G.R. No. 153793 August 29, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact) Respondent.

FACTS:

Respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in "manufacturing, marketing on wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile products." Through JUBANITEX‘s General Manager, Marina Q. Guzman, the corporation appointed and engaged the services of respondent as commission agent. It was agreed that respondent will receive 10% sales commission on all sales actually concluded and collected through her efforts.

In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from which JUBANITEX withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted the same to the BIR.

On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended that her sales commission income is not taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. Source, according to respondent is the situs of the activity which produced the income. And since the source of her income were her marketing activities in Germany, the income she derived from said activities is not subject to Philippine income taxation.

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The BIR denied respondent‘s claim for refund.

ISSUE:

Whether or not respondent‘s sales commission income is taxable in the Philippines.

RULING:

Respondent‘s sales commission income is taxable in the Philippines; hence, she is not entitled a refund.

Pursuant to Sec. 25 (A(1)) & (B) of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation on their income received from all sources within the Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the income‘s "source."

"Source" is not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations.

The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered.

In the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioner‘s interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income.

After having established the principle, the decisive factual consideration now is the sufficiency of evidence to prove that the services she rendered were performed in Germany.

The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation.

What she presented as evidence to prove that she performed income producing activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients. However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and whether these sales were truly concluded in Germany, respondent presented no such evidence. Neither did she establish reasonable connection between the orders/instructions faxed and the reported monthly sales purported to have transpired in Germany.

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Furthermore, respondent presented no evidence to prove that JUBANITEX does not sell embroidered products in the Philippines and that her appointment as commission agent is exclusively for Germany and other European markets.

In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate to support the conclusion that it was in Germany where she performed the income producing service which gave rise to the reported monthly sales in the months of March and May to September of 1995. She thus failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund should be denied.

CIR vs. AMERICAN EXPRESS INTERNATIONAL, INC.

FACTS:

Respondent is a Philippine branch of American Express International, Inc., a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, U.S.A., with office in the Philippines is engaged primarily to facilitate the collections of Amex-HK receivables from card members situated in the Philippines and payment to service establishments in the Philippines.

Amex Philippines registered itself with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT) taxpayer and was issued VAT Registration Certificate. On April 13, 1999, respondent filed with the BIR a letter-request for the refund of its 1997 excess input taxes in the amount of P3,751,067.04, which amount was arrived at after deducting from its total input VAT paid of P3,763,060.43 its applied output VAT liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively. Respondent cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to state:

‗Section 110. Tax Credits. -

x x x x x x x x x

‗(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. Any input tax attributable to the purchase of capital goods or 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.‘

There being no immediate action on the part of the petitioner, respondent filed a Petition for Review. Respondent contends that under Sec 102 the Tax Code, Export sales by a VAT-registered person, the consideration for which is paid for in acceptable foreign currency inwardly remitted to the Philippines and accounted for in accordance with existing regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent (0%). According to respondent, being a VAT-registered entity, it is subject to the VAT imposed under Title IV of the Tax Code.

ISSUE:

WON respondent is entitled to the refund of the amount of P3,352,406.59 allegedly representing excess input VAT for the year 1997.

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HELD:

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% percent of gross receipts derived by any person engaged in the sale of services. Xxx Provided That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

(1) x x x

(2) Services other than those mentioned in the preceding subparagraph, the consideration is paid for in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the BSP. x x x.‘

The law is very clear. Under the last paragraph quoted above, services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated. Respondent is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident (Hong Kong based) foreign client, for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is not in the same category as ―processing, manufacturing or repacking of goods‖ and should, therefore, be zero-rated.

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax.[51] Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed. Confusion in zero rating arises because petitioner equates the performance of a particular type of service with the consumption of its output abroad. In the present case, the facilitation of the collection of receivables is different from the utilization or consumption of the outcome of such service. While the facilitation is done in the Philippines, the consumption is not. Respondent renders assistance to its foreign clients -- the ROCs outside the country -- by receiving the bills of service establishments located here in the country and forwarding them to the ROCs abroad. The consumption contemplated by law, contrary to petitioner‘s administrative interpretation, does not imply that the service be done abroad in order to be zero-rated.

Consumption is ―the use of a thing in a way that thereby exhausts it.‖Applied to services, the term means the performance or ―successful completion of a contractual duty, usually resulting in the performer‘s release from any past or future liability x x x.‖The services rendered by respondent are performed or successfully completed upon its sending to its foreign client the drafts and bills it has gathered from service establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines. Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can only be a ―predetermined end of a course‖ when determining the service ―location or position x x x for legal purposes.‖ Respondent‘s facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. Under the destination principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent.

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However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, ―paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP].‖Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the service be performed in the Philippines; second, the service fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations. Indeed, these three requirements for exemption from the destination principle are met by respondent. Its facilitation service is performed in the Philippines. It falls under the second category found in Section 102(b) of the Tax Code, because it is a service other than ―processing, manufacturing or repacking of goods‖ as mentioned in the provision. Undisputed is the fact that such service meets the statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it should be zero-rated. In sum, having resolved that transactions of respondent are zero-rated, the Court upholds the former‘s entitlement to the refund.

G.R. No. 144104 June 29, 2004 LUNG CENTER OF THE PHILIPPINES, petitioner, vs.QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon City,respondents

FACTS:

Petitioner Lung Center of the Philippines is a non-stock and non-profit entity. It is the registered owner of a parcel of land. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes. The petitioner filed a Claim for Exemption from real property taxes with the City Assessor, predicated on its claim that it is a charitable institution. The petitioner‘s request was denied, and a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of its hospital operation is to serve charity patients. The petitioner contends that it is a charitable institution and, as such, is exempt from real property taxes. The QC-LBAA rendered judgment dismissing the petition and holding the petitioner liable for real property taxes.6

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ISSUES:

(a) Whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160;

(b) Whether the real properties of the petitioner are exempt from real property taxes.

RULING:

On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.11

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions of the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines.

The medical services of the petitioner are to be rendered to the public in general in any and all walks of life including those who are poor and the needy without discrimination. After all, any person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity.

As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust purposes and cannot be diverted to private profit or benefit.

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character as a charitable institution simply because the gift or donation is in the form of subsidies granted by the government

second issue, that those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY,

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DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively."40 If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation.41 The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law.42 Solely is synonymous with exclusively.43

Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes.45 On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes.

CIR vs. St. Luke’s

In a nutshell: St. Luke‘s Medical Center, Inc. (St. Luke‘s) is a hospital organized as a non-stock and non-profit corporation. St. Luke‘s accepts both paying and non-paying patients. With respect to its non-paying patients, St. Luke‘s is exempted from income tax pursuant to Sec. 30 (E) and (G) of the NIRC for being a non-stock corporation or organization operated exclusively for charitable or social welfare purposes. Accepting paying patients does not destroy the exemption of St. Luke‘s under Sec. 30 of the NIRC. Instead, the last paragraph of Sec. 30 of the NIRC provides that St. Luke‘s activities conducted for profit, regardless of the disposition of such income, shall be subject to tax imposed under this Code. What is the income tax rate to be applied to St. Luke‘s activities conducted for profit? With respect to its paying patients, St. Luke‘s is subject to the 10% preferential tax rate of proprietary non-profit hospitals under Section 27(B). Relevant Sections: Before discussing the case, let us take a look at the relevant sections of the law in question. Section 27(B) of the National Internal Revenue Code (NIRC) states: (B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term ‗unrelated trade, business or other activity‘ means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A ‗proprietary educational institution‘ is any

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private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. (Emphasis supplied) In comparison, Section 30(E) and Section 30(G) state: Sec. 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: x x x x (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 inure to the benefit of any member, organizer, officer or any specific person; x x x x (G) Civic League or organization not organized for profit but operated exclusively for the promotion of social welfare x x x x 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 of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)

CASE DIGEST Facts: St. Luke‘s Medical Center, Inc. (St. Luke‘s) is a hospital organized as a non-stock and non-profit corporation. The BIR assessed St. Luke‘s deficiency taxes for 1998 comprised of deficiency income tax, value-added tax, and withholding tax. The BIR claimed that St. Luke‘s should be liable for income tax at a preferential rate of 10% as provided for by Section 27(B). Further, the BIR claimed that St. Luke‘s was actually operating for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover, the hospital‘s board of trustees, officers and employees directly benefit from its profits and assets. On the other hand, St. Luke‘s maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes exempt from income tax under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption. Issue:

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The sole issue is whether St. Luke‘s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-profit hospitals. Ruling: Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means private, following the definition of a ―proprietary educational institution‖ as ―any private school maintained and administered by private individuals or groups‖ with a government permit. “Non-profit” means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution‘s purposes and all its activities conducted not for profit. “Non-profit” does not necessarily mean “charitable.” In Collector of Internal Revenue v. Club Filipino Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club was primarily funded by membership fees and dues. If it had profits, they were used for overhead expenses and improving its golf course. The club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-making enterprise. The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined ―charity‖ in Lung Center of the Philippines v. Quezon City as ―a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or [by] otherwise lessening the burden of government.‖ However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Sec. 30. To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury

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The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. (Emphasis supplied) Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution ―actually, directly and exclusively‖ use the property for a charitable purpose. (Emphasis supplied) To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property ―actually, directly and exclusively‖ for charitable purposes. (Emphasis supplied) To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be ―organized and operated exclusively‖ for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be ―operated exclusively‖ for social welfare. (Emphasis supplied) However, the last paragraph of Section 30 of the NIRC qualifies the words ―organized and operated exclusively‖ by providing that: 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. (Emphasis supplied) In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts ―any‖ activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. Thus, even if the charitable institution must be ―organized and operated exclusively‖ for charitable purposes, it is nevertheless allowed to engage in ―activities conducted for profit‖ without losing its tax exempt status for its not-for-profit activities. The only consequence is that the ―income of whatever kind and character‖ of a charitable institution ―from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax.‖ Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%. (Emphasis supplied) The Court finds that St. Luke‘s is a corporation that is not ―operated exclusively‖ for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be ―operated exclusively‖ for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns

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income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B). (Emphasis supplied) St. Luke‘s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke‘s, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. St. Luke‘s is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke‘s has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke‘s is ―a corporation for purely charitable and social welfare purposes‖ and thus exempt from income tax. In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that ―good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and interest.‖

WHEREFORE, St. Luke‘s Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate under Section 27(8) of the National Internal Revenue Code. However, it is not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.

JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIÑO FOUNDATION INC., CENTER FORALTERNATIVE SYSTEMS FOUNDATION INC., REGINA VICTORIA A. BENAFIN REPRESENTED AND JOINEDBY HER MOTHER MRS. ELISA BENAFIN, IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHERMRS. REBECCA MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED BY HER MOTHER ROSEMARIEG. PE, SOLEDAD S. CAMILO, ALICIA C. PACALSO ALIAS "KEVAB," BETTY I. STRASSER, RUBY C. GIRON,URSULA C. PEREZ ALIAS "BA-YAY," EDILBERTO T. CLARAVALL, CARMEN CAROMINA, LILIA G. YARANON,DIANE MONDOC, petitioners, vs. VICTOR LIM, PRESIDENT, BASES CONVERSION DEVELOPMENTAUTHORITY; JOHN HAY PORO POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.)CO. LTD., ASIAWORLD INTERNATIONALE GROUP, INC., DEPARTMENT OF ENVIRONMENT AND NATURALRESOURCES, respondents.

Facts:

The controversy stemmed from the issuance of Proclamation No. 420 by then President Ramos declaring a portion of Camp John Hay as a Special Economic Zone

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(SEZ) and creating a regime of tax exemption within the John Hay Special Economic Zone. In the present petition, petitioners assailed the constitutionality of the proclamation.

Issue:

Whether Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other economic incentives to the John Hay Special Economic Zone.

Held:

The Provisions of Proclamation No. 420 which provide for national and local tax exemption within and granting other economic incentives to the John Hay Special Economic Zone is unconstitutional. It is the legislature, unless limited by a provision of the Constitution, that has the full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. The challenged grant of tax exemption would circumvent the Constitution's imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. Moreover, the claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be mistaken. Tax exemption cannot be implied as it must be categorically and unmistakenly expressed. If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. 7227. Thus, the Court declared that the grant by Proclamation No. 420 of tax exemption and other privileges to the John Hay SEZ was void for being violative of the Constitution.

Commissioner on Internal Revenue V. Court of Tax Appeals and Manila Golf and Country Club GR No. 47421, May 14, 1990

FACTS:

In Commissioner of Internal Revenue V. Manila Hotel Corporation, SC overruled Court of Tax Appeals decision that caterer‘s tax under RA 6110 is illegal because it was vetoed by Former President Marcos and Congress had not taken steps to override the veto. SC ruled in this case that the law has always imposed a 3% caterer‘s tax, as provided in Par 1, Sec 206 of the Tax Code.

Manila Golf & Country Club, Inc., a non-stock corporation who maintains a golf course and operates a clubhouse with a lounge, bar &dining room exclusively for its members & guests claims that they should have been exempt from payment of privilege taxes were it not for the last paragraph of Section 191-A of RA No. 6110, otherwise known as "Omnibus Tax Law". By virtue of RA No. 6110, the CIR assessed the Manila Golf and Country Club fixed taxes as operators of golf links and restaurant, and also percentage tax (caterer's tax) for its sale of foods and fermented liquors/wines for the period covering September 1969 to December 1970 in the amount of P32,504.96 in which the club protested claiming the assessment to be without basis because Section 42 was vetoed by then President Marcos. President Marcos vetoed Sec 191-A because

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according to him it would 1) shift the burden of taxation to the consuming public and 2) restrain the development of hotels which are essential to the tourist industry. CIR denied the protestation of the club, who maintain that Section 42was not entirely vetoed but merely the words "hotel, motels, resthouses" on the ground that it might restrain the development of hotels which is essential to the tourism industry.

ISSUE:

Whether or not the presidential veto referred to the entire section or merely to the imposition of 20% tax on gross receipt of operators or proprietors of restaurants, refreshment parlors, bars and other eatingplaces which are maintained within the premises or compound of a hotel, motel or resthouses.

HELD:

President does not have the power to repeal an existing tax. Therefore, he could not have repealed the 3% caterer‘s tax.

CTA agreed with respondent club that president vetoed only a certain part. CTA mentioned that President can veto only an entire item, and not just words. SC held that the President intentionally only vetoed a few words in Sec 191-A. Assuming that the veto could not apply to just one provision but all would render the Presidential veto void and still in favor of petitioner.

Inclusion of ―hotels, motels, resthouses‖ in the 20% caterer‘s tax bracket are items. President has the right to veto such item, that which is subject to tax and tax rate. It does not refer to an entire section. To construe item as an entire section would be to tie his hands to either completely agree with a section he has objections with or to disagree with an entire section where he only has a portion he disagrees with. It was then agreed by the SC with then Solicitor General Estelito Mendoza and his associates that inclusion of hotels, motels, and rest houses in the 20% caterer's tax bracket are "items" in themselves within the meaning of Sec. 20(3), Article VI of the 1935Constitution. The Petition is granted. Sec. 191-A of RA 6110 is valid and enforceable, hence the Manila Golf and Country Club, Inc is liable for the amount assessed against it.

Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, G.R. No. 158540, 3 August 2005

―Cement is hardly an exciting subject for litigation. Still, the parties in this case have done their best to put up a spirited advocacy of their respective positions, throwing in everything including the proverbial kitchen sink. At present, the burden of passion, if not proof, has shifted to public respondents Department of Trade and Industry (DTI) and private respondent Philippine Cement Manufacturers Corporation (Philcemcor),[1] who now seek reconsideration of our Decision dated 8 July 2004 (Decision), which granted the petition of petitioner Southern Cross Cement Corporation (Southern Cross). This case, of course, is ultimately not just about cement. For respondents, it is about love of country and the future of the domestic industry in the face of foreign competition. For this Court, it is about elementary statutory construction, constitutional limitations on the executive power to impose tariffs and similar measures, and

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obedience to the law. Just as much was asserted in the Decision, and the same holds true with this present Resolution.‖ POWER OF PRESIDENT TO IMPOSE TARIFF RATES: Without Section 28(2), Article VI, the executive branch has no authority to impose tariffs and other similar tax levies involving the importation of foreign goods. Assuming that Section 28(2) Article VI did not exist, the enactment of the SMA by Congress would be voided on the ground that it would constitute an undue delegation of the legislative power to tax. The constitutional provision shields such delegation from constitutional infirmity, and should be recognized as an exceptional grant of legislative power to the President, rather than the affirmation of an inherent executive power. QUALIFIERS: This being the case, the qualifiers mandated by the Constitution on this presidential authority attain primordial consideration: (1) there must be a law; (2) there must be specified limits; and (3) Congress may impose limitations and restrictions on this presidential authority. POWER EXERCISED BY ALTER EGOS OF PRES: The Court recognizes that the authority delegated to the President under Section 28(2), Article VI may be exercised, in accordance with legislative sanction, by the alter egos of the President, such as department secretaries. Indeed, for purposes of the President‘s exercise of power to impose tariffs under Article VI, Section 28(2), it is generally the Secretary of Finance who acts as alter ego of the President. The SMA provides an exceptional instance wherein it is the DTI or Agriculture Secretary who is tasked by Congress, in their capacities as alter egos of the President, to impose such measures. Certainly, the DTI Secretary has no inherent power, even as alter ego of the President, to levy tariffs and imports. TARIFF COMMISSION AND DTI SEC ARE AGENTS: Concurrently, the tasking of the Tariff Commission under the SMA should be likewise construed within the same context as part and parcel of the legislative delegation of its inherent power to impose tariffs and imposts to the executive branch, subject to limitations and restrictions. In that regard, both the Tariff Commission and the DTI Secretary may be regarded as agents of Congress within their limited respective spheres, as ordained in the SMA, in the implementation of the said law which significantly draws its strength from the plenary legislative power of taxation. Indeed, even the President may be considered as an agent of Congress for the purpose of imposing safeguard measures. It is Congress, not the President, which possesses inherent powers to impose tariffs and imposts. Without legislative authorization through statute, the President has no power, authority or right to impose such safeguard measures because taxation is inherently legislative, not executive. When Congress tasks the President or his/her alter egos to impose safeguard measures under the delineated conditions, the President or the alter egos may be properly deemed as agents of Congress to perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law that the agent may not act beyond the specifically delegated powers or disregard the restrictions imposed by the principal. In short, Congress may establish the procedural framework under which such safeguard measures may be imposed, and assign the various offices in the government bureaucracy respective tasks pursuant to the imposition of such measures, the task assignment including the factual determination of whether the necessary conditions exists to warrant such impositions. Under the SMA, Congress

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assigned the DTI Secretary and the Tariff Commission their respective functions in the legislature‘s scheme of things. There is only one viable ground for challenging the legality of the limitations and restrictions imposed by Congress under Section 28(2) Article VI, and that is such limitations and restrictions are themselves violative of the Constitution. Thus, no matter how distasteful or noxious these limitations and restrictions may seem, the Court has no choice but to uphold their validity unless their constitutional infirmity can be demonstrated. What are these limitations and restrictions that are material to the present case? The entire SMA provides for a limited framework under which the President, through the DTI and Agriculture Secretaries, may impose safeguard measures in the form of tariffs and similar imposts.

POWER BELONGS TO CONGRESS: …the cited passage from Fr. Bernas actually states, ―Since the Constitution has given the President the power of control, with all its awesome implications, it is the Constitution alone which can curtail such power.‖ Does the President have such tariff powers under the Constitution in the first place which may be curtailed by the executive power of control? At the risk of redundancy, we quote Section 28(2), Article VI: ―The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.‖ Clearly the power to impose tariffs belongs to Congress and not to the President.

American Bible Society v. City of Manila, G.R. No. L-9637, 30 April 1957

Facts:

American Bible Society (ABS) is a foreign, non-stock, non-profit, religious, missionary corporation, which in the course of its ministry has been distributing and selling bibles and/or gospel portions thereof throughout the Philippines and translating the same into several Philippine dialects. The City Treasurer of the City of Manila considered ABS to be conducting the business of general merchandise, and pursuant to ordinances of the City of Manila, Nos. 3000, as amended, and 2529, 3028 and 3364, required ABS to secure business permit and license fees , together with compromise in the total sum of P5,821.45. ABS paid said amount under protest, however, it assailed the validity of the aforementioned municipal ordinances, contending that these ordinances provide for religious censorship and restrain the free exercise and enjoyment of its religious profession, to wit: the distribution and sale of bibles and other religious literature to the people of the Philippines.

Issues:

Whether said ordinances are inapplicable, invalid or unconstitutional if applied to the alleged business of distribution and sale of bibles to the people of the Philippines by a religious corporation like the American Bible Society.

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Ruling:

The ordinances are inapplicable to ABS business, trade or occupation. The City of Manila is powerless to license or tax the business of plaintiff ABS involved herein because it would impair ABS‘ right to the free exercise and enjoyment of its religious profession and worship, as well as its right of dissemination of religious beliefs.

Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines, provides that:

(7) No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof, and the free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religion test shall be required for the exercise of civil or political rights.

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the freedom of religious profession and worship. The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraints of such right can only be justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has the right to prevent". (Tañada and Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297).

What is involved here is a license tax — a flat tax imposed on the exercise of a privilege granted by the Bill of Rights. The power to impose a license tax on the exercise of these freedom is indeed as potent as the power of censorship which this Court has repeatedly struck down. It is not a nominal fee imposed as a regulatory measure to defray the expenses of policing the activities in question. It is in no way apportioned. It is flat license tax levied and collected as a condition to the pursuit of activities whose enjoyment is guaranteed by the constitutional liberties of press and religion and inevitably tends to suppress their exercise. That is almost uniformly recognized as the inherent vice and evil of this flat license tax.

The dissemination of religious information cannot be conditioned upon the approval of an official. The right to enjoy freedom of the press and religion occupies a preferred position as against the constitutional right of property owners.

It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some instances a little bit higher than the actual cost of the same but this cannot mean that appellant was engaged in the business or occupation of selling said "merchandise" for profit.

Tolentino v. Secretary of Finance, G.R. No. 115455, 30 October 1995

FACTS:

Herein various petitioners seek to declare RA 7166 as unconstitutional as it seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code. The value-added tax (VAT) is levied on

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the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services.

CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress shall "evolve a progressive system of taxation."

ISSUE:

Whether or not RA 7166 violates the principle of progressive system of taxation.

HELD:

No, there is no justification for passing upon the claims that the law also violates the rule that taxation must be progressive and that it denies petitioners' right to due process and that equal protection of the laws. The reason for this different treatment has been cogently stated by an eminent authority on constitutional law thus: "When freedom of the mind is imperiled by law, it is freedom that commands a momentum of respect; when property is imperiled it is the lawmakers' judgment that commands respect. This dual standard may not precisely reverse the presumption of constitutionality in civil liberties cases, but obviously it does set up a hierarchy of values within the due process clause."

The claim of the Philippine Press Institute, petitioner in G.R. No. 115544, that the VAT will drive some of its members out of circulation because their profits from advertisements will not be enough to pay for their tax liability, while purporting to be based on the financial statements of the newspapers in question, still falls short of the establishment of facts by evidence so necessary for adjudicating the question whether the tax is oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities (Art. XIII, § 1), or for the promotion of the right to "quality education" (Art. XIV, § 1). These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights.

Smart Communications v. The City of Davao, G.R. No. 155491, 16 September 2008

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G.R. No. 155491

FACTS: Smart contends that its telecenter in Davao City is exempt from payment of franchise tax to the City, on the following grounds: (a) the issuance of its franchise under Republic Act (R.A.) No. 72945 subsequent to R.A. No. 7160 shows the clear legislative intent to exempt it from the provisions of R.A. 7160; (b) Section 137 of R.A. No. 7160 can only apply to exemptions already existing at the time of its effectivity and not to future exemptions; (c) the power of the City of Davao to impose a franchise tax is subject to statutory limitations such as the "in lieu of all taxes" clause found in Section 9 of R.A. No. 7294; and (d) the imposition of franchise tax by the City of Davao would amount to a violation of the constitutional provision against impairment of contracts.7 Respondents filed their Answer in which they contested the tax exemption claimed by Smart. They invoked the power granted by the Constitution to local government units to create their own sources of revenue. ISSUE: Whether Smart is liable to pay the franchise tax imposed by the City of Davao. RULING: Prospective Effect of R.A. No. 7160 On March 27, 1992, Smart‘s legislative franchise (R.A. No. 7294) took effect. Section 9 thereof, quoted hereunder, is at the heart of the present controversy: Section 9. Tax provisions. — The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of' this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business 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: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. Smart alleges that the "in lieu of all taxes" clause in Section 9 of its franchise exempts it from all taxes, both local and national, except the national franchise tax (now VAT), income tax, and real property tax. On January 1, 1992, two months ahead of Smart‘s franchise, the Local Government Code (R.A. No. 7160) took effect. Section 137, in relation to Section 151 of R.A. No. 7160, allowed the imposition of franchise tax by the local government units; while

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Section 193 thereof provided for the withdrawal of tax exemption privileges granted prior to the issuance of R.A. No. 7160 except for those expressly mentioned therein, viz.: Section 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 the 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. Section 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. Section 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 RA No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied.) Smart argues that it is not covered by Section 137, in relation to Section 151 of R.A. No. 7160, because its franchise was granted after the effectivity of the said law. We agree with Smart‘s contention on this matter. The withdrawal of tax exemptions or incentives provided in R.A. No. 7160 can only affect those franchises granted prior to the effectivity of the law. The intention of the legislature to remove all tax exemptions or incentives granted prior to the said law is evident in the language of Section 193 of R.A. No. 7160. No interpretation is necessary. The "in lieu of all taxes" Clause in R.A. No. 7294 Smart is of the view that the only taxes it may be made to bear under its franchise are the national franchise tax (now VAT), income tax, and real property tax. It claims exemption from the local franchise tax because the "in lieu of taxes" clause in its franchise does not distinguish between national and local taxes. We pay heed that R.A. No. 7294 is not definite in granting exemption to Smart from local taxation. Section 9 of R.A. No. 7294 imposes on Smart a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under the franchise and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof. R.A. No 7294 does not expressly provide what kind of taxes Smart is exempted from. It is not clear whether the "in lieu of all taxes" provision in the franchise of Smart would include exemption from local or national taxation. What is clear is that Smart shall pay franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But whether the franchise tax exemption would include exemption from exactions by both the local and the national government is not unequivocal.

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The uncertainty in the "in lieu of all taxes" clause in R.A. No. 7294 on whether Smart is exempted from both local and national franchise tax must be construed strictly against Smart which claims the exemption. Smart has the burden of proving that, aside from the imposed 3% franchise tax, Congress intended it to be exempt from all kinds of franchise taxes – whether local or national. However, Smart failed in this regard. Tax exemptions are never presumed and are strictly construed against the taxpayer and liberally in favor of the taxing authority. In this case, the doubt must be resolved in favor of the City of Davao. The "in lieu of all taxes" clause applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice Antonio T. Carpio in a similar case involving a demand for exemption from local franchise taxes: [T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause does not apply to income tax. NOTA BENE: It should be noted that the "in lieu of all taxes" clause in R.A. No. 7294 has become functus officio with the abolition of the franchise tax on telecommunications companies. As admitted by Smart in its pleadings, it is no longer paying the 3% franchise tax mandated in its franchise. Currently, Smart along with other telecommunications companies pays the uniform 10% value-added tax. Tax Exclusion/Tax Exemption Smart gives another perspective of the "in lieu of all taxes" clause in Section 9 of R.A. No. 7294 in order to avoid the payment of local franchise tax. It says that, viewed from another angle, the "in lieu of all taxes" clause partakes of the nature of a tax exclusion and not a tax exemption. A tax exemption means that the taxpayer does not pay any tax at all. Smart pays VAT, income tax, and real property tax. Thus, what it enjoys is more accurately a tax exclusion. However, as previously held by the Court, both in their nature and effect, there is no essential difference between a tax exemption and a tax exclusion. An exemption is an immunity or a privilege; it is the freedom from a charge or burden to which others are subjected. An exclusion, on the other hand, is the removal of otherwise taxable items from the reach of taxation, e.g., exclusions from gross income and allowable deductions. An exclusion is, thus, also an immunity or privilege which frees a taxpayer from a charge to which others are subjected. Consequently, the rule that a tax

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exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions. Non-impairment Clause of the Constitution Another argument of Smart is that the imposition of the local franchise tax by the City of Davao would violate the constitutional prohibition against impairment of contracts. The franchise, according to petitioner, is in the nature of a contract between the government and Smart. However, we find that there is no violation of Article III, Section 10 of the 1987 Philippine Constitution. As previously discussed, the franchise of Smart does not expressly provide for exemption from local taxes. Absent the express provision on such exemption under the franchise, we are constrained to rule against it. The "in lieu of all taxes" clause in Section 9 of R.A. No. 7294 leaves much room for interpretation. Due to this ambiguity in the law, the doubt must be resolved against the grant of tax exemption. Moreover, Smart‘s franchise was granted with the express condition that it is subject to amendment, alteration, or repeal. 3rd Batch of Cases

EVANGELISTA vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS,

G.R. No. L-9996

FACTS:

This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a decision of the Court of Tax Appeals

That the petitioners borrowed from their father the sum of P59,140.00 which amount together with their personal monies was used by them for the purpose of buying real properties. That on February 2, 1943 they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m. including improvements thereon for the sum of P100,000.00; this property has an assessed value of P57,517.00 as of 1948. That 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 P18,000.00; this property has an assessed value of P8,255.00 as of 1948. That on April 23, 1944 they purchased from the Insular Investments, Inc., a lot of 4,358 sq. m. including improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1943. That on April 28, 1944 they bought from Mrs. Valentin Afable a lot of 8,371 sq. m. including improvements thereon for P237,234.14. This property has an assessed value of P59,140.00 as of 1948. That in a document dated August 16, 1945, 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 tenant; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and checks for them.

That after having bought the above-mentioned real properties, the petitioners had the same rented or leased to various tenants wherein income were derive there from.

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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, computed, according to the assessments made by said officer. The TOTAL TAXES DUE is P6,878.34.

Said letter of demand and the corresponding assessments were delivered to petitioners on December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in question, with costs against the respondent.

After appropriate proceedings, the Court of Tax Appeals rendered the above-mentioned decision for the respondent, and, a petition for reconsideration and new trial having been subsequently denied.

ISSUE:

The issue in this case is whether petitioners are subject to the tax on corporations as well as to the residence tax for corporations and the real estate dealers' fixed tax.

HELD:

TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION WHICH ARE NOT NECESSARY PARTNERSHIP. — "Corporations" strictly speaking are distinct and different from "partnership". When our Internal Revenue Code includes "partnership" among the entities subject to the tax on "corporations", it must be allude to organization which are not necessarily "partnership" in the technical sense of the term.

As defined in section 84 (b) of the Internal Revenue Code "the term corporation includes partnership, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standards form, or conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for the purposes of the tax on corporations.

CORPORATIONS INCLUDES "JOINT ACCOUNT" AND ASSOCIATIONS WITHOUT LEGAL PERSONALITY. — Pursuant to Section 84 (b) of the Internal Revenue Code, the term "corporations" includes, among the others, "joint accounts (cuenta en participacion)" and "associations", none of which has a legal personality of its own independent of that of its members. For purposes of the tax on corporations, our National Internal Revenue Code includes these partnership. — with the exception only of duly registered general partnership. — within the purview of the term "corporations." Held: That the petitioners in the case at bar, who are engaged in real estate transactions for monetary gain and divide the same among themselves, constitute a partnership, so far as the said Code is concerned, and are subject to the income tax for the corporation.

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CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY SUBJECT TO RESIDENCE TAX ON CORPORATION. — The pertinent part of the provision of Section 2 of Commonwealth Act No. 465 which says: "The term corporation as used in this Act includes joint-stock company, partnership, joint account (cuentas en participacion), association or insurance company, no matter how created or organized." is analogous to that of Section 24 and 84 (b) of our Internal Revenue Code which was approved the day immediately after the approval of said Commonwealth Act No. 565. Apparently, the terms "corporation" and "Partnership" are used both statutes with substantially the same meaning, Held: That the petitioners are subject to the residence tax corporations.

Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed with costs against the petitioners herein. It is so ordered

Afisco Insurance Corp., et al. vs. Court of Appeals, et al., G.R. No. 112675, January 25, 1999

FACTS:

The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance policies for machines. The petitioners in 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a pool, which they complied with.

In 1976, the pool of machinery insurers submitted a financial statement and filed an ―Information Return of Organization Exempt from Income Tax‖ for 1975. On the basis of this, the CIR assessed a deficiency of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively.

The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed their appeal.

The CA ruled in that the pool of machinery insurers was a partnership taxable as a corporation, and that the latter‘s collection of premiums on behalf of its members, the ceding companies, was taxable income.

ISSUE/S:

Whether or not the pool is taxable as a corporation.

Whether or not there is double taxation.

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HELD:

1) Yes: Pool taxable as a corporation

Argument of Petitioner: The reinsurance policies were written by them ―individually and separately,‖ and that their liability was limited to the extent of their allocated share in the original risks thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its role was limited to its principal function of ―allocating and distributing the risk(s) arising from the original insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance, collection and custody of funds, etc.‖

Argument of SC: According to Section 24 of the NIRC of 1975:

―SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, but not including duly registered general co-partnership (compañias colectivas), general professional partnerships, private educational institutions, and building and loan associations xxx.‖

Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Interestingly, the NIRC‘s inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997 Sec. 27 read together with Sec. 22 reads:

―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 xxx.‖

―SEC. 22. -- Definition. -- When used in this Title:

xxx xxx xxx

(B) The term ‗corporation‘ shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract without the Government. ‗General professional partnerships‘ are partnerships formed

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by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members.

Furthermore, Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich may be considered a partnership because it contains the following elements: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool. (2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. (3) While, the pool itself is not a reinsurer and does not issue any policies; its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums pursuant to the agreement with Munich. Profit motive or business is, therefore, the primordial reason for the pool‘s formation.

2) No: There is no double taxation.

Argument of Petitioner: Remittances of the pool to the ceding companies and Munich are not dividends subject to tax. Imposing a tax ―would be tantamount to an illegal double taxation, as it would result in taxing the same premium income twice in the hands of the same taxpayer.‖ Furthermore, even if such remittances were treated as dividends, they would have been exempt under tSections 24 (b) (I) and 263 of the 1977 NIRC , as well as Article 7 of paragraph 1and Article 5 of paragraph 5 of the RP-West German Tax Treaty.

Argument of Supreme Court: Double taxation means ―taxing the same person twice by the same jurisdiction for the same thing.‖ In the instant case, the insurance pool is a taxable entity distince from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends received by the companies. There is no double taxation.

Tax exemption cannot be claimed by non-resident foreign insurance corporattion; tax exemption construed strictly against the taxpayer - Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax Code because the same subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language too plain to be mistaken.

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Wise & Co., Inc. vs. Bibiano L. Meer, G.R. No. 48231, June 30, 1947

Facts: On June 1, 1937, Manila Wine Merchants, Ltd., a Hongkong company, was liquidated and its capital stock was distributed to its stockholders, one of which is the petitioner. As part of its liquidation, the corporation was sold to Manila Wine Merchants., Inc. for Php400,000. The said earnings, declared as dividends, were distributed to its stockholders.

The Hongkong company then paid the income tax for the entire earnings. As a result of the sale of its business and assets, a surplus was realized by the Hongkong company after deducting the dividends. This surplus was also distributed to its stockholders. The Hongkong company also paid the income tax for the said surplus. The petitioners then filed their respective income tax returns. The respondent Commissioner, then, made a deficiency assessment charging the individual stockholders for taxes on the shares distributed to them despite the fact that income tax was already paid by the Hongkong company.

The petitioners paid the assessed amount in protest. The lower courts ruled in favor of the Commissioner of Internal Revenue, hence, this action.

ISSUES and RULINGS:

1.) Appellants contend that the amounts received by them and on which the taxes in question were assessed and collected were ordinary dividends; CIR contends that they were liquidating dividends.

SC: The distributions under consideration were not ordinary dividends. Therefore, they are taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8. They could not consistently deem all the business and assets of the corporation sold as of June 1, 1937, and still say that said corporation,as a going concern,distributed ordinary dividends to them thereafter.

2.) Are such liquidating dividends taxable income?

SC: Income tax law states that ³Where a corporation, partnership, association, joint-account, or insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible loss as the case may be.´ Appellants received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK Co. which was dissolved and in process of complete liquidation. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the Income Tax Law. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their

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stock to it and it paid the sums in question to them in exchange, a transaction took place. The shareholder who received the consideration for the stock earned that much money as income of his own, which again was properly taxable to him under the Income Tax Law.

3.) Non-resident alien individual appellants contend that if the distributions received by them were to be considered as a sale of their stock to the HK Co., the profit realized by them does not constitute income from Philippine sources and is not subject to Philippine taxes, "since all steps in the carrying out of this so-called sale took place outside the Philippines."

SC: This contention is untenable. The HK Co. was at the time of the sale of its business in the Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the Philippines. The HK Co. was incorporated for the purpose of carrying on

in the Philippine Islands the business of wine, beer, and spirit merchants and the other objects set out in its memorandum of association. Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in question were made, the major part of which consisted in the purchase price of the business, had been earned and acquired in the Philippines. As such, it is clear that said distributions were income "from Philippine sources."

Commissioner of Internal Revenue vs. Juliane Baier-Nickel, G.R. No. 153793, August 29, 2006

Facts:

CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the CTA. Juliane Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic corporation engaged in the manufacturing, marketing and selling of embroidered textile products. Through Jubanitex‘s general manager, Marina Guzman, the company appointed respondent as commission agent with 10% sales commission on all sales actually concluded and collected through her efforts.

In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the 10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax return but then claimed a refund from BIR for the P170K, alleging this was mistakenly withheld by Jubanitex and that her sales commission income was compensation for services rendered in Germany not Philippines and thus not taxable here.

She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but decision was reversed by CA on appeal, holding that the commission was received as sales agent not as President and that the ―source‖ of income arose from marketing activities in Germany.

Issue:

1. Whether or not respondent‘s sales commission income is taxable in the Philippines/

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2. W/N respondent is entitled to refund

Held:

1. Yes. The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation. The appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the service which would entitle her to 10% commission income, are "sales actually concluded and collected through [her] efforts."

What she presented as evidence to prove that she performed income producing activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients. In the instant case, respondent failed to give substantial evidence to prove that she performed the incoming producing service in Germany, which would have entitled her to a tax exemption for income from sources outside the Philippines.

2. No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to the Philippine income taxation on their income received from all sources in the Philippines. In determining the meaning of ―source‖, the Court resorted to origin of Act 2833 (the first Philippine income tax law), the US Revenue Law of 1916, as amended in 1917.

US SC has said that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. If the income is from labor, the place where the labor is done should be decisive; if it is done in this country, the income should be from ―sources within the United States.‖ If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the income should be from ―sources within the United States.‖ If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive. ―Source‖ is not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations.

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.

RUFINO R. TAN VS. RAMON R. DEL ROSARIO, JR, ET AL. GR NO. 109289, OCTOBER 3, 1994

FACTS:

Petitioner asserted that Republic Act No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

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Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws.

Further, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.

ISSUE(S):

1. Whether or not Republic Act No. 7496 is unconstitutional.

2. Whether or not the public respondents exceeded their authority in applying SNIT to partners in a general professional partnership.

HELD:

1. The full text of the title reads: ―An Act Adopting the Simplified Net Income Taxation (SNIT) Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as Amended.‖

It would be difficult to accept petitioner's view that the amendatory law should be considered as having now adopted a gross income, instead of as having still retained the net income, taxation scheme. The allowance for deductible items, (Sec. 21 and 29 as amended) 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. 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.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not forfend classification as long as: (1) the standards that are used thereof are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us.

2. A general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496.

There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession.

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the

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above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships, which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is such an example. 4 Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the

above standing rule as now so modified by Republic ActNo. 7496 on basically the

extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED.

CIR V. PHILIPPINE AIRLINES, INC.

G.R. No. 18006

Topic: INCOME TAX – Minimum Income Tax

FACTS:

PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been liable for Minimum Corporate Income Tax based on its gross income. However, PHILIPPINE AIRLINES, INC. did not pay the Minimum Corporate Income Tax using as basis its franchise which exempts it from ―all other taxes‖ upon payment of whichever is lower of either (a) the basic corporate income tax based on the net taxable income or (b) a franchise tax of 2%.

ISSUE:

Is PAL liable for Minimum Corporate Income Tax?

HELD:

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NO. PHILIPPINE AIRLINES, INC.‘s franchise clearly refers to "basic corporate income tax" which refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction under the Tax Code between taxable income, which is the basis for basic corporate income tax under Sec. 27 (A) and gross income, which is the basis for the Minimum Corporate Income Tax under Section 27 (E). The two terms have their respective technical meanings and cannot be used interchangeably. Not being covered by the Charter which makes PAL liable only for basic corporate income tax, then Minimum Corporate Income Tax is included in "all other taxes" from which PHILIPPINE AIRLINES, INC. is exempted.

The CIR also can not point to the ―Substitution Theory‖ which states that Respondent may not invoke the ―in lieu of all other taxes‖ provision if it did not pay anything at all as basic corporate income tax or franchise tax. The Court ruled that it is not the fact tax payment that exempts Respondent but the exercise of its option. The Court even pointed out the fallacy of the argument in that a measly sum of one peso would suffice to exempt PAL from other taxes while a zero liability would not and said that there is really no substantial distinction between a zero tax and a one-peso tax liability. Lastly, the Revenue Memorandum Circular stating the applicability of the MCIT to PAL does more than just clarify a previous regulation and goes beyond mere internal administration and thus cannot be given effect without previous notice or publication to those who will be affected thereby.

COMMISSIONER OF INTERNAL REVENUE vs. ST. LUKE'S MEDICAL CENTER, INC.

G.R. No. 195909.

FACTS:

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation. Under its articles of incorporation, one its corporate purpose is to establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and disabled persons provided that purely medical and surgical services shall be performed by duly licensed physicians and surgeons who may be freely and individually contracted by patients;

The Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting to P76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on compensation and expanded withholding tax. St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.

Argument of St. Luke‘s:

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St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

Argument of BIR:

According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code

The Ruling of the Court of Tax Appeals

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the amount of P110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable year 1998 in the respective amounts of P5,496,963.54 and P778,406.84 or in the sum of P6,275,370.38

Hence, CIR filed this petition.

ISSUE:

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27 (B) of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

RULING:

This Court resolves this case on a pure question of law, which involves the interpretation of Section 27 (B) vis-Ã -vis Section 30 (E) and (G) of the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of proprietary non-profit hospitals.

Argument of BIR (reiterated its argument before the CTA):

According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code.

The 10% income tax rate under Section 27(B) specifically pertains to proprietary educational institutions and proprietary non-profit hospitals.

SEC. 27. Rates of Income Tax on Domestic Corporations. -

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) (TAKE NOTE: D refers to passive income) hereof:

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Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income.

For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.

Argument of St. Luke‘s:

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable institution and an organization promoting social welfare; the arguments of St. Luke's focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable institutions.

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:

(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 inure to the benefit of any member, organizer, officer or any specific person;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

XXXX

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.

The Court partly grants the petition of the BIR but on a different ground.

We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption.

The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions and proprietary non-profit hospitals, which are among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

RATIONALE FOR THE RULING:

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of

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(1) proprietary non-profit educational institutions and

(2) proprietary non-profit hospitals.

The only qualifications for hospitals are that they must be proprietary and non-profit.

―Proprietary‖ means private, following the definition of a "proprietary educational institution" as "any private school maintained and administered by private individuals or groups" with a government permit.

―Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit.

An organization may be considered as non-profit if it does not distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Section 30 ―Charity‖ is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions.

As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income taxes.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable purposes.

However, under Lung Center, any profit by a charitable institution must not only be plowed back as income but must be "devoted or used altogether to the charitable object which it is intended to achieve."

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There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso facto tax exempt.

1. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property "actually, directly and exclusively" for charitable purposes.

2. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized and operated exclusively" for charitable purposes.

3. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by providing that:

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. In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for profit, such activity IS SUBJECT TO TAX even as its ―not-for-profit activities‖ remain tax exempt.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind and character" of a charitable institution "from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate of 30% under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED.

Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc., G.R. No. 139786

Asian Bank Corporation vs CIR G.R. No. 140857

FACTS:

Case is about conflicting decisions regarding the inclusion of the twenty percent (20%) final withholding tax (FWT) on a bank‘s passive income form part of the taxable

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gross receipts for the purpose of computing the five percent (5%) gross receipts tax (GRT).

On January 30, 1996, the CTA, in Asian Bank Corporation v. Commissioner of Internal Revenue (ASIAN BANK case), ruled that the basis in computing the 5% GRT is the gross receipts minus the 20% FWT. In other words, the 20% FWT on a bank‘s passive income does not form part of the taxable gross receipts.

On the strength of the above-mentioned case City Trust and Asian Bank Corp filed for petition for review with the CTA, which allowed for a refund of the 5% GRT they paid on the portion of 20% FWT.

CIR appealed the CTA decision. CA affirmed the CTA decision on Citytrust but reversed the CTA decision on Asian Bank

ISSUES:

Does the twenty percent (20%) final withholding tax (FWT) on a bank‘s passive income form part of the taxable gross receipts for the purpose of computing the five percent (5%) gross receipts tax (GRT)?

Would inclusion of the 20% FWT in the gross receipt constitute double taxation?

RULING:

1. Interest income, whether actually received or merely accrued (income received + amount withheld representing 20% FWT), form part of the bank’s taxable gross receipts

A catena of cases decided by the SC is unanimous in defining ―gross receipts‖ as ―the entire receipts without any deduction.‖

Citytrust and Asian Bank simply anchor their argument on Section 4(e) of Revenue Regulations No. 12-80 stating that “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.” They contend that since the 20% FWT is withheld at source, the same cannot be considered actually received, hence, must be excluded from the taxable gross receipts.

However, Revenue Regulations No. 12-80, had been superseded by Revenue Regulations No. 17-84, which includes all interest income (whether actual or accrued) in computing the GRT.

In Bank of Commerce (G.R. No. 149636, June 8, 2005), the court held that ―actual receipt may either be physical receipt or constructive receipt,‖ thus:

When the depositary 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. 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.

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 the income of the taxpayer, and thus forms part of his gross receipts.

Both Asian bank and Citytrust rely on Manila Jockey Club, but what happened there is earmarking and not withholding.

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It was held that the gross receipts of the Manila Jockey Club should not include the 5½% which went to the Board on Races and to the owners of horses and jockeys, although delivered to the Club.

Amounts earmarked do not form part of gross receipts because these are by law or regulation reserved for some person other than the taxpayer, although delivered or received. On the contrary, amounts withheld form part of gross receipts because these are in constructive possession and not subject to any reservation. The distinction was explained in Solidbank, thus:

The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys amounts that never became the property of the race track (Manila Jockey Club merely held that these amounts were held in trust and did not form part of gross receipts). Unlike these amounts, the interest income that had been withheld for the government became property of the financial institutions upon constructive possession thereof.

It is ownership that determines whether interest income forms part of taxable gross receipts being originally owned by these financial institutions as part of their interest income, the FWT should form part of their taxable gross receipts.

2. The imposition of the 20% FWT and 5% GRT does not constitute double taxation.

Double taxation means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, for the same purpose and with the same kind of character of tax. This is not the situation in the case at bar. The GRT is a percentage tax under Title V of the Tax Code ([Section 121], Other Percentage Taxes), while the FWT is an income tax under Title II of the Code (Tax on Income). The two concepts are different from each other.

In fine, let it be stressed that tax exemptions are highly disfavored. It is a governing principle in taxation 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.

MARUBENI CORPORATION (formerly Marubeni — Iida, Co., Ltd.) vs. CIR

G.R. No. 76573.

FACTS:

Petitioner Marubeni s a foreign corporation duly organized under the existing laws of Japan and duly licensed to engage in business under Philippine laws.

Marubeni of Japan has equity investments in Atlantic Gulf & Pacific Co. of Manila.

AG&P declared and directly remitted the cash dividends to Marubeni‘s head office in Tokyo net of the final dividend tax and withholding profit remittance tax.

Thereafter, Marubeni, through SGV, sought a ruling from the BIR on whether or not the dividends it received from AG&P are effectively connected with its business in the Philippines as to be considered branch profits subject to profit remittance tax.

The Acting Commissioner ruled that the dividends received by Marubeni are not income from the business activity in which it is engaged. Thus, the dividend if remitted abroad are not considered branch profits subject to profit remittance tax.

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Pursuant to such ruling, petitioner filed a claim for refund for the profit tax remittance erroneously paid on the dividends remitted by AG& P.

Respondent Commissioner denied the claim. It ruled that since Marubeni is a non resident corporation not engaged in trade or business in the Philippines it shall be subject to tax on income earned from Philippine sources at the rate of 35% of its gross income.

On the other hand, Marubeni contends that, following the principal-agent relationship theory, Marubeni Japan is a resident foreign corporation subject only to final tax on dividends received from a domestic corporation.

ISSUE:

Whether or not Marubeni Japan is a resident foreign corporation.

HELD:

No. The general rule is a foreign corporation is the same juridical entity as its branch office in the Philippines . The rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent.

However, when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.

Thus, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is considered as a separate and distinct income taxpayer from the branch in the Philippines.

THE MANILA WINE MERCHANTS, INC. v. CIR

G.R. No. L-26145.

FACTS:

"Petitioner, a domestic corporation organized in 1937, is principally engaged in the importation and sale of whisky, wines, liquors and distilled spirits. Its original subscribed and paid capital was P500,000.00. Its capital of P500,000.00 was reduced to P250,000.00 in 1950 with the approval of the Securities and Exchange Commission but the reduction of the capital was never implemented. On June 21, 1958, petitioner‘s capital was increased to P1,000,000.00 with the approval of the said Commission.

On December 31, 1957, herein respondent caused the examination of herein petitioner‘s book of account and found the latter of having unreasonably accumulated surplus of P428,934.32 for the calendar year 1947 to 1957, in excess of the reasonable needs of the business subject to the 25% surtax imposed by Section 25 of the Tax Code.

On February 26, 1963, the Commissioner of Internal Revenue demanded upon the Manila Wine Merchants, Inc. payment of P126,536.12 as 25% surtax and interest on the latter‘s unreasonable accumulation of profits and surplus for the year 1957…

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Respondent contends that petitioner has accumulated earnings beyond the reasonable needs of its business because the average ratio of the cash dividends declared and paid by petitioner from 1947 to 1957 was 40.33% of the total surplus available for distribution at the end of each calendar year. On the other hand, petitioner contends that in 1957, it distributed 100% of its net earnings after income tax and part of the surplus for prior years. Respondent further submits that the accumulated earnings tax should be based on 25% of the total surplus available at the end of each calendar year while petitioner maintains that the 25% surtax is imposed on the total surplus or net income for the year after deducting therefrom the income tax due.

The records show the following analysis of petitioner‘s net income, cash dividends and earned surplus for the years 1946 to 1957:

Another basis of respondent in assessing petitioner for accumulated earnings tax is its substantial investment of surplus or profits in unrelated business. These investments are itemized as follows:

As to the investment of P27,501.00 made by petitioner in the Acme Commercial Co., Inc., Mr. N.R.E. Hawkins, president of the petitioner corporation 2 explained as follows:

‗The first item consists of shares of Acme Commercial Co., Inc. which the Company acquired in 1947 and 1949. In the said years, we thought it prudent to invest in a business which patronizes us. As a supermarket, Acme Commercial Co., Inc. is one of our best customers. The investment has proven to be beneficial to the stockholders of this Company. As an example, the Company received cash dividends in 1961 totalling P16,875.00 which was included in its income tax return for the said year.‘

As to the investments of petitioner in Union Insurance Society of Canton and Wack Wack Golf Club in the sums of P1,145.76 and P1.00, respectively, the same official of the petitioner-corporation stated that:

‗The second and fourth items are small amounts which we believe would not affect this case substantially. As regards the Union Insurance Society of Canton shares, this was a pre-war investment, when Wise & Co., Inc., Manila Wine Merchants and the said insurance firm were common stockholders of the Wise Bldg. Co.,, Inc. and the three companies were all housed in the same building. Union Insurance invested in Wise Bldg. Co., Inc. but invited Manila Wine Merchants, Inc. to buy a few of its shares.‘

As to the U.S.A. Treasury Bonds amounting to P347,217.50, Mr. Hawkins explained as follows:

‗With regards to the U.S.A. Treasury Bills in the amount of P347,217.50, in 1950, our balance sheet for the said year shows the Company had deposited in current account in various banks P629,403.64 which was not earning any interest. We decided to utilize part of this money as reserve to finance our importations and to take care of future expansion including acquisition of a lot and the construction of our own office building and bottling plant.

At that time, we believed that a dollar reserve abroad would be useful to the Company in meeting immediate urgent orders of its local customers. In order that the money may earn interest, the Company, on May 31, 1951 purchased US Treasury bills with 90-day maturity and earning approximately 1% interest with the face value of US$175,000.00. US Treasury Bills are easily convertible into cash and for the said reason they may be better classified as cash rather than investments.

The Treasury Bills in question were held as such for many years in view of our expectation that the Central Bank inspite of the controls would allow no-dollar licenses

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importations. However, since the Central Bank did not relax its policy with respect thereto, we decided sometime in 1957 to hold the bills for a few more years in view of our plan to buy a lot and construct a building of our own. According to the lease agreement over the building formerly occupied by us in Dasmariñas St., the lease was to expire sometime in 1957. At that time, the Company was not yet qualified to own real property in the Philippines. We therefore waited until 60% of the stocks of the Company would be owned by Filipino citizens before making definite plans. Then in 1959 when the Company was already more than 60% Filipino owned, we commenced looking for a suitable location and then finally in 1961, we bought the man lot with an old building on Otis St., Paco, our present site, for P665,000.00. Adjoining smaller lots were bought later. After the purchase of the main property, we proceeded with the remodelling of the old building and the construction of additions, which were completed at a cost of P143,896.00 in April, 1962.

In view of the needs of the business of this Company and the purchase of the Otis lots and the construction of the improvements thereon, most of its available funds including the Treasury Bills had been utilized, but inspite of the said expenses the Company consistently declared dividends to its stockholders. The Treasury Bills were liquidated on February 15, 1962.‘

Respondent found that the accumulated surplus in question were invested to ‗unrelated business‘ which were not considered in the ‗immediate needs‘ of the Company such that the 25% surtax be imposed therefrom."

Petitioner appealed to the Court of Tax Appeals.

On the basis of the tabulated figures, supra, the Court of Tax Appeals found that the average percentage of cash dividends distributed was 85.77% for a period of 11 years from 1946 to 1957 and not only 40.33% of the total surplus available for distribution at the end of each calendar year actually distributed by the petitioner to its stockholders, which is indicative of the view that the Manila Wine Merchants, Inc. was not formed for the purpose of preventing the imposition of income tax upon its shareholders.

With regards to the alleged substantial investment of surplus or profits in unrelated business, the Court of Tax Appeals held that the investment of petitioner with Acme Commercial Co., Inc., Union Insurance Society of Canton and with the Wack Wack Golf and Country Club are harmless accumulation of surplus and, therefore, not subject to the 25% surtax provided in Section 25 of the Tax Code.

As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax Appeals ruled that its purchase was in no way related to petitioner‘s business of importing and selling wines, whisky, liquors and distilled spirits. Respondent Court was convinced that the surplus of P347,217.50 which was invested in the U.S.A. Treasury Bonds was availed of by petitioner for the purpose of preventing the imposition of the surtax upon petitioner‘s shareholders by permitting its earnings and profits to accumulate beyond the reasonable needs of business. Hence, the Court of Tax Appeals modified respondent‘s decision by imposing upon petitioner the 25% surtax for 1957 only in the amount of P86,804.38…

ISSUES:

(1) whether the purchase of the U.S.A. Treasury bonds by petitioner in 1951 can be construed as an investment to an unrelated business and hence, such was availed of by petitioner for the purpose of preventing the imposition of the surtax upon petitioner‘s shareholders by permitting its earnings and profits to accumulate beyond the reasonable needs of the business, and if so,

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(2) whether the penalty tax of twenty-five percent (25%) can be imposed on such improper accumulation in 1957 despite the fact that the accumulation occurred in 1951.

HELD:

The pertinent provision of the National Internal Revenue Code reads as follows:

"Sec. 25. Additional tax on corporations improperly accumulating profits or surplus. — (a) Imposition of Tax. — If any corporation, except banks, insurance companies, or personal holding companies whether domestic or foreign, is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by section twenty-four and shall be computed, collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax: Provided, that no such tax shall be levied upon any accumulated profits or surplus, if they are invested in any dollar-producing or dollar-saving industry or in the purchase of bonds issued by the Central Bank of the Philippines.

(c) Evidence determinative of purpose. — The fact that the earnings of profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by clear preponderance of evidence, shall prove the contrary." (As amended by Republic Act No. 1823)

A prerequisite to the imposition of the tax has been that the corporation be formed or availed of for the purpose of avoiding the income tax (or surtax) on its shareholders, or on the shareholders of any other corporation by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. If the earnings and profits were distributed, the shareholders would be required to pay an income tax thereon whereas, if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. 8 The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. 9 Thus, if the failure to pay dividends is due to some other cause, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose does not fall within the interdiction of the statute.

An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is unreasonable if it is not required for the purpose of the business, considering all the circumstances of the case.

In purchasing the U.S.A. Treasury Bonds, in 1951, petitioner argues that these bonds were so purchased (1) in order to finance their importation; and that a dollar reserve abroad would be useful to the Company in meeting urgent orders of its local customers and (2) to take care of future expansion including the acquisition of a lot and the construction of their office building and bottling plant.

We find no merit in the petition.

To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the purchase of the U.S.A. Treasury Bonds in 1951 with a face value of $175,000.00 was an investment within the reasonable needs of the Corporation.

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To determine the "reasonable needs" of the business in order to justify an accumulation of earnings, the Courts of the United States have invented the so-called "Immediacy Test" which construed the words "reasonable needs of the business" to mean the immediate needs of the business, and it was generally held that if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply. 12 American cases likewise hold that investment of the earnings and profits of the corporation in stock or securities of an unrelated business usually indicates an accumulation beyond the reasonable needs of the business.

The finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds were in no way related to petitioner‘s business of importing and selling wines whisky, liquors and distilled spirits, and thus construed as an investment beyond the reasonable needs of the business 14 is binding on Us, the same being factual. 15 Furthermore, the wisdom behind thus finding cannot be doubted…

The records further reveal that from May 1951 when petitioner purchased the U.S.A. Treasury shares, until 1962 when it finally liquidated the same, it (petitioner) never had the occasion to use the said shares in aiding or financing its importation. This militates against the purpose enunciated earlier by petitioner that the shares were purchased to finance its importation business. To justify an accumulation of earnings and profits for the reasonably anticipated future needs, such accumulation must be used within a reasonable time after the close of the taxable year.

Petitioner advanced the argument that the U.S.A. Treasury shares were held for a few more years from 1957, in view of a plan to buy a lot and construct a building of their own; that at that time (1957), the Company was not yet qualified to own real property in the Philippines, hence it (petitioner) had to wait until sixty percent (60%) of the stocks of the Company would be owned by Filipino citizens before making definite plans.

These arguments of petitioner indicate that it considers the U.S.A. Treasury shares not only for the purpose of aiding or financing its importation but likewise for the purpose of buying a lot and constructing a building thereon in the near future, but conditioned upon the completion of the 60% citizenship requirement of stock ownership of the Company in order to qualify it to purchase and own a lot. The time when the company would be able to establish itself to meet the said requirement and the decision to pursue the same are dependent upon various future contingencies. Whether these contingencies would unfold favorably to the Company and if so, whether the Company would decide later to utilize the U.S.A. Treasury shares according to its plan, remains to be seen. From these assertions of petitioner, We cannot gather anything definite or certain. This, We cannot approve.

In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of accumulation not subsequently declared intentions which are merely the product of afterthought. 19 A speculative and indefinite purpose will not suffice. The mere recognition of a future problem and the discussion of possible and alternative solutions is not sufficient. Definiteness of plan coupled with action taken towards its consummation are essential. 20 The Court of Tax Appeals correctly made the following ruling:

"As to the statement of Mr. Hawkins in Exh. "B" regarding the expansion program of the petitioner by purchasing a lot and building of its own, we find no justifiable reason

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for the retention in 1957 or thereafter of the US Treasury Bonds which were purchased in 1951.

"Moreover, if there was any thought for the purchase of a lot and building for the needs of petitioner‘s business, the corporation may not with impunity permit its earnings to pile up merely because at some future time certain outlays would have to be made. Profits may only be accumulated for the reasonable needs of the business, and implicit in this is further requirement of a reasonable time.

Finally, petitioner asserts that the surplus profits allegedly accumulated in the form of U.S.A. Treasury shares in 1951 by it (petitioner) should not be subject to the surtax in 1957. In other words, petitioner claims that the surtax of 25% should be based on the surplus accumulated in 1951 and not in 1957.

This is devoid of merit.

The rule is now settled in Our jurisprudence that undistributed earnings or profits of prior years are taken into consideration in determining unreasonable accumulation for purposes of the 25% surtax.

‘In determining whether accumulations of earnings or profits in a particular year are within the reasonable needs of a corporation, it is necessary to take into account prior accumulations, since accumulations prior to the year involved may have been sufficient to cover the business needs and additional accumulations during the year involved would not reasonably be necessary.‘"

WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is AFFIRMED in toto, with costs against petitioner.

Cyanamid Philippines, Inc. vs. Court of Appeals, et al., G.R. No. 108067, January 20, 2000

CYANAMID PHIL., INC. vs. COURT OF APPEALS, ET AL.G.R. No. 108067January 20, 2000

Facts:

Petitioner, Cyanamid Philippines, Inc., is a corporation engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an importer/indentor. The CIR sent an assessment letter to petitioner Cyanamid Phil., Inc. and demanded the payment of deficiency income tax for 1981. Petitioner then protested the assessments, particularly, (1) the 25% Surtax Assessment; (2) the 1981Deficiency Income Assessment; and (3) the 1981 Deficiency Percentage Assessment. Petitioner claimed that the surtax for the undue accumulation of earnings was not proper because the said profits were retained to increase petitioner‘s working capital and it would be used for reasonable business needs of the company. The CIR, however, refused to allow the cancellation of the assessment notices. Petitioner appealed to the CTA. During the pendency of the case, both parties agreed to compromise the 1981 Deficiency Income Assessment. However, the surtax on improperly accumulated profits remained unresolved.

Issue:

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Is a manufacturing company liable for the accumulated earnings tax, despite its claim that earnings were accumulated to increase working capital and to be used for its reasonable needs, if it fails to present evidence to prove such allegations?

Held:

Yes. The respondent court correctly decided that the petitioner is liable for the accumulated earnings tax for the year 1981 based on the following grounds:

1. The amendatory provision of Sec. 25 of the 1977 NIRC, which was PD 1739,enumerated the corporations exempt from the imposition of improperly accumulated tax such as banks, non-bank financial intermediaries, insurance companies and corporations authorized by the Central Bank of the Phils. to hold shares of stocks of banks. The petitioner does not fall among those exempt classes.

2. If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of proving is on the taxpayer. And in order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts. Furthermore, the accumulated profits must be used within a reasonable time after the close of the taxable years. In this case, petitioner did not establish, by clear and convincing evidence when such accumulation of profit was for the immediate needs of the business.

3. 3.Lastly, in the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between current assets to current liabilities. The working capital needs of a business depend upon the nature of the business, its credit policies,the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit to the business, and similar factors. Petitioner, by adhering to the ―bardahl‖ formula, failed to impress the tax court with the required definiteness envisioned by the statute. We agree with the tax court that the burden of proof to establish that the profits accumulated were not beyond the reasonable needs of the company, remained on the taxpayer. Hence, this Court will not set aside lightly the conclusion reached by the CTA, which by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has necessarily developed expertise on the subject unless there has been an abuse of improvident exercise of authority

CIR vs. CA, CTA and YMCA G.R. No. 124043.

FACTS:

The Commissioner of Internal Revenue filed a petition for review on certiorari assailing the decision of the Court of Appeals affirming the initial rulings of the CTA in allowing YMCA to claim tax exemption from the lease of its real property.

YMCA is a non-stock, non-profit institution. Being such, on the year 1980 it earned the following as rent income: (1) P676,829.80 for leasing its premises to small shop owners like canteen operators. (2) P44,259 as parking fees collected from non-members.

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In 1984, the CIR assessed YMCA for a total amount of P415,615.01 representing including surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages.

YMCA in response filed a letter protest with the CIR, one which the latter denied. Aggrieved, YMCA filed a petition for review with the CTA which ruled in its favor, ruling that the canteen operations and parking were reasonably necessary for the accomplishment of the objectives of the YMCA.

The CIR then appealed to the Court of Appeals which initially reversed the decision of the CTA. But upon motion for reconsideration, the CA reversed itself and again ruled in favor of YMCA adopting the ratio of the CTA.

ISSUE:

(1) Whether or not the collection or earnings of rental income from the lease of certain premises and income earned from parking fees shall fall under the last paragraph of Section 27 (Now section 30) of the National Internal Revenue Code of 1977, as amended

RULING:

NO. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions. Furthermore, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. Thus, the claimed exemption "must expressly be granted in a statute stated in a language too clear to be mistaken." In the instant case, 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. It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be applied. Parenthetically, a consideration of the question of construction must not even begin, particularly when such question is on whether to apply a strict construction or a liberal one on statutes that grant tax exemptions to "religious, charitable and educational propert[ies] or institutions." The phrase "any of their activities conducted for profit" does not qualify the word "properties." This makes income from the property of the organization taxable, regardless of how that income is used — whether for profit or for lofty non-profit purposes. Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from renting out its real property, on the solitary but unconvincing ground that the said income is not collected for profit but is merely incidental to its operation. The law does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither should we.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents.

Facts:

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The President of CIC Benigno Toda sold to Rafael A. Altonaga a commercial building known as Cibles Building situated in two parcels of land for P100 million, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public. For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.

On 16 April 1990, CIC filed its corporate annual income tax return for the year 1989, declaring, among other things, its gain from the sale of real property. After crediting withholding taxes it paid its net taxable income of P75,987,725. Subsequently in 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa. Three and a half years later, Toda died.

A Notice of Assessment was sent to the new CIC on March 29, 1994 by the Commissioner of Internal Revenue for deficiency income tax arising from the alleged simulated sale of the building. The new CIC asked for reconsideration, asserting that the assessment should be directed against the old CIC.

Upon receipt by the Estate of Toda the Notice of Assessment, it thereafter filed a protest. The Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million.

In the CTA, the Estate interposed that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed. The Commissioner on its part said that the two transactions actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period. The CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it and the government's right to assess CIC prescribed on 15 April 1993. The Court of Appeals affirmed the decision of the CTA. Hence, this petition.

Issues: 1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed?

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

Ruling:

1. Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arm‘s length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-

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payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willful," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful.

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI, and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance. Also, as of 31 July 1989, another P40 million was debited and reflected in RMI's trial balance. This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. That Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. The admission is borne by the records. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga's sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. The intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. Hence, the sale to Altonaga should be disregarded for income tax purposes. The two sale transactions should be treated as a single direct sale by CIC to RMI. Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997).

2. The period of assessment has not prescribed by virtue of Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997). Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be.

Although the BIR was amply informed of the transactions even prior to the execution of the necessary documents to affect the transfer in a query by Altonaga in August 24, 1989 regarding tax consequences of the sale, such circumstance do not negate the existence of fraud. And even assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale.

The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991. The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period.

3. Respondent estate cannot deny liability for CIC's deficiency income tax for the year 1989. A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise, i.e., he agrees to hold himself personally and solidarily liable with the corporation.

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It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989 provided in the Deed of Sale of Shares of Stocks. When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor. Petition granted.

SANTOS vs. SERVIER PHILIPPINES, INC. and NATIONAL LABOR RELATIONS COMMISSION

G.R. No. 166377

FACTS:

Petitioner Ma. Isabel Santos is a Human Resource Manager of respondent Servier Philippines since 1991 up to 1999. She attended a meeting in Paris, France on March 26 and 27 1998, together with her husband and her only child. On March 29, she and her family had dinner at Leon des Bruxelles, a restaurant known for mussels. While having dinner, petitioner experienced stomach pains and was rushed to the hospital; she fell into a coma for 21 days and stayed at the ICU for 52. Doctors found that she had an allergic reaction to the mussels.

During the time, respondent paid for her hospital bills, as well as the stay of her family in Paris. Petitioner was subsequently transferred to St. Luke‘s Medical Center in the Philippines.

In a letter dated May 14, 1999, respondent informed the petitioner that the former had requested the latter's physician to conduct a thorough physical and psychological evaluation of her condition, to determine her fitness to resume her work at the company. Petitioner's physician concluded that the former had not fully recovered mentally and physically. Hence, respondent was constrained to terminate petitioner's services effective August 31, 1999.

As a consequence of petitioner's termination from employment, respondent offered a retirement package which consists of: Retirement Plan Benefits:P1,063,841.76, among other benefits. Out of this amount, only P701,454.89 was released to petitioner's husband, the balance thereof was withheld allegedly for taxation purposes, and the other benefits were also not given. Petitioner through her husband filed a case with the Labor Arbiter and NLRC to recover said amounts.

The LA did not rule on the withholding of the income for tax purposes, as did the NLRC, for allegedly a lack of jurisdiction on their part to rule on the tax issue. But the latter tribunal ruled in favour of petitioner for the other benefits. Unsatisfied, petitioner is now questioning the propriety of the deduction.

ISSUES:

1. WHETHER OR NOT THE LABOR ARBITER AND THE NLRC HAVE JURISDICTION TO RULE ON THE ILLEGAL DEDUCTION.

2. WHETHER OR NOT PETITIONER‘S RETIREMENT BENEFITS ARE TAX EXEMPT.

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RULING:

1. Contrary to the Labor Arbiter and NLRC's conclusions, petitioner's claim for illegal deduction falls within the tribunal's jurisdiction. It is noteworthy that petitioner demanded the completion of her retirement benefits, including the amount withheld by respondent for taxation purposes. The issue of deduction for tax purposes is intertwined with the main issue of whether or not petitioner's benefits have been fully given her. It is, therefore, a money claim arising from the employer-employee relationship, which clearly falls within the jurisdiction 41 of the Labor Arbiter and the NLRC.

2. Section 32 (B) (6) (a) of the New National Internal Revenue Code (NIRC) provides for the exclusion of retirement benefits from gross income, thus:

(6)Retirement Benefits, Pensions, Gratuities, etc. —

a)Retirement benefits received under Republic Act 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. . . . .

Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) the retiring official or employee is not less than fifty (50) years of age at the time of his retirement; and (4) the benefit had been availed of only once. 43

As discussed above, petitioner was qualified for disability retirement. At the time of such retirement, petitioner was only 41 years of age; and had been in the service for more or less eight (8) years. As such, the above provision is not applicable for failure to comply with the age and length of service requirements. Therefore, respondent cannot be faulted for deducting from petitioner's total retirement benefits the amount of P362,386.87, for taxation purposes.

INTERCONTINENTAL BROADCASTING CORPORATION (IBC) vs. AMARILLA

G.R. No. 162775

FACTS:

On various dates, petitioner employed the respondents at its Cebu station. The four (4) employees retired from the company and received, on staggered basis, their retirement benefits under the 1993 Collective Bargaining Agreement (CBA) between petitioner and the bargaining unit of its employees.

In the meantime, a P1,500.00 salary increase was given to all employees of the company, current and retired, effective July 1994. However, when the four retirees demanded theirs, petitioner refused and instead informed them via a letter that their

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differentials would be used to offset the tax due on their retirement benefits in accordance with the National Internal Revenue Code (NIRC).

The four (4) retirees filed separate complaints against IBC TV-13 Cebu and Station Manager Louella F. Cabañero for unfair labor practice and non-payment of backwages before the NLRC, Regional Arbitration Branch VII.

The complainants averred that their retirement benefits are exempt from income tax under Article 32 of the NIRC. Sections 28 and 72 of the NIRC, which petitioner relied upon in withholding their differentials, do not apply to them since these provisions deal with the applicable income tax rates on foreign corporations and suits to recover taxes based on false or fraudulent returns. They pointed out that, under Article VIII of the CBA, only those employees who reached the age of 60 were considered retired, and those under 60 had the option to retire, like Quiñones and Otadoy who retired at ages 58 and 51, respectively.

For its part, petitioner averred that under Section 21 of the NIRC, the retirement benefits received by employees from their employers constitute taxable income. While retirement benefits are exempt from taxes under Section 28(b) of said Code, the law requires that such benefits received should be in accord with a reasonable retirement plan duly registered with the Bureau of Internal Revenue (BIR) after compliance with the requirements therein enumerated. Since its retirement plan in the 1993 CBA was not approved by the BIR, complainants were liable for income tax on their retirement benefits.

ISSUES:

(1) Whether the retirement benefits of respondents are part of their gross income; and

(2) Whether petitioner is estopped from reneging on its agreement with respondent to pay for the taxes on said retirement benefits.

RULING:

(1) Yes; (2) Yes.

We agree with petitioner's contention that, under the CBA, it is not obliged to pay for the taxes on the respondents' retirement benefits. We have carefully reviewed the CBA and find no provision where petitioner obliged itself to pay the taxes on the retirement benefits of its employees.

We also agree with petitioner's contention that, under Section 28 (b) (7) (A) of the NIRC of 1986, the retirement benefits of respondents are part of their gross income subject to taxes.

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Sec. 28.Gross Income. —

(b)Exclusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this Title:

(7)Retirement benefits, pensions, gratuities, etc. — (A) Retirement benefits received by officials and employees of private firms whether individuals or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once….

Revenue Regulation No. 12-86, the implementing rules of the foregoing provisions, provides:

(b)Pensions, retirements and separation pay. — Pensions, retirement and separation pay constitute compensation subject to withholding tax, except the following:

(1)Retirement benefit received by official and employees of private firms under a reasonable private benefit plan maintained by the employer, if the following requirements are met:

(i)The retirement plan must be approved by the Bureau of Internal Revenue;

(ii)The retiring official or employees must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and

(iii)The retiring official or employee shall not have previously availed of the privilege under the retirement benefit plan of the same or another employer.

Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only once.

Article VIII of the 1993 CBA provides for two kinds of retirement plans - compulsory and optional.

Respondents were qualified to retire optionally from their employment with petitioner. However, there is no evidence on record that the 1993 CBA had been approved or was ever presented to the BIR; hence, the retirement benefits of respondents are taxable.

However, we agree with respondents' contention that petitioner did not withhold the taxes due on their retirement benefits because it had obliged itself to pay the taxes due thereon. This was done to induce respondents to agree to avail of the optional retirement scheme.

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Respondents received their retirement benefits from the petitioner in three staggered installments without any tax deduction for the simple reason that petitioner had remitted the same to the BIR with the use of its own funds conformably with its agreement with the retirees. It was only when respondents demanded the payment of their salary differentials that petitioner alleged, for the first time, that it had failed to present the 1993 CBA to the BIR for approval, rendering such retirement benefits not exempt from taxes; consequently, they were obliged to refund to it the amounts it had remitted to the BIR in payment of their taxes. Petitioner used this "failure" as an afterthought, as an excuse for its refusal to remit to the respondents their salary differentials. Patently, petitioner is estopped from doing so. It cannot renege on its commitment to pay the taxes on respondents' retirement benefits on the pretext that the "new management" had found the policy disadvantageous. For petitioner to renege on its contract with respondents simply because its new management had found the same disadvantageous would amount to a breach of contract.

ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION vs. CIR

G.R. No. L-26911

CIR vs. ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION and COURT OF TAX APPEALS

G.R. No. L-26924.

FACTS:

In an appeal, where Atlas Consolidated Mining and Development Corporation assailed the disallowance of the transfer agent's fee; stockholder's relation fee; U.S. listing expenses; suit expenses and provision for contingencies, as deductible expenses from its gross income which resulted in the deficiency income tax assessments made by the Commissioner of Internal Revenue against Atlas, the Court of Tax Appeals allowed said disallowed items except the stockholders relation service fee and suit expenses. Both parties appealed by filing two separate petitions for review, one filed by Atlas in L-26911 as to the portion disallowed and the other by the Commissioner in L-26924, not only raising for the first time lack of proof of payment of the expense deducted but questioning as well the allowance of said deductible expenses.

ISSUES:

1. WON the atty‘s fees/litigation expenses paid in defense of title tot he Toledo Mining properties purchased from Mindanao Lode Mines Inc. in a civil case is an allowable deduction as business expense under Sec. 30 (a)(1) of NIRC.

2. WON the CIR can raise the fact of payment for the first time on appeal.

RULING:

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The Supreme Court ruled: in L-26911, that the stockholder's relation service fee was in effect spent as a capital expenditure and should be disallowed and in L-26924, that: (a) the Commissioner of Internal Revenue cannot raise for the first time on appeal the fact of payment of expense deducted; (b) the listing fee which was paid annually is deductible as an ordinary and necessary business expense; (c) the findings of the Court of Tax Appeal on the "provision for contingencies" are factual in nature and in the absence of grave abuse of discretion should not be disturbed on appeal; and (d) litigation expenses in defense of title of property are capital in nature and not deductible.

Judgments modified as to taxable amount.

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company) vs. CIR

G.R. No. 28508-9

FACTS:

On appeal is the decision of the Court of Tax Appeals denying petitioner's claims for refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.

In CTA Case No. 1251, petitioner deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the respondent CIR on the ground that the expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. ESSO amended its return and further claimed as ordinary and necessary expenses in the same return the margin fees it had paid to the Central Bank on its profit remittances to its New York head office.

In 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the margin fees paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960 which arose from the disallowance of the margin fees.

ESSO settled this deficiency assessment in 1964 under protest and claimed overpayment on the interest on its deficiency income tax. It argued that the interest should be only on the difference between the total deficiency and its tax credit.

The CIR denied the claims of ESSO. ESSO appealed to the CTA, contending that the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense. ESSO further argued on the excess interest.

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The CTA denied petitioner's claim for refund but sustained its claim for excess interest.

ISSUE:

Whether R.A. 2009, entitled An Act to Authorize the Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue measure.

RULING:

It is a police measure.

Basis:

If it is a revenue measure, the margin fees should be deductible from ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code which provides that all taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade, business or profession are deductible from gross income.

In 2 other cases, SC held that a margin fee is not a tax but an exaction designed to curb the excessive demands upon our international reserve.

To be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business.

Ordinarily, an expense will be considered necessary, where the expenditure is appropriate and helpful in the development of the taxpayer's business.

The fees were paid for the remittance by ESSO as part of the profits to the head office in the United States. As stated in the Lopez case, the margin fees are not expenses in connection with the production or earning of petitioner's incomes in the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the remittance of funds after they have already been earned by petitioner's branch in the Philippines for the disposal of its Head Office in New York which is already another distinct and separate income taxpayer.

Thus, ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business.

Claims for deductions are a matter of legislative grace. The taxpayer has the burden of justifying the allowance of any deduction claimed.

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COMMISSIONER OF INTERNAL REVENUE vs. GENERAL FOODS (PHILS.), INC.

G.R. No. 143672

FACTS:

On June 14, 1985, respondent corporation, which is engaged in the manufacture of beverages such as "Tang," "Calumet" and "Kool-Aid," filed its income tax return for the fiscal year ending February 28, 1985. In said tax return, respondent corporation claimed as deduction, among other business expenses, the amount of P9,461,246 for media advertising for "Tang."

On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by respondent corporation. Consequently, respondent corporation was assessed deficiency income taxes in the amount of P2,635,141.42. The latter filed a motion for reconsideration but the same was denied.

ISSUE:

Whether or not the subject media advertising expense for "Tang" incurred by respondent was an ordinary and necessary expense fully deductible under the National Internal Revenue Code (NIRC).

RULING:

To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.

The parties are in agreement that the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was necessary. However, their views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary. These two requirements must be met.

As agreed by the Supreme Court, the Commissioner of Tax Appeals maintains that the subject advertising expense was not ordinary on the ground that it failed the two conditions set by U.S. jurisprudence: first, "reasonableness" of the amount incurred and second, the amount incurred must not be a capital outlay to create "goodwill" for

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the product and/or private respondent's business. Otherwise, the expense must be considered a capital expenditure to be spread out over a reasonable time.

We find the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible.

Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer's trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.

We agree with the Court of Tax Appeals that the subject advertising expense was of the second kind. Not only was the amount staggering; the respondent corporation itself also admitted, in its letter protest to the Commissioner of Internal Revenue's assessment, that the subject media expense was incurred in order to protect respondent corporation's brand franchise, a critical point during the period under review.

The protection of brand franchise is analogous to the maintenance of goodwill or title to one's property. This is a capital expenditure which should be spread out over a reasonable period of time.

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

C.M. HOSKINS&CO, INC. v CIR

G.R No. L-24059

FACTS:

Petitioner, a domestic corporation engaged in the real estate business as brokers, managing agents and administrators, filed its income tax return for its fiscal year ending September 30, 1957 showing a net income of P92,540.25 and a tax liability due thereon of P18,508.00, which it paid in due course. Upon verification of its return, CIR, disallowed four items of deduction in petitioner's tax returns and assessed against it an income tax deficiency in the amount of P28,054.00 plus interests. The Court of Tax Appeals upon reviewing the assessment at the taxpayer's petition, upheld respondent's disallowance of the principal item of petitioner's having paid to Mr. C. M. Hoskins, its

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founder and controlling stockholder the amount of P99,977.91 representing 50% of supervision fees earned by it and set aside respondent's disallowance of three other minor items.

Petitioner questions in this appeal the Tax Court's findings that the disallowed payment to Hoskins was an inordinately large one, which bore a close relationship to the recipient's dominant stockholdings and therefore amounted in law to a distribution of its earnings and profits.

ISSUE:

Whether the 50% supervision fee paid to Hoskin may be deductible for income tax purposes.

RULING:

NO.

Hoskin owns 99.6% of the CM Hoskins & Co. He was also the President and Chairman of the Board. That as chairman of the Board of Directors, he received a salary of P3,750.00 a month, plus a salary bonus of about P40,000.00 a year and an amounting to an annual compensation of P45,000.00 and an annual salary bonus of P40,000.00, plus free use of the company car and receipt of other similar allowances and benefits, the Tax Court correctly ruled that the payment by petitioner to Hoskins of the additional sum of P99,977.91 as his equal or 50% share of the 8% supervision fees received by petitioner as managing agents of the real estate, subdivision projects of Paradise Farms, Inc. and Realty Investments, Inc. was inordinately large and could not be accorded the treatment of ordinary and necessary expenses allowed as deductible items within the purview of the Tax Code.

The fact that such payment was authorized by a standing resolution of petitioner's board of directors, since "Hoskins had personally conceived and planned the project" cannot change the picture. There could be no question that as Chairman of the board and practically an absolutely controlling stockholder of petitioner, Hoskins wielded tremendous power and influence in the formulation and making of the company's policies and decisions. Even just as board chairman, going by petitioner's own enumeration of the powers of the office, Hoskins, could exercise great power and influence within the corporation, such as directing the policy of the corporation, delegating powers to the president and advising the corporation in determining executive salaries, bonus plans and pensions, dividend policies, etc.

It is a general rule that 'Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a

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reasonable compensation for the services rendered. The conditions precedent to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3) the bonuses, when added to the salaries, are 'reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one of them being the amount and quality of the services performed with relation to the business.' Other tests suggested are: payment must be 'made in good faith'; 'the character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type and extent of the services rendered, the salary policy of the corporation'; 'the size of the particular business'; 'the employees' qualifications and contributions to the business venture'; and 'general economic conditions. However, 'in determining whether the particular salary or compensation payment is reasonable, the situation must be considered as whole. Ordinarily, no single factor is decisive. . . . it is important to keep in mind that it seldom happens that the application of one test can give satisfactory answer, and that ordinarily it is the interplay of several factors, properly weighted for the particular case, which must furnish the final answer."

Petitioner's case fails to pass the test. On the right of the employer as against respondent Commissioner to fix the compensation of its officers and employees, we there held further that while the employer's right may be conceded, the question of the allowance or disallowance thereof as deductible expenses for income tax purposes is subject to determination by CIR. As far as petitioner's contention that as employer it has the right to fix the compensation of its officers and employees and that it was in the exercise of such right that it deemed proper to pay the bonuses in question, all that We need say is this: that right may be conceded, but for income tax purposes the employer cannot legally claim such bonuses as deductible expenses unless they are shown to be reasonable. To hold otherwise would open the gate of rampant tax evasion.

Lastly, the question of allowing or disallowing as deductible expenses the amounts paid to corporate officers by way of bonus is determined by respondent exclusively for income tax purposes.

CHINA BANKING CORP. V. COURT OF APPEALS, ET AL.,

G.R. No. 125508, JULY 19, 2000

FACTS:

China Banking Corporation made a 53% equity investment ({16,227,851.80) in the First CBC Capital – a Hong Kong subsidiary engaged in financing and investment with ―deposit-taking‖ function.

However, it was shown that CBC has become insolvent so China Banking wrote-off its investment as worthless and treated it as a bad debt or as an ordinary loss deductible from its gross income.

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The CIR disallowed the deduction on the ground that the investment should not be classified as being worthless. It also held that assuming that the securities were worthless, then they should be classified as a capital loss and not as a bad debt since there was not indebtedness between China Banking and CBC.

ISSUE:

Whether or not the investment made by China Banking can be treated as a bad debt ,therefore deductible from its gross income.

RULING:

NO.

An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital asset. 3 A capital asset is defined negatively in Section 33(1) of the NIRC; viz:

"(1) Capital assets. — The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section twenty-nine; or real property used in the trade or business of the taxpayer."

Thus, shares of stock, like the other securities defined in Section 20(t) 4 of the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities.

In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets.

A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets.

Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer.

In sum —

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(a)The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset.

(b)Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a capital, not an ordinary, loss.

(c)The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become "worthless."

PHILIPPINE REFINING COMPANY (now known as "UNILEVER PHILIPPINES [PRC], INC.") vs. COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF INTERNAL REVENUE, .

G.R. No. 118794

FACTS:

This is an appeal by certiorari from the decision of respondent Court of Appeals 1affirming the decision of the Court of Tax Appeals which disallowed petitioner's claim for deduction as bad debts of several accounts in the total sum of P395,324,27, and imposing a 25% surcharge and 20% annual delinquency interest on the alleged deficiency income tax liability of petitioner. Cdpr

Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00, computed as follows:

Deficiency Income Tax

Net Income per investigationP197,502,568.00

Add: Disallowances

Bad DebtsP713,070.93

Interest ExpenseP2,666,545.49P3,379,616.00

————————————

Net Taxable IncomeP200,882,184.00

———————

Tax Due ThereonP70,298,764.00

Less: Tax PaidP69,115,899.00

Deficiency Income TaxP1,182,865.00

Add: 20% Interest (60% max.)P709,719.00

——————

Total Amount Due and CollectibleP1,892.584.00 2

———————

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The assessment was timely protested by petitioner on April 26, 1989, on the ground that it was based on the erroneous disallowances of "bad debts" and "interest expense" although the same are both allowable and legal deductions. Respondent Commissioner, however, issued a warrant of garnishment against the deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila, which action the latter considered as a denial of its protest.

ISSUE:

Whether or not there was an erroneous disallowance of bad debts.

RULING:

We agree with respondent Court of Tax Appeals:

Out of the sixteen (16) accounts alleged as bad debts, We find that only three (3) accounts have met the requirements of the worthlessness of the accounts, hence were properly written off as bad debts.

We find that said accounts have not satisfied the requirements of the 'worthlessness of a debt'. Mere testimony of the Financial Accountant of the Petitioner explaining the worthlessness of said debts is seen by this Court as nothing more than a self-serving exercise which lacks probative value. There was no iota of documentary evidence (e.g., collection letters sent, report from investigating fieldmen, letter of referral to their legal department, police report/affidavit that the owners were bankrupt due to fire that engulfed their stores or that the owner has been murdered etc.), to give support to the testimony of an employee of the Petitioner. Mere allegations cannot prove the worthlessness of such debts in 1985. Hence, the claim for deduction of these thirteen (13) debts should be rejected."

This pronouncement of respondent Court of Appeals relied on the ruling of this Court in Collector vs. Goodrich International Rubber Co., which established the rule in determining the "worthlessness of a debt." In said case, we held that for debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that (1) there is a valid and subsisting debt; (2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future.

Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court.

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Basilan Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22492, September 5, 1967

―Doctrine:

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law.‖

Facts:

Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from gross income the value of depreciation computed on the reappraised value.

CIR disallowed the deductions claimed by petitioner, consequently assessing the latter of deficiency income taxes.

Issue:

Whether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assets

Held:

Yes. The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated:

(1)In general. — A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or out of its not being used: Provided, That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer . . . no further allowance shall be made. . . .

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law [Gutierrez v. Collector of Internal Revenue, L-19537, May 20, 1965].

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Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. It commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement.

The recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation.

Kepco Phil. Corp. vs. Commissioner of Internal Revenue, G.R. No. 179356, December 14, 2009

FACTS: Korea Electric Power Corporation (KEPCO) Philippines Corporation (petitioner) is an independent power producer engaged in selling electricity to the National Power Corporation (NPC). After its incorporation and registration with the Securities and Exchange Commission on June 15, 1995, petitioner forged a Rehabilitation Operation Maintenance and Management Agreement with NPC for the rehabilitation and operation of Malaya Power Plant Complex in Pililia, Rizal.[1]

On September 30, 1998, petitioner filed with the Commissioner of Internal Revenue (respondent) administrative claims for tax refund in the amounts of P4,895,858.01 representing unutilized input Value Added Tax (VAT) payments on domestic purchases of goods and services for the 3rd quarter of 1996 and P4,084,867.25 representing creditable VAT withheld from payments received from NPC for the months of April and June 1996.

Petitioner filed before respondent on December 28, 1998 still another claim for refund representing unutilized input VAT payments attributable to its zero-rated sale transactions with NPC, including input VAT payments on domestic goods and services in the amount of P13,191,278.00 for the 4th quarter of 1996. Petitioner also filed the same claim before the CTA on December 29, 1998, docketed as CTA Case No. 5704.

The two petitions before the CTA for a refund in the total amount of P22,172,003.26 were consolidated.

Petitioner appealed under Rule 43 of the Rules of Court before the Court of Appeals,[3] praying only for the refund of P3,455,199.54, claiming that the purchases represented thereby were used in the rehabilitation of the Malaya Power Plant Complex which should be considered as capital expense to fall within the purview of capital goods.

1) Inventory supplies/materials

2) Inventory supplies/lubricants

3) Inventory supplies/spare parts

4) Inventory supplies/supplies

5) Cost/O&M Supplies

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6) Cost/O&M Uniforms and Working Clothes

7) Cost/O&M/Supplies

8) Cost/O&M/Repairs and Maintenance

9) Office Supplies

10) Repair and Maintenance/Mechanics

11) Repair and Maintenance/Common/General

12) Repair and Maintenance/Chemicals

ISSUE: WON THE PURCHASES FALL UNDER THE DEFINITION OF ―CAPITAL GOODS‖?

RULING: NO. The Petitioner failed to prove that the purchases are capital goods.

Section 4.106-1 (b) of Revenue Regulations No. 7-95 defines capital goods and its scope in this wise:

x x x x

(b) Capital Goods. – Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed to the extent that such input taxes have not been applied against output taxes. The application should be made within two (2) years after the close of the taxable quarter when the importation or purchase was made.

Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion corresponding to taxable operations.

―Capital goods or properties‖ refer to goods or properties with estimated useful life greater that one year and which are treated as depreciable assets under Section 29 (f) ,[4] used directly or indirectly in the production or sale of taxable goods or services.

For petitioner‘s purchases of domestic goods and services to be considered as ―capital goods or properties,‖ three requisites must concur. First, useful life of goods or properties must exceed one year; second, said goods or properties are treated as depreciable assets under Section 34 (f) and; third, goods or properties must be used directly or indirectly in the production or sale of taxable goods and services.

From petitioner‘s evidence, the account vouchers specifically indicate that the disallowed purchases were recorded under inventory accounts, instead of depreciable accounts. That petitioner failed to indicate under its fixed assets or depreciable assets account, goods and services allegedly purchased pursuant to the rehabilitation and maintenance of Malaya Power Plant Complex, militates against its claim for refund. As correctly found by the CTA, the goods or properties must be recorded and treated as depreciable assets under Section 34 (F) of the NIRC.

CONSOLIDATED MINES, INC. vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, .

104

G.R. Nos. L-18843 & 18844

FACTS

The Company, a domestic corporation engaged in mining, had filed its income tax returns for 1951, 1952, 1953 and 1956. After the investigation the examiners reported that (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Company's mines, although for income tax purposes the Company had reported income and expenses on the accrual basis; (2) depletion and depreciation expenses had been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated; and that (B) for the year 1956 (1) the Company had overstated its claim for depletion; and (2) certain claims for miscellaneous expenses were not duly supported by evidence.

ISSUES and RULING

DEPLETION

The first issue raised by the Company is with respect to the rate of mine depletion used by the Court of Tax Appeals. The Tax Code provides that in computing net income there shall be allowed as deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made

As an income tax concept, depletion is wholly a creation of the statute 21 — "solely a matter of legislative grace." 22Hence, the taxpayer has the burden of justifying the allowance of any deduction claimed. 23 As in connection with all other tax controversies, the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer, and this is true with respect to the value of the property constituting the basis of the deduction. 24 This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence. 25

The question as to which figure should properly correspond to "mine cost" is one of fact. 37 The findings of fact of the Tax Court, where reasonably supported by evidence, are conclusive upon the Supreme Court. 38

DEPRECIATION EXPENSE

In its second assigned error, the Company questions the disallowance by the Tax Court of the depreciation charges claimed by the Company as deductions from its gross income 44 The items thus disallowed consist mainly of depreciation expenses for

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the years 1953 and 1954 allegedly sustained as a result of the deterioration of some of the Company's incomplete constructions.

The initial memorandum 45 of the BIR examiner states the basic reason why the Company's claimed depreciation should be disallowed or re-adjusted, thus: since "up to its completion (the incomplete asset) has not been and is not capable of use in the operation, the depreciation claimed could not, in fairness to the Government and the taxpayer, be considered as proper deduction for income tax purposes as the said asset is still under construction."

For taxation purposes the phrase "out of its not being used," with reference to depreciation allowable on assets which are idle or the use of which is temporarily suspended, should be understood to refer only to property that has once been used in the trade or business, not to property that has never been actually devoted to the taxpayer's business, particularly incomplete assets that have yet to be used.

MISCELLANEOUS BUSINESS EXPENDITURES

The Company's third assigned error assails the Court of Tax Appeals in not allowing the deduction from its gross income of certain miscellaneous business expenditures in the course of its operation "for lack of any supporting paper or evidence."

The vouchers and cancelled checks submitted by the Company only show that the amounts claimed had indeed been spent, and confirm the fact of disbursement, but do not necessarily prove that the expenses for which they were disbursed are deductible items. In the case of Collector of Internal Revenue vs. Goodrich International Rubber Co. 48 this Court rejected the taxpayer's similar claim for deduction of alleged representation expenses, based upon receipts issued not by the entities to which the alleged expenses were paid but by the officers of taxpayer corporation who allegedly paid them. It was there stated:

If the expenses had really been incurred, receipts or chits would have been issued by the entities to which the payments have been made, and it would have been easy for Goodrich or its officers to produce such receipts. These receipts issued by said officers merely attest to their claim that they had incurred and paid said expenses. They do not establish payment of said alleged expenses to the entities in which the same are said to have been incurred.

In the case before Us, except for the Company's own vouchers and cancelled checks, together with the Company treasurer's lone and uncorroborated testimony regarding the purpose of said disbursements, there is no other supporting evidence to show that the expenses were legally deductible items. We therefore affirm the Tax Court's disallowance of the same.

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Lung Center of the Phil. vs. Quezon City, et al., G.R. No. 144104, June 29, 2004

FACTS:

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established by virtue of Presidential Decree No. 1823. It is the registered owner of a parcel of land. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being leased to private parties. Almost one-half of the entire area on the left side is vacant and idle, while a big portion on the right side, is being leased for commercial purposes to a private enterprise.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government.

Both the land and the hospital building of the petitioner were assessed for real property taxes. The petitioner filed a Claim for Exemption from real property taxes predicated on its claim that it is a charitable institution. The petitioner's request was denied.

ISSUES:

(a) whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160;

(b) whether the real properties of the petitioner are exempt from real property taxes.

RULING:

(a) Yes. Petitioner is a charitable institution.

The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage.

Petitioner is a non-profit and non-stock corporation organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines.

As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.

The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust purposes and cannot be diverted to private profit or benefit.

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character as a charitable institution simply because the gift or donation is in the form of subsidies granted by the government.

(b) The portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from real property taxes. On the other hand, the portions of the land occupied by the hospital and portions of

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the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.

Section 2 of Presidential Decree No. 1823 specifically provides that the petitioner shall enjoy the tax exemptions and privileges for income and gift taxes however, nowhere in said decree did it provide for exemption from real property tax.

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

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

The tax exemption under this constitutional provision covers property taxes only. ". . . what is exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes."

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:

SECTION 234.Exemptions from Real Property Tax. — The following are exempted from payment of the real property tax:

xxx xxx xxx

(b)Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law. Solely is synonymous with exclusively.

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What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.

TOMAS CALASANZ, ET AL.vs. CIR

G.R. No. L-26284 October 8, 1986

FACTS:

Petitioner inherited a parcel of land and in order to liquidate her inheritance, they had the land surveyed and subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and lighting system, were introduced to make the lots saleable. Soon after, the lots were sold to the public at a profit. They paid Capital gains tax from proceeds of the realized sale of lot. BIR and then CTA held them liable for Deficiency of Income Tax.

Defense of Petitioner: It is captal gain and not income tax because they are not Real Estate Dealers. The subdivision and improvements made was to facilitate liquidation of inherited lot

ISSUES:

(1) WON Petitioners are Real Estate Dealer

(2) WON the property is capital asset or ordinary asset?

HELD:

(1)They are deemed as Real Estate Dealers. The activities of petitioners are indistinguishable from those invariably employed by one engaged in the business of selling real estate. Also, Petitioners did not sell the land in the condition in which they acquired it. While the land was originally devoted to rice and fruit trees. And lastly, Another distinctive feature of the real estate business discernible from the records is the existence of contracts receivables which signify the lots were sold on installment basis.

As to their defense in mere liquidation process, the American court in clear and categorical terms rejected the liquidation test in determining whether or not a taxpayer is carrying on a trade or business The court observed that the fact that property is sold for purposes of liquidation does not foreclose a determination that a "trade or business" is being conducted by the seller.

(2)ORDINARY ASSET. A property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable. However, if the inherited property is substantially improved or very actively sold or both

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it may be treated as held primarily for sale to customers in the ordinary course of the heir's business.

DEVELOPMENT BANK OF THE PHILIPPINES vs. COMMISSION ON AUDIT

G.R. No. 144516.

FACTS:

On February 20, 1980, the Development Bank of the Philippines (DBP) Board of Governors adopted Resolution No. 794 creating the DBP Gratuity Plan and authorizing the setting up of a retirement fund to cover the benefits due to DBP retiring officials and employees under Commonwealth Act No. 186, as amended.

In 1983, the Bank established a Special Loan Program availed thru the facilities of the DBP Provident Fund and funded by placements from the Gratuity Plan Fund. Under the Special Loan Program, a prospective retiree is allowed the option to utilize in the form of a loan a portion of his ―outstanding equity‖ in the gratuity fund and to invest it in a profitable investment or undertaking. The earnings of the investment shall then be applied to pay for the interest due on the gratuity loan which was initially set at 9% per annum subject to the minimum investment rate resulting from the updated actuarial study. The excess or balance of the interest earnings shall then be distributed to the investor-members.

Pursuant to the investment scheme, DBP-TSD paid to the investor-members a total of P11,626,414.25 representing the net earnings of the investments for the years 1991 and 1992. The payments were disallowed by the Auditor under Audit Observation Memorandum No. 93-2 dated March 1, 1993, on the ground that the distribution of income of the Gratuity Plan Fund (GPF) to future retirees of DBP is irregular and constituted the use of public funds for private purposes which is specifically proscribed under Section 4 of P.D. 1445. The Auditor reasoned that ―the Fund is still owned by the Bank, the Board of Trustees is a mere administrator of the Fund in the same way that the Trust Services Department where the fund was invested was a mere investor and neither can the employees, who have still an inchoate interest in the Fund be considered as rightful owner of the Fund.‖

ISSUES:

1. Whether or not the income of the Gratuity Plan Fund is income of DBP.

2. Whether or not the distribution of income of the Gratuity Plan Fund (GPF) to future retirees of DBP makes it lose its tax-exempt status.

HELD:

1. NO. An employees' trust is a trust maintained by an employer to provide retirement, pension or other benefits to its employees. Resolution No. 794 shows that DBP intended to establish a trust fund to cover the retirement benefits of certain employees

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under Republic Act No. 1616. The principal and income of the Fund would be separate and distinct from the funds of DBP.

2. YES. The Gratuity Plan will lose its tax-exempt status if the retirement benefits are released prior to the retirement of the employees. The trust funds of employees other than those of private employers are qualified for certain tax exemptions pursuant to Section 60(B), formerly Section 53(b), of the National Internal Revenue Code.

The Gratuity Plan provides that the gratuity benefits of a qualified DBP employee shall be released only ―upon retirement under the Plan.‖ If the earnings and principal of the Fund are distributed to DBP employees prior to their retirement, the Gratuity Plan will no longer qualify for exemption under Section 60(B). To recall, DBP Resolution No. 794 creating the Gratuity Plan expressly provides that ―since the gratuity plan will be tax qualified under the National Internal Revenue Code xxx, the Bank‘s periodic contributions thereto shall be deductible for tax purposes and the earnings therefrom tax free.‖ If DBP insists that its employees may receive the P11,626,414.25 dividends, the necessary consequence will be the non-qualification of the Gratuity Plan as a tax-exempt plan.

Carmelino F. Pansacola vs. CIR, G.R. No. 159991, November 16, 2006

FACTS:

petitioner Carmelino F. Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5,950. In it he claimed the increased amounts of personal and additional exemptions under Section 354 of the NIRC, although his certificate of income tax withheld on compensation indicated the lesser allowed amounts on these exemptions. He claimed a refund of P5,950 with the Bureau of Internal Revenue, which was denied. Later, the Court of Tax Appeals also denied his claim because according to the tax court, "it would be absurd for the law to allow the deduction from a taxpayer‘s gross income earned on a certain year of exemptions availing on a different taxable year…" Petitioner sought reconsideration, but the same was denied.

ISSUE:

Whether or not the increased personal and additional exemptions under [the NIRC] can be availed of by the petitioner for purposes of computing his income tax liability for the taxable year 1997 and thus be entitled to the refund.

Could the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997?

RULING: NO.

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Personal and additional exemptions under Section 35 of the NIRC are fixed amounts to which certain individual taxpayers (citizens, resident aliens)12 are entitled. Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence,13 taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress.

A careful scrutiny of the provisions14 of the NIRC specifically shows that Section 79 (D)15 provides that the personal and additional exemptions shall be determined in accordance with the main provisions in Title II of the NIRC.

The policy declarations in the enactment of the NIRC do not indicate it was a social legislation that adjusted personal and additional exemptions according to the poverty threshold level nor is there any indication that its application should retroact. At the time petitioner filed his 1997 return and paid the tax due thereon in April 1998, the increased amounts of personal and additional exemptions in Section 35 were not yet available. It has not yet accrued as of December 31, 1997, the last day of his taxable year. Petitioner‘s taxable income covers his income for the calendar year 1997.

The law cannot be given retroactive effect. It is established that tax laws are prospective in application, unless it is expressly provided to apply retroactively. In the NIRC, we note, there is no specific mention that the increased amounts of personal and additional exemptions under Section 35 shall be given retroactive effect.

Conformably too, personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed27 against the taxpayer28 and cannot be allowed unless granted in the most explicit and categorical language29 too plain to be mistaken. They cannot be extended by mere implication or inference. And, where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms.

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