CIR vs. Menguito

Taxation – Pre-Assessment Notice – Estoppel – Piercing the Veil of Corporate Fiction 

DominadorMenguito and his wife are the owners of Copper Kettle Catering Services, Inc. (CKCSI). They also operate several restaurant branches in the Philippines. One such branch was the Copper Kettle Cafeteria Specialist (CKCS) in Club John Hay, Baguio City. The branch was registered as a sole proprietorship. In September 1997, a formal assessment notice (FAN) was issued against the spouses and they were adjudged to pay P34 million in deficiency taxes for the years 1991 to 1993. The Bureau of Internal Revenue found that in order for CKCS to operate in Club John Hay, a contract was entered into by CKCSI and Club John Hay; hence, CKCS and CKCSI are one and the same.

Mrs.Menguito then sent a letter to the BIR acknowledging receipt of the assessment notice. She asked for more time to sort the issue. Later, when Menguito eventually filed a protest, he denied, through his witness (Ma. Therese Nalda, CKCS employee), receiving the FAN; that the FAN was addressed to the wrong person because it was addressed to CKCSI not CKCS. He presented as evidence a photocopy of the articles of incorporation (AOI) of CKCSI.

On the other hand, the Commissioner of Internal Revenue (CIR) presented proof of the due mailing of the FAN. It however was not able to prove that it issued a pre-assessment notice (PAN) or a post-assessment notice.

ISSUE: Whether or not due process was observed by the Commissioner of Internal Revenue.

HELD:  Yes. The veil of corporate fiction is pierced because it was proven that CKCSI is actively managing CKCS. Further, CKCS is more known as CKCSI. Also, the photocopy of the AOI presented by Menguito is not a conclusive proof of the separate personality of CKCSI and CKCS.

More importantly, Menguito and his wife are in estoppel because they already acknowledged the receipt of the FAN through the letter sent by Mrs.Menguito to the BIR. They cannot later on deny the receipt of the FAN. Worse, it should be Menguito who should be directly denying the receipt and not through an employee (Nalda) who was not even an employee of the spouses when the FAN was issued and received in 1997. It was only in 1998 that Nalda was employed by CKCS. Since Menguito did not legally deny the receipt of the FAN, the presumption that he actually received it still subsists. Further, based on the records, Menguito, in the stipulation of facts, acknowledged the receipt of the FAN.

Anent the issue of the non-issuance of the PAN, the same is not vital to due process. The Supreme Court ruled that the strict requirement of

proving that an assessment is sent and received by the taxpayer is only applicable to FANs and to PANs. The issuance of a valid formal assessment is a substantive prerequisite to tax collection, for it contains not only a computation of tax liabilities but also a demand for payment within a prescribed period, thereby signaling the time when penalties and interests begin to accrue against the taxpayer and enabling the latter to determine his remedies therefor. A PAN or a post-assessment notice does not bear the gravity of a FAN. Neither notice contains a declaration of the tax liability of the taxpayer or a demand for payment thereof. Hence, the lack of such notices inflicts no prejudice on the taxpayer for as long as the latter is properly served a formal assessment notice.

NOTE: In the case of CIR vs Metro Star Superama (December 2010), the Supreme Court held that the due issuance of the PAN is part of due process. Hence, this superseded the ruling in this case as regards the issuance of PANs. (CIR vsMenguito is a September 2008 case).

CIR vs. Enron Subic Power Corp.

In 1997, Enron Subic Power Corporation received a pre-assessment notice from the Bureau of Internal Revenue (BIR). Enron allegedly had a tax deficiency of P2.8 million for the year 1996. Enron filed a protest. In 1999, Enron received a final assessment notice (FAN) from the BIR for the same amount of tax deficiency.

Enron however assailed the FAN  because according to Enron the FAN is not compliant with Section 228 of the National Internal Revenue Code (NIRC) which provides that the legal and factual bases of the assessment must be contained in the FAN. The FAN issued to Enron only contained the computation of its alleged tax liability.

The Commissioner of Internal Revenue (CIR) admitted that the FAN did not contain the legal and factual bases of the assessment however, the CIR insisted that the same has been substantially complied with already because during the pre-assessment stage, the representative of Enron has been advised of the said factual and legal bases of the assessment.

ISSUE: Whether or not there is a valid final assessment notice issued to Enron.

HELD: No. The wording of Section 228 of the NIRC provides:The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise the assessment shall be void.

The word “shall” is mandatory. The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. It cannot be substituted by other notices or advisories issued or delivered to the taxpayer during the preliminary stage.

CIR V. FMF DEVELOPMENT CORP.

Facts: On April 15, 1996, FMF filed its Corporate Annual Income Tax Return for taxable year 1995 and declared a loss of P3,348,932.The BIR then sent FMF pre-assessment notices informing it of its alleged tax liabilities. FMF filed a protest against these notices with the BIR and requested for a reconsideration/reinvestigation. RDO Rogelio Zambarrano informed FMF that the reinvestigation had been referred to Revenue Officer Alberto Fortaleza. 

On February 9, 1999, FMF President executed a waiver of the three-year prescriptive period for the BIR to assess internal revenue taxes to extend the assessment period until October 31, 1999. The waiver was accepted and signed by RDO Zambarrano. 

On October 18, 1999, FMF received amended pre-assessment notices dated October 6, 1999 from the BIR. FMF immediately filed a protest on November 3, 1999 but on the same day, it received BIR’s Demand Letter and Assessment Notice dated October 25, 1999 reflecting FMF’s alleged deficiency taxes and accrued interests the total of which amounted to P2,053,698.25. 

On November 24, 1999, FMF filed a letter of protest on the assessment invoking the defense of prescription by reason of the invalidity of the waiver. 

The BIR insisted that the waiver is valid. It ordered FMF to immediately settle its tax liabilities, otherwise, judicial action will be taken. Treating this as BIR’s final decision, FMF filed a petition for review with the CTA. 

The CTA granted the petition and cancelled Assessment Notice made by the BIR because it was already time-barred. The CTA ruled that the waiver did not extend the three-year prescriptive period within which the BIR can make a valid assessment because it did not comply with the procedures laid down in Revenue Memorandum Order (RMO) No. 20-90. On appeal, the Court of Appeals affirmed the decision of the CTA. 

Issues: (1) Is the waiver valid? and 

(2) Did the three-year period to assess internal revenue taxes already prescribe? 

Held: Petitioner contends that the waiver was validly executed mainly because it complied with Section 222 (b) of the National Internal Revenue Code (NIRC). On the other hand, respondent counters that the waiver is void because it did not comply with RMO No. 20-90Moreover, a waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription. 

Petition lacks merit. Under Section 203 of the NIRC, internal revenue taxes must be assessed within three years counted from the period fixed by law for the filing of the tax return or the actual date of filing, whichever is later. This mandate governs the question of prescription of the government’s right to assess internal revenue taxes primarily to safeguard the interests of taxpayers from unreasonable investigation. Accordingly, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time. 

An exception to the three-year prescriptive period on the assessment of taxes is Section 222 (b) of the NIRC, which provides: 

(b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. 

The above provision authorizes the extension of the original three-year period by the execution of a valid waiver. Under RMO No. 20-90, which implements Sections 203 and 222 (b), the following procedures should be followed: 

1. The waiver must be in the form identified as Annex "A" hereof…. 

2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. 

Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to the waiver. The date of such acceptance by the Bureau should be indicated. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed. 

3. The following revenue officials are authorized to sign the waiver. 

A. In the National Office 

3. Commissioner For tax cases involving more than P1M 

B. In the Regional Offices 

1. The Revenue District Officer with respect to tax cases still pending investigation and the period to assess is about to prescribe regardless of amount. 

4. The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy. 

5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with. 

Applying RMO No. 20-90, the waiver in question here was defective and did not validly extend the original three-year prescriptive period. 

Firstly, it was not proven that respondent was furnished a copy of the BIR-accepted waiver. Secondly, the waiver was signed only by a revenue district officer, when it should have been signed by the Commissioner as mandated by the NIRC and RMO No. 20-90, considering that the case involves an amount of more than P1 million, and the period to assess is not yet about to prescribe. Lastly, it did not contain the date of acceptance by the Commissioner of Internal Revenue, a requisite necessary to determine whether the waiver was validly accepted before the expiration of the original three-year period. Bear in mind that the waiver in question is a bilateral agreement, thus necessitating the very signatures of both the Commissioner and the taxpayer to give birth to a valid agreement. 

The waiver of the statute of limitations under the NIRC, to a certain extent being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed. The waiver of the statute of limitations does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally, particularly where the language of the document is equivocal. Notably, in this case, the waiver became unlimited in time because it did not specify a definite date, agreed upon between the BIR and respondent, within which the former may assess and collect taxes. It also had no binding effect on respondent because there was no consent by the Commissioner. On this basis, no implied consent can be presumed, nor can it be contended that the concurrence to such waiver is a mere formality. 

Consequently, petitioner cannot rely on its invocation of the rule that the government cannot be estopped by the mistakes of its revenue officers in the enforcement of RMO No. 20-90 because the law on prescription should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommended the approval of the law.

CIR V. ISABELA CULTURAL CORP.

Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for deficiency income tax and expanded withholding tax from BIR. It arose from the disallowance of ICC’s claimed expense for professional and security services paid by ICC; as well as the alleged understatement of interest income on the three promissory notes due from Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security services. 

ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought the case to CTA, which held that it is unappealable, since the final notice is not a decision. CTA’s ruling was reversed by CA, which was sustained by SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for professional and security services were properly claimed, it said that even if services were rendered in 1984 or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which overstate the interest income, when it applied compounding absent any stipulation. 

Petitioner appealed to CA, which affirmed CTA, hence the petition. 

Issue: Whether or not the expenses for professional and security services are deductible. 

Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must have been paid or incurred during the taxable year. This requisite is dependent on the method of accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, under this method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed in the succeeding year. 

The accrual of income and expense is permitted when the all-events test has been met. This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy. 

From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an

excuse the delayed billing, since it could have inquired into the amount of their obligation and reasonably determine the amount. 

CIR v Japan Airlines (JAL)(Situs of Taxation) Facts:JAL is a foreign corporation engaged in the business of International air carriage. Since mid-July of 1957, JAL hadmaintained an office at the Filipinas Hotel, RoxasBoulevardManila. The said office did not sell tickets but was merely for the promotion of the company. On July 17 1957, JALconstituted PAL as its agent in the Philippines. PAL sold ticketsfor and in behalf of JAL.On June 1972, JAL then received deficiency income taxassessments notices and a demand letter from petitioner for years 1959 through 1963. JAL protested against saidassessments alleging that as a non-resident foreigncorporation, it as taxable only on income from Philippinessources as determined by section 37 of the Tax Code, therebeing no income on said years, JAL is not liable for taxes.

Issue: WON proceeds from sales of JAL tickets sold in thePhilippines are taxable as income from sources within thePhilippines.

Held: The ticket sales are taxable.

Citing the case of CIR v BOAC, the court reiterated that thesource of an income is the property, activity or service thatproduced the income. For the source of income to beconsidered as coming from the Philippines, it is sufficient thatthe income is derived from activity within the Philippines.The absence of flight operations to and from the Philippines isnot determinative of the source of income or the situs of income taxation. The test of taxability is the source, and thesource of the income is that activity which produced theincome. In this case, as JAL constitutes PAL as its agent, thesales of JAL tickets made by PAL is taxable

COMMISSIONER OF INTERNAL REVENUE v. MANILA MINING CORPORATION 468 SCRA 571 (2005), THIRD DIVISION, (Carpio Morales,

For a judicial claim for refund to prosper, the party must not only prove that it is a VAT registered entity, it must substantiate the input VAT paid by purchase invoices or official receipts.

Respondent Manila Mining Corporation (MMC), a VAT-registered enterprise, filed its VAT Returns for the year of 1991 with the BIR. MMC, relying on Sec. 2 of Executive Order (E.O.) 581 as

amended which provides that gold sold to the Central Bank is considered an export sale which under Section 100(a)(1) of the NIRC, as amended by E.O. 273, is subject to zero-rated if such sale is made by a VAT-registered person, filed an application for tax refund/credit of the input VAT it paid from such year.

The Commissioner of Internal Revenue (CIR) failed to act upon MMC’s application within sixty (60) days from the dates of filing. MMC was then filed a Petition for Review against the CIR before the Court of Tax Appeals (CTA) seeking the issuance of tax credit certificate or refund. The CIR specifically denied the veracity of the amounts stated in MMC’s VAT returns and application for credit/refund as the same continued to be under investigation. However, such was not verified prompting MMC to file a “SUPPLEMENT (To Annotation of Admission)” alleging that as the reply was not under oath, “an implied admission of its requests arose” as a consequence thereof. The CTA granted MMC’s Request for Admissions and denied the CIR’s Motion to Admit Reply.

The CTA denied MMC’s claim for refund of input VAT for failure to prove that it paid the amounts claimed as such for the year 1991, no sales invoices, receipts or other documents as required having been presented. Upon appeal of MMC to the Court of Appeals (CA), it reversed the decision of the CTA and granted MMC’s claim for refund or issuance of tax credit certificates on the ground that there was no need for MMC to present the photocopies of the purchase invoices or receipts evidencing the VAT paid and the best evidence rule is misplaced since this rule does not apply to matters which have been judicially admitted.

ISSUE: Whether or not MMC adduced sufficient evidence to prove its claim for refund of its input VAT for taxable year 1991

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

For a judicial claim for refund to prosper, however, MMC must not only prove that it is a VAT registered entity and that it filed its claims within the prescriptive period. It must substantiate the input

VAT paid by purchase invoices or official receipts. It is required that a photocopy of the purchase Invoice or receipt evidencing the vat paid shall be submitted together with the application. The MMC failed to do.

CIR vs. MarubeniThe dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income arising from the business activity in which Marubeni Corporation is engaged. Accordingly, said dividends if remitted abroad are not considered branch profits subject to Branch Profit Remittance Tax.

Facts:Marubeni Corporation is a Japanese corporation licensed to engage in business in the Philippines. When the profits on Marubeni’s investments in Atlantic Gulf and Pacific Co. of Manila were declared, a 10% final dividend tax was withheld from it, and another 15% profit remittance tax based on the remittable amount after the final 10% withholding tax were paid to the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or tax credit for the amount which it has allegedly overpaid the BIR.

Issues and Ruling:1. Whether or not the dividends Marubeni Corporation received from Atlantic Gulf and Pacific Co. are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to 15% profit remittance tax imposed under Section 24(b)(2) of the National Internal Revenue Code.

NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income arising from the business activity in which Marubeni Corporation is engaged. Accordingly, said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24(b)(2) of the Tax Code, as amended.

2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.

Marubeni Corporation is a non-resident foreign corporation, with respect to the transaction. Marubeni Corporation’s head office in Japan is a separate and distinct income taxpayer from the branch in the Philippines. The investment on Atlantic Gulf and Pacific Co. was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Corporation in Japan, but certainly not of the branch in the Philippines.

3. At what rate should Marubeni be taxed?

15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with the Philippine-Japan Tax Treaty of 1980. As a general rule, it is taxed 35% of its gross income from all sources within the Philippines. However, a discounted rate of 15% is given to Marubeni Corporation on dividends received from Atlantic Gulf and Pacific Co. on the condition that Japan, its domicile state, extends in favor of Marubeni Corporation a tax credit of not less than 20% of the dividends received. This 15% tax rate imposed on the dividends received under Section 24(b)(1)(iii) is easily within the maximum ceiling of 25% of the gross amount of the dividends as decreed in Article 10(2)(b) of the Tax Treaty.

Note: Each tax has a different tax basis.Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum rate, as reflected in the phrase “shall not exceed.” This means that any tax imposable by the contracting state concerned  hould not exceed the 25% limitation and said rate would apply only if the tax imposed by our laws exceeds the same.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MIRANT PAGBILAO CORPORATION, respondent. G.R. No. 159593, October 12, 2006; Chico-Nazario, J.

The facts of this case are straight forward. Respondent is a registered VAT- taxpayer with a certificate of registration issued on January 26, 1996. For the period April 1, 1996 to December 31, 1996, respondent religiously filed its quarterly VAT returns reflecting thereon the amount of accumulated input taxes. These input taxes were paid to VAT suppliers of capital goods and services for the construction and development of the power generating plant in Pagbilao, Quezon.

A claim for refund for these input taxes was filed with the BIR. Without waiting for its resolution in the administrative level, it filed a petition for review with the CTA on July 10, 1998, in order to toll the running of the toe-year prescriptive period for claiming a refund under the law.

In answer to this petition, the Commissioner advanced as special and affirmative defenses that: MPC’s claim for refund is still pending investigation and consideration before his office, accordingly, the filing of the petition is premature; well-settled is the doctrine that provisions for refund and credit are construed strictly against the taxpayer as they are in the nature of tax exemption; the claimant has the burden to show that the taxes are erroneously paid and that the claim is filed within the prescriptive period.The CTA ruled in favor of MPC and declared that MPC had overwhelmingly proved, through the VAT invoices and official receipts it had presented, that its purchases of goods and services were necessary in the construction of power plant facilities which is used in its business of power generation and sale.

On an appeal to the CA, the Commissioner raised new arguments which were never raised in the CTA – MPC is an electric utility subject to the franchise tax and since it is exempt from VAT, it is not entitled to the refund. The CA, finding no merit in the Commissioner’s petition, affirmed the CTA decision.

Issue: Can the Commissioner change his theory of the case on appeal by raising for the first time on appeal questions of both fact and law not taken up in the tax court?

HELD: The SC ruled against the petitioner. The SC emphasized that “The settled rule is that defenses not pleaded in the answer may not be raised for the first time on appeal. A party cannot, change fundamentally the nature of the issue in the case. When a party deliberately adopts a certain theory and the case is decided upon that theory in the court below, he will not be permitted to change the same on appeal, because to permit him to do so would be unfair to the adverse party”. (Carantes v. Court of Appeals, G.R. No. L-33360, April 25, 1977, 76 SCRA 514).

COMMISSIONER OF INTERNAL REVENUE V. MISTUBISHIMETAL CORPORATION (181 SCRA 214)

Facts:  Atlas Consolidated Mining andDevelopment Corporation, a domestic corporation, entered into a Loan and Sales Contract with Mitsubishi Metal Corporation, a Japanese corporation licensed to engage in business in the Philippines. To be able to extend the loan to Atlas, Mitsubishi entered into another loan agreement with Export-Import Bank (Eximbank), a financing institution owned, controlled, and financed by the Japanese government. After making interest payments to Mitsubishi, with the corresponding 15% tax thereon remitted to the Government of the Philippines, Altas claimed for tax credit with the Commissioner of Internal Revenue based on Section 29(b)(7) (A) of the National Internal Revenue Code, stating that since Eximbank, and not Mitsubishi, is where the money for the loan originated from Eximbank, then it should be exempt from paying taxes on its loan thereon.

Issue: WON the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation.

NO. Mitsubishi secured the loan from Eximbank in its own independent capacity as a private entity and not as a conduit of Eximbank. Therefore, what the subject of the 15% withholding tax is not the interest income paid by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from the loan to Atlas. Thus, it does not come within the ambit of Section 29(b)(7)(A), and it is not exempt from the payment of taxes.

Notes: Findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed on appeal if they are not supported by

substantial evidence or if there is a showing of gross error or abuse on the part of the tax court. Laws granting exemption from tax are construed strictissimijurisagainst the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception.

COMMISSIONER OF INTERNAL REVENUE v. PHILIPPINE HEALTH CARE PROVIDERS, INC. G.R. No. 168129. April 24, 2007

FACTS: On 1987, CIR issued VAT Ruling No. 231-88 stating that Philhealth, as a provider of medical services, is exempt from the VAT coverage.  When RA 8424 or the new Tax Code was implemented it adopted the provisions of VAT and E-VAT. On 1999, the BIR sent Philhealth an assessment notice for deficiency VAT and documentary stamp taxes for taxable years 1996 and 1997. After CIR did not act on it, Philhealth filed a petition for review with the CTA. The CTA withdrew the VAT assessment. The CIR then filed an appeal with the CA which was denied.

ISSUES: Whether Philhealth is subject to VAT. Whether VAT Ruling No. 231-88 exempting Philhealth from payment of VAT has retroactive application.

RULING:YES. Section 103 of the NIRC exempts taxpayers engaged in the performance of medical, dental, hospital, and veterinary services from VAT. But, in Philhealth's letter requesting of its VAT-exempt status, it was held that it showed Philhealth provides medical service only between their members and their accredited hospitals, that it only provides for the provision of pre-need health care services, it contracts the services of medical practitioners and establishments for their members in the delivery of health services.  

Thus, Philhealth does not fall under the exemptions provided in Section 103, but merely arranges for such, making Philhealth not VAT-exempt. YES. Generally, the NIRC has no retroactive application except when: where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue;where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, orwhere the taxpayer acted in bad faith.

The Court held that Philhealth acted in good faith. The term health maintenance organization was first recorded in the Philippine statute books in 1995.  It is apparent that when VAT Ruling No. 231-88 was issued in Philhealth'sfavor, the term health maintenance organization was unknown and had no significance for taxation purposes. Philhealth, therefore,

believed in good faith that it was VAT exempt for the taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88.  The rule is that the BIR rulings have no retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer.

Commissioner of Internal Revenue vs. Primetown Property Group, Inc.

G.R. No. 162155, August 28, 2007

FACTS

On April 14, 1998 Primetown Property Group. Inc. filed its final adjusted return. On March 11, 1999 Gilbert Yap, vice chair of Primetown Property Group. Inc., filed for the refund or tax credit of income tax paid in 1997. However, it was not acted upon. Thus Primetown filed a petition for review but the Court of Tax Appeals dismissed it claiming that it was filed beyond the two-year reglementary period provided by section 229 of the National Internal Revenue Code. The Court of Tax Appeals further argued that in National Marketing Corp. vs. Tecson the Supreme Court ruled that a year is equal to 365 days regardless of whether it is a regular year or a leap year.

ISSUE

Whether or not the respondent’s petition was filed within the two-year reglementary period.

RULING

The Supreme Court held that the petition was filed within the two-year reglementary period because Article 13 of the New Civil Code that provides that a year is composed of 365 years is repealed by Executive Order 292 or the Administrative Code of the Philippines. Under Executive Order 292, a year is composed of 12 calendar months.

CIR vs. P&GNON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF the country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:

Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only 15%.

MAIN ISSUE:Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:YES. P&G Philippines is entitled. Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF  he country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for ”taxes deemed paid in the Philippines” applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were met.

NOTES: Breakdown:a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation (owning 10% of remitting foreign corporation) shall be deemed to have paid a proportionate extent of taxes paid by such foreign corporation upon its remittance of dividends to domestic corporation.

CIR vs. Rosemarie AcostaG.R. No. 154068                     August 3, 2007Quisombing, J.:

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 WANDER PHILIPPINES, INC. - CASE DIGESTG.R. NO. L-68275, April 15, 1988

Commissioner of Internal Revenue, petitionervs

WANDER Philippines, Inc., and the Court of Tax Appeals, respondents

FACTS:

Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not engaged in trade for business in the Philippines.

Wander filed it'switholding tax return for 1975 and 1976 and remitted to its parent company Glaro dividends from which 35% withholding tax was withheld and paid to the BIR.

In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for reimbursement, contending that it is liable only to 15% withholding tax in accordance with sec. 24 (b) (1) of the Tax code, as amended by PD nos. 369 and 778, and not on the basis of 35% which was withheld ad paid to and collected by the government. petitioner failed to act on the said claim for refund, hence Wander filed a petition with Court of Tax Appeals who in turn ordered to grant a refund and/or tax credit. CIR's petition for reconsideration was denied hence the instant petition to the Supreme Court.

ISSUE:

Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and to remitted to its parent corporation.

HELD:

Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this case, reads:sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby further amended to read as follows:(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not engaged in trade or business in the Philippines, including a foreign life insurance company not engaged in life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except interest on a foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensation, remuneration for technical services or otherwise emolument, or other fixed determinable annual, periodical ot casual gains, profits and income, and capital gains: xxx Provided, still further that on dividends received from a domestic corporation liable to tax under this chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in sec 53 (d) of this code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporation and the tax (15%) dividends as provided in this section: xxx."

From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivakent to 20%  which represents the difference betqween the regular tax (35%) on corpoorations and the tax (15%) on dividends.

While it may be true that claims for refund construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax on the dividends received by Glaro from  the Philippines should be considered as a full satisfaction if the given condition. For, as aptly stated by respondent Court, to deny private respondent the privilege to withhold only 15% tax provided for under PD No. 369 amending section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations interest here and discourage them for investing capital in our country.

CHAMBER OF REAL ESTATE AND BUILDERS’ ASSOCIATION, INC. vs. EXECUTIVE SECRETARY- Minimum Corporate Income Tax

FACTS:CREBA assails the imposition of the minimum corporate income tax (MCIT) as being violative of the due process clause as it levies income tax even if there is no realized gain. They also question the creditable withholding tax (CWT) on sales of real properties classified as ordinary assets stating that (1) they ignore the different treatment of ordinary assets and capital assets; (2) the use of gross selling price or fair market value as basis for the CWT and the collection of tax on a per transaction basis (and not on the net income at the end of the year) are inconsistent with the tax on ordinary real properties; (3) the government collects income tax even when the net income has not yet been determined; and (4) the CWT is being levied upon real estate enterprises but not on other enterprises, more particularly those in the manufacturing sector.

ISSUE:Are the impositions of the MCIT on domestic corporations and     CWT on income from sales of real properties classified as     ordinary assets unconstitutional?

HELD:NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT 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. Besides, there are sufficient safeguards that exist for the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows the carry forward of any excess MCIT paid over the normal income tax; and (3) the Secretary of Finance can suspend the imposition of MCIT in justifiable instances.

The regulations on CWT did not shift the tax base of a real estate business’ income tax from net income to GSP or FMV of the property sold since the taxes withheld are in the nature of advance tax payments and they are thus just installments on the annual tax which may be due at the end of the taxable year. As such the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income and the use of the GSP or FMV is because these are the only factors reasonably known to the buyer in connection with the performance of the duties as a withholding agent.Neither is there violation of equal protection even if the CWT is levied only on the real industry as the real estate industry is, by itself, a class on its own and can be validly treated different from other businesses. 

CYANAMID PHILS. Vs. CAIn order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time

of the accumulation, not intentions subsequently, which are mere afterthoughts.

Facts:Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In 1985 the CIR assessed on petitioner a deficiency income tax of P119,817) for the year 1981. Cyanamid protested the assessments particularly the 25% surtax for undue accumulation of earnings. It claimed that said profits were retained to increase petitioner’s working capital and it would be used for reasonable business needs of the company. The CIR refused to allow the cancellation of the assessments, petitioner appealed to the CTA. It claimed that there was not legal basis for the assessment because 1) it accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness 2) it is a wholly owned subsidiary of American Cyanamid Company, a foreign corporation, and its shares are listed and traded in the NY Stock Exchange. The CTA denied the petition stating that the law permits corporations to set aside a portion of its retained earnings for specified purposes under Sec. 43 of the Corporation Code but that petitioner’s purpose did not fall within such purposes. It found that there was no need to set aside such retained earnings as working capital as it had considerable liquid funds. Those corporations exempted from the accumulated earnings tax are found under Sec. 25 of the NIRC, and that the petitioner is not among those exempted. The CA affirmed the CTA’s decision.

Issue: Whether or not the accumulation of income was justified.

Held:In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts. The accumulated profits must be used within reasonable time after the close of the taxable year. In the instant case, petitioner did not establish by clear and convincing evidence that such accumulated was for the immediate needs of the business.

To determine the reasonable needs of the business, the United States Courts have invented the “Immediacy Test” which construed the words “reasonable needs of the business” to mean the immediate needs of the business, and it is held that if the corporation did not prove an immediate need for the accumulation of earnings and profits such was not for reasonable needs of the business and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business depend on 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 and other similar factors. The Tax Court opted to determine the working capital sufficiency by using the ration between the current assets to current liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the petitioner’s failure to prove the CIR incorrect, clearly and conclusively, the Tax Court’s ruling is upheld.

Eastern Telecommunications Philippines, Inc. vs. Commissioner of Internal RevenueG.R. No. 168856August 29, 2012.

National Internal Revenue Code; Value Added Tax; claim for credit or refund of input value-added tax; printing of “zero-rated.”. Section 244 of the National Internal Revenue Code (NIRC) explicitly grants the Secretary of Finance the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the tax code. Consequently, the following invoicing requirements enumerated in Section 4.108-1 of the Revenue Regulations (RR) 7-95 must be observed by all VAT-registered taxpayers: (1) the name, TIN and address of seller; (2) date of transaction; (3) quantity, unit cost and description of merchandise or nature of service; (4) the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client; (5) the word “zero-rated imprinted on the invoice covering zero-rated sales; and the invoice value or consideration. The need for taxpayers to indicate in their invoices and receipts the fact that they are zero-rated or that its transactions are zero-rated became more apparent upon the integration of the abovementioned provisions of RR No. 7-95 in Section 113 of the NIRC enumerating the invoicing requirements of VAT-registered persons when the NIRC was amended by Republic Act No. 9337. The Court has consistently ruled that the absence of the word “zero-rated” on the invoices and receipts of a taxpayer will result in the denial of the claim for tax refund. 

Philacor Credit Corporation vs. Commissioner of Internal Revenue,G.R. No. 169899.  February 6, 2013

National Internal Revenue Code; documentary stamp tax; issuance of promissory notes; persons liable for the payment of DST; acceptance. Under Section 173 of the National Internal Revenue Code, the persons primarily liable for the payment of DST are the persons (1) making; (2) signing; (3) issuing; (4) accepting; or (5) transferring the taxable documents, instruments or papers. Should these parties be exempted from paying tax, the other party who is not exempt would then be liable. In this case, petitioner Philacor is engaged in the business of retail financing. Through retail financing, a prospective buyer of home appliance may purchase an appliance on installment by executing a unilateral promissory note in favor of the appliance dealer, and the same promissory note is

assigned by the appliance dealer to Philacor. Thus, under this arrangement, Philacor did not make, sign, issue, accept or transfer the promissory notes. It is the buyer of the appliances who made, signed and issued the documents subject to tax while it is the appliance dealer who transferred these documents to Philacor which likewise indisputably received or “accepted” them. Acceptance, however, is an act that is not even applicable to promissory notes, but only to bills of exchange. Under the Negotiable Instruments Law, the act of acceptance refers solely to bills of exchange. In a ruling adopted by the Bureau of Internal Revenue as early as 1995, “acceptance” has been defined as having reference to incoming foreign bills of exchange which are accepted in the Philippines by the drawees thereof, and not as referring to the common usage of the word as in receiving. Thus, a party to a taxable transaction who “accepts” any documents or instruments in the plain and ordinary meaning does not become primarily liable for the tax.

National Internal Revenue Code; documentary stamp tax; issuance of promissory notes; persons liable for the payment of DST; Revenue Regulations No. 26 Revenue Regulations No. 26.  Section 42 of Revenue Regulations (RR) No. 26 issued on March 26, 1924 provides that the person using a promissory note can be held responsible for the payment of documentary stamp tax (DST). The rule uses the word “can” which is permissive, rather than the word “shall,” which would make the liability of the persons named definite and unconditional. In this sense, a person using a promissory note can be made liable for the DST if the person is: (a) among those persons enumerated under the law – i.e., the person who makes, issues, signs, accepts or transfers the document or instrument; or (2) if these persons are exempt, a non-exempt party to the transaction. Such interpretation would avoid any conflict between Section 173 of the 1997 National Internal Revenue Code and section 42 of RR No. 26 and make it unnecessary for the latter to be struck down as having gone beyond the law it seeks to interpret. However, section 42 of RR No. 26  cannot be interpreted to mean that anyone who “uses” the document, regardless of whether such person is a party to the transaction, should be liable, as this reading would go beyond section 173 of the 1986 National Internal Revenue Code, the law it seeks to implement. Implementing rules and regulations cannot amend a law for they are intended to carry out, not supplant or modify, the law. To allow RR No. 26 to extend the liability for DST to persons who are not even mentioned in the relevant provisions of the tax codes (particularly the 1986 National Internal Revenue Code which is the relevant law at that time) would be a clear breach of the rule that a statute must always be superior to its implementing regulations.  Philacor Credit Corporation vs. Commissioner of Internal Revenue, G.R. No. 169899. February 6, 2013.

National Internal Revenue Code; documentary stamp tax; assignment or transfer of evidence of indebtedness.   Under Section 198 of the then 1986 National Internal Revenue Code, an assignment or transfer becomes taxable only in connection with mortgages, leases and policies of insurance. The list does not include the assignment or transfer of evidence of indebtedness; rather it is the renewal of these that is taxable. The present case does not involve a renewal, but a mere transfer or assignment of the evidence of indebtedness or promissory notes. A renewal would involve an increase in the amount of indebtedness or an extension of a period, and not the mere change in the person of the payee. The law has set a pattern of expressly providing for the imposition of documentary stamp tax on the transfer and/or assignment of documents evidencing certain transactions. Where the law did not specify that such transfer and/or assignment is to be taxes, there would be no basis to recognize an imposition. Philacor Credit Corporation vs. Commissioner of Internal Revenue, G.R. No. 169899. February 6, 2013.

RCBC V. CIR

FACTS:RCBC received the final assessment notice on July 5, 2001. It filed a protest on July 20, 2001. As the protest was not acted upon, it filed a Petition for Review with the Court of Tax Appeals (CTA) on April 30, 2002, or more than 30 days after the lapse of the 180-day period reckoned from the submission of complete documents. The CTA dismissed the Petition for lack of jurisdiction since the appeal was filed out of time.

ISSUE:Has the action to protest the assessment judicially prescribed? 

HELD:YES. The assessment has become final. The jurisdiction of the CTA has been expanded to include not only decision but also inactions and both are jurisdictional such that failure to observe either is fatal.However, if there has been inaction, the taxpayer can choose between (1) file a Petition with the CTA within 30 days from the lapse of the 180-day period OR (2) await the final decision of the CIR and appeal such decision to the CTA within 30 days after receipt of the decision. These options are mutually exclusive and resort to one bars the application of the other. Thus, if petitioner belatedly filed an action based on inaction, it can not subsequently file another petition once the decision comes out.

REPUBLIC V. GST PHIL. INC

FACTS

Respondent GST is a VAT registered domestic corporation primarily engaged in steel and iron products. During taxable years 2004-2005, GST filed claimed for unutilized excess input VAT attributable to its zero rated sales.

For failure of CIR to act on its administrative claims, GST filed for a petition for review before the CTA. The CTA granted the petition. CIR filed an MR but was denied. In a petition for review before the CTA En Banc, CIR raised that the appeal before the CTA was filed beyond the reglementary period. GST asserts that under Section 112 (A) of the Tax Code, the prescriptive period is complied with if both the administrative and judicial claims are filed within the two-year prescriptive period; and that compliance with the 120-day and 30-day periods under Section 112 (D) of the Tax Code is not mandatory ISSUEWhether GST’s action for refund has complied with the prescriptive periods under the Tax Code. HELDNO, as to claims in 2004 and first quarter of 2005.YES, as to second and third quarter of 2005.

The 120-day period is mandatory and jurisdictional.However, the Supreme Court categorically held that BIR Ruling No. DA-489-03 dated December 10, 2003 provided a valid claim for equitable estoppel under Section 246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states that the “taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review.”As such, all taxpayers can rely on said ruling from the time of its issuance on December 10, 2003 up to its reversal by the Supreme Court in Aichi on October 6, 2010, where it was held that the 120+30 day periods are mandatory and jurisdictional.

Therefore, GST can benefit from BIR Ruling No. DA-489-03 with respect to its claims for refund of unutilized excess input VAT for the second and third quarters of taxable year 2005 which were filed before the CIR on November 18, 2005 but elevated to the CTA on March 17, 2006 before the expiration of the 120-day period (March 18, 2006 being the 120th day). BIR Ruling No. DA-489-03 effectively shielded the filing of GST’s judicial claim from the vice of prematurity.

Silkair (Singapore) Pte. Ltd. vs. Commissioner of Internal Revenue, G.R. No. 166482, January 25, 2012.

National Internal Revenue Code; excise tax; proper party to seek a tax refund. Silkair (Singapore) is a foreign corporation licensed to do business in the Philippines as an on-line international carrier. It purchased aviation fuel from Petron and paid the excise taxes. It filed an administrative claim

for refund for excise taxes on the purchase of jet fuel from Petron, which it alleged to have been erroneously paid. For indirect taxes, the proper party to question or seek a refund of the tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even when he shifts the burden thereof to another. Thus, Petron, not Silkair, is the statutory taxpayer which is entitled to claim a refund. Excise tax is due from the manufacturers of the petroleum products and is paid upon removal of the products from their refineries. Even before the aviation jet fuel is purchased from Petron, the excise tax is already paid by Petron. Petron, being the manufacturer, is the “person subject to tax.” In this case, Petron, which paid the excise tax upon removal of the products from its Bataan refinery, is the “person liable for tax.” Petitioner is neither a “person liable for tax” nor “a person subject to tax.” 

Southern Cross Cement Corp. v. Cement Manufacturers Association of the Phils., G.R. No. 158540, Aug. 3, 2005

(HOLY CRAP, CHECK OUT THE INTRO!!!! ^.^)

“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. 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.

South African Airways vs. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010.

Gross Philippine billings;   off line carrier . South African Airways, an off-line international carrier selling passage documents through an independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject to the 32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.

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

To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income.  

Tan vs. Del Rosario237 SCRA 324

Facts:Petitioners challenge the constitutionality of RA 7496 or the simplified income taxation scheme (SNIT) under Arts (26) and (28) and III (1). The SNIT contained changes in the tax schedules and different treatment in the professionals which petitioners assail as unconstitutional for being isolative of the equal protection clause in the constitution.

Issue:Is the contention meritorious?

Ruling:No. uniformity of taxation, like the hindered concept of equal protection, merely require that all subjects or objects of taxation similarly situated are to be treated alike both privileges and liabilities. Uniformity, does not offend classification as long as it rest on substantial distinctions, it is germane to the purpose of the law. It is not limited to existing only and must apply equally to all members of the same class.

The legislative intent is to increasingly shift the income tax system towards the scheduled approach in taxation of individual taxpayers and maintain the present global treatment on taxable corporations. This classification is neither arbitrary nor inappropriate.