COMMISSIONER OF CUSTOMS, petitioner, vs. PHILIPPINE PHOSPHATE FERTILIZER CORPORATION, respondent. G.R. No.

144440 [September 1, 2004]

The financial planners of the State are often confounded by the precarious balance between the need to provide a conducive investment climate and the need to enhance revenue collections. Tax exemptions are generally construed strictly against the taxpayer; yet, when the purported ambiguities in the law are more imagined than real, there should be no hesitation to rule for the taxpayer.

FACTS: Respondent Philippine Phosphate Fertilizer Corporation (Philphos) is a domestic corporation engaged in the manufacture and production of fertilizers for domestic and international distribution, based in Leyte Industrial Development Estate, an export processing zone. It is also registered with the Export Processing Zone Authority (EPZA), now known as the Philippine Export Zone Authority (PEZA). The manufacture of fertilizers required Philphos to purchase fuel and petroleum products for its machineries, which are considered indispensable by Philphos, as they are used to run the machines and equipment and in the transformation of raw materials into fertilizer. The fuel supplies are secured domestically from local distributors, Petron Corporation (Petron), which imports the same and pays the corresponding customs duties to the Bureau of Customs. When the fuel and petroleum products are delivered at Philphoss manufacturing plant, it is billed by Petron the corresponding customs duties imposed on these products. Effectively thus, Philphos reimburses Petron for the customs duties on the purchased fuels and petroleum products which are passed on by the Petron as part of the selling price. Philphos made several purchases from Petron of fuels and other petroleum products used directly or indirectly in the manufacture of fertilizers for the period of October 1991 until June 1992. During the period in question, Philphos indirectly paid as customs duties. In a letter to the Bureau of Customs, Philphos sought the refund of customs duties it had paid for the period covering the months of October to December 1991, and January to June, 1992. It pointed out that Philphos, being an enterprise registered with the export processing zone, is entitled to tax incentives under Presidential Decree No. 66 (EPZA Law), it also argued that the customs duties billed by Petron on Philphos should be refunded. The Bureau of Customs denied the claim for refund. Hence, a Petition for Review was filed with the Court of Tax Appeals. The CTA ruled for Philphos. The matter was elevated by the Commissioner of Customs (Commissioner) to the Court of Appeals (CA), which eventually affirmed the CTAs Decision. Both the CTA and the CA relied upon Section 17(1) of the EPZA Law to justify the conclusion that Philphos is entitled to the refund. It likewise insists that controlling in this case is Section 18(i) of the EPZA Law, under which claims for refunds similar to Philphoss are precluded. Finally, the Commissioner posits that since a refund on tax credit partake the nature of an exemption, the grant thereof must be explicit. Petitioner dispute the legal basis for the exemption.
Section 17 and 18 of the EPZA Law states: SEC. 17. Tax Treatment of Merchandize in the Zone. (1) Except as otherwise provided in this Decree, foreign and domestic merchandise, raw materials, supplies, articles, equipment, machineries, spare parts and wares of every description, except those prohibited by law, brought into the Zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated,

Construction of Tax Law

manufactured, mixed with foreign or domestic merchandise or used whether directly or indirectly in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the following provisions of law to the contrary notwithstanding . (emphasis supplied) SEC. 18. Additional Incentives. A zone registered enterprise shall also enjoy the following incentives : Xxx (i)Tax credit. Every registered zone enterprise shall enjoy a tax credit equivalent to the sales, compensating and specific taxes and duties on supplies, raw materials and semi-manufactured products used in the manufacture, processing or production of its export products and forming part thereof; x x x. (emphasis supplied)

ISSUE: WON Philphos is entitled for tax exemption HELD: The relief sought for erroneously paid taxes would be a return to the taxpayer of the amount paid to the government. The Tax Reform Act of 1997 authorizes either a refund or credit as a means of recovery of tax erroneously or illegally collected. It may be that there is no essential difference between a tax refund and a tax credit since both are modes of recovering taxes erroneously or illegally paid to the government. Yet, there are unmistakable formal and practical differences between the two modes. Formally, a tax refund requires a physical return of the sum erroneously paid by the taxpayer, while a tax credit involves the application of the reimbursable amount against any sum that may be due and collectible from the taxpayer. On the practical side, the taxpayer to whom the tax is refunded would have the option, among others, to invest for profit the returned sum, an option not proximately available if the taxpayer chooses instead to receive a tax credit. It should be noted that the initial letter to the Commissioner, Philphos specifically requested the refund of P20, 149, 473.77. However, in its Petition for Review before the CTA, Philphos prayed for the issuance of "corresponding tax credits" in the same amount. Still, there is no vehement insistence on the part of Philphos that the return of the amount paid should come in the form of a refund or a credit. The CTA, as affirmed by the CA, ordered the issuance of a Tax Credit Certificate in favor of Philphos. No elaboration was made as to why the relief granted was a tax credit and not a refund, but it is deduce that such was the relief afforded as it was the relief prayed for by Philphos in its Petition before the tax court. However, a slight modification of the award is necessary so as not to render nugatory the proscription under Section 18(i) that a tax credit avails only if the supplies form part of the export product. Instead of awarding a Tax Credit Certificate to Philphos, a refund of the same amount is warranted under the circumstances. The grant of exemption under Section 17(1) is clear and unambiguous. There is neither logic nor need to cast a speck of uncertainly on a doubt-free situation to resolve the resulting forced question in favor of the government. The disposition arises not out of a blind solicitude towards the concerns of business, but from the duty to affirm and enforce a crystal-clear legislative policy and initiative intent. Indeed, the revenue collectors of the government should be cautious before attempting to gut away at concessions the State itself has deemed worthy of award to deserving investors. It is unsound practice and uncouth behaviour to invite over guests to dinner at home, then charge them for the use of the silverware before allowing them to dine. WHEREFORE, the Petition for Review is DENIED. The assailed Decisions of the Court of Appeals and of the Court of Tax Appeals are AFFIRMED. SO ORDERED.

Construction of Tax Law

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., THE PHILIPPINE AMERICAN ASSURANCE COMPANY, INC., and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Respondents. G.R. No. 141658 [March 18, 2005] FACTS: Respondents are domestic corporations licensed to transact insurance business in the country. From August 1971 to September 1972, respondents paid the Bureau of Internal Revenue under protest the 3% tax imposed on lending investors by Section 195-A of Commonwealth Act No. 466 ("CA 466"), as amended by Republic Act No. 6110 ("RA 6110") and other laws. CA 466 was the National Internal Revenue Code ("NIRC") applicable at the time. On January 1973, respondents sent a letter-claim to petitioner seeking a refund of the taxes paid under protest. When respondents did not receive a response, each respondent filed a petition for review with the CTA. These three petitions, which were later consolidated, argued that respondents were not lending investors and as such were not subject to the 3% lending investors tax under Section 195-A. The CTA held that respondents are not taxable as lending investors because the term "lending investors" does not embrace insurance companies. The CTA held that the practice of lending money at interest is part of the insurance business. CA 466 already taxes the insurance business. The CTA pointed out that the law recognizes and even regulates this practice of lending money by insurance companies. Dissatisfied, petitioner elevated the matter to the Court of Appeals. The Court of Appeals ruled that respondents are not taxable as lending investors. Petitioner appealed the CA Decision, it also contends that the refund granted to respondents is in the nature of a tax exemption, and cannot be allowed unless granted explicitly and categorically. ISSUE: WON respondents insurance companies are taxable as lending investors under Sections 182(A)(3)(DD) AND 195-A, respectively in relation to Section 194(U), of the NIRC HELD: Insurance companies cannot be considered lending investors. 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. This is because taxes are burdens on the taxpayer, and should not be unduly imposed or presumed beyond what the statutes expressly and clearly import. Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies. Section 182(A)(3)(dd) provides for the taxation of lending investors in different localities. Section 195-A refers to dealers in securities and lending investors. The burden is thus on petitioner to show that insurance companies are lending investors for purposes of taxation. Section 194(u) does not tax the practice of lending per se. It merely defines what lending investors are. The question is whether the lending activities of insurance companies make them lending investors for purposes of taxation. WHEREFORE, we DENY the instant petition and AFFIRM the Decision of Court of Appeals. SO ORDERED.

Construction of Tax Law

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ROSEMARIE ACOSTA, as represented by Virgilio A. Abogado, respondent. G.R. No. 154068 [August 3, 2007] FACTS: Respondent is an employee of Intel Manufacturing Phils., Inc. (Intel). For the period January to December 1996, respondent was assigned in a foreign country. During that period, Intel withheld the taxes due on respondents compensation income and remitted to the Bureau of Internal Revenue (BIR). Respondent and her husband filed with the BIR their Joint Individual Income Tax Return for the year 1996. On June 1997, respondent, through her representative, filed an amended return and a NonResident Citizen Income Tax Return, and paid the BIR plus interests. On October 1997, she filed another amended return indicating an overpayment of P358,274.63. Claiming that the income taxes withheld and paid by Intel and respondent resulted in an overpayment, respondent filed a petition for review with the Court of Tax Appeals (CTA). The Commissioner of Internal Revenue (CIR) moved to dismiss the petition for failure of respondent to file the mandatory written claim for refund before the CIR. The CTA dismissed respondents petition, it ruled that respondent failed to file a written claim for refund with the CIR, a condition precedent to the filing of a petition for review before the CTA. Upon review, the Court of Appeals reversed the CTA and directed the latter to resolve respondents petition for review, CA ruled that respondents filing of an amended return indicating an overpayment was sufficient compliance with the requirement of a written claim for refund. Petitioner sought reconsideration, but it was denied hence, the instant petition. Petitioner avers that an amended return showing an overpayment does not constitute the written claim for refund required under NIRC. He claims that an actual written claim for refund is necessary before a suit for its recovery may proceed in any court. On the other hand, respondent contends that the filing of an amended return indicating an overpayment constitutes a written claim for refund. Respondent invokes the liberal application of technicalities in tax refund cases. ISSUE: WON the amended return filed by respondent indicating an overpayment constitutes the written claim for refund required by law. HELD: The amended return filed by respondent does not constitutes the written claim for refund required by the old Tax Code, the law prevailing at that time. The requirements under Section 230 for refund claims are as follows: 1. A written claim for refund or tax credit must be filed by the taxpayer with the Commissioner; 2. The claim for refund must be a categorical demand for reimbursement; 3. The claim for refund or tax credit must be filed, or the suit or proceeding therefor must be commenced in court within two (2) years from date of payment of the tax or penalty regardless of any supervening cause. (Emphasis ours.)

Construction of Tax Law

The law is clear. A claimant must first file a written claim for refund, categorically demanding recovery of overpaid taxes with the CIR, before resorting to an action in court. This obviously is intended, first, to afford the CIR an opportunity to correct the action of subordinate officers; and second, to notify the government that such taxes have been questioned, and the notice should then be borne in mind in estimating the revenue available for expenditure. Entrenched in our jurisprudence is the principle that tax refunds are in the nature of tax exemptions which are construed strictissimi juris against the taxpayer and liberally in favor of the government. As tax refunds involve a return of revenue from the government, the claimant must show indubitably the specific provision of law from which her right arises; it cannot be allowed to exist upon a mere vague implication or inference17 nor can it be extended beyond the ordinary and reasonable intendment of the language actually used by the legislature in granting the refund. To repeat, strict compliance with the conditions imposed for the return of revenue collected is a doctrine consistently applied in this jurisdiction. Finally, revenue laws are not intended to be liberally construed. Considering that taxes are the lifeblood of the government and in Holmess memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented. WHEREFORE, the petition is GRANTED. Both the assailed Decision and Resolution of the Court of Appeals are REVERSED and SET ASIDE. SO ORDERED.

Construction of Tax Law

COMMISSIONER OF INTERNAL REVENUE, petitioner vs. FORTUNE TOBACCO CORPORATION, respondent G.R. Nos. 167274-75 [July 21, 2008] FACTS: Respondent FTC is a domestic corporation that manufactures cigarettes packed by machine under several brands. Prior to January 1, 1997, Section 142 of the 1977 Tax Code subjected said cigarette brands to ad valorem tax. Annex D of R.A. No. 4280 prescribed the cigarette brands tax classification rates based on their net retail price. On January 1, 1997, R.A. No. 8240 took effect. Sec. 145 thereof now subjects the cigarette brands to specific tax and also provides that: (1) the excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996; (2) the rates of excise tax on cigarettes enumerated therein shall be increased by 12% on January 1, 2000; and (3) the classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex D shall remain in force until revised by Congress. The Secretary of Finance issued RR No. 17-99 to implement the provision for the 12% excise tax increase. RR No. 17-99 added the qualification that the new specific tax rate xxx shall not be lower than the excise tax that is actually being paid prior to January 1, 2000. In effect, it provided that the 12% tax increase must be based on the excise tax actually being paid prior to January 1, 2000 and not on their actual net retail price. FTC filed 2 separate claims for refund or tax credit of its purportedly overpaid excise taxes for the month of January 2000 and for the period January 1-December 31, 2002. It assailed the validity of RR No. 17-99 in that it enlarges Section 145 by providing the aforesaid qualification. In this petition, petitioner CIR alleges that the literal interpretation given by the CTA and the CA of Section 145 would lead to a lower tax imposable on 1 January 2000 than that imposable during the transition period, which is contrary to the legislative intent to raise revenue. After much wrangling in the Court of Tax Appeals (CTA) and the Court of Appeals, Fortune Tobacco Corporation (Fortune Tobacco) was granted a tax refund or tax credit representing specific taxes erroneously collected from its tobacco products. The tax refund is being re-claimed by the Commissioner of Internal Revenue (Commissioner) in this petition. The Commissioner contended that a tax refund partakes the nature of a tax exemption does not apply to the tax refund to which Fortune Tobacco is entitled. There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. ISSUE: WON Fortune Tobacco is entitled for tax exemption HELD: YES. Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken. The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention. A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit

Construction of Tax Law

and categorical language. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain to be mistaken. Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a persons unjust enrichment at the expense of another. The dynamic of erroneous payment of tax fits to a tee the prototypic quasicontract, solutio indebiti, which covers not only mistake in fact but also mistake in law. The Government is not exempt from the application of solutio indebiti. Indeed, the taxpayer expects fair dealing from the Government, and the latter has the duty to refund without any unreasonable delay what it has erroneously collected. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, it must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. It should not unjustly enrich itself at the expense of taxpayers. And so, given its essence, a claim for tax refund necessitates only preponderance of evidence for its approbation like in any other ordinary civil case. Under the Tax Code itself, apparently in recognition of the pervasive quasi-contract principle, a claim for tax refund may be based on the following: (a) erroneously or illegally assessed or collected internal revenue taxes; (b) penalties imposed without authority; and (c) any sum alleged to have been excessive or in any manner wrongfully collected. What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals and its Resolution are AFFIRMED. SO ORDERED.

Construction of Tax Law