[C.T.A. CASE NO. 6268. September 12, 2002.

]
DONALD L. SMITH, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
This Petition for Review involves a claim for refund in the amount of One Million Five Hundred Thirty
Three Thousand Six Hundred and Sixty Pesos & 70/100 (P1,533,660.70) allegedly representing the
income tax erroneously paid by herein petitioner for taxable year 1998. cTESIa
The antecedent facts of the case are as follows:
Petitioner is a citizen of the United States, of legal age, single, and is an employee of Coastal Subic Bay
Terminal, Inc., with address at 42A Grayling Street, West Kalayaan, Subic Bay Freeport Zone,
Philippines. He was employed as Controller of Coastal Subic Bay Terminal Inc. in 1998 (pars. 1 and 3,
Joint Stipulation of Facts).
Coastal Subic Bay Terminal Inc. is a business entity located within the Subic Special Economic Zone,
as created by Republic Act 7227, and was issued by the Subic Bay Metropolitan Authority a Certificate
of Registration and Tax Exemption No. 93-0019 on December 4, 1997, valid until December 4, 1998
(par. 5 Joint Stipulation of Facts).
On April 15, 1999, petitioner, with tax identification number 170-302-240, filed his annual income tax
return and paid P1,533,660.70 in compensation income taxes for the income he derived from his
employment with Coastal Subic Bay Terminal, Inc. (Annexes A, B and C, Petition for Review).
Claiming that the payment of tax on his compensation income was erroneous, petitioner filed a written
claim for refund with the Bureau of Internal Revenue (BIR) on April 5, 2001 (par. 7, Joint Stipulation
of Facts). As there was no immediate action on his claim for refund and the two-year prescriptive
period was about to lapse, petitioner elevated his case to this court by way of Petition for Review on
April 6, 2001.
On May 10, 2001, petitioner filed a Manifestation and Motion to Correct Petition for Review. As
alleged, said errors were due to some typographical errors committed in the finalization of the draftpetition. The motion was granted in open court on May 25, 2001 and confirmed in a resolution dated
May 31, 2001.
On August 14, 2001, herein respondent filed his Answer, raising the following Special and Affirmative
Defenses:
1.
Petitioner's alleged claim for refund is still subject to administrative routinary
investigation/examination by respondent's bureau.
2.
Section 12(c) of RA 7227, otherwise known as the Bases Conversion and Development Act of
1992", relied upon by petitioner in claiming the refund provides:
Section 12.

Subic Special Economic Zones.

xxx

xxx

xxx

(c)
The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes,
local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes,
three percent (3%) of the gross income earned by all businesses and enterprises within the Subic
Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the
local government units affected by the declaration of the zone in proportion to their population area,
and other factors. In addition, there is hereby established a development fund of one percent (1%) of
the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to
be utilized for the development of municipalities outside the City of Olongapo and the Municipality of
Subic, and other municipalities contiguous to the base areas.
In case of conflict between national and local laws with respect to tax exemption privileges in the Subic
Special Economic Zone, the same shall be resolved in favor of the latter. (Emphasis Supplied)
Under the foregoing provisions, only business establishments operating within the Subic Special
Economic Zone are exempt from national and local taxes. Petitioner is not covered by the exemption
granted under Section 12 (c) of Republic Act 7227, as implemented by Section 4 of Revenue
Regulations No. 1-95.
3.

Petitioner's claim for refund lacks any basis in law.

4.
In an action for refund/credit, the burden of proof is upon the taxpayer to establish its right to
refund and failure to sustain the burden is fatal to the action for refund.
Upon approval of their Joint Stipulation of Facts and Issues, the parties agreed to dispense with the trial
and submit this case for decision, considering that the issues involved are purely legal.
The issues to be resolved by this court in the case at bar are as follows:
1.
Whether or not aliens working within the Subic Special Economic Zone are subject to
Philippine income taxes on income earned from such employment;
2.
Whether or not petitioner is entitled to a refund or tax credit for income taxes paid on
compensation earned from working within the Subic Special Economic Zone;
3.

Whether or not Section 12 (c) of Republic Act No. 7227 applies to petitioner.

With respect to the first issue, petitioner posits the view that the entire territory known as Subic Special
Economic Zone (SSEZ, for brevity) is a tax-free territory and as such, all income derived within the
zone, including that of an alien individual, is exempt from income tax and other taxes. Consequently,
according to petitioner, SSEZ is beyond the coverage of RA 8424, otherwise known as the National
Internal Revenue Code and the Tariff and Customs Code, as well as other Philippine tax laws.
Said contention deserves scant consideration.
The law in point is RA 7227, particularly Section 12 (c), to quote:

Section 12.

Subic Special Economic Zones.

(c)
The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes,
local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes,
three percent (3%) of the gross income earned by all businesses and enterprises within the Subic
Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the
local government units affected by the declaration of the zone in proportion to their population area,
and other factors. In addition, there is hereby established a development fund of one percent (1%) of
the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to
be utilized for the development of the municipalities outside the City of Olongapo and the Municipality
of Subic, and other municipalities contiguous to the base areas.
In case of conflict between national and local laws with respect to tax exemption privileges in the Subic
Special Economic Zone, the same shall be resolved in favor of the latter (Emphasis ours).
In interpreting the aforequoted section of RA 7227, fundamental rules of construction shall accordingly
be applied. The phrase "no taxes, local and national shall be imposed within the SSEZ" shall not be
treated in isolation with the other subsequent phrases as it might convey a meaning different from that
of its context taken as a whole. It is important that every section, provision or clause of the statute be
expounded by reference to each other in order to arrive at the effect contemplated by the legislature
(page 61, Agpalo, Statutory Construction, 1995 ed.). Thus, the phrase "no taxes, local and national,
shall be imposed within the SSEZ" must be read together with the following sentence "In lieu of paying
taxes, 3% of the gross income earned by all businesses and enterprises within the SSEZ shall be
remitted to the National Government, one percent (1%) each to the local government units affected by
the declaration of the zone in proportion to their population area, and other factors. In addition, there is
hereby established a development fund of one percent (1%) of the gross income earned by all
businesses and enterprises within the Subic Special Economic Zone to be utilized for the development
of the municipalities outside the City of Olongapo and the Municipality of Subic, and other
municipalities contiguous to the base areas." This phrase belies petitioner's assertion that SSEZ is
indeed a tax-free territory. The term "in lieu of paying taxes" as used in the law does not constitute an
absolute exemption from taxation. While spared from national and local taxes, businesses and
enterprises within the SSEZ are subjected to the said tax base on gross income. No matter what legal
jargon is used, the said taxes are in fact taxes imposed on businesses or enterprises operating within the
SSEZ. Thus, it is incorrect to say that SSEZ is actually a tax-free territory.
Individual aliens employed within the Subic Special Economic Zone (SSEZ) are not exempt from the
awesome power of Philippine taxation especially so that they sourced out their earnings from within
the Philippines. The secured area of SSEZ, which is virtually delineated in metes and bounds by
Proclamation No. 532, issued by the then President Fidel Ramos on February 1, 1995, is in reality part
of the territorial jurisdiction of the Philippines. To buttress the point that SSEZ is indeed within the
Philippine jurisdiction, Section 12 (h) of RA 7227, actually placed the fenced-off area of SSEZ under
the responsibility of the Philippine National Government, thus,
"The defense of the zone and the security of its perimeters shall be the responsibility of the National
Government in coordination with the Subic Bay Metropolitan Authority. The Subic Bay Metropolitan
Authority shall provide and establish its own internal security and fire-fighting forces."
Such being the case, all subjects over which the Philippines can exercise dominion are necessarily

objects of taxation. As such, all subjects of taxation within its jurisdiction are required to pay tax in
exchange of the protection that the state gives (Commissioner of Internal Revenue vs. Algue, Inc., et
al., L-28896, February 17, 1988). Thus, the SSEZ, being within the territorial boundaries of the
Philippines, the aliens residing therein, who enjoy the benefits and protection from the said state are not
exempt from contributing their share in the running of the government. They have the bounden duty to
surrender part of their hard-earned income to the taxing authorities. SAHaTc
Contrary to petitioner's assertion, the National Internal Revenue Code operates with equal force and
effect to all subjects within the territorial boundary of the Philippines. Being a general law, it covers all
persons, properties and privileges, which are found within its jurisdictional limit. With the enactment of
RA 7227, there came an exception to the general rule. Being a special law, it prevails over the general
law but only in so far as a certain group of persons or things is concerned. Since the law, in granting tax
incentives, only made mention of businesses and enterprises within the SSEZ, it follows then that said
RA 7227 operates only on the said group. As no mention was made to individual taxpayers being taxexempt, it follows that they still fall within the ambit of the general law pursuant to the maxim excepto
firmat regulam in casibus non exceptis, a thing not being excepted must be regarded as coming within
the purview of the general rule.
Parenthetically, there is not much of a substantial difference between individual citizen and an
individual resident alien working in the Philippines as far as income taxation is concerned. In fact,
under the National Internal Revenue Code (NIRC) of 1997, both classes of individual taxpayers are
similarly taxed under Section 24(A). The distinction lies only on the source of income to be taxed:
While a resident citizen is taxed on all income from within and without the Philippines, the resident
alien is taxed only on income from within the Philippines.
Proceeding now to the issue of whether herein petitioner is entitled to a refund of income taxes paid on
compensation earned from working within the SSEZ, we answer in the negative. As previously
discussed, resident aliens within the SSEZ are still subject to the NIRC as far as their income from
within the Philippines is concerned. Accordingly, no refund of the said tax can be granted to petitioner
as the said tax due the petitioner in the amount of P1,533,660.70 was correctly remitted to the BIR.
Anent the last issue of whether Section 12(c) of RA 7227 applies to petitioner, again, we rule in the
negative. A close reading of Section 12 (c) would reveal that the exemption from taxes, local or
national, is actually intended to benefit only those registered businesses and establishments operating
within the territory and not to individual taxpayers working within its parameters. The grant of said
incentive is premised on the fact that the influx of new investments in our economy could very well
meet the country's avowed policy of accelerating economic growth and development.
As held by the Supreme Court in the case of Tiu vs. Court of Appeals, 301 SCRA 278, January 20,
1999, thus:
"From the above provisions of the law, it can easily be deduced that the real concern of RA 7227 is to
convert the lands formerly occupied by the US military bases into economic or industrial areas. In
furtherance of such objective, Congress deemed it necessary to extend economic incentives to attract
and encourage investors, both local and foreign. Among such enticements are: (1) a separate customs
territory within the zone, (2) tax-and duty free importations, (3) restructured income tax rates on
business enterprises within the zone, (4) no foreign exchange control, (5) liberalized regulations on
banking and finance, and (6) the grant of resident status to certain investors and of working visas to

certain foreign executives and workers" (emphasis supplied).

It is clear from the foregoing that the purpose of the law is to attract and encourage investors who could
spur economic growth and resultantly could generate employment opportunities for the Filipinos.
Nothing has been said about the employees and personnel working thereat to be likewise tax-exempt on
their compensation income as no objective of national magnitude is actually realized if the law intends
to exempt them from tax. Except for the privilege of granting a working visa for said alien workers, the
law is silent with regards to their taxability. To likewise exempt them from payment of taxes would be
stretching the coverage of the law a little bit too far. This court cannot indulge in expansive
construction and write into the law an exemption not therein set forth.
If the law intended to exempt individuals employed within the SSEZ from taxes, it could have
expressly stated it in clear and unequivocal language. The exemption from the common burden cannot
be permitted to exist upon vague implication nor can it be made out of inference. Settled is the rule that
he who claims an exemption from his share of the common burden in taxation must justify his claim by
showing that the legislature intended to exempt him by words too plain to be mistaken (Surigao
Consolidated Mining Co., Inc. vs. Collector of Internal Revenue, et al., L-14878, December 26, 1963).
Since RA 7227 does not specifically mention the granting of tax exemptions to individuals working
within the SSEZ, then no tax refund should be accorded to herein petitioner.
The oft-repeated rule that "a refund partakes of the nature of a tax exemption and so it must be
construed in strictissimi juris against the grantee and liberally in favor of the taxing power" deserves
reiteration in this case.
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for lack of
merit. TEAaDC
SO ORDERED.
(SGD.) ERNESTO D. ACOSTA
Presiding Judge
I CONCUR:
(SGD.) JUANITO C. CASTAEDA, JR.
Associate Judge

[C.T.A. CASE NO. 6139. December 17, 2003.]

MITSUBISHI CORPORATION MANILA BRANCH, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
DECISION
This case involves a claim for refund of erroneously paid income tax and branch profit remittance tax
for the fiscal year ended March 31, 1998 amounting to P44,288,712 and P8,324,100, respectively,
arising from petitioner's Overseas Economic Cooperation Fund funded Batangas Coal-Fired
Thermal Power Plant Project. cEHSTC
Petitioner is the Philippine Branch of Mitsubishi Corporation, a corporation duly organized and
existing under the laws of Japan and duly licensed to engage in business in the Philippines, with office
address at the 14th Floor, L.V. Locsin, Building, 6752 Ayala Avenue, Makati City, Metro Manila (par.
1, Joint Stipulation of Facts and Issues).
Through an Exchange of Notes between the Government of Japan and the Government of the
Philippines dated June 11, 1987 (Exhibit "J"), it was agreed that a loan amounting to Forty Billion Four
Hundred Million Japanese Yen (Y40,400,000,000) will be extended to the Republic of the Philippines
by the then Overseas Economic Cooperation Fund (hereinafter, "OECF"), (now the Japan Bank for
International Cooperation or "JIBC" for the implementation of the Calaca II Coal-Fired Thermal Power
Plant Project (hereinafter, Calaca II Project).
In paragraph 5(2) of the said Exchange of Notes, it was stated that:
"The Government of the Republic of the Philippines, will, itself or through its instrumentalities, assume
all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals
operating as suppliers, contractors or consultants on and /or in connection with any income that may
accrue from the supply of products of Japan and services of Japanese nationals to be provided under the
Loan" (Exhibit "J").
Subsequently, the OECF and the Government of the Republic of the Philippines entered into a Loan
Agreement (Loan Agreement No. PH-P76) dated September 25, 1987 for Forty Billion Four Hundred
Million Japanese Yen (Y40,400,000,000) for the implementation of the Calaca II Project (Exhibit "O").
On June 21, 1991, the National Power Corporation (hereinafter, "NPC") and Mitsubishi Corporation,
petitioner's head office in Japan, entered into a contract for the engineering, supply, construction,
installation, testing and commissioning of one (1) x 300 MW Batangas Coal-Fired Thermal Power
Project II at Calaca, Batangas (Calaca II Coal-Fired Thermal Power Project) (hereinafter, "Contract")
(Exhibit "I").
Article VI of the Contract provided that "The Foreign Currency Portion of the Contract Price for Phase
I is funded by OECF Loan No. PH-P76. Any Foreign Currency Portion of the Contract which is not
covered by OECF Loan No. PH-P76 shall constitute as Phase II of the Contract. Corporation (NPC)
shall secure additional financing from OECF for Phase II within one (1) year after the date of Contract
effectivity (Exhibit "I"). IAcTaC

Thus, a second loan agreement (Loan Agreement No. PH-P141) dated December 20, 1994 for the
amount of Five Billion Five Hundred Thirteen Million Japanese Yen (Y5,513,000,000.00) was entered
into between the OECF and the Government of the Republic of the Philippines for the additional
funding of the Calaca II Project (Exhibit "P").
The Calaca II Project was completed by the petitioner on December 2, 1995 but was only accepted by
NPC on January 31, 1998 through a Certificate of Completion and Final Acceptance dated February 4,
1998 (Exhibit "D").
On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year ended March 31, 1998 with
the Bureau of Internal Revenue (par. 3, Joint Stipulation of Facts and Issues; Exhibits "B", "B-1" and
"B-2"). In the return, petitioner (being the Manila Branch of Mitsubishi Corporation) reported an
income tax due of P90,481,711.00 computed in accordance with the provisions of Revenue
Memorandum Order ("RAMO") No. 1-95, as follows:
Solicitation and Trading Activities
Worldwide Operating Income
Sales to the Philippines

P6,421,609,029.00

15,342,816,283.00

Worldwide Sales

3,281,557,773,404.00 .004675467

Taxable Income from

Solicitation Activities
Attribution Rate

30,024,023.00
75%

22,518,017.00

Taxable Income April-December 1997

Tax Rate

35%

16,888,513.00

5,910,980.00

Taxable Income January-March 1998

5,629,504.00

Tax Rate

34%

1,914,031.00

Tax Due from solicitation and

trading activities

P7,825,011.00

Construction and Other Activities

Taxable Income April-December 1997
Tax Rate

236,162,001.00

35%

Tax due from construction and other activities

Total Tax Due

P82,656,700.00

P90,481,711.00
==============

(Exhibits "B-3", "B-6" and "B-7")

In computing the P90,481,711.00 income tax due for fiscal year ended March 31, 1998, petitioner
included as part of its taxable income, all revenues earned and cost incurred for its Calaca II Project, in
accordance with the completed contract method of reporting income (Exhibit "B").
The net income from the Calaca II Project amounted to P151,997,705, computed below:
Revenue

P1,416,829,241

Less: Project Cost

1,111,706,964

Gross Profit

305,122,277

Less: Operating Expenses 74,162,777

Income from Operations

230,959,500

Add: Other Income 3,482,413

Income Before Income Tax 234,441,913

Provision for Income Tax

82,444,208

Net Income

P151,997,705
============

(Exhibit "B-16")
Likewise, on July 15, 1998, petitioner filed its Monthly Remittance Return of Income Taxes Withheld
(Exhibit "C") and remitted the amount of P8,324,100 representing its branch profit remittance tax
(BPRT) for branch profits remitted to the Head Office (in Japan) out of its income for the fiscal year
ended March 31, 1998. The tax rate used was 10% in accordance with the Philippines-Japan Tax
Treaty. HCSDca
On September 7, 1998, the respondent issued Bureau of Internal Revenue Ruling No. DA-407-98
(Exhibit K) where it held that "Mitsubishi has no liability for income tax and other taxes and fiscal
levies, including VAT, . . . on the 100% of its foreign currency portion of the Calaca II Project since the
said taxes were assumed by the Philippine Government." (par. 5, Stipulation of Facts, Joint Stipulation
of Facts and Issues).
Of the P1,416,829,241.00 (Exhibit "B-16") total revenue from the Calaca II Project, P640,907,792 or
45.24% represents that portion which was not OECF-funded considering that this amount represents
the Philippine Peso component of the project, while P775,921,449 or 54.76% represents the OECF
funded portion (Exhibit N).
Since petitioner paid P82,444,208.00 income tax for its income from the entire Calaca II Project
(inclusive of the OECF-funded and non-OECF funded portions) and P8,324,100.00 BPRT for the
remittance of its income (inclusive of the income on the OECF-funded portion of the Calaca II Project),
petitioner now seeks a tax refund/credit of the P44,288,712 erroneously paid income tax and the
P8,324,100.00 erroneously paid BPRT computed hereunder as follows:
Erroneously Paid Income Tax on Calaca II Project
Explanation

Income Taxes Paid

P82,444,208 for income attributable to the

========== Calaca II Project

Sales P640,907,792 non-OECF funded portion

Less: Project Cost

502,936,230 P1,111,706,964 (Total Project Cost)

x 45.24% (non-OECF funded portion)

Gross Profit

137,971,562

Less: Operating Expenses

33,551,240

P74,162,777(total operating expenses)

x 45.24% (non-OECF funded portion)

Income from Operation

104,420,322 pertaining to the non-OECF funded

portion
Add: Other Income

3,482,413

Income before tax

107,902,735

Add: 1,112,967

Taxable Income

109,015,702 pertaining to the non-OECF funded

portion
Income tax due

38,155,496

pertaining to the non-OECF funded

========== portion
Income taxes paid for
the entire project

82,444,208

Income tax due

38,155,496

Erroneously paid
Income taxes P44,288,712 pertaining to the OECF funded
========== portion and, therefor, should not

have been paid by Mitsubishi

(Exhibit "A")
Erroneously Paid Branch Profit Remittance Tax Pertaining to Branch Profits from OECF Funded
Portion of Calaca II Project
Net Income from Calaca II Project 151,997,705
Divided by: Total Revenue

1,416,829,241

Ratio of Net Income to Total Revenue

10.728%

==========
OECF Funded portion of Calaca II Project 775,921,449
x Ratio of Net Income to Total Revenue

10.728%

Net income from OECF-funded Portion

Multiply by BPRT Rate

83,240,998

10%

Erroneously paid BPRT

P8,324,100*

===========
*pertaining to the income from the OECF funded portion and, therefore, should not have been paid by
Mitsubishi
(Exhibit "A")
On June 30, 2000, petitioner filed an administrative claim for refund and/or tax credit with respondent
in the amount of P52,612,812.00, representing its erroneously paid income taxes in the amount of
P44,288,712 and erroneously paid branch profit remittance tax in the amount of P8,324,100.00
corresponding to the OECF-funded portion of its Calaca II Project as computed above (par. 6,
Stipulation of Facts, Joints Stipulation of Facts and Issues; Exhibits "A" and "A-1").
On July 13, 2000, petitioner, in order to suspend the running of the two-year period within which to file
a judicial claim for refund, filed the instant petition for review pursuant to Section 229 of the Tax Code.
Respondent, on September 12, 2000, filed his answer raising the following Special and Affirmative

Defenses, to wit:
"7.
Petitioner's alleged claim for refund is subject to administrative routinary
investigation/examination by respondent's bureau.
8.
Since BIR Ruling No. DA-407-98 is based merely on petitioner's self-serving representations
and not on actual investigation by respondent, petitioner must prove with evidence its applicability to
the instant case.
9.

Taxes are presumed to have been collected in accordance with law.

10.
In action for refund/credit, the burden of proof is on the taxpayer to establish its right to refund
and its failure to sustain the burden is fatal to the claim for refund/credit.
11.
Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the
Tax Code."
On April 6, 2001, petitioner, by leave of court, moved for the adoption of the procedure under CTA
Circular No. 1-95, as amended by CTA Circular No. 10-97 which was granted by this court on April 23,
2001. Mr. Ruben R. Rubio, a partner of Sycip Gorres Velayo & Co. was commissioned to examine and
verify the voluminous documents supporting petitioner's claim. Thereafter, on August 28, 2001, Mr.
Ruben R. Rubio submitted his report (Exhibit "S") relative to his verification of petitioner's claim for
refund. The report reveals an erroneously paid income tax and erroneously paid branch profit
remittance tax amounting to P44,288,712 and P8,324,100, respectively. This court noted that there is no
discrepancy between the amount cited in the report and the amount being claimed by petitioner.
cEAIHa
In support of its claim for refund petitioner, presented documentary and testimonial evidence. On the
contrary, respondent did not present any testimonial or documentary evidence to dispute the claim of
petitioner.
On May 23, 2003, petitioner filed its memorandum. On the other hand, respondent, despite the
extension given by this court for him to file his memorandum, failed to file the same. And so, this
court, in its resolution dated July 15, 2003, submitted this case for decision.
The issues to be resolved by this court as stipulated by the parties are as follows:
1.
Whether petitioner has erroneously paid income and branch profit remittance taxes for the fiscal
year ended March 31, 1998, which is a proper claim for refund pursuant to Sections 204 and 229 of the
Tax Code; and
2.
Whether the erroneously paid income and branch profit remittance taxes for the fiscal year
ended March 31, 1998 are substantiated by documentary evidence.
We are now going to discuss the first issue.
Records reveal that petitioner anchored its claim for refund on BIR Ruling No. DA-407-98, dated
September 7, 1998 (Exhibit K) interpreting Item 5, paragraph 2 of the Exchange of Notes, which we

herein quote for easy reference, to wit:

DA-407-98
9-7-98
Sycip Gorres Velayo & Co.
6760 Ayala Avenue
Makati City
Attn.: Atty. C. P. Noel
Tax Division
Gentlemen:
This refers to your letter dated May 15, 1998 requesting on behalf of your client, Mitsubishi
Corporation-Manila Branch, for a ruling regarding the tax consequences of its OECF-funded NAIA II
and Calaca II Projects.
It is represented that your client, Mitsubishi Corporation (Mitsubishi), is a private corporation duly
organized and existing under and by virtue of the laws of Japan; that Mitsubishi was duly authorized by
the Securities and Exchange Commission to operate a branch in the Philippines; that Mitsubishi is a
member of the MTOB Consortium, the consortium which was granted the NAIA II Project is 75%
foreign-funded by the government of Japan through the OECF and 25% as counterpart fund of the
Philippine Government; the funding of this project was made pursuant to an Exchange of Notes (NotesNAIA) between the Government of Japan and the Philippines; that under Notes NAIA, a loan in
Japanese Yen up to the amount of Y47,036,000,000.00 was extended to the Philippine Government to
fund, among other projects stated therein, the Ninoy Aquino International Airport Terminal 2 or the
NAIA II project; that the NAIA II Project was allocated Y18,120,000,000.00; that item 7, paragraph 2
of Notes-NAIA states:
"7.

...

(2)
The Government of the Republic of the Philippines will, itself or through its executing agencies
or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and/or services of Japanese
nationals to be provided under the Loan.
It is likewise represented that on June 21, 1991, Mitsubishi entered into a contract with the National
Power Corporation (NPC) for the supply of equipment and services, engineering, construction, testing
and commissioning of equipment in connection with the Calaca II Project; that funding of the project is
made through a grant from the Japanese Government through the OECF and pursuant to an Exchange
of Notes dated June 11, 1987 (Notes-Calaca); that under the Notes-Calaca, a loan up to
Y40,400,000,000.00 was extended expressly to implement the Calaca II Project; that Item 5, paragraph

2 Notes-Calaca provides;
"5.

...

(2)
The Government of the Republic of the Philippines will, itself or through its executing agencies
or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and services of Japanese
nationals to be provided under the Loan." (Emphasis supplied.)
It is further represented that the above contributions of the Japanese Government through the OECF
represents 75% of the NAIA II Projects and 100% of the foreign currency portion of the Calaca II
project both of which will benefit not Japan but the Philippines; and that under Notes-NAIA and NotesCalaca, any income, value added tax or the other fiscal levies that may arise therefrom should not be
made the obligation of Japanese firms engaged in the Projects.
In reply, please be informed that the aforequoted provisions of Notes-NAIA and Notes-Calaca are not
grants of direct tax exemption privilege to the Japanese firms, Mitsubishi in this case, and Japanese
nationals operating as suppliers, contractors or consultants involved in either of the two projects
because the said provisions state that it is the Government of the Republic of the Philippines that is
obligated to pay whatever fiscal levies or taxes they may be liable to. Thus there is no tax exemption to
speak of because the said taxes shall be assumed by the Philippine Government; hence the said
provision is not violative of the Constitutional prohibition against grants of tax exemption without the
concurrence of the majority of the members of Congress (BIR Ruling No. 071-97 citing Sec. 28(4), Art.
VI, 1987 Philippine Constitution).
In view thereof, and considering that the estimated contribution of the Government of Japan is
Y18,120,000,000.00 in the NAIA II Project and Y40,400,000,000.00 in the Calaca II Project and that
the beneficiary is the Philippine Government, this office is of the opinion and hereby holds that
Mitsubishi has no liability for income tax and other taxes and fiscal levies, including VAT, on the 75%
of the NAIA II Project and on the 100% of the foreign currency portion of the Calaca II Project since
the said taxes were assumed by the Philippine Government.
This ruling is being issued based on the foregoing representation. If upon investigation, it will be
discovered that the facts are different, then this ruling shall be considered null and void.
Very truly yours,
SIXTO S ESQUIVAS IV
Deputy Commissioner
(Legal and Enforcement Group)
Based on the above-stated BIR Ruling DA 407-98 and the Exchange of Notes, petitioner now claims
that its payment of the subject taxes was erroneous pursuant to Section 229 of the Tax Code, to wit:
Section 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be

maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless on any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid. (Emphasis supplied.)
We agree with petitioner.

IaSCTE

Notably, there was an erroneous payment of the subject taxes by petitioner for the reason that said taxes
are to be assumed by the Government of the Philippines through its executing agency, the NPC, in
connection with Item 5(2) of the Exchange of notes. As defined in Black's Law Dictionary, 6th Edition,
the word "assume" means "to take on, become bound, or put oneself in place of another as to an
obligation or liability". As can be gleaned from the definition, the Government of the Philippines,
through NPC, binds itself to shoulder the tax obligations and liabilities of petitioner. This finds support
under the provision of Article VII (B) (1) of the Contract (Exhibit "I") executed between petitioner and
NPC, to wit:
Article VII (B) (1)
"B.

FOR ONSHORE PORTION

1.)
CORPORATION (NPC) shall, subject to the provisions under the Contract Documents on
Taxes, pay any and all forms of taxes which are directly imposable under the Contract including VAT,
that may be imposed by the Philippine Government, or any of its agencies and political subdivisions."
(Exhibit "I-1")
In addition, the testimony of petitioner's witness on the matter on which between the parties shall
shoulder the subject taxes further strengthened petitioner's claim, thus:
xxx

xxx

xxx

Atty. Manalo:
Now, based on the amendment to the contract between National Power Corporation and
Mitsubishi Corporation, who will pay the taxes for the onshore portion of the Contract?
Witness:
Under Article VII (B) of the original contract, the National Power Corporation shall pay the
taxes for the onshore portion of the contract.

Atty. Manalo:
I would like to request again for the submarking of Article VIII (B) of the original contract as
Exhibit "I-1".
xxx

xxx

xxx

Therefore, the income tax and BPRT payments made by petitioner to respondent when such payments
should have been made by the NPC, undoubtedly, put petitioner's case in the operation of Section 229
of the Tax Code as one involving erroneous payment.
A careful reading of the provisions of the Exchange of Notes will show that it is the intention of the two
governments not to use the proceeds of the loan in the payment of all fiscal levies or taxes imposed by
the Philippines. In view thereof, we believe that to deny petitioner's claim for refund would violate the
covenant that the funded amount should not be subject to any taxes. This statement finds support under
item 8(a) of the Exchange of Notes, to wit:
"8.

The Government of the Republic of the Philippines will take necessary measures to ensure that:

(a)

The Loan be used properly and exclusively for the Project.

This is not the first time that this court has upheld the validity of the Exchange of Notes as a basis for
the refund of erroneously collected taxes. In the case of P & N Corporation (Manila Branch Office) vs.
Commissioner of Internal Revenue, CTA Case Nos. 4163 and 4293 (July 24, 1991), which involved a
claim for refund of erroneously collected contractors' and withholding taxes, this court in granting the
petition on the ground that the subject provision of the Exchange of Notes partakes the nature of a tax
exemption, stated that: DaTHAc
"It must be remembered that "tax exemption is founded on public policy . . . are granted on the ground
that they will benefit the public generally, or as a reward or compensation for services rendered in the
performance of some function deemed socially desirable . . . are favored on the theory that the
concession is due to quid pro quo for the performance of services essentially public by which the State
is relieved pro tanto from performing (84 C.J.S. No. 215, pp. 413414). Thus it is important to note that
the exchange of notes in this case was entered into in pursuance of a loan agreement with Japan. Under
the Constitution, in force at that time, the President may contract and guarantee foreign and domestic
loans on behalf of the Republic of the Philippines subject to such limitations as may be provided by law
(Art. II, Section 12, 1973 Constitution, as amended). Therefore, having validly entered into a loan
agreement through the exchange of notes, the terms therein necessarily govern the execution of the loan
agreement. The contract, involved in this case which was entered into pursuant to the loan merely
embodies the exemption provision in said exchange of notes."
Moreover, in Mitsubishi Corporation, Tokyu Construction Co., Ltd., A. M. Oreta and Co., Inc. and BF
Corporation, Operating as MTOB Consortium, CTA Case No. 5757, January 15, 2002, and in
Mitsubishi Corporation, Tokyu Construction Co., Ltd., A. M. Oreta and Co., Inc. and BF Corporation,
Operating as MTOB Consortium, CTA Case No. 6037, November 11, 2002, this court, again pursuant
to the Exchange of Notes, granted the claim of petitioners for the refund of unutilized creditable
withholding value-added tax (VAT) in recognition of the validity of the Exchange of Notes. This court
has noted that in these decisions, the subject claim for refund was based on the Notes-NAIA mentioned

in BIR Ruling DA 407-98 in which herein petitioner was one of the claimants. Thus, in consideration
of the above-stated pronouncements of this court affirming the validity of the Exchange of Notes as a
valid ground for refund of erroneously paid taxes, this court finds no valid reason to disturb the wisdom
of said rulings.
Likewise, this court is aware of Revenue Memorandum Circular (RMC) No. 42-99, dated June 2, 1999,
amending Revenue Memorandum Circular No. 32-99, which has for its subject the standard clauses
(referring to Item 5 paragraphs 1 and 2 of said Exchange of Notes) pertaining to the tax treatment of
participating Japanese contractors and nationals under the exchange of notes between the Japanese
Government and the Republic of the Philippines, providing for the proper procedure for petitioner in
case where it already paid the taxes subject of this case to the BIR. Pertinent portions of which read as
follows:
The foregoing provisions of the Exchange of Notes mean that the Japanese contractors or nationals
engaged in OECF-funded projects in the Philippines shall not be required to shoulder all fiscal levies or
taxes associated with the project. Instead, the taxes shall be shouldered and borne by the executing
government agencies. Hence, for the comprehensive treatment of the tax implications arising
therefrom, the following rulings are hereby promulgated:
A)

...

B)

INCOME TAX

1.
Japanese firms or nationals operating as suppliers, contractors or consultants on and/or in
connection with any income that may accrue from the supply of products and/or services to be provided
under the Project Loan, shall file the prescribed income tax returns. Since the executing government
agencies are mandated to assume the payment thereof under the Exchange of Notes, the said Japanese
firms or nationals need not pay the taxes due thereunder.
2.
The concerned Revenue District Officer shall, in turn, collect the said income taxes from the
concerned executing government agencies.
3.
In cases where income taxes were previously paid directly by the Japanese contractors or
nationals, the corresponding cash refund shall be recovered from the government executing agencies
upon the presentation of proof of payment thereof by the Japanese contractors or nationals. (Emphasis
supplied).
C)

...

Indubitably, under the RMC as regards income taxes, petitioner is only required to file its ITR but need
not pay the taxes due thereunder. The Commissioner of the BIR has mandated the District Officer to
collect the income taxes from the government executing agency. But in cases where income taxes were
previously paid directly by petitioner to the BIR, as what petitioner did in this case, the cash refund
shall be recovered from the NPC. However, the RMD dated June 2, 1999 only took effect after its
publication in the National Administrative Register, July-September 1999 issue while the ITR of
petitioner was filed on July 15, 1998 or almost a year before the issuance of the RMC. Therefore, we
hold that said refund must be claimed directly by petitioner from the respondent for it would be unfair
on the part of the petitioner that said RMC be given retroactive effect.

Anent the second issue, this court finds that petitioner has properly presented sufficient evidence to
substantiate its claim for erroneously paid income and branch profit remittance taxes for the fiscal year
ended March 31, 1998.
WHEREFORE, in the light of the foregoing, petitioner's claim for refund is GRANTED. Respondent
Commissioner of Internal Revenue is hereby ORDERED to REFUND to petitioner the amount of
P44,288,712.00 and P8,324,100.00 representing erroneously paid income tax and branch profit
remittance tax, respectively. CEcaTH
No pronouncement as to cost.
SO ORDERED.
(SGD.) ERNESTO D. ACOSTA
Presiding Judge
I CONCUR:
(SGD.) LOVELL R. BAUTISTA
Associate Judge
Separate Opinions
DISSENTING OPINION
With due respect to my colleagues, I beg to disagree with the majority's conclusion that petitioner is
exempt from income tax and branch profit remittance tax pursuant to the Exchange of Notes between
the Government of Japan and the Government of the Philippines (Exhibit "J") and BIR Ruling DA407-98 dated September 7, 1998 (Exhibit "K") based on the following legal grounds: TSIDEa
1.
There are constitutional grounds to prohibit the grant of tax exemption under such Exchange of
Notes.
2.
Section 32(B)(5) of the 1997 Tax Code provides that only treaties can grant income tax
exemption.
3.
The Exchange of Notes only provides for the assumption of tax liabilities by the Philippine
Government. It does not provide for tax exemption.
4.
BIR Ruling DA-407-98 dated September 7, 1998 does not entitle petitioner to a refund of
income taxes paid by it.
Section 28(4), Article VI (Legislative Department) of the 1987 Constitution of the Philippines
expressly provides: "No law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of the Congress." The requirement of an absolutely majority of all the
Members of Congress in the grant of tax exemption clearly manifests the intent of the framers of our

Constitution that tax exemptions are not to be frivolously granted.

On the other hand, Section 21, Article VII (Executive Department) of the Constitution states: "No
treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds
of all the Members of the Senate."
Related thereto is Section 32(B)(5) of the 1997 Tax Code, which provides:
Sec. 32.
xxx

Gross Income.
xxx

xxx

(B)
Exclusions from Gross Income. The following items shall not be included in gross income
and shall be exempt from fixation under this Title:
xxx

xxx

xxx

(5)
Income Exempt under Treaty. Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.
In this regard, there is no showing that the Exchange of Notes involved here was approved by at least
two-thirds of the entire Senate membership. Consequently, such Exchange of Notes cannot validly
grant tax exemption and in fact, it did not.
As stated in the Majority Decision, records reveal that petitioner anchored its claim for refund on BIR
Ruling No. DA-407-98 dated September 7, 1998 (Exhibit "K"), issued by Deputy Commissioner Sixto
S. Esquivias IV, interpreting Item 5, paragraph 2 of the aforementioned Exchange of Notes, which we
herein quote for in pertinent part: HScAEC
. . . that item 7, paragraph 2 of Notes-NAIA states:
"7.

...

(2)
The Government of the Republic of the Philippines will, itself or through its executing agencies
or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and/or services of Japanese
nationals to be provided under the Loan.
It is likewise represented that on June 21, 1991, Mitsubishi entered into a contract with the National
Power Corporation (NPC) for the supply of equipment and services, engineering, construction, testing
and commissioning of equipment in connection with the Calaca II Project; that funding of the project is
made through a grant from the Japanese Government through the OECF and pursuant to an Exchange
of Notes dated June 11, 1987 (Notes-Calaca); that under the Notes-Calaca, a loan up to
Y40,400,000,000.00 was extended expressly to implement the Calaca II Project; that Item 5, paragraph
2 Notes-Calaca provides;
"5.

...

(2)
The Government of the Republic of the Philippines will, itself or through its executing agencies
or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and services of Japanese
nationals to be provided under the Loan." (Emphasis supplied.)
In reply, please be informed that the aforequoted provisions of Notes-NAIA and Notes-Calaca are not
grants of direct tax exemption privilege to the Japanese firms, . . . because the said provisions state that
it is the Government of the Republic of the Philippines that is obligated to pay whatever fiscal levies or
taxes they may be liable to. Thus there is no tax exemption to speak of because the said taxes shall be
assumed by the Philippine Government; hence the said provision is not violative of the Constitutional
prohibition against grants of tax exemption without the concurrence of the majority of the members of
Congress (BIR Ruling No. 071-97 citing Sec. 28(4), Art. VI, 1987 Philippine Constitution). aHECST
In view thereof, and considering that the estimated contribution of the Government of Japan is
Y18,120,000,000.00 in the NAIA II Project and Y40,400,000,000.00 in the Calaca II Project and that
the beneficiary is the Philippine Government, this office is of the opinion and hereby holds that
Mitsubishi has no liability for income tax and other taxes and fiscal levies, including VAT, on the 75%
of the NAIA II Project and on the 100% of the foreign currency portion of the Calaca II Project since
the said taxes were assumed by the Philippine Government.
The aforequoted ruling clearly states that the Exchange of Notes grants no tax exemption and merely
provides that the Philippine Government assumes all tax liabilities. Hence, there is no violation of "the
Constitutional prohibition against grants of tax exemption without the concurrence of the majority of
the members of Congress (BIR Ruling No. 071-97 citing Sec. 28(4) Art. VI, 1987 Philippine
Constitution)."
It must be noted that the Exchange of Notes is merely an agreement between the two governments
(Philippines and Japan) involved. The Exchange of Notes is not a source of tax exemption as correctly
pointed out by respondent in its ruling by stating that "there is no tax exemption to speak of because the
said taxes shall be assumed by the Philippine Government." Undoubtedly, a tax assumption is not
equivalent to tax exemption. The former arises from contract while the latter is granted by law through
the legislative branch of the government. As a rule, "the claim of tax exemption must expressly be
granted in a statute stated in a language too clear to be mistaken'' (Commissioner of Internal Revenue
vs. Court of Appeals, 298 SCRA 83).
The Exchange of Notes is just a preparatory agreement or a mere understanding between the two
governments in which the government of Japan will grant a loan in favor of the Philippine government
to be used in the latter's economic development program. This is evident from the opening statements
of the Exchange of Notes wherein it provided that:
"Excellency,
I have the honour to confirm the following understanding recently reached between the representatives
of the Government of Japan and of the Government of the Republic of the Philippines concerning a
Japanese loan to be extended with a view to promoting economic development efforts of the Republic
of the Philippines: . . . " (p. 1, Exhibit "J")

Clearly, the Exchange of Notes is not a "self-executing" agreement. This was the reason why the two
loan agreements, Loan Agreement No. PH-P76 (Exhibit "O") dated September 25, 1987 and Loan
Agreement No. PH-P141 (Exhibit "P") dated December 20, 1994, were executed providing the
Philippine government enough funds to implement the Calaca II Project. Accordingly, in order to
realize this project, the NPC, the executing agency of the Philippine government entered into a contract
with herein petitioner and in said Contract the provision of Article VIII (B) (1) (Exhibit "I") was
included in order to carry-out the undertaking assumed by the Philippine government (through the
NPC), to wit: HAICTD
Article VIII (B) (1)
"B.

FOR ONSHORE PORTION

1.)
CORPORATION (NPC) shall, subject to the provisions under the Contract Documents on
Taxes, pay any and all forms of taxes which are directly imposable under the Contract including VAT,
that may be imposed by the Philippine Government, or any of its agencies and political subdivisions."
(Exhibit "I-1")
This provision not only realized the intent of the two governments under Item 5, paragraph 2 of the
Exchange of Notes but it also recognized the covenant of the two governments not to use the proceeds
of the loan in the payment of all fiscal levies or taxes imposed by the Philippines. This statement finds
support under Item 8(a) of the Exchange of Notes, to wit:
"8.

The Government of the Republic of the Philippines will take necessary measures to ensure that:

(a)

The Loan be used properly and exclusively for the Project, . . ."

However, despite the provision in the Contract that NPC shall assume the tax liabilities of petitioner,
the latter still made payments of the subject taxes to respondent. And now, petitioner, believing that it
has made erroneous payments of the subject taxes, is before us invoking the provision of Section 229 in
relation to Section 204 of the Tax Code. cIECTH
The petition is without merit.
Petitioner has no basis in law. The provision of Section 229 is not applicable to petitioner, to wit:
Section 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding, shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duty filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless on any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit

any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid. (Emphasis supplied)
The above-cited section speaks of taxes erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been excessively or in
any manner wrongfully collected. Undeniably, it is not proper for us to allow a claim for refund in
favor of petitioner who, by law, is legally mandated to pay the taxes due from it. The allegation of
petitioner that the subject taxes it paid comes within the purview of an erroneous payment merely
because said taxes, by virtue of a contract, are to be assumed by NPC is unavailing.
It is a basic principle in civil law that with certain exceptions not obtaining in this case, a contract can
only bind the parties who had entered into it or their successors who assumed their personalities or their
juridical positions, and that, as a consequence, such contract can neither favor nor prejudice a third
person (Ouano vs. Court of Appeals, G.R. No. 95900, July 23, 1992). Article 1311 of the Civil Code of
the Philippines provides that "Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law." This is the principle of relativity of contracts.
CDHcaS
In the case at bar, it is undisputed that the contract was entered into only by and between the parties
(NPC and herein petitioner) and the herein respondent was neither a party thereto nor was he aware of
the provision thereof. Thus, respondent should not be made to observe the term of the contract between
the parties, otherwise, the principle of relativity of contracts, long enshrined in our substantive laws,
will be violated.
The "assumption of taxes" clause in the Contract between the petitioner and NPC is not enough to put
petitioner's case within the operation of Section 229 of the Tax Code. The payments of petitioner to
respondent of the income taxes and the BPRT were made legally by it and the Contract is not enough
ground to grant petitioner's claim for refund. A contract is, as always, subordinate to the law.
However, petitioner remedy, if any, is to seek a cash refund from NPC for the equivalent amount of the
income taxes and branch profit remittance taxes it paid to the BIR. This remedy is recognized by the
respondent himself when he issued Revenue Memorandum Circular (RMC) No. 32-99, as amended by
Revenue Memorandum Circular 42-99 dated June 2, 1999, which provides that "In cases where income
taxes were previously paid directly by the Japanese contractors or nationals, the corresponding cash
refund shall be recovered from the government executing agencies upon the presentation of proof of
payment thereof by the Japanese contractors or nationals".
International comity may not be invoked to evade our tax laws. Thus, the Supreme Court held:
"It is too settled a rule in this jurisdiction, as to dispense with the need for citations, 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 burden of proof rests upon the
party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus
petitioners have failed to discharge. Significantly, private respondents are not even among the entities
which, under Section 29(b)(7)(A) of the tax code, are entitled to exemption and which should
indispensably be the party in interest in this case. AaDSTH

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer
due to diminution of much needed funds. Nor can we close this discussion without taking cognizance
of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in
this case on the nebulous representation that the funds involved in the loans are those of a foreign
government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax
laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans
or other domestic securities with private foreign entities, which in turn will negotiate independently
with their governments, could be availed of to take advantage of the tax exemption law under
discussion." Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation, G.R. No. 54908,
January 22, 1990, 181 SCRA 82.
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 of the
parties (Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, G.R. No. L-19707, Aug.
17, 1967; Manila Electric Company vs. Vera, etc., G.R. No. L-29987, Oct. 22,1975; Surigao
Consolidated Mining Co., Inc. v. Collector of Internal Revenue, et al., G.R. No. L-14878, December
26, 1963, all cited in Aban, Law of Basic Taxation of the Philippines, p. 119). Tax exemptions are not
presumed (Lealda Electric Co., Inc. v. Collector of Internal Revenue, G.R. No. L-16428, April 30,
1963). Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person claiming the exemption
(Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., 309 SCRA 87 [1999]).
In the light of the foregoing, we cannot conclude that the Exchange of Notes grants tax exemption to
petitioner. Hence, petitioner's claim for refund should be denied for lack of merit. ScTCIE
(SGD.) JUANITO C. CASTAEDA, JR.
Associate Judge[C.T.A. CASE NO. 6139. December 17, 2003.]
MITSUBISHI CORPORATION MANILA BRANCH, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
DECISION
This case involves a claim for refund of erroneously paid income tax and branch profit remittance tax
for the fiscal year ended March 31, 1998 amounting to P44,288,712 and P8,324,100, respectively,
arising from petitioner's Overseas Economic Cooperation Fund funded Batangas Coal-Fired
Thermal Power Plant Project. cEHSTC
Petitioner is the Philippine Branch of Mitsubishi Corporation, a corporation duly organized and
existing under the laws of Japan and duly licensed to engage in business in the Philippines, with office
address at the 14th Floor, L.V. Locsin, Building, 6752 Ayala Avenue, Makati City, Metro Manila (par.
1, Joint Stipulation of Facts and Issues).
Through an Exchange of Notes between the Government of Japan and the Government of the
Philippines dated June 11, 1987 (Exhibit "J"), it was agreed that a loan amounting to Forty Billion Four
Hundred Million Japanese Yen (Y40,400,000,000) will be extended to the Republic of the Philippines

by the then Overseas Economic Cooperation Fund (hereinafter, "OECF"), (now the Japan Bank for
International Cooperation or "JIBC" for the implementation of the Calaca II Coal-Fired Thermal Power
Plant Project (hereinafter, Calaca II Project).
In paragraph 5(2) of the said Exchange of Notes, it was stated that:
"The Government of the Republic of the Philippines, will, itself or through its instrumentalities, assume
all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals
operating as suppliers, contractors or consultants on and /or in connection with any income that may
accrue from the supply of products of Japan and services of Japanese nationals to be provided under the
Loan" (Exhibit "J").
Subsequently, the OECF and the Government of the Republic of the Philippines entered into a Loan
Agreement (Loan Agreement No. PH-P76) dated September 25, 1987 for Forty Billion Four Hundred
Million Japanese Yen (Y40,400,000,000) for the implementation of the Calaca II Project (Exhibit "O").
On June 21, 1991, the National Power Corporation (hereinafter, "NPC") and Mitsubishi Corporation,
petitioner's head office in Japan, entered into a contract for the engineering, supply, construction,
installation, testing and commissioning of one (1) x 300 MW Batangas Coal-Fired Thermal Power
Project II at Calaca, Batangas (Calaca II Coal-Fired Thermal Power Project) (hereinafter, "Contract")
(Exhibit "I").
Article VI of the Contract provided that "The Foreign Currency Portion of the Contract Price for Phase
I is funded by OECF Loan No. PH-P76. Any Foreign Currency Portion of the Contract which is not
covered by OECF Loan No. PH-P76 shall constitute as Phase II of the Contract. Corporation (NPC)
shall secure additional financing from OECF for Phase II within one (1) year after the date of Contract
effectivity (Exhibit "I"). IAcTaC
Thus, a second loan agreement (Loan Agreement No. PH-P141) dated December 20, 1994 for the
amount of Five Billion Five Hundred Thirteen Million Japanese Yen (Y5,513,000,000.00) was entered
into between the OECF and the Government of the Republic of the Philippines for the additional
funding of the Calaca II Project (Exhibit "P").
The Calaca II Project was completed by the petitioner on December 2, 1995 but was only accepted by
NPC on January 31, 1998 through a Certificate of Completion and Final Acceptance dated February 4,
1998 (Exhibit "D").
On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year ended March 31, 1998 with
the Bureau of Internal Revenue (par. 3, Joint Stipulation of Facts and Issues; Exhibits "B", "B-1" and
"B-2"). In the return, petitioner (being the Manila Branch of Mitsubishi Corporation) reported an
income tax due of P90,481,711.00 computed in accordance with the provisions of Revenue
Memorandum Order ("RAMO") No. 1-95, as follows:
Solicitation and Trading Activities
Worldwide Operating Income
Sales to the Philippines

P6,421,609,029.00

15,342,816,283.00


Worldwide Sales

3,281,557,773,404.00 .004675467

Taxable Income from

Solicitation Activities
Attribution Rate

30,024,023.00
75%

22,518,017.00

Taxable Income April-December 1997

Tax Rate

35%

16,888,513.00

5,910,980.00

Taxable Income January-March 1998

Tax Rate

34%

5,629,504.00

1,914,031.00

Tax Due from solicitation and

trading activities

P7,825,011.00

Construction and Other Activities

Taxable Income April-December 1997
Tax Rate

236,162,001.00

35%

Tax due from construction and other activities

P82,656,700.00

Total Tax Due

P90,481,711.00
==============

(Exhibits "B-3", "B-6" and "B-7")

In computing the P90,481,711.00 income tax due for fiscal year ended March 31, 1998, petitioner
included as part of its taxable income, all revenues earned and cost incurred for its Calaca II Project, in
accordance with the completed contract method of reporting income (Exhibit "B").
The net income from the Calaca II Project amounted to P151,997,705, computed below:
Revenue

P1,416,829,241

Less: Project Cost

1,111,706,964

Gross Profit

305,122,277

Less: Operating Expenses 74,162,777

Income from Operations

230,959,500

Add: Other Income 3,482,413

Income Before Income Tax 234,441,913

Provision for Income Tax

82,444,208

Net Income

P151,997,705
============

(Exhibit "B-16")
Likewise, on July 15, 1998, petitioner filed its Monthly Remittance Return of Income Taxes Withheld
(Exhibit "C") and remitted the amount of P8,324,100 representing its branch profit remittance tax
(BPRT) for branch profits remitted to the Head Office (in Japan) out of its income for the fiscal year
ended March 31, 1998. The tax rate used was 10% in accordance with the Philippines-Japan Tax

Treaty.

HCSDca

On September 7, 1998, the respondent issued Bureau of Internal Revenue Ruling No. DA-407-98
(Exhibit K) where it held that "Mitsubishi has no liability for income tax and other taxes and fiscal
levies, including VAT, . . . on the 100% of its foreign currency portion of the Calaca II Project since the
said taxes were assumed by the Philippine Government." (par. 5, Stipulation of Facts, Joint Stipulation
of Facts and Issues).
Of the P1,416,829,241.00 (Exhibit "B-16") total revenue from the Calaca II Project, P640,907,792 or
45.24% represents that portion which was not OECF-funded considering that this amount represents
the Philippine Peso component of the project, while P775,921,449 or 54.76% represents the OECF
funded portion (Exhibit N).
Since petitioner paid P82,444,208.00 income tax for its income from the entire Calaca II Project
(inclusive of the OECF-funded and non-OECF funded portions) and P8,324,100.00 BPRT for the
remittance of its income (inclusive of the income on the OECF-funded portion of the Calaca II Project),
petitioner now seeks a tax refund/credit of the P44,288,712 erroneously paid income tax and the
P8,324,100.00 erroneously paid BPRT computed hereunder as follows:
Erroneously Paid Income Tax on Calaca II Project
Explanation

Income Taxes Paid

P82,444,208 for income attributable to the

========== Calaca II Project

Sales P640,907,792 non-OECF funded portion
Less: Project Cost

502,936,230 P1,111,706,964 (Total Project Cost)

x 45.24% (non-OECF funded portion)

Gross Profit

137,971,562

Less: Operating Expenses

33,551,240

P74,162,777(total operating expenses)

x 45.24% (non-OECF funded portion)

Income from Operation

104,420,322 pertaining to the non-OECF funded

portion
Add: Other Income

3,482,413

Income before tax

107,902,735

Add: 1,112,967

Taxable Income

109,015,702 pertaining to the non-OECF funded

portion
Income tax due

38,155,496

pertaining to the non-OECF funded

========== portion
Income taxes paid for
the entire project

82,444,208

Income tax due

38,155,496

Erroneously paid
Income taxes P44,288,712 pertaining to the OECF funded
========== portion and, therefor, should not
have been paid by Mitsubishi
(Exhibit "A")
Erroneously Paid Branch Profit Remittance Tax Pertaining to Branch Profits from OECF Funded
Portion of Calaca II Project
Net Income from Calaca II Project 151,997,705
Divided by: Total Revenue

1,416,829,241

Ratio of Net Income to Total Revenue

10.728%

==========
OECF Funded portion of Calaca II Project 775,921,449
x Ratio of Net Income to Total Revenue

10.728%


Net income from OECF-funded Portion
Multiply by BPRT Rate

83,240,998

10%

Erroneously paid BPRT

P8,324,100*

===========
*pertaining to the income from the OECF funded portion and, therefore, should not have been paid by
Mitsubishi
(Exhibit "A")
On June 30, 2000, petitioner filed an administrative claim for refund and/or tax credit with respondent
in the amount of P52,612,812.00, representing its erroneously paid income taxes in the amount of
P44,288,712 and erroneously paid branch profit remittance tax in the amount of P8,324,100.00
corresponding to the OECF-funded portion of its Calaca II Project as computed above (par. 6,
Stipulation of Facts, Joints Stipulation of Facts and Issues; Exhibits "A" and "A-1").
On July 13, 2000, petitioner, in order to suspend the running of the two-year period within which to file
a judicial claim for refund, filed the instant petition for review pursuant to Section 229 of the Tax Code.
Respondent, on September 12, 2000, filed his answer raising the following Special and Affirmative
Defenses, to wit:
"7.
Petitioner's alleged claim for refund is subject to administrative routinary
investigation/examination by respondent's bureau.
8.
Since BIR Ruling No. DA-407-98 is based merely on petitioner's self-serving representations
and not on actual investigation by respondent, petitioner must prove with evidence its applicability to
the instant case.
9.

Taxes are presumed to have been collected in accordance with law.

10.
In action for refund/credit, the burden of proof is on the taxpayer to establish its right to refund
and its failure to sustain the burden is fatal to the claim for refund/credit.
11.
Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the
Tax Code."
On April 6, 2001, petitioner, by leave of court, moved for the adoption of the procedure under CTA
Circular No. 1-95, as amended by CTA Circular No. 10-97 which was granted by this court on April 23,
2001. Mr. Ruben R. Rubio, a partner of Sycip Gorres Velayo & Co. was commissioned to examine and
verify the voluminous documents supporting petitioner's claim. Thereafter, on August 28, 2001, Mr.

Ruben R. Rubio submitted his report (Exhibit "S") relative to his verification of petitioner's claim for
refund. The report reveals an erroneously paid income tax and erroneously paid branch profit
remittance tax amounting to P44,288,712 and P8,324,100, respectively. This court noted that there is no
discrepancy between the amount cited in the report and the amount being claimed by petitioner.
cEAIHa
In support of its claim for refund petitioner, presented documentary and testimonial evidence. On the
contrary, respondent did not present any testimonial or documentary evidence to dispute the claim of
petitioner.
On May 23, 2003, petitioner filed its memorandum. On the other hand, respondent, despite the
extension given by this court for him to file his memorandum, failed to file the same. And so, this
court, in its resolution dated July 15, 2003, submitted this case for decision.
The issues to be resolved by this court as stipulated by the parties are as follows:
1.
Whether petitioner has erroneously paid income and branch profit remittance taxes for the fiscal
year ended March 31, 1998, which is a proper claim for refund pursuant to Sections 204 and 229 of the
Tax Code; and
2.
Whether the erroneously paid income and branch profit remittance taxes for the fiscal year
ended March 31, 1998 are substantiated by documentary evidence.
We are now going to discuss the first issue.
Records reveal that petitioner anchored its claim for refund on BIR Ruling No. DA-407-98, dated
September 7, 1998 (Exhibit K) interpreting Item 5, paragraph 2 of the Exchange of Notes, which we
herein quote for easy reference, to wit:
DA-407-98
9-7-98
Sycip Gorres Velayo & Co.
6760 Ayala Avenue
Makati City
Attn.: Atty. C. P. Noel
Tax Division
Gentlemen:
This refers to your letter dated May 15, 1998 requesting on behalf of your client, Mitsubishi
Corporation-Manila Branch, for a ruling regarding the tax consequences of its OECF-funded NAIA II
and Calaca II Projects.

It is represented that your client, Mitsubishi Corporation (Mitsubishi), is a private corporation duly
organized and existing under and by virtue of the laws of Japan; that Mitsubishi was duly authorized by
the Securities and Exchange Commission to operate a branch in the Philippines; that Mitsubishi is a
member of the MTOB Consortium, the consortium which was granted the NAIA II Project is 75%
foreign-funded by the government of Japan through the OECF and 25% as counterpart fund of the
Philippine Government; the funding of this project was made pursuant to an Exchange of Notes (NotesNAIA) between the Government of Japan and the Philippines; that under Notes NAIA, a loan in
Japanese Yen up to the amount of Y47,036,000,000.00 was extended to the Philippine Government to
fund, among other projects stated therein, the Ninoy Aquino International Airport Terminal 2 or the
NAIA II project; that the NAIA II Project was allocated Y18,120,000,000.00; that item 7, paragraph 2
of Notes-NAIA states:
"7.

...

(2)
The Government of the Republic of the Philippines will, itself or through its executing agencies
or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and/or services of Japanese
nationals to be provided under the Loan.
It is likewise represented that on June 21, 1991, Mitsubishi entered into a contract with the National
Power Corporation (NPC) for the supply of equipment and services, engineering, construction, testing
and commissioning of equipment in connection with the Calaca II Project; that funding of the project is
made through a grant from the Japanese Government through the OECF and pursuant to an Exchange
of Notes dated June 11, 1987 (Notes-Calaca); that under the Notes-Calaca, a loan up to
Y40,400,000,000.00 was extended expressly to implement the Calaca II Project; that Item 5, paragraph
2 Notes-Calaca provides;
"5.

...

(2)
The Government of the Republic of the Philippines will, itself or through its executing agencies
or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and services of Japanese
nationals to be provided under the Loan." (Emphasis supplied.)
It is further represented that the above contributions of the Japanese Government through the OECF
represents 75% of the NAIA II Projects and 100% of the foreign currency portion of the Calaca II
project both of which will benefit not Japan but the Philippines; and that under Notes-NAIA and NotesCalaca, any income, value added tax or the other fiscal levies that may arise therefrom should not be
made the obligation of Japanese firms engaged in the Projects.
In reply, please be informed that the aforequoted provisions of Notes-NAIA and Notes-Calaca are not
grants of direct tax exemption privilege to the Japanese firms, Mitsubishi in this case, and Japanese
nationals operating as suppliers, contractors or consultants involved in either of the two projects
because the said provisions state that it is the Government of the Republic of the Philippines that is
obligated to pay whatever fiscal levies or taxes they may be liable to. Thus there is no tax exemption to
speak of because the said taxes shall be assumed by the Philippine Government; hence the said

provision is not violative of the Constitutional prohibition against grants of tax exemption without the
concurrence of the majority of the members of Congress (BIR Ruling No. 071-97 citing Sec. 28(4), Art.
VI, 1987 Philippine Constitution).
In view thereof, and considering that the estimated contribution of the Government of Japan is
Y18,120,000,000.00 in the NAIA II Project and Y40,400,000,000.00 in the Calaca II Project and that
the beneficiary is the Philippine Government, this office is of the opinion and hereby holds that
Mitsubishi has no liability for income tax and other taxes and fiscal levies, including VAT, on the 75%
of the NAIA II Project and on the 100% of the foreign currency portion of the Calaca II Project since
the said taxes were assumed by the Philippine Government.
This ruling is being issued based on the foregoing representation. If upon investigation, it will be
discovered that the facts are different, then this ruling shall be considered null and void.
Very truly yours,
SIXTO S ESQUIVAS IV
Deputy Commissioner
(Legal and Enforcement Group)
Based on the above-stated BIR Ruling DA 407-98 and the Exchange of Notes, petitioner now claims
that its payment of the subject taxes was erroneous pursuant to Section 229 of the Tax Code, to wit:
Section 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless on any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid. (Emphasis supplied.)
We agree with petitioner.

IaSCTE

Notably, there was an erroneous payment of the subject taxes by petitioner for the reason that said taxes
are to be assumed by the Government of the Philippines through its executing agency, the NPC, in
connection with Item 5(2) of the Exchange of notes. As defined in Black's Law Dictionary, 6th Edition,
the word "assume" means "to take on, become bound, or put oneself in place of another as to an
obligation or liability". As can be gleaned from the definition, the Government of the Philippines,
through NPC, binds itself to shoulder the tax obligations and liabilities of petitioner. This finds support
under the provision of Article VII (B) (1) of the Contract (Exhibit "I") executed between petitioner and

NPC, to wit:
Article VII (B) (1)
"B.

FOR ONSHORE PORTION

1.)
CORPORATION (NPC) shall, subject to the provisions under the Contract Documents on
Taxes, pay any and all forms of taxes which are directly imposable under the Contract including VAT,
that may be imposed by the Philippine Government, or any of its agencies and political subdivisions."
(Exhibit "I-1")
In addition, the testimony of petitioner's witness on the matter on which between the parties shall
shoulder the subject taxes further strengthened petitioner's claim, thus:
xxx

xxx

xxx

Atty. Manalo:
Now, based on the amendment to the contract between National Power Corporation and
Mitsubishi Corporation, who will pay the taxes for the onshore portion of the Contract?
Witness:
Under Article VII (B) of the original contract, the National Power Corporation shall pay the
taxes for the onshore portion of the contract.
Atty. Manalo:
I would like to request again for the submarking of Article VIII (B) of the original contract as
Exhibit "I-1".
xxx

xxx

xxx

Therefore, the income tax and BPRT payments made by petitioner to respondent when such payments
should have been made by the NPC, undoubtedly, put petitioner's case in the operation of Section 229
of the Tax Code as one involving erroneous payment.
A careful reading of the provisions of the Exchange of Notes will show that it is the intention of the two
governments not to use the proceeds of the loan in the payment of all fiscal levies or taxes imposed by
the Philippines. In view thereof, we believe that to deny petitioner's claim for refund would violate the
covenant that the funded amount should not be subject to any taxes. This statement finds support under
item 8(a) of the Exchange of Notes, to wit:
"8.

The Government of the Republic of the Philippines will take necessary measures to ensure that:

(a)

The Loan be used properly and exclusively for the Project.

This is not the first time that this court has upheld the validity of the Exchange of Notes as a basis for

the refund of erroneously collected taxes. In the case of P & N Corporation (Manila Branch Office) vs.
Commissioner of Internal Revenue, CTA Case Nos. 4163 and 4293 (July 24, 1991), which involved a
claim for refund of erroneously collected contractors' and withholding taxes, this court in granting the
petition on the ground that the subject provision of the Exchange of Notes partakes the nature of a tax
exemption, stated that: DaTHAc
"It must be remembered that "tax exemption is founded on public policy . . . are granted on the ground
that they will benefit the public generally, or as a reward or compensation for services rendered in the
performance of some function deemed socially desirable . . . are favored on the theory that the
concession is due to quid pro quo for the performance of services essentially public by which the State
is relieved pro tanto from performing (84 C.J.S. No. 215, pp. 413414). Thus it is important to note that
the exchange of notes in this case was entered into in pursuance of a loan agreement with Japan. Under
the Constitution, in force at that time, the President may contract and guarantee foreign and domestic
loans on behalf of the Republic of the Philippines subject to such limitations as may be provided by law
(Art. II, Section 12, 1973 Constitution, as amended). Therefore, having validly entered into a loan
agreement through the exchange of notes, the terms therein necessarily govern the execution of the loan
agreement. The contract, involved in this case which was entered into pursuant to the loan merely
embodies the exemption provision in said exchange of notes."
Moreover, in Mitsubishi Corporation, Tokyu Construction Co., Ltd., A. M. Oreta and Co., Inc. and BF
Corporation, Operating as MTOB Consortium, CTA Case No. 5757, January 15, 2002, and in
Mitsubishi Corporation, Tokyu Construction Co., Ltd., A. M. Oreta and Co., Inc. and BF Corporation,
Operating as MTOB Consortium, CTA Case No. 6037, November 11, 2002, this court, again pursuant
to the Exchange of Notes, granted the claim of petitioners for the refund of unutilized creditable
withholding value-added tax (VAT) in recognition of the validity of the Exchange of Notes. This court
has noted that in these decisions, the subject claim for refund was based on the Notes-NAIA mentioned
in BIR Ruling DA 407-98 in which herein petitioner was one of the claimants. Thus, in consideration
of the above-stated pronouncements of this court affirming the validity of the Exchange of Notes as a
valid ground for refund of erroneously paid taxes, this court finds no valid reason to disturb the wisdom
of said rulings.
Likewise, this court is aware of Revenue Memorandum Circular (RMC) No. 42-99, dated June 2, 1999,
amending Revenue Memorandum Circular No. 32-99, which has for its subject the standard clauses
(referring to Item 5 paragraphs 1 and 2 of said Exchange of Notes) pertaining to the tax treatment of
participating Japanese contractors and nationals under the exchange of notes between the Japanese
Government and the Republic of the Philippines, providing for the proper procedure for petitioner in
case where it already paid the taxes subject of this case to the BIR. Pertinent portions of which read as
follows:
The foregoing provisions of the Exchange of Notes mean that the Japanese contractors or nationals
engaged in OECF-funded projects in the Philippines shall not be required to shoulder all fiscal levies or
taxes associated with the project. Instead, the taxes shall be shouldered and borne by the executing
government agencies. Hence, for the comprehensive treatment of the tax implications arising
therefrom, the following rulings are hereby promulgated:
A)

...

B)

INCOME TAX

1.
Japanese firms or nationals operating as suppliers, contractors or consultants on and/or in
connection with any income that may accrue from the supply of products and/or services to be provided
under the Project Loan, shall file the prescribed income tax returns. Since the executing government
agencies are mandated to assume the payment thereof under the Exchange of Notes, the said Japanese
firms or nationals need not pay the taxes due thereunder.
2.
The concerned Revenue District Officer shall, in turn, collect the said income taxes from the
concerned executing government agencies.
3.
In cases where income taxes were previously paid directly by the Japanese contractors or
nationals, the corresponding cash refund shall be recovered from the government executing agencies
upon the presentation of proof of payment thereof by the Japanese contractors or nationals. (Emphasis
supplied).
C)

...

Indubitably, under the RMC as regards income taxes, petitioner is only required to file its ITR but need
not pay the taxes due thereunder. The Commissioner of the BIR has mandated the District Officer to
collect the income taxes from the government executing agency. But in cases where income taxes were
previously paid directly by petitioner to the BIR, as what petitioner did in this case, the cash refund
shall be recovered from the NPC. However, the RMD dated June 2, 1999 only took effect after its
publication in the National Administrative Register, July-September 1999 issue while the ITR of
petitioner was filed on July 15, 1998 or almost a year before the issuance of the RMC. Therefore, we
hold that said refund must be claimed directly by petitioner from the respondent for it would be unfair
on the part of the petitioner that said RMC be given retroactive effect.
Anent the second issue, this court finds that petitioner has properly presented sufficient evidence to
substantiate its claim for erroneously paid income and branch profit remittance taxes for the fiscal year
ended March 31, 1998.
WHEREFORE, in the light of the foregoing, petitioner's claim for refund is GRANTED. Respondent
Commissioner of Internal Revenue is hereby ORDERED to REFUND to petitioner the amount of
P44,288,712.00 and P8,324,100.00 representing erroneously paid income tax and branch profit
remittance tax, respectively. CEcaTH
No pronouncement as to cost.
SO ORDERED.
(SGD.) ERNESTO D. ACOSTA
Presiding Judge
I CONCUR:
(SGD.) LOVELL R. BAUTISTA
Associate Judge

Separate Opinions
DISSENTING OPINION
With due respect to my colleagues, I beg to disagree with the majority's conclusion that petitioner is
exempt from income tax and branch profit remittance tax pursuant to the Exchange of Notes between
the Government of Japan and the Government of the Philippines (Exhibit "J") and BIR Ruling DA407-98 dated September 7, 1998 (Exhibit "K") based on the following legal grounds: TSIDEa
1.
There are constitutional grounds to prohibit the grant of tax exemption under such Exchange of
Notes.
2.
Section 32(B)(5) of the 1997 Tax Code provides that only treaties can grant income tax
exemption.
3.
The Exchange of Notes only provides for the assumption of tax liabilities by the Philippine
Government. It does not provide for tax exemption.
4.
BIR Ruling DA-407-98 dated September 7, 1998 does not entitle petitioner to a refund of
income taxes paid by it.
Section 28(4), Article VI (Legislative Department) of the 1987 Constitution of the Philippines
expressly provides: "No law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of the Congress." The requirement of an absolutely majority of all the
Members of Congress in the grant of tax exemption clearly manifests the intent of the framers of our
Constitution that tax exemptions are not to be frivolously granted.
On the other hand, Section 21, Article VII (Executive Department) of the Constitution states: "No
treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds
of all the Members of the Senate."
Related thereto is Section 32(B)(5) of the 1997 Tax Code, which provides:
Sec. 32.
xxx

Gross Income.
xxx

xxx

(B)
Exclusions from Gross Income. The following items shall not be included in gross income
and shall be exempt from fixation under this Title:
xxx

xxx

xxx

(5)
Income Exempt under Treaty. Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.
In this regard, there is no showing that the Exchange of Notes involved here was approved by at least
two-thirds of the entire Senate membership. Consequently, such Exchange of Notes cannot validly
grant tax exemption and in fact, it did not.

As stated in the Majority Decision, records reveal that petitioner anchored its claim for refund on BIR
Ruling No. DA-407-98 dated September 7, 1998 (Exhibit "K"), issued by Deputy Commissioner Sixto
S. Esquivias IV, interpreting Item 5, paragraph 2 of the aforementioned Exchange of Notes, which we
herein quote for in pertinent part: HScAEC
. . . that item 7, paragraph 2 of Notes-NAIA states:
"7.

...

(2)
The Government of the Republic of the Philippines will, itself or through its executing agencies
or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and/or services of Japanese
nationals to be provided under the Loan.
It is likewise represented that on June 21, 1991, Mitsubishi entered into a contract with the National
Power Corporation (NPC) for the supply of equipment and services, engineering, construction, testing
and commissioning of equipment in connection with the Calaca II Project; that funding of the project is
made through a grant from the Japanese Government through the OECF and pursuant to an Exchange
of Notes dated June 11, 1987 (Notes-Calaca); that under the Notes-Calaca, a loan up to
Y40,400,000,000.00 was extended expressly to implement the Calaca II Project; that Item 5, paragraph
2 Notes-Calaca provides;
"5.

...

(2)
The Government of the Republic of the Philippines will, itself or through its executing agencies
or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and services of Japanese
nationals to be provided under the Loan." (Emphasis supplied.)
In reply, please be informed that the aforequoted provisions of Notes-NAIA and Notes-Calaca are not
grants of direct tax exemption privilege to the Japanese firms, . . . because the said provisions state that
it is the Government of the Republic of the Philippines that is obligated to pay whatever fiscal levies or
taxes they may be liable to. Thus there is no tax exemption to speak of because the said taxes shall be
assumed by the Philippine Government; hence the said provision is not violative of the Constitutional
prohibition against grants of tax exemption without the concurrence of the majority of the members of
Congress (BIR Ruling No. 071-97 citing Sec. 28(4), Art. VI, 1987 Philippine Constitution). aHECST
In view thereof, and considering that the estimated contribution of the Government of Japan is
Y18,120,000,000.00 in the NAIA II Project and Y40,400,000,000.00 in the Calaca II Project and that
the beneficiary is the Philippine Government, this office is of the opinion and hereby holds that
Mitsubishi has no liability for income tax and other taxes and fiscal levies, including VAT, on the 75%
of the NAIA II Project and on the 100% of the foreign currency portion of the Calaca II Project since
the said taxes were assumed by the Philippine Government.
The aforequoted ruling clearly states that the Exchange of Notes grants no tax exemption and merely
provides that the Philippine Government assumes all tax liabilities. Hence, there is no violation of "the

Constitutional prohibition against grants of tax exemption without the concurrence of the majority of
the members of Congress (BIR Ruling No. 071-97 citing Sec. 28(4) Art. VI, 1987 Philippine
Constitution)."
It must be noted that the Exchange of Notes is merely an agreement between the two governments
(Philippines and Japan) involved. The Exchange of Notes is not a source of tax exemption as correctly
pointed out by respondent in its ruling by stating that "there is no tax exemption to speak of because the
said taxes shall be assumed by the Philippine Government." Undoubtedly, a tax assumption is not
equivalent to tax exemption. The former arises from contract while the latter is granted by law through
the legislative branch of the government. As a rule, "the claim of tax exemption must expressly be
granted in a statute stated in a language too clear to be mistaken'' (Commissioner of Internal Revenue
vs. Court of Appeals, 298 SCRA 83).
The Exchange of Notes is just a preparatory agreement or a mere understanding between the two
governments in which the government of Japan will grant a loan in favor of the Philippine government
to be used in the latter's economic development program. This is evident from the opening statements
of the Exchange of Notes wherein it provided that:
"Excellency,
I have the honour to confirm the following understanding recently reached between the representatives
of the Government of Japan and of the Government of the Republic of the Philippines concerning a
Japanese loan to be extended with a view to promoting economic development efforts of the Republic
of the Philippines: . . . " (p. 1, Exhibit "J")
Clearly, the Exchange of Notes is not a "self-executing" agreement. This was the reason why the two
loan agreements, Loan Agreement No. PH-P76 (Exhibit "O") dated September 25, 1987 and Loan
Agreement No. PH-P141 (Exhibit "P") dated December 20, 1994, were executed providing the
Philippine government enough funds to implement the Calaca II Project. Accordingly, in order to
realize this project, the NPC, the executing agency of the Philippine government entered into a contract
with herein petitioner and in said Contract the provision of Article VIII (B) (1) (Exhibit "I") was
included in order to carry-out the undertaking assumed by the Philippine government (through the
NPC), to wit: HAICTD
Article VIII (B) (1)
"B.

FOR ONSHORE PORTION

1.)
CORPORATION (NPC) shall, subject to the provisions under the Contract Documents on
Taxes, pay any and all forms of taxes which are directly imposable under the Contract including VAT,
that may be imposed by the Philippine Government, or any of its agencies and political subdivisions."
(Exhibit "I-1")
This provision not only realized the intent of the two governments under Item 5, paragraph 2 of the
Exchange of Notes but it also recognized the covenant of the two governments not to use the proceeds
of the loan in the payment of all fiscal levies or taxes imposed by the Philippines. This statement finds
support under Item 8(a) of the Exchange of Notes, to wit:

"8.

The Government of the Republic of the Philippines will take necessary measures to ensure that:

(a)

The Loan be used properly and exclusively for the Project, . . ."

However, despite the provision in the Contract that NPC shall assume the tax liabilities of petitioner,
the latter still made payments of the subject taxes to respondent. And now, petitioner, believing that it
has made erroneous payments of the subject taxes, is before us invoking the provision of Section 229 in
relation to Section 204 of the Tax Code. cIECTH
The petition is without merit.
Petitioner has no basis in law. The provision of Section 229 is not applicable to petitioner, to wit:
Section 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding, shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duty filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless on any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid. (Emphasis supplied)
The above-cited section speaks of taxes erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been excessively or in
any manner wrongfully collected. Undeniably, it is not proper for us to allow a claim for refund in
favor of petitioner who, by law, is legally mandated to pay the taxes due from it. The allegation of
petitioner that the subject taxes it paid comes within the purview of an erroneous payment merely
because said taxes, by virtue of a contract, are to be assumed by NPC is unavailing.
It is a basic principle in civil law that with certain exceptions not obtaining in this case, a contract can
only bind the parties who had entered into it or their successors who assumed their personalities or their
juridical positions, and that, as a consequence, such contract can neither favor nor prejudice a third
person (Ouano vs. Court of Appeals, G.R. No. 95900, July 23, 1992). Article 1311 of the Civil Code of
the Philippines provides that "Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law." This is the principle of relativity of contracts.
CDHcaS
In the case at bar, it is undisputed that the contract was entered into only by and between the parties
(NPC and herein petitioner) and the herein respondent was neither a party thereto nor was he aware of
the provision thereof. Thus, respondent should not be made to observe the term of the contract between
the parties, otherwise, the principle of relativity of contracts, long enshrined in our substantive laws,
will be violated.

The "assumption of taxes" clause in the Contract between the petitioner and NPC is not enough to put
petitioner's case within the operation of Section 229 of the Tax Code. The payments of petitioner to
respondent of the income taxes and the BPRT were made legally by it and the Contract is not enough
ground to grant petitioner's claim for refund. A contract is, as always, subordinate to the law.
However, petitioner remedy, if any, is to seek a cash refund from NPC for the equivalent amount of the
income taxes and branch profit remittance taxes it paid to the BIR. This remedy is recognized by the
respondent himself when he issued Revenue Memorandum Circular (RMC) No. 32-99, as amended by
Revenue Memorandum Circular 42-99 dated June 2, 1999, which provides that "In cases where income
taxes were previously paid directly by the Japanese contractors or nationals, the corresponding cash
refund shall be recovered from the government executing agencies upon the presentation of proof of
payment thereof by the Japanese contractors or nationals".
International comity may not be invoked to evade our tax laws. Thus, the Supreme Court held:
"It is too settled a rule in this jurisdiction, as to dispense with the need for citations, 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 burden of proof rests upon the
party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus
petitioners have failed to discharge. Significantly, private respondents are not even among the entities
which, under Section 29(b)(7)(A) of the tax code, are entitled to exemption and which should
indispensably be the party in interest in this case. AaDSTH
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer
due to diminution of much needed funds. Nor can we close this discussion without taking cognizance
of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in
this case on the nebulous representation that the funds involved in the loans are those of a foreign
government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax
laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans
or other domestic securities with private foreign entities, which in turn will negotiate independently
with their governments, could be availed of to take advantage of the tax exemption law under
discussion." Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation, G.R. No. 54908,
January 22, 1990, 181 SCRA 82.
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 of the
parties (Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, G.R. No. L-19707, Aug.
17, 1967; Manila Electric Company vs. Vera, etc., G.R. No. L-29987, Oct. 22,1975; Surigao
Consolidated Mining Co., Inc. v. Collector of Internal Revenue, et al., G.R. No. L-14878, December
26, 1963, all cited in Aban, Law of Basic Taxation of the Philippines, p. 119). Tax exemptions are not
presumed (Lealda Electric Co., Inc. v. Collector of Internal Revenue, G.R. No. L-16428, April 30,
1963). Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person claiming the exemption
(Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., 309 SCRA 87 [1999]).
In the light of the foregoing, we cannot conclude that the Exchange of Notes grants tax exemption to
petitioner. Hence, petitioner's claim for refund should be denied for lack of merit. ScTCIE

(SGD.) JUANITO C. CASTAEDA, JR.

Associate Judge

Donald L. Smith,
petitioner vs.
Commissioner
of Internal
Revenue
C.T.A Case no.
6268 September
12, 2002.

Facts:
This petition for
review involves
a claim for
refund in the
amount of One
MillionFive
Hundred Thirty

Three Thousand
Six Hundred and
Sixty pesos &
70/100
(1533,660.70)
allegedly
representing the
income tax

erroneously paid
by
hereinpetitioner
for taxable year
1998.Petitioner
is a citizen of the
United States
and is employed

as Controller
of Coastal Subic
Bay Terminal,
Inc. , a business
entity located
within the Subic
SpecialEconomi
c Zone as

created by
Republic Act
7227. On April
15, 1999,
petitioner filed
hisannual
income tax
return and paid

P1,533,660.70
in compensation
income taxes for
theincome he
derived from his
employment.
Claiming that the
payment of

income tax onhis

compensation
was erroneous,
petitioner filed a
written claim for
refund with the
BIRon April 5,
2001. Petitioner

alleged that he
is covered by Ra
7227 or
otherwise
knownas the
Bases
Conversion and
Development

Act of 1992, thus

he is tax
exempt. Asthere
was no
immediate
action and the
two year
prescriptive

period was
about to
lapse,petitioner
elevated his
case to the CTA
by way of
petition for

review on April
6, 2001.
Issues:
(1) Whether or
not Section 12
(c) of Republic
Act No. 7227
applies to

petitioner.(2)
Whether or not
aliens working
within the Subic
Special
Economic Zone
are
withinPhilippine

jurisdiction to be
subjected from
income taxes on
income earned
from
suchemploymen
t;
RULING:(1)

No. RA 7227
applies only to
business
establishments
within the
SubicSpecial
Economic Zone.
It only operates

on the said
group.Petitioner
relying upon RA
7227 otherwise
known as the
Bases
Conversion
adDevelopment

Act of 1992
which states
that: Sec.
12.Subic Special
Economic
Zones.

xxx xxx xxx (c)

The Provision of
existing laws,
rules and
regulations to
the
contrarynotwiths
tanding, no

taxes, local and

national, shall be
imposed within
the Subic
SpecialEconomi
c Zone shall be
remitted to the
National

Government,
one percent
(1%) eachto the
local
government
units affected by
the declaration
of the zone in

proportion
totheir
population area,
and other
factors. In
addition, there is
hereby
established

adevelopment
fund of one
percent (1%) of
the gross
income earned
by all
businessesand
enterprises

within the Subic

Special
Economic Zone
to be utilized for
thedevelopment
of municipalities
outside the City
of Olongapo and

the Municipality
of Subic,
and other munici
palities
contiguous
to the
base areas.
In case

of conflictbetwee
n national and
local laws with
respect to tax
exemption
privileges in the
SubicSpecial
Economic Zone,

the same shall

be resolved in
favor of the
latter.
(2)
Individual aliens
employed within
the Subic

Special
Economic Zone
(SSEZ)are not
exempt from the
awesome power
of Philippine
taxation
especially so

that theysourced
out their
earnings from
within the
Philippines.
The secured
area of
SSEZ,which is

virtually
delineated in
metes and
bounds by
Proclamation
No. 532, issued
bythe then
President Fidel

Ramos on
February 1,
1995, is in reality
part of the
territorial
jurisdiction of th
e
Philippines. To b

uttress the point

that SSEZ is ind
eed within thePh
ilippine
jurisdiction,
Section 12 (h) of
RA 7227,
actually placed

the fenced-off
area of SSEZ
under the
responsibility of
the Philippine
National
Government,
thus,

"Thedefense of
the zone and the
security of its
perimeters shall
be the
responsibility of
theNational
Government in

coordination with
the Subic Bay
Metropolitan
Authority.
TheSubic Bay
Metropolitan
Authority shall
provide and

establish its own

internal
securityand firefighting
forces."Such
being the case,
all subjects over
which the

Philippinescan
exercise
dominion are
necessarily
objects of
taxation. As
such, all
subjects

of taxation within
its jurisdiction
are required to
pay tax in
exchange of the
protection
thatthe state
gives. Thus,

the SSEZ,
being within
the territorial
boundaries
of thePhilippines
, the aliens
residing therein,
who enjoy the

benefits and
protection from
thesaid state are
not exempt
from contributing
their share
in the running
of thegovernmen

t. They have the

bounden duty to
surrender part of
their hardearnedincome to
the taxing
authorities.