You are on page 1of 26

INCOME TAXATION A. INTRODUCTION FISHER v.

TRINIDAD (October 30, 1922) DOCTRINE: When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations resulting from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out of the entire investment. The SC does not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such property can be reached under the ordinary from of taxation. NATURE: Appeal PONENTE: Johnson FACTS: 1. That during the year 1919 the Philippine American Drug Company was a corporation that appellant was a stockholder of 2. Corporation, as result of the business for that year, declared a "stock dividend"; that the proportionate share of said stock divided of the appellant was P24,800; that the stock dividend for that amount was issued to the appellant; 3. Thereafter, in the month of March, 1920, the appellant, upon demand of the appellee, paid under protest, and voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend. 4. For the recovery of that sum (P889.91) the present action was instituted. ISSUES: Are the "stock dividends" in the present case "income" and taxable as such under the provisions of section 25 of Act No. 2833? HELD: NO. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such property can be reached under the ordinary from of taxation. PETITIONERS CONTENTIONS: - Cited US CASES which held that: "stock dividends" were capital and not an "income" and therefore not subject to the "income tax" law COLLECTORS CONTENTIONS: - Admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189) that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the stock dividend, does not violate the provisions of the Jones Law - Further argues that the statute of the United States providing for tax upon stock dividends is different from the statute of the Philippine Islands, and therefore the decision of the Supreme Court of the United States should not be followed in interpreting the statute in force here

- There are no constitutional limitations upon the power of the Philippine Legislature such as exist in the United States COURTS RULING: (Sorry medyo Doctrine vomit sya) RE: Difference in US Statute and Act. No. 2833 - It will be noted from a reading of the provisions of the two laws above quoted that the writer of the law of the Philippine Islands must have had before him the statute of the United States. No important argument can be based upon the slight different in the wording of the two sections. RE: Constitutional Limitations upon power to impose income taxes - There is no question that the Philippine Legislature may provide for the payment of an income tax, but it cannot, under the guise of an income tax, collect a tax on property which is not an "income." The Philippine Legislature can not impose a tax upon "property" under a law which provides for a tax upon "income" only. - Constitutional limitations, that is to say, a statute expressly adopted for one purpose cannot, without amendment, be applied to another purpose which is entirely distinct and different. A statute providing for an income tax cannot be construed to cover property which is not, in fact income. The Legislature cannot, by a statutory declaration, change the real nature of a tax which it imposes. - It is true that the statute in question provides for an income tax and contains a further provision that "stock dividends" shall be considered income and are therefore subject to income tax provided for in said law. If "stock dividends" are not "income" then the law permits a tax upon something not within the purpose and intent of the law. RE: WON Stock dividends are considered income which may be subjected to income tax STOCK DIVIDENDS DEFINED: - ILLUSTRATION: (Its easier to understand by way of this illustration) A and B form a corporation with an authorized capital of P10,000 for the purpose of opening and conducting a drug store, with assets of the value of P2,000, and each contributes P1,000. Their entire assets are invested in drugs and put upon the shelves in their place of business. They commence business without a cent in the treasury. Every dollar contributed is invested. Shares of stock to the amount of P1,000 are issued to each of the incorporators, which represent the actual investment and entire assets of the corporation. Business for the first year is good. At the end of the first year an inventory of the assets of the corporation is made, and it is then ascertained that the assets or capital of the corporation on hand amount to P4,000, with no debts, and still not a cent in the treasury. All of the receipts during the year have been reinvested in the business. Every peso received for the sale of merchandise was immediately used in the purchase of new stock new supplies. At the beginning of the year they were P2,000, and at the end of the year they were P4,000, and neither of the stockholders have received a centavo from the business during the year. At the close of the year, instead of selling the extra merchandise on hand and thereby reducing the business to its original capital, they agree among themselves to increase the capital they agree among themselves to increase the capital issued and for that purpose issue additional stock in the form of "stock dividends" or additional stock of P1,000 each, which represents the actual increase of the shares of interest in the business. At the beginning of the year each stockholder held one-half interest

TAXATION 1 LAFORTEZA WEEK 7: d2014

INCOME DEFINED: - Mr. Black: "An income is the return in money from one's business, labor, or capital invested; gains, profit or private revenue." "An income tax is a tax on the yearly profits arising from property , professions, trades, and offices." - Mr. Justice Hughes, in the case of Towne vs. Eisner, defined an "income" in an income tax law, unless it is otherwise specified, to mean cash or its equivalent. It does not mean choses in action or unrealized increments in the value of the property - "income" in its natural and obvious sense, as importing something distinct from principal or capital and conveying the idea of gain or increase arising from corporate activity - Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the court said: "An income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets." STOCK DIVIDEND NOT INCOME - 'A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished and their interest are not increased. . . . The proportional interest of each shareholder remains the same. . . .' In short, the corporation is no poorer and the stockholder is no richer then they were before." - The dividend normally is payable in money and when so paid, then only does the stockholder realize a profit or gain, which becomes his separate property, and thus derive an income from the capital that he has invested. Until that, is done the increased assets belong to the corporation and not to the individual stockholders. - When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. - Far from being a realization of profits of the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets, and no longer is available for actual distribution.

DISPOSITION: Having reached the conclusion, supported by the great weight of the authority, that "stock dividends" are not "income," the same cannot be taxes under that provision of Act No. 2833 which provides for a tax upon income. For all of the foregoing reasons, we are of the opinion, and so decide, that the judgment of the lower court should be revoked, and without any finding as to costs, it is so ordered.

TAXATION 1 LAFORTEZA WEEK 7: d2014

in the capital. At the close of the year, and after the issue of the said stock dividends, they each still have one-half interest in the business. - Generally speaking, stock dividends represent undistributed increase in the capital of corporations or firms, joint stock companies, etc., etc., for a particular period. They are used to show the increased interest or proportional shares in the capital of each stockholder. - In other words, the inventory of the property of the corporation, etc., for particular period shows an increase in its capital, so that the stock theretofore issued does not show the real value of the stockholder's interest, and additional stock is issued showing the increase in the actual capital, or property, or assets of the corporation, etc. - It is not denied, for the purpose of ordinary taxation, that the taxable property of the corporation at the beginning of the year was P2,000, that at the close of the year it was P4,000, and that the tax rolls should be changed in accordance with the changed conditions in the business. In other words, the ordinary tax should be increased by P2,000.

- The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations resulting from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out of the entire investment. - We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such property can be reached under the ordinary from of taxation. - WHEN IS STOCK DIVIDEND TAXABLE FOR INCOME TAX It may be argued that a stockholder might sell the stock dividend which he had acquired. If he does, then he has received, in fact, an income and such income, like any other profit which he realizes from the business, is an income and he may be taxed thereon. - CASH DIVIDEND v. STOCK DIVIDEND: There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends declared. The one is a disbursement to the stockholders of accumulated earning, and the corporation at once parts irrevocably with all interest thereon. The other involves no disbursement by the corporation. It parts with nothing to the stockholders. The latter receives, not an actual dividend, but certificates of stock which evidence in a new proportion his interest in the entire capital. When a cash becomes the absolute property of the stockholders and cannot be reached by the creditors of the corporation in the absence of fraud. A stock dividend however, still being the property of the corporation and not the stockholder, it may be reached by an execution against the corporation, and sold as a part of the property of the corporation. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend, whether large or small, are regarded as "income" and all stock dividends, as capital or assets - If the ownership of the property represented by a stock dividend is still in the corporation and to in the holder of such stock, then it is difficult to understand how it can be regarded as income to the stockholder and not as a part of the capital or assets of the corporation. - A corporation may be solvent and prosperous today and issue stock dividends in representation of its increased assets, and tomorrow be absolutely insolvent by reason of changes in business conditions, and in such a case the stockholder would have received nothing from his investment. In such a case, if the holder of the stock dividend is required to pay an income tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. An income subject to taxation under the law must be an actual income and not a promised or prospective income.

VOTE: EN BANC; Araullo, C.J. Avancea, Villamor and Romualdez, JJ.,Street, concur. Ostrand, Malcolm, Johns, dissent. CONCURRING/DISSENTING OPINION: (There are concurring and dissenting opinions. But, I wont be including them just because Maam usually doesnt ask for separate opinions (other than the fact that I havent read it. ) -David 1. History of the Philippine Income Tax Law VICENTE MADRIGAL and SUSANA PATERNO vs JAMES RAFFERTY (August 7, 1918) Doctrine: The Income Tax Law is the result of an effect on the part of the legislators to put into statutory form the canon of taxation and of social reform. The aim of the law has been to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay. Nature: Appeal from a judgment of RTC Ponente: Malcolm J. Facts: Petitioners are spouses, legally married prior to January 1, 1914. Their property regime is conjugal partnership (sociedad de gananciales). On February 25, 1915, Vicente Madrigal declared as his total net income for the 1914, the sum of P296,302.73 broken down as follows: Profits made by Vicente Madrigal in his coal and shipping business Profits made by Susana Paterno in her embroidery business Profits made by Vicente Madrigal in a pawnshop company General deductions allowed Resulting net income 362,407.67 4,086.50 16,687.80 86,879.24 296,302.73

Issue: WON for purposes of computing the additional income tax, the income should be divided into two equal parts because of the conjugal partnership existing between the spouses. SUPER DISCLAIMER: I DID NOT UNDERSTAND THE REASONING BY THE COURT. I just dont get Rafferty cases. =l Held: NO. Ratio: The point we are discussing has heretofore been considered by the AttorneyGeneral of the Philippine Islands and the United States Treasury Department. The decision of the latter overruling the opinion of the Attorney-General is as follows: TREASURY DEPARTMENT, Washington. FRANK MCINTYRE, Chief, Bureau of Insular Affairs, War Department, Washington, D. C. xxx From the correspondence it appears that Gregorio Araneta, married and living with his wife, had an income of an amount sufficient to require the imposition of the net income was properly computed and then both income and deductions and the specific exemption were divided in half and two returns made, one return for each half in the names respectively of the husband and wife, so that under the returns as filed there would be an escape from the additional tax; that Araneta claims the returns are correct on the ground under the Philippine law his wife is entitled to half of his earnings; that Araneta has dominion over the income and under the

For the purpose of assessing the normal tax of 1% on the net income there were allowed as specific deductions the following: (1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted to Vicente Madrigal and Susana Paterno, husband and wife. Tax upon which was to be paid at source Specific exemption granted to Vicente Madrigal and Susana Paterno, husband and wife Remainder 16,687.80 8,000 271,614.93

The remainder, P271,614.93 was the sum upon which the normal tax 1% was assessed. The normal tax thus arrived at was P2,716.15. (The dispute between

TAXATION 1 LAFORTEZA WEEK 7: d2014

the plaintiffs and the defendants in this case however concerned the additional tax provided for in the Income Tax Law.) Vicente later wanted to correct the declaration he made because the sum of 296,302.73 was actually the income of their conjugal partnership, hence in computing and assessing the additional income tax provided by Income Tax Law, the income should be divided into two equal parts: as income of Vicente, as income of Susana. Hence, if the income tax for the year 1914 had been correctly computed, the tax due is P2,921.09 from each of the petitioners or a total of P5,842.18 instead of P9,668.21, erroneously and unlawfully collected. The general question had been submitted to the Attorney-General of the Philippine Islands who ruled in favor of petitioner. CIR forwarded the matter to US Treasury Department. US CIR reversed the Attorney-General. Petitioner paid under protest but sued for recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally collected. The trial court ruled in favor of defendants.

Philippine law, the right to determine its use and disposition; that in this case the wife has no "separate estate" within the contemplation of the Act of October 3, 1913, levying an income tax. It appears further from the correspondence that upon the foregoing explanation, tax was assessed against the entire net income against Gregorio Araneta; that the tax was paid and an application for refund made, and that the application for refund was rejected, whereupon the matter was submitted to the Attorney-General of the Islands who holds that the returns were correctly rendered, and that the refund should be allowed; and thereupon the question at issue is submitted through the Governor-General of the Islands and Bureau of Insular Affairs for the advisory opinion of this office. By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be administered as in the United States but by the appropriate internal-revenue officers of the Philippine Government. You are therefore advised that upon the facts as stated, this office holds that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this case was taxable to Gregorio Araneta, both for the normal and additional tax, and that the application for refund was properly rejected. The separate estate of a married woman within the contemplation of the Income Tax Law is that which belongs to her solely and separate and apart from her husband, and over which her husband has no right in equity. It may consist of lands or chattels. xxx In all instances the income of husband and wife whether from separate estates or not, is taken as a whole for the purpose of the normal tax. Where the wife has income from a separate estate makes return made by her husband, while the incomes are added together for the purpose of the normal tax they are taken separately for the purpose of the additional tax. In this case, however, the wife has no separate income within the contemplation of the Income Tax Law. Respectfully, DAVID A. GATES. Acting Commissioner. The Income Tax Law was drafted by the Congress of the United States and has been by the Congress extended to the Philippine Islands. Being thus a law of American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is charged with enforcing it has peculiar force for the Philippines. It has come to be a wellsettled rule that great weight should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution. We

conclude that the judgment should be as it is hereby affirmed with costs against appellants Note the pertinent part of the case to the topic of history of income tax law: The Income Tax Law of the United States, extended to the Philippine Islands, is the result of an effect on the part of the legislators to put into statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay.

Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." Disposition: We conclude that the judgment should be as it is hereby affirmed with costs against appellants. So ordered. Vote: Torres, Johnson, Carson, Street and Fisher, JJ., concur. Concurring/Dissenting Opinion: None. -Dana

TAXATION 1 LAFORTEZA WEEK 7: d2014

To carry out this idea, public considerations have demanded an exemption roughly equivalent to the minimum of subsistence. With these exceptions, the income tax is supposed to reach the earnings of the entire non-governmental property of the country. Such is the background of the Income Tax Law.

3. Meaning of Income Eisner vs Macomber (1920) Ponente: Pitney (US case) Doctrine: pro rata stock dividends are not taxable income Facts: Standard Oil Company of California, had surplus and undivided profits amounting to $45,000,000, of which about $20,000,000 had been earned prior to March 1, 1913. In order to readjust the capitalization, the board of directors decided to issue stock dividend of 50 percent of the outstanding stock, and to transfer from surplus account to capital stock account an amount equivalent to such issue. Macomber,being the owner of 2,200 shares of the old stock, received certificates for 1,100 additional shares, of which 18.07 per cent., or 198.77 shares, par value $19,877, were treated as representing surplus earned between March 1, 1913, and January 1, 1916. She was called upon to pay, and did pay under protest, a tax imposed based upon a supposed income of $ 19,877 because of the new shares.The Revenue Act of 1916, allowed the IRS to treat stock dividends as income to the sum of its cash value. Mrs. Macomber argued that the Revenue Act of 1916 was unconstitutional under the 16th Amendment. Thus this case MACOMBER: Revenue Act of 1916 , in so far as it considers stock dividends as income, violated the Constitution of the United States. Issue: Whether or not Congress has the power to tax, as income of the stockholder and without apportionment, a stock dividend made lawfully and in good faith against profits accumulated by the corporation. Held: No, stock dividend is not taxable. Income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets and not a gain accruing to capital; not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being 'derived'-that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal- that is income derived from property. A 'stock dividend' shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the

company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. Having regard to the very truth of the matter, to substance and not to form, he has received nothing that answers the definition of income within the meaning of the Sixteenth Amendment. We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is the richer because of an increase of his capital, at the same time shows he has not realized or received any income in the transaction. 3. Classification of income taxpayers 4. General Principles of Income Taxation B. TAX ON INDIVIDUALS 1. Kinds of individual taxpayers 2. Definition of each kind of taxpayer Carlos Superdrug Corp. vs. DSWD, ibid.- Mae Mercury Drug Corporation v. Commissioner of Internal Revenue (July 20, 2011) Kind of tax: income tax Doctrine: (seriously nothing relevant I can see here. ) Nature: petition for review on certiorari Ponente: Facts: 1. Pursuant to RA 7432, Mercury Drug granted 20% sales discount to qualified senior citizens on their purchases of medicines. For taxable year April to December 1993 and January to December 1994, the amounts representing the 20% sales discount totalled P3,719,287.68 and P35,500,593.44, respectively, which Mercury claimed as deductions from its gross income. 2. Realizing that Republic Act No. 7432 allows a tax credit for sales discounts granted to senior citizens, petitioner filed with the Commissioner of Internal Revenue (CIR) claims for refund. Kester

TAXATION 1 LAFORTEZA WEEK 7: d2014

Collector of Internal Revenue v. Batangas Transportation Co. Barbie CIR vs. Oa Lorenzo T. Oa, and Heirs of Julia Bunales, namely: Rodolfo B. Oa, Mariano B. Oa, Luz B. Oa, Virginia B. Oa, and Lorenzo B. Oa, Jr., petitioners, vs. The Commissioner of Internal Revenue, respondent RATIO: The tax in question is one imposed upon 'corporations', which, strictly speaking, are distinct and different from 'partnerships'. When the Internal Revenue Code includes 'partnerships' among the entities subject to the tax on 'corporations', said Code must allude, therefore, to organizations which are not necessarily 'partnerships', in the technical sense of the term. Likewise, as defined in section 84(b) of said Code, 'the term corporation includes partnerships, no matter how created or organized.' This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said section 84(b), the term 'corporation' includes, among other, 'joint accounts, (cuentas en participacion)' and 'associations', none of which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein referred to. Date: May 25, 1972 Shorter Facts & Ratio found in a reviewer: Julia Buales passed away on March 23, 1944, leaving behind her husband, Lorenzo Oa, and their five children. In her intestate proceedings, Lorenzo was appointed administrator of her estate. On April 1949, he submitted the project of partition, but because three of the children were still minors at the time of approval of the partition, Lorenzo filed a petition to be appointed as guardian of the minors. The project of partition shows that the heirs have undivided interest in ten parcels of land, six houses, and an amount collected from the War Damage Commission. This amount was used to rehabilitate the properties owned by them.

4. Upon appeal to CA, CA affirmed CTA. Hence this appeal. Issue: Is the claim for tax credit to be based on the full amount of the 20% senior citizen discount or the acquisition cost of the item sold? Held: YES, it should be based on full amount of 20% senior citizens discount. RATIO: Sec. 4 of RA 7432 clearly states: The senior citizens shall be entitled to the following: a. the grant of 20% discount from all establishments relative to the utilization of transportation services, hotels and similar lodging establishments, restaurants and recreation centers and the purchase of medicines anywhere in the country, Provided, that private establishments may claim the cost as tax credit. The burden imposed on private establishments amounts to taking of private property for public use with just compensation in the form of a tax credit. Proviso specifically allows the 20% discount to be claimed as tax credit, and not merely as deduction from gross sales or gross income. The law however, is silent as to how cost of the discount as tax credit should be construed. There is nothing novel in this question. As we have held in the case of Bicolandia Drug Corp. v. CIR, etc. the term cost refers to the amount of the 20% discount extended to senior citizens in the purchase of their medicine. We reiterated this ruling in the 2008 case of Cagayan Valley Drug.

TAXATION 1 LAFORTEZA WEEK 7: d2014

3. When the CIR failed to act upon petitioners claims, the latter filed a petition for review with the Court of Tax Appeals. On 6 September 2000, the Court of Tax Appeals rendered the following judgment: Petition for Review is hereby PARTIALLY GRANTED. Accordingly, Revenue Regulations No. 2-94 of the CIR is declared null and void insofar as it treats the 20% discount given by private establishments as a deduction from gross sales. CIR is hereby ORDERED to GRANT A REFUND OR ISSUE A TAX CREDIT CERTIFICATE to Mercury Drug in the reduced amount of P1,688,178.43 representing the latters overpaid income tax for the taxable year 1993. However, the claim for refund for taxable year 1994 is denied for lack of merit. CTA: declared that the 20% sales discount should be treated as a tax credit rather than a mere deduction from gross income. But there are irregularities and discrepancies in the cash slips submitted by Mercury as basis for tax refund so those for 1994 and some of amounts for 1993 are disallowed. The amount of P3,522,123.25 corresponding to 1993 will be further reduced to P2,989,930.43 as this Courts computation is based on the cost of the 20% discount and not on the total amount of the 20% discount based on the decision of the Court of Appeals in Commissioner of Internal Revenue v. Elmas Drug Corporation, CA-SP No. 49946 promulgated on October 19, 1999, where it ruled: "Thus the cost of the 20% discount represents the actual amount spent by drug corporations in complying with the mandate of RA 7432. Working on this premise, it could not have been the intention of the lawmakers to grant these companies the full amount of the 20% discount as this could be extending to them more than what they actually sacrificed when they gave the 20% discount to senior citizens." Similarly the amount of P8,789,792.27 corresponding to taxable year 1994 will be reduced to P7,393,094.28 based on the aforequoted Court of Appeals decision.

The tax credit should be equivalent to the actual 20% sales discount granted to the senior citizens. The previous ruling of the CTA that the tax credit is based only on the cost of the discount which was interpreted to cover only direct acquisition cost, excluding administrative and other incremental costs, is struck down by the Court. DISPOSITIVE: The judgment of the lower court affirmed with modification. VOTES: 2nd Division; Carpio, Brion, De Castro and Peralta concur. -Ann

C. TAX ON CORPORATIONS 1. Definition of corporations

Although the partition was approved, no actual partition was made. Instead, the properties remained under the management of Lorenzo who used the properties in business by leasing or selling them and investing the income earned in real properties. The incomes were recorded in books of account kept by Lorenzo, with the corresponding shares of each child for the year known. However, the children did not actually receive their shares in the profits, which were kept by Lorenzo as he reinvested them. On the basis of these facts the Commissioner decided that the Oas were in an unregistered partnership and therefore subject to corporate income tax. Are the Oas liable for corporate income tax? Yes, but only from 1955, when the CIR assessed them as a de facto partnership, and not from the moment of the creation of the de facto partnership itself. The moment the Oas allowed not only the incomes from their respective shares but even the inherited properties themselves to be used by Lorenzo as a common funin undertaking several transactions or in business, with the intention of deriving profit to shared by them proportionally, such act was tantamount to actually contributing incomes to a common fund and thus formed anunregistered partnership within the purview of the provisions of the Tax Code. From the moment of partition, heirs are entitled to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own wthout the intervention of the other heirs, and he becomes liable individually for all taxes in connection therewith. If after partition, he allows his share to be held in common withhis co-heirs under a single management to be used with the intentof making profit thereby in proportion to his share,there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes at least, an unregistered partnership is formed. For purposes of the tax on corporations, our NIRC includes these partnerships, with the exception only of duly registered general copartnerships within the purview of the term corporation. Ponente: Barredo, J. FACTS: On March 23, 1944, Julia Buales died leaving as heirs her surviving spouse, Lorenzo and her five children. In 1948, Civil Case No. 4519 was instituted for the settlement of her estate. Later, Lorenzo, the surviving spouse, was appointed administrator of the estate. April 14, 1949 The administrator submitted the project of partition, which was approved by the Court on May 16, 1949. Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., were still minors when the project of partition was approved, Lorenzo filed a petition in Civil Case No. 9637 for appointment as guardian of said minors. The Court appointed him guardian of the persons and property of the minors.

The project of partition shows that the heirs have undivided interest in ten parcels of land with a total assessed value of P87,860, six houses with a total assessed value of P17,590 and an undetermined amount to be collected from the War Damage Commission. Later, they received from said Commission the amount of P50,000, more or less. This amount was not divided among them but was used in the rehabilitation of properties owned by them in common. Of the ten parcels of land, two were acquired after the death of the decedent with money borrowed from the Philippine Trust Company in the amount of P72,173. The project of partition also shows that the estate shares equally with Lorenzo, in the obligation of P94,973, consisting of loans contracted by the latter with the approval of the Court.. Although the project of partition was approved by the Court, no attempt was made to divide the properties therein listed. Instead, the properties remained under the management of Lorenzo who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners' properties and investments gradually increased from P105,450 in 1949 to P480,005 in 1956. From said investments and properties, petitioners derived such incomes as profits from installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests. The said incomes are recorded in the books of account kept by Lorenzo, where the corresponding shares of the petitioners in the net income for the year are also known. Every year, petitioners returned for income tax purposes their shares in the net income derived from said properties and securities and/or from transactions involving them. However, petitioners did not actually receive their shares in the yearly income. The income was always left in the hands of Lorenzo who invested them in real properties and securities. On the basis of the foregoing facts, the Commissioner of Internal Revenue decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956, respectively. Petitioners protested against the assessment and asked for reconsideration of the ruling of respondent that they have formed an unregistered partnership. Finding no merit in petitioners' request, respondent denied it. CTA affirmed. Issue: W/N petitioners have formed an unregistered partnership Held: YES. Ratio: At the start, or in the years 1944 to 1954, the Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he considered them as having formed an unregistered partnership. Petitioners never actually received any share of the income or profits from Lorenzo, and instead, they allowed him to continue using said shares as part of the common fund for their ventures, even as they paid the corresponding income taxes on the basis of their respective shares of the profits of their common business as reported by Lorenzo. Petitioners did not merely limit themselves to holding the properties inherited by them. During the material years involved, some of the said properties were sold

TAXATION 1 LAFORTEZA WEEK 7: d2014

at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo, in the purchase and sale of corporate securities. All the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. In these circumstances, from the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamount to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the Tax Code. It is logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather than unregistered co-partners within the contemplation of corporate tax laws. Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs without them becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares under the common management of the administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code. In Evangelista vs. Collector, it was stated, among the reasons for holding the appellants therein to be unregistered co-partners for tax purposes, that their common fund was not something they found already in existence" and that it was not a property inherited by them pro indiviso, but it does not follow that in all instances where an inheritance is not actually divided, there can be no unregistered co-partnership. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. The tax in question is one imposed upon 'corporations', which, strictly speaking, are distinct and different from 'partnerships'. When the Internal Revenue Code includes 'partnerships' among the entities subject to the tax on 'corporations', said Code must allude, therefore, to organizations which are not necessarily 'partnerships', in the technical sense of the term. Likewise, as defined in section 84(b) of said Code, 'the term corporation includes partnerships, no matter how created or organized.' This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual

*taken from B2013 reviewer on Partnership. -Jamie OBILLOS v. CIR and CTA (Oct 29, 1985) DOCTRINE: Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture. NATURE: Instant Appeal PONENTE: Aquino FACTS: 1. March 2, 1973. Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. The company sold the two lots to petitioners for P178,708.12 on March 13. Presumably, the Torrens titles issued to them would show that they were coowners of the two lots. In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050. They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

2.

3.

TAXATION 1 LAFORTEZA WEEK 7: d2014

requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said section 84(b), the term 'corporation' includes, among other, 'joint accounts, (cuentas en participacion)' and 'associations', none of which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein referred to. American law: o Under the term 'partnership' it includes not only a partnership as known as common law but, as well, a syndicate, group, pool, joint venture, or other unincorporated organization which carries on any business, financial operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . . .' (7A Merten's Law of Federal Income Taxation, p. 789) o 'The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. . . .' (8 Merten's Law of Federal Income Taxation, p. 562 Note 63)

4.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof. He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56. a. He also considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.

See Gatchalian vs. Collector of Internal Revenue where 15 persons contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership. The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. 2. ALL CO-OWNERSHIPS ARE NOT AUTOMATICALLY DEEMED UNREGISTERED PARTNERSHIPS

The Commissioner has even based its ruling on the following CTA Decisions: Co-Ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation. De Leon v. CIR, CTA case See Longa v. Aranas, CTA case: The Longa heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents; they did not contribute or invest additional ' capital to increase or expand the inherited properties; they merely continued dedicating the property to the use to which it had been put by their forebears; they individually reported in their tax returns their corresponding shares in the income and expenses of the 'hacienda', and they continued for many years the status of co-ownership in order, as conceded by respondent, 'to preserve its value and to continue the existing contractual relations. 3. As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture. WHEN CO-OWNERSHIP MAY BECOME AN UNREGISTERED PARTNERSHIP

6. ISSUE: 1.

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant appeal. WON petitioners formed a partnership or joint venture. NO

RATIO: Petitioners did not form a partnership or joint venture 1. NO INTENTION TO FORM PARTNERSHIP To regard the petitioners as having formed a taxable unregistered partnership under Art. 1767 NCCsimply because they allegedly contributed money to buy the two lots, resold the same and divided the profit among themselveswould result in oppressive taxation.

Where after an extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was held that they were taxable as an unregistered partnership. In the following cases, the SC held that petitioners had an unregistered partnership: Reyes vs. Commissioner of Internal Revenue: where father and son purchased a lot and building, entrusted the administration of the building to an administrator and divided equally the net income, Evangelista vs. Collector of Internal Revenue: where the three Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals therefrom. In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners and whether he paid the donor's tax (See

TAXATION 1 LAFORTEZA WEEK 7: d2014

5.

In sum, the petitioners were held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them. a. The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code.

Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed. DISPOSITION: WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs. VOTING: 2nd Division. 4 concur. 1 on leave -Jenin 2. Classification of corporations and the tax rates a. In general b. Special corporations 1. Private educational institutions and non-profit hospitals 2. Non-resident cinematographic film owner, lessor or distributor 3. International carriers Commissioner of Internal Revenue v. British Overseas Airways COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents. (April 30, 1987) NOTES: Kind of Tax Involved: Income Tax a direct tax on the income of persons or other entities. DE LEON: Income Tax is a tax on the net income or the entire income realized in one taxable year. It is levied upon corporate and individual incomes in excess of specified amounts, less certain deductions and/or specified exemption in cases permitted by law. Where was income tax imposed? On the ticket sales of British Airways made in the Philippines, which was coursed through their local agents and not on the actual exercise of transportation (which would have been an excise tax). An issue was raised, however, that the tax assessment was ACTUALLY a common carriers excise tax, which is a tax on transporting or removing passengers and cargo from one place to another. But, the main decision reiterated that the tax in this case is on the income derived from the ticket sales made in the Philippines. The distinction is important because, while excise tax may only be collected where the services or activities were performed, income tax is collected on whatever source derived in the Philippines. DOCTRINE: The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ... which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the PhilippinesThe word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax assessments in these cases,

or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are now taxed as follows: ... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).

PONENTE: MELENCIO-HERRERA, J.: FACTS: 1. BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business. 2. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and necessity. 3. Consequently, it did not carry passengers and/or cargo to or from the Philippines. 4. Although during the period covered by the assessments, it maintained a general sales agent in the Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. 5. First CTA Case Petitioner (CIR, for brevity) assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963 and subsequent investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under protest. BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR. 6. Second CTA Case BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise penalties for the requirement to file corporate returns. BOAC's request for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second Case before the Tax Court praying that it be absolved of liability for deficiency income tax for the years 1969 to 1971. 7. CTAs DECISION: Reversed CIR MAIN POSITION: The CTA position was that income from transportation is income from services so that the place where services are rendered determines the source.

10

TAXATION 1 LAFORTEZA WEEK 7: d2014

NATURE: Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of Tax Appeals (CTA), which set aside petitioner's assessment of deficiency income taxes against respondent British Overseas Airways Corporation

The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, These do not constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines" Therefore, said income is not subject to Philippine income tax.

HELD/RATIO/RULING: (1) It is our considered opinion that BOAC is a resident foreign corporation. Under Section 20 of the 1977 Tax Code: (h) the term resident foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization, such as the appointment of a local agent, and not one of a temporary character BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines that was engaged in activities that were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. (See enumeration p. 405 last par.) In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. (2) RESPONDENTS CONTENTION: Income derived from transportation is income for services, with the result that the place where the services are rendered determines the source since BOAC's service of transportation is performed outside the Philippines, the income derived is from sources without the Philippines and, therefore, not taxable under our income tax laws COURTS RULING: Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines.

RESPONDENTS LAST CONTENTION Cites JAL v. CIR: that the mere sale of tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein subject to the common carrier's tax. COURTS RULING: The subject matter of the case under consideration is income tax, a direct tax on the income of persons and other entities "of whatever kind and in whatever form derived from any source." The common carrier's tax is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one place to another.

11

TAXATION 1 LAFORTEZA WEEK 7: d2014

ISSUES: (1) Whether or not during the fiscal years in question BOAC is a resident foreign corporation doing business in the Philippines or has an office or place of business in the Philippines. (2) Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable.

The Tax Code "Gross income" as gains, profits, and income derived from xxxbusiness, commerce, sales, or x xxtransactions of any business carried on for gain or profile, or gains, profits, and income derived from any source whatever (Sec. 29[3] o The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words 'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws." The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. o In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. o The tickets exchanged hands here and payments for fares were also made here in Philippine currency. o The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. The test of taxability is the "source"; and the source of an income is that activity ... which produced the income. o And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. o For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are now taxed on their income from Philippine sources. The 2- % tax on gross Philippine billings is an income tax. If it had been intended as an excise or percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.

It purports to tax the business of transportation. Being an excise tax, the same can be levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines. The tax in this case is imposed on the income not the activity of transportation. 4.

DISPOSITION: VOTE: EN BANC; Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur. Fernan, J., took no part; Feliciano, Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent. CONCURRING/DISSENTING OPINION (I tried to summarize the dissent as much as I could and this is the best I can do. She likes Feliciano kasi di ba so I dont know how detailed this should be. In case of doubt read the original na lang. Especially in No. 3, medyointerrelation of tax provisions yun kung paanosyanagarrivesa conclusions nya which would make this digest super long if I dont cut it. also, I dont think Teehankees dissent would matter just because he pointed out nadahilsabaging PD nanaissue rendered moot naang conflict of interpretation ngdalawang justices.): FELICIANO, J., dissenting: 1. Whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to income tax only to the extent that it derives income from sources within the Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for present purposes, is thereforewhether of not BOAC is deriving income from sources within the Philippines. 2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which produced the income." 3. We turn now to the question what is the source of income rule applicable in the instant case. There are two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in respect of contracts of service; and (b) the source rule applicable in respect of sales of personal property. Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as follows: the income is sourced in the place where the service contracted for is rendered: Section 37. Income for sources within the Philippines: (a) Gross income from sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: (3) Services. Compensation for labor or personal services performed in the Philippines;... (Emphasis supplied) It should be noted that the portion of Section 37 (e) was derived from the 1939 U.S. Tax Code which "was based upon a recognition that transportation was a service and that the source of the income derived therefrom was to be treated as being the place where the service of transportation was rendered.

Section 37 (e) of the Tax Code quoted above carries a strong wellnigh irresistible, implication that income derived from transportation or other services rendered entirely outside the Philippines must be treated as derived entirely from sources without the Philippines. The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of service, i.e., carriage of passengers or cargo between points located outside the Philippines.The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of the ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a prestation from BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one point to another outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and the passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase price of a physical good or commodity such as a pair of shoes of a refrigerator or an automobile; it is really the compensation paid for the undertaking of BOAC to transport the passenger or cargo outside the Philippines. The very existance of "source rules" specifically and precisely applicable to the rendition of services must preclude the application here of "source rules" applying generally to sales, and purchases and sales, of personal property which can be invoked only by the grace of popular language. On a slighty more abstract level, BOAC's income is more appropriately characterized as derived from a "service", rather than from an "activity" (a broader term than service and including the activity of selling) or from the here involved is income taxation, and not a sales tax or an excise or privilege tax. o -JP UNITED AIRLINES V. CIR G.R. No. 178788 29 September 2010 United Airlines, Inc., petitioner v. Commissioner of Internal Revenue, respondent.

Villarama, Jr., J. DOCTRINE: "Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document NATURE: Petition for Review

12

TAXATION 1 LAFORTEZA WEEK 7: d2014

ISSUE: 1. W/N United is entitled to a refund of its income tax overpayments? HELD/RATIO 1. NO United claims that the denial of its claim based on the finding that it has cargo revenue income tax underpayments is tantamount to an offset of its tax liability and its refunds It claims that it is settled that such an offset cannot be done citing the cases of Francia v. IAC, et seq. Further, the examination of the CTA of its other income and its declaration of underpayments is tantamount to an assessment of liability outside the province of the CTA and is a denial of due process The relevant provision of the NIRC provides:

However, the refund sought cannot be granted in any case. This is because, as correctly found by the CTA, United had underpayments of its cargo revenue income taxes for the same period which was even greater than the refund sought While it is true that offsetting of tax liabilities are generally not allowed (cf. Francia, Philex cases), the case of CIR v. CTA granted the offsetting of a tax refund with a tax deficiency That case held that:
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund. xxx Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes.

SEC. 28. Rates of Income Tax on Foreign Corporations . (A) Tax on Resident Foreign Corporations. xxxx (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder:

Thus the Court upheld the resulting offset on the theory that the deficiencies found in the payment of cargo revenue taxes negates the validity of the returns on which the refund is based Hence having underpaid its cargo revenue income taxes by 31 Million, it cannot properly claim a refund of passenger revenue income taxes amounting to only 5 Million pesos

13

DISPOSITION: Decision of the Court of Tax Appeals AFFIRMED

TAXATION 1 LAFORTEZA WEEK 7: d2014

FACTS: United Airlines is a foreign airline organized under Delaware law. It used to operate cargo and passenger flights originating in the Philippines On Feb. 21, 1998, it ceased operating passenger flights from the Philippines. Instead it appointed Aerotel, Ltd. As its general sales agent and continued operating cargo flights from the Philippines until Jan. 31, 2001 In 2002, United filed a claim for refund of allegedly overpaid income tax for the period of 1999 to 2001. The claim included some 5.028M pesos income tax paid for the year 1999 on passenger revenue It contended that since it no longer operated passenger flights from the Philippines, it no longer needed to pay income tax on such revenue based on the revised definition of gross Philippine billings (GPB) The CIR not having acted on its claim, United elevated it to the CTA. The CTA First Division agreed that United cannot be taxed on the revenues from passenger flights originating outside the Philippines. The definition of GPB under Sec. 28 of the NIRC includes only flights originating from the Philippines HOWEVER, the Court disallowed the payment of refund since it found that United underpaid its taxes for its cargo revenue by some 31.43M pesos which is greater than the amount it sought to be refunded The CTA en banc affirmed the decision of the Division Hence this present recourse by United

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

The Court held that United correctly pointed out that since it ceased operating passenger flights to or from the Philippines in 1998, it is not taxable under Section 28(A)(3)(a) of the NIRC for gross passenger revenues. This much was also found by the CTA in their assailed decision. In South African Airways v. Commissioner of Internal Revenue, the Court ruled that the correct interpretation of the said provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2% of its GPB, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income.

Votes: Carpio-Morales, Brion, Bersamin and Sereno, JJ., concur -Raffy 4-7. xxx 8. Enterpirse Registered under Bases Conversion and Development Act of 1992 and Philippine Economic Zone Act of 1995 John Hay Peoples Alternative Coalition v. Victor Lim (October 24, 2003) DOCTRINE: (Note: the doctrine is particular to the case, given that it falls under the topic of the Bases Conversion Act) The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, the extension of the same to the John Hay SEZ finds no support therein. Such grant is in the nature of a tax exemption. It is the legislature, unless limited by a provision of the state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. NATURE: Assailing the constitutionality of Proclamation No. 420 insofar as it grants tax exemptions to the Camp John Hay SEZ. PONENTE: Carpio-Morales FACTS: Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, set out the policy of the government to accelerate the sound and balanced conversion into alternative productive uses of the former military bases under the 1947 Philippines-United States of America Military Bases Agreement; o created public respondent Bases Conversion and Development Authority (BCDA), vesting it with powers pertaining to the multifarious aspects of carrying out the ultimate objective of utilizing the base areas; o Also granted the Subic SEZ incentives ranging from tax and duty-free importations; o expressly gave authority to the President to create through executive proclamation, subject to the concurrence of the local government units directly affected, other Special Economic Zones (SEZ) in the areas; BCDA entered into a Memorandum of Agreement and Escrow Agreement with private respondents, o preparatory to the formation of a joint venture for the development of Poro Point in La Union and Camp John Hay as premier tourist destinations and recreation centers; o the Sanggunian of Baguio City passed a resolution requesting the Mayor to order the determination of realty taxes which may otherwise be collected from real properties of Camp John Hay. o The resolution was intended to intelligently guide the sanggunian in determining its position on whether Camp John Hay be declared a SEZ; On July 5, 1994 then President Ramos issued Proclamation No. 420, the title of which was earlier indicated, which established a SEZ on a portion of Camp John Hay; o Petitioners now challenging the constitutionality of the Proclamation; its constitutionality or validity as well as the legality of the Memorandum of Agreement and Joint Venture Agreement between public respondent BCDA and private respondents TUNTEX and ASIAWORLD

PETITIONERS ARGUMENTS: Petitioners argue that nowhere in R. A. No. 7227 is there a grant of tax exemption to SEZs yet to be established in base areas, unlike the grant under Section 12 thereof of tax exemption and investment incentives to the therein established Subic SEZ. The grant of tax exemption to the John Hay SEZ, petitioners conclude, thus contravenes Article VI, Section 28 (4) of the Constitution which provides that No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress. o Proc. 420 provides that: the zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted. o Futhermore, It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was granted by Congress with tax exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to other SEZs still to be created at the time via presidential proclamation; ISSUE: Is Proclamation No. 420 valid as it grants the same tax exemptions as the Subic SEZ to the Camp John Hay SEZ?1 NO. RATIO: See petitioners arguments as to Proclamation 420 and RA 7227.

The provision in question: Among others, the zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted.

14

TAXATION 1 LAFORTEZA WEEK 7: d2014

RESPONDENTS ARGUMENTS: In maintaining the validity of Proclamation No. 420, respondents contend that by extending to the John Hay SEZ economic incentives similar to those enjoyed by the Subic SEZ which was established under R.A. No. 7227, the proclamation is merely implementing the legislative intent of said law to turn the US military bases into hubs of business activity or investment. They underscore the point that the governments policy of bases conversion can not be achieved without extending the same tax exemptions granted by R.A. No. 7227 to Subic SEZ to other SEZs.

While the grant of economic incentives may be essential to the creation and success of SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained. o The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support therein. o Neither does the same grant of privileges to the John Hay SEZ find support in the other laws specified under Section 3 of Proclamation No. 420, which laws were already extant before the issuance of the proclamation or the enactment of R.A. No. 7227. The nature of most of the assailed privileges is one of tax exemption . (You know, like we havent discussed this shit for the thousandth time. But shell still ask this ofcourse, so have fun.) o It is the legislature, unless limited by a provision of the state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. o The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon. The unconstitutionality of the grant of tax immunity and financial incentives as contained in the second sentence of Section 3 of Proclamation No. 420 notwithstanding, the entire assailed proclamation cannot be declared unconstitutional, the other parts thereof not being repugnant to law or the Constitution. o The delineation and declaration of a portion of the area covered by Camp John Hay as a SEZ was well within the powers of the President to do so by means of a proclamation.

COCONUT OIL REFINERS ASSOCIATION vs HON. RUBEN TORRES, in his capacity as Executive Secretary; BCDA, CDC, SBMA, 88 MART DUTY FREE, FREEPORT TRADERS, PX CLUB, AMERICAN HARDWARE, ROYAL DUTY FREE SHOPS etc. (July 29, 2005) NOTE: CSEZ means Clark and Other Special Economic Zones BCDA means Bases Conversion and Development Authority DOCTRINE: In the present case, while Section 12 of Republic Act No. 7227 expressly provides for the grant of incentives to the SSEZ, it fails to make any similar grant in favor of other economic zones, including the CSEZ. Tax and duty-free incentives being in the nature of tax exemptions, the basis thereof should be categorically and unmistakably expressed from the language of the statute. Consequently, in the absence of any express grant of tax and duty-free privileges to the CSEZ in Republic Act No. 7227, there would be no legal basis to uphold the questioned portions of two issuances: Section 5 of Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain to the CSEZ. Congress had justifiable reasons in granting incentives to the private respondents, in accordance with Republic Act No. 7227s policy of developing the SSEZ into a self-sustaining entity that will generate employment and attract foreign and local investment. If petitioners had wanted to avoid any alleged unfavorable consequences on their profits, they should upgrade their standards of quality so as to effectively compete in the market. In the alternative, if petitioners really wanted the preferential treatment accorded to the private respondents, they could have opted to register with SSEZ in order to operate within the special economic zone. Nature: Petition for Prohibition and Injunction seeking to enjoin and prohibit the Executive Branch, through the public respondents Ruben Torres in his capacity as Executive Secretary, the Bases Conversion Development Authority (BCDA), the Clark Development Corporation (CDC) and the Subic Bay Metropolitan Authority (SBMA), from allowing, and the private respondents from continuing with, the operation of tax and duty-free shops located at the Subic Special Economic Zone Ponente: Azcuna, J. FACTS: Petitioners are suppliers of the local retailers operating outside the special economic zones. March 13, 1992: Congress enacted Republic Act No. 7227, providing for the conversion of the Clark and Subic military reservations to special economic zones in order to promote the economic and social development of Central Luzon in particular and the country in general. Salient provisions of RA 7227: SECTION 12. Subic Special Economic Zone. ... The abovementioned zone shall be subject to the following policies:

DISPOSITIVE: This Court finds that the other provisions in Proclamation No. 420 converting a delineated portion of Camp John Hay into the John Hay SEZ are separable from the invalid second sentence of Section 3 thereof, hence they stand. WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is hereby declared NULL AND VOID and is accordingly declared of no legal force and effect. -Ice John Hay Peoples Alternative Coalition v. Victor Lim (2005) Ivan

15

TAXATION 1 LAFORTEZA WEEK 7: d2014

The CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited investment incentives, while the CSEZ Sub-Zone covering the rest of the CSEZ shall have limited incentives. The full incentives in the Clark SEZ Main Zone and the limited incentives in the Clark SEZ SubZone shall be determined by the BCDA. May 18, 1993: Pursuant to the Executive Order No. 80, the Bases Conversion and Development Authority (BCDA) passed Board Resolution No. 93-05034, allowing the tax and duty-free sale at retail of consumer goods imported via Clark for consumption outside the CSEZ. June 10, 1993: President issued Executive Order No. 97, "Clarifying the Tax and Duty Free Incentive Within the Subic Special Economic Zone Pursuant to R.A. No. 7227." Said issuance in part states, thus: SECTION 1. On Import Taxes and Duties Tax and duty-free importations shall apply only to raw materials, capital goods and equipment brought in by business enterprises into the SSEZ. Except for these items, importations of other goods into the SSEZ, whether by business enterprises or resident individuals, are subject to taxes and duties under relevant Philippine laws. The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts of the Philippine territory shall be subject to duties and taxes under relevant Philippine laws. June 19, 1993: Executive Order No. 97-A was issued, "Further Clarifying the Tax and Duty-Free Privilege Within the Subic Special Economic and Free Port Zone." Petitioners assail the $100 monthly and $200 yearly tax-free shopping privileges granted by the aforecited provisions respectively to SSEZ residents living outside the Secured Area of the SSEZ and to Filipinos aged 15 and over residing outside the SSEZ. February 23, 1998: petitioners filed the instant petition seeking the declaration of nullity of Executive 97.

SECTION 15. Clark and Other Special Economic Zones. Subject to the concurrence by resolution of the local government units directly affected, the President is hereby authorized to create by executive proclamation a Special Economic Zone covering the lands occupied by the Clark military reservations and its contiguous extensions as embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended, located within the territorial jurisdiction of Angeles City, Municipalities of Mabalacat and Porac, Province of Pampanga and the Municipality of Capas, Province of Tarlac, in accordance with the policies as herein provided insofar as applicable to the Clark military reservations. The governing body of the Clark Special Economic Zone shall likewise be established by executive proclamation with such powers and functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66 as amended. The policies to govern and regulate the Clark Special Economic Zone shall be determined upon consultation with the inhabitants of the local government units directly affected which shall be conducted within six (6) months upon approval of this Act Similarly, subject to the concurrence by resolution of the local government units directly affected, the President shall create other Special Economic Zones, in the base areas of Wallace Air Station in San Fernando, La Union (excluding areas designated for communications, advance warning and radar

16

TAXATION 1 LAFORTEZA WEEK 7: d2014

(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments; (b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; (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 Ecoomic 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 Olangapo and the Municipality of Subic, and other municipalities contiguous to the base areas.

requirements of the Philippine Air Force to be determined by the Conversion Authority) and Camp John Hay in the City of Baguio. April 3, 1993: President Fidel V. Ramos issued Executive Order No. 80, which declared that Clark shall have all the applicable incentives granted to the Subic Special Economic and Free Port Zone under Republic Act No. 7227. Assailed provision under EO 80: SECTION 5. Investments Climate in the CSEZ. Pursuant to Section 5(m) and Section 15 of RA 7227, the BCDA shall promulgate all necessary policies, rules and regulations governing the CSEZ, including investment incentives, in consultation with the local government units and pertinent government departments for implementation by the CDC. Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under RA 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments laws which may hereinafter be enacted.

2. ISSUES + HELD: 1. WON petitioner has legal standing, WON there is unreasonable delay in the filing of the petition, WON petition is barred by laches, and WON the remedy of prohibition is proper. PROCEDURAL TECHNICALITIES BRUSHED ASIDE. 2. WON Section 5 of Executive Order No. 80; and Section 4 of BCDA Board Resolution No. 93-05-034) constitute invalid exercise of executive legislation for a. Extending the tax exemption to consumer goods. YES b. Extending the tax exemptions enjoyed by SSEZ (Subic Special Economic Zone) to CSEZ (Clark Special Economic Zone). YES. 3. WON paragraphs 1.2 and 1.3 of Executive Order No. 97-A, are null and void for being contrary to Section 12 of Republic Act No. 7227. YES. 4. WON Executive Order No. 97-A is violative of the right to equal protection of the laws. NO. 5. WON the grant of special tax exemptions and privileges gave the private respondents undue advantage over local enterprises which do not operate inside the SSEZ, thereby creating unfair competition in violation of the constitutional prohibition against unfair competition and practices in restraint of trade. NO. 6. WON Executive Order No. 97-A openly violated the State policy of promoting the preferential use of Filipino labor, domestic materials and locally produced goods and adopting measures to help make them competitive. NO. RATIO: I. Procedural flaws Assuming that the petitioners do not suffer direct injury in the enforcement of the issuances being assailed herein, this Court has nevertheless held that in cases of paramount importance where serious constitutional questions are involved, the standing requirements may be relaxed and a suit may be allowed to prosper even where there is no direct injury to the party claiming the right of judicial review. In the same vein, with respect to the other alleged procedural flaws, even assuming the existence of such defects, this Court, in the exercise of its discretion, brushes aside these technicalities and takes cognizance of the petition considering the importance to the public of the present case and in keeping with the duty to determine II. Executive legislation A. Extension of tax exemption to consumer goods Petitioner: RA. 7227 clearly limits the grant of tax incentives to the importation of raw materials, capital and equipment only, hence the following issuances constitute executive legislation for invalidly granting tax incentives in the importation of consumer goods such as those being sold in the duty-free shops, pursuant to 1. An application of the legal maxim expressio unius est exclusio alterius

Committee Report No. 1206 submitted by the Ad Hoc Oversight Committee on Bases Conversion2

Law contravened: Sec. 12 RA 7227: (b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment Assailed issuances: 1. EO 97-A: Business enterprises and individuals (Filipinos and foreigners) residing within the Secured Area are free to import raw materials, capital goods, equipment, and consumer items tax and duty-free 2. Board Resolution No. 93-05-034: Section 4: The CSEZ-registered enterprises/businesses shall be entitled to all the incentives available under R.A. No. 7227, E.O. No. 226 and R.A. No. 7042 which shall include, but not limited to, the following: 4. Tax and duty-free purchase and consumption of goods/articles (duty free shopping) within the CSEZ Main Zone. 5. For individuals, duty-free consumer goods may be brought out of the CSEZ Main Zone into the Philippine Customs territory but not to exceed US$200.00 per month per CDC-registered person Committee Report No. 1206: the setting up of duty-free stores never figured in the minds of the authors of Republic Act No. 7227 in attracting foreign investors to the former military baselands. BUT SC SAYS: 1. Expressio unius est exclusio alterius a. To limit the tax-free importation privilege of enterprises located inside the special economic zone only to raw materials, capital and equipment clearly runs counter to the intention of the Legislature to create a free port where the "free flow of goods or capital within, into, and out of the zones" is insured. b. The maxim expressio unius est exclusio alterius, on which petitioners impliedly rely to support their restrictive interpretation, does not apply when i. words are mentioned by way of example It is obvious from the wording of Republic Act No. 7227, particularly the use of the phrase "such as," that the enumeration only meant to illustrate incentives that the SSEZ is authorized to grant, in line with its being a free port zone. ii. legislative intent which is manifest The records of the Senate containing the discussion of the concept of "special economic zone" in Section 12 (a) of Republic Act No. 7227 show the legislative intent that consumer goods entering the SSEZ which satisfy the needs of the zone and are consumed
2

17

TAXATION 1 LAFORTEZA WEEK 7: d2014

there are not subject to duties and taxes in accordance with Philippine laws. 2. Committee Report No. 1206 It is well-established that opinions expressed in the debates and proceedings of the Legislature, steps taken in the enactment of a law, or the history of the passage of the law through the Legislature, may be resorted to as aids in the interpretation of a statute with a doubtful meaning, which is not the case at bar. b. Petitioners overlook the fact that the 1995 Committee Report they are referring to came into being well after the enactment of Republic Act No. 7227 in 1993. Hence, as pointed out by respondent Executive Secretary Torres, the aforementioned report cannot be said to form part of Republic Act No. 7227s legislative history. a. B. Extension of tax exemption enjoyed by SSEZ (Subic Special Economic Zone) to CSEZ (Clark Special Economic Zone)

Petitioner: The incentives under Republic Act No. 7227 are exclusive only to the SSEZ. The President, therefore, had no authority to extend their application to CSEZ. Law applicable: SECTION 12. Subic Special Economic Zone. (b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment (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 Ecoomic Zone shall be remitted to the National Government, Section 15 of the same law did not extend the same privileges to Clark Special Economic Zone and other special economic zones. Assailed issuances: 1. EO No. 80 Sec. 5: Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under RA 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments laws which may hereinafter be enacted. Board Resolution No. 93-05-034, Sec. 4: The CSEZ-registered enterprises/businesses shall be entitled to all the incentives available under R.A. No. 7227, E.O. No. 226 and R.A. No. 7042

The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon. Contrary to public respondents suggestions, the claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be mistaken. Tax exemption cannot be implied as it must be categorically and unmistakably expressed. 2. In the present case, while Section 12 of Republic Act No. 7227 expressly provides for the grant of incentives to the SSEZ, it fails to make any similar grant in favor of other economic zones, including the CSEZ. Tax and duty-free incentives being in the nature of tax exemptions, the basis thereof should be categorically and unmistakably expressed from the language of the statute. Consequently, in the absence of any express grant of tax and duty-free privileges to the CSEZ in Republic Act No. 7227, there would be no legal basis to uphold the questioned portions of two issuances: Section 5 of Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain to the CSEZ.

2.

III. Executive Order 97-A Petitioner: Paragraphs 1.2 and 1.3 of Executive Order No. 97-A, allowing tax and dutyfree removal of goods to certain individuals, even in a limited amount, from the Secured Area of the SSEZ, are null and void for being contrary to Section 12 of Republic Act No. 7227. Law contravened: Sec. 12 RA 7227:

BUT SC SAYS: 1. SC applied the ruling in John Hay Peoples Alternative Coalition, et al. v. Victor Lim, et al In that case, the SC Court resolved an issue, concerning the legality of the tax exemption benefits given to the John Hay Economic Zone under Presidential Proclamation No. 420, Series of 1994. In that case, among the

18

TAXATION 1 LAFORTEZA WEEK 7: d2014

arguments raised was that the granting of tax exemptions to John Hay was an invalid and illegal exercise by the President of the powers granted only to the Legislature. Petitioners therein argued that Republic Act No. 7227 expressly granted tax exemption only to Subic and not to the other economic zones yet to be established. Thus, the grant of tax exemption to John Hay by Presidential Proclamation contravenes the constitutional mandate that "[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress." SC sustained the argument and ruled that the incentives under Republic Act No. 7227 are exclusive only to the SSEZ and that the President, therefore, had no authority to extend their application to John Hay. More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless limited by a provision of a state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes.

However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.. Assailed issuances: 1. EO 97-A Par. 1.2: Residents of the SSEFPZ living outside the Secured Area can enter the Secured Area and consume any quantity of consumption items in hotels and restaurants within the Secured Area. However, these residents can purchase and bring out of the Secured Area to other parts of the Philippine territory consumer items worth not exceeding US$100 per month per person. Only residents age 15 and over are entitled to this privilege. 2. EO 97-A Par. 1.3: Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity of consumption items in hotels and restaurants within the Secured Area. However, they can purchase and bring out [of] the Secured Area to other parts of the Philippine territory consumer items worth not exceeding US$200 per year per person. Only Filipinos age 15 and over are entitled to this privilege. BUT SC SAYS: The second sentences of paragraphs 1.2 and 1.3 of Executive Order No. 97-A, allowing tax and duty-free removal of goods to certain individuals, even in a limited amount, from the Secured Area of the SSEZ, are null and void for being contrary to Section 12 of Republic Act No. 7227. However, by virtue of the promulgation of EO 3033 (amending EO 4444), this issue has been rendered moot and academic. IV. Equal Protection Petitioner: EO 97-A is violative of their right to equal protection of the laws. Private respondents operating inside the SSEZ are not different from the retail establishments located outside, the products sold being essentially the same. The only distinction lies in the products variety and source, and the fact that private respondents import their

items tax-free, to the prejudice of the retailers and manufacturers located outside the zone. BUT SC SAYS: Petitioners contention cannot be sustained. It is an established principle of constitutional law that the guaranty of the equal protection of the laws is not violated by a legislation based on a reasonable classification. Classification, to be valid, must (1) rest on substantial distinction, (2) be germane to the purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to all members of the same class. 1. Substantial distinctions lie between the establishments inside and outside the zone, justifying the difference in their treatment. In Tiu v. Court of Appeals, petitioners claimed that Executive Order No. 97-A was discriminatory in confining the application of Republic Act No. 7227 within a secured area of the SSEZ, to the exclusion of those outside but are, nevertheless, still within the economic zone. This Court therein found substantial differences between the retailers inside and outside the secured area, thereby justifying a valid and reasonable classification: a. there are substantial differences between the big investors who are being lured to establish and operate their industries in the so-called "secured area" and the present business operators outside the area. b. On the one hand, we are talking of billion-peso investments and thousands of new jobs. On the other hand, definitely none of such magnitude. In the first, the economic impact will be national; in the second, only local. In this case, enterprises outside the zones maintain their businesses within Philippine customs territory, while private respondents and the other duly-registered zone enterprises operate within the so-called "separate customs territory." To grant the same tax incentives given to enterprises within the zones to businesses operating outside the zones, as petitioners insist, would clearly defeat the statutes intent to carve a territory out of the military reservations in Subic Bay where free flow of goods and capital is maintained. 2. The classification is germane to the purpose of Republic Act No. 7227. As held in Tiu, the real concern of Republic Act No. 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 the establishments within the zone to attract and encourage foreign and local investors. This is the very rationale behind Republic Act No. 7227 and other similar special economic zone laws which grant a complete package of tax incentives and other benefits. 3. The classification, moreover, is not limited to the existing conditions when the law was promulgated, but to future conditions as well, inasmuch as the law envisioned the former military reservation to ultimately develop into a self-sustaining investment center. 4. The classification applies equally to all retailers found within the "secured area." As ruled in Tiu, the individuals and businesses within the "secured

that "[a]ll special shopping privileges as granted under Section 3 of Executive Order 444, s. 1997, are hereby deemed terminated. The grant of duty free shopping privileges shall be restricted to qualified individuals as provided by law."
4

SECTION 3. Special Shopping Privileges Granted During the Year-round Centennial Anniversary Celebration in 1998. Upon effectivity of this Order and up to the Centennial Year 1998, in addition to the permanent residents, locators and employees of the fenced-in areas of the Subic Special Economic and Freeport Zone and the Clark Special Economic Zone who are allowed unlimited duty free purchases, provided these are consumed within said fenced-in areas of the Zones, the residents of the municipalities adjacent to Subic and Clark as respectively provided in R.A. 7227 (1992) and E.O. 97-A s. 1993 shall continue to be allowed One Hundred US Dollars (US$100) monthly shopping privilege until 31 December 1998. Domestic tourists visiting Subic and Clark shall be allowed a shopping privilege of US$25 for consumable goods which shall be consumed only in the fenced-in area during their visit therein. Note: EO 444 was promulgated to curtail the duty-free shopping privileges in the SSEZ and the CSEZ and "to prevent abuse of duty-free privilege and to protect local industries from unfair competition

19

TAXATION 1 LAFORTEZA WEEK 7: d2014

area," being in like circumstances or contributing directly to the achievement of the end purpose of the law, are not categorized further. They are all similarly treated, both in privileges granted and in obligations required. V. Prohibition against Unfair Competition and Practices in Restraint of Trade 4.

country, it does not prohibit them either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only on foreign competition that is unfair. Further, with the subsequent issuance of Executive Order Nos. 4445 and 3036, the Executive Department has provided certain measures to prevent unfair competition

Petitioner: The grant of special tax exemptions and privileges gave the private respondents undue advantage over local enterprises which do not operate inside the SSEZ, thereby creating unfair competition in violation of the constitutional prohibition against unfair competition and practices in restraint of trade. BUT SC SAYS: The argument is without merit. 1. Just how the assailed issuance is violative of the prohibition against unfair competition and practices in restraint of trade is not clearly explained in the petition. 2. The mere fact that incentives and privileges are granted to certain enterprises to the exclusion of others does not render the issuance unconstitutional for espousing unfair competition. Said constitutional prohibition cannot hinder the Legislature from using tax incentives as a tool to pursue its policies. 3. Congress had justifiable reasons in granting incentives to the private respondents, in accordance with Republic Act No. 7227s policy of developing the SSEZ into a self-sustaining entity that will generate employment and attract foreign and local investment. VI. Preferential Use of Filipino Labor, Domestic Materials and Locally Produced Goods Petitioner: EO No. 97-A openly violated the State policy of promoting the preferential use of Filipino labor, domestic materials and locally produced goods and adopting measures to help make them competitive. BUT SC SAYS: the argument lacks merit. 1. Petitioners failed to substantiate their sweeping conclusion. 2. Manila Prince Hotel v. GSIS cited by petitioner does not apply. That case dealt with the policy enunciated under the second paragraph of Section 10, Article XII of the Constitution, applicable to the grant of rights, privileges, and concessions "covering the national economy and patrimony," which is different from the policy invoked in this petition, specifically that of giving preference to Filipino materials and labor found under Section 12 of the same Article of the Constitution. 3. In Taada v. Angara, this Court elaborated on the meaning of Section 12, Article XII of the Constitution in this wise: [W]hile the Constitution indeed mandates a bias in favor of Filipino goods, services, labor and enterprises, at the same time, it recognizes the need for business exchange with the rest of the world on the bases of equality and reciprocity and limits protection of Filipino enterprises only against foreign competition and trade practices that are unfair. In other words, the Constitution did not intend to pursue an isolationist policy. It did not shut out foreign investments, goods and services in the development of the Philippine economy. While the Constitution does not encourage the unlimited entry of foreign goods, services and investments into the

Vote: Davide, Jr., C.J., Puno, Panganiban, Quisumbing, Ynares-Santiago, SandovalGutierrez, Austria-Martinez, Carpio-Morales, Callejo, Sr., Tinga, Chico-Nazario, and Garcia, JJ., concur. Carpio, J., no part. Corona, J., on official leave. Concurring/Dissenting Opinion: None. -Kriszanne (modified Danas orig digest) 3. Kinds of Taxes a. Income subject to corporate income tax COMMISSIONER OF INTERNAL REVENUE, petitioner, -versusPROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE COURT OF TAX APPEALS, respondents. (April 15, 1988 | G.R. No. L-66838 | Second Division) DOCTRINE: XXX (Certain) conditions necessary in order that the dividends received by the non resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to
5 6

20

Executive Order Nos. 444 and 303 have restricted the special shopping privileges to certain individuals. Executive Order No. 303 has limited the range of items that may be sold in the duty-free outlets, and imposed sanctions to curb abuses of duty-free privileges.

TAXATION 1 LAFORTEZA WEEK 7: d2014

Disposition: WHEREFORE, the petition is PARTLY GRANTED. Section 5 of Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034 are hereby declared NULL and VOID and are accordingly declared of no legal force and effect. Respondents are hereby enjoined from implementing the aforesaid void provisions. All portions of Executive Order No. 97-A are valid and effective, except the second sentences in paragraphs 1.2 and 1.3 of said Executive Order, which are hereby declared INVALID.

present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines. XXX TYPE OF TAX INVOLVED: Income Tax; Tax on Domestic Corporations NATURE: This is a petition for review on certiorari filed by the herein petitioner, Commissioner of Internal Revenue, seeking the reversal of the decision of the Court of Tax Appeals PONENTE: PARAS, J. FACTS: Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred to as PMC-Phil.), a corporation duly organized and existing under and by virtue of the Philippine laws, is engaged in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A. herein referred to as PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and business therein. As such PMC-U.S.A. is the sole shareholder or stockholder of PMC Phil., as PMCU.S.A. owns wholly or by 100% the voting stock of PMC Phil. and is entitled to receive income from PMC-Phil. in the form of dividends, if not rents or royalties. In addition, PMC-Phil has a legal personality separate and distinct from PMC-U.S.A. For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of P56,500,332.00 and accordingly paid the corresponding income tax thereon equivalent to P25%-35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax Code: SEC. 24. Rates of tax on corporation. a) Tax on domestic corporations. A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or geting under the laws of the Philippines, and partnerships, no matter how created or organized, but not including general professional partnerships 25% when taxable net income is 100,000 PHP 35% when taxable net income is > 100,000 PHP After taxation, its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of its sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of P17,707,460.00 which latter amount was subjected to Philippine taxation of 35% or P6,197,611.23 as provided for in Section 24(b) of the Philippine Tax Code which: ---XXX--SECTION 1. The first paragraph of subsection (b) of Section 24 of the National Bureau Internal Revenue Code, as amended, is hereby further amended to read as follows: (b) Tax on foreign corporations. 41) Non-resident corporation. A foreign corporation not engaged in trade or business in the Philippines, including a foreign life

insurance company not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except interest on foreign loans which shall be subject to 15% tax), dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains, profits, and income, and capital gains: XXX Provided, still further That on dividends received from a domestic corporation able to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in Section 53(d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this section: Provided, finally That regional or area headquarters established in the Philippines by multinational corporations and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region shall not be subject to tax. ---XXX--For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of P8,735,125.00 which was subjected to Philippine taxation at the rate of 25%-35% or P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil. again declared a dividend in favor of PMC-U.S.A. at the tax rate of 35% or P6,457,485.00. In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as aforequoted, as the withholding agent of the Philippine government, with respect to the dividend taxes paid by PMC-U.S.A., filed a claim with the herein petitioner, Commissioner of Internal Revenue, for the refund of the 20 percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the alleged "overpaid withholding tax at source or overpaid withholding tax in the amount of P4,832,989.00," XXX There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the intervention of the CTA when on July 13, 1977 it filed with herein respondent court a petition for review praying that it be declared entitled to the refund or tax credit claimed and ordering respondent therein to refund to it the amount of P4,832,989.00, or to issue tax credit in its favor in lieu of tax refund.

21

TAXATION 1 LAFORTEZA WEEK 7: d2014

On the other hand therein respondent, Commissioner of Internal Revenue, in his answer, prayed for the dismissal of said Petition and for the denial of the claim for refund. On January 31, 1974 the Court of Tax Appeals in its decision ruled in favor of [P&G.]

administrative officers should never be allowed to jeopardize the government's financial position. The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged over paid taxes, is completely meritorious. The real party in interest being the mother corporation in the United States, it follows that American entity is the real party in interest, and should have been the claimant in this case. Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. a non-resident foreign corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an American) a domestic corporation domiciled in the United States, is entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared or waived as otherwise considered or deemed paid by the government. The law pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received from foreign corporations: XXX To Our mind there is nothing in the provision that would justify tax return of the disputed 15% to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines. DISPOSITIVE: WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED. No costs. VOTES: Yap (Chairman), Melencio-Herrera, Padilla and Sarmiento, JJ., concur. NO DISSENTING/CONCURRING OPINION. - Poy CIR v PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORP. (Dec. 2, 1991) DOCTRINE: Following Sec 24(b)(1) of the NIRC, the ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation goes down to 15% if the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid

ISSUE: (a) Is P&G Phils. entitled to the preferential 15% tax rate on dividends declared and remitted to its parent corporation? HELD: (a) NO. First, the real party in interest being the mother corporation in the United States, it follows that American entity is the real party in interest, and should have been the claimant in this case. Second, private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines. REASONING: A. MAIN ISSUE XXX (Two) questions are posed by the petitioner Commissioner of Internal Revenue, and they are (1) Whether or not PMC-Phil. is the proper party to claim the refund and (2) Whether or not the U. S. allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends? The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the remitter or payor of the dividend income, and a mere withholding agent for and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any. It will be observed at the outset that petitioner raised this issue for the first time in the Supreme Court. He did not raise it at the administrative level, nor at the Court of Tax Appeals. As clearly ruled by Us "To allow a litigant to assume a different posture when he comes before the court and challenges the position he had accepted at the administrative level," would be to sanction a procedure whereby the Court-which is supposed to review administrative determinations would not review, but determine and decide for the first time, a question not raised at the administrative forum." Thus it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot generally be raised for the first time on appeal. (Pampanga Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107 SCRA 726 [1981]), Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of certain

22

TAXATION 1 LAFORTEZA WEEK 7: d2014

in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. the NIRC requires that the tax credit for taxes deemed paid in Phils, must as a minimum reach 20% (difference bet regular 35% rate and preferred 15% rate). NIRC does not require that US tax law deem the parent corp to have paid the 20% points of dividend tax waived by the Phils. It only requires that the US shall allow P&G-USA a deemed paid tax credit in an amount equivalent to 20% points waived by the Philippines. NATURE: Motion for reconsideration of decision of SC 2nd division PONENTE: Feliciano, J. FACTS: For taxable years 1974 (ending June 30, 1974) and 1975 (ending June 30, 1975), private respondent P&G Phil declared dividends payable to its parent company and sole stockholder P&G USA amounting to P24,164,946.30. From this amount, P8, 457,731.21 representing 35% withholding tax at source was deducted. On Jan 5, 1997, P&G-Phil filed with the Commissioner a claim for refund or tax credit in the amount of P4,832,989.26 claiming that per Sec 24(b)(1) of the NIRC, as amended by PD 369, the applicable rate of withholding tax on dividends remitted is 15% (not 35% of dividends). When CIR didnt respond, P&G-Phil filed a petition for review with CTA. CTA: ordered CIR to refund or grant the tax credit of P4.8M. SCs 2nd Division: reversed and held: o P&G-USA, not P&G-Phil was the proper party to claim refund/ tax credit o There is nothing in Sec 902 and other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA of taxes deemed paid in the Phils equal to 20% (difference bet 35% on corp and 15% on dividends) o P&G-Phil failed to meet conditions in order that dividends received by P&G-USA may be subject to preferential tax rate of 15% WON P&G-Phil has the capacity to bring claim for refund? Yes. a. WON P&G-Phil is a taxpayer under Sec 309(3) of NIRC?7 Yes. WON the dividend remittance of P&G-Phil to P&G-USA is entitled to the 15% rate? Yes. a. WON the US law complies with the requirements to entitle P&G-USA to decreased rate? WON P&G-Phil met the conditions necessary so that the dividends received by P&G-USA may be subject to the 15% preferential tax rate? Yes.

1.

P&G can bring suit. The question on P&G-Phils capacity to bring the present claim was raised for the first time on appeal (before SC). The government must follow the same rules of procedure which bind private parties. A question of fairness arises if BIR, unlike other litigants, will be allowed to raise questions for the first time on appeal. a. A taxpayer is defined by NIRC as any person subject to tax imposed by the Title (On Tax on Income). Under Sec 53(c) of the NIRC, the withholding agent who is required to deduct and withhold any tax is made personally liable for such tax. P&G-Phil, as withholding agent, is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is subject to and liable for deficiency assessments, surcharges and penalties should the amount of tax withheld be finally found less than the amount that should have been withheld under law. The person liable for tax has been held to be a person subject to tax and properly considered as a taxpayer. In Phil Guaranty Comp. v CIR, a withholding agent is the agent of both govt and taxpayer, and that he is not an ordinary govt agent (held personally liable for tax he should withhold). The withholding agent is also an agent of the beneficial owner of the dividends in filing ITR and actual payment of tax, and such authority may be held to include authority to file claim for refund and to bring an action for recovery of such claim. This is especially warranted where the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times under the latters effective control.

2.

ISSUES/HELD: 1. 2.

3.

RATIO/RULING:

No credit or refund shall be allowed unless the taxpayer files with the Commissioner a claim for credit/refund within 2 years after payment of tax/penalty.

Following Sec 24(b)(1) of the NIRC, the ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation goes down to 15% if the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in this case, 15% dividend tax rate is applicable if the USA shall allow to P&G-USA a tax credit for taxes deemed paid in the Phils applicable against the US taxes of P&G-USA. Also, the NIRC requires that the tax credit for taxes deemed paid in Phils, must as a minimum reach 20% (difference bet regular 35% rate and preferred 15% rate). NIRC does not require that US tax law deem the parent corp to have paid the 20% points of dividend tax waived by the Phils. It only requires that the US shall allow P&G-USA a deemed paid tax credit in an amount equivalent to 20% points waived by the Philippines. Upon examining the US Tax Code, court concluded that: US law (Sec 901, US Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i.e. withheld) from the dividend remittances to P&G-USA

23

TAXATION 1 LAFORTEZA WEEK 7: d2014

US law (Sec 902, US Tax Code) grants to P&G-USA a deemed paid tax credit for a proportionate part of the corporate income tax actually paid to the Phils by P&G-Phil

income tax paid by the corp declaring the dividend. (See case for computation, basically Plana did the same thing) Also, the concept of deemed paid tax credit is exactly the same deemed paid tax credit found in our NIRC. Per Sec 30(c)(8) NIRC, the BIR must give a tax credit to a Phil parent corp for taxes deemed paid by it (taxes paid to US by the US subsidiary of Phil corp). 3. First, court distinguished between legal question (which is applicable rate 15 or 35?) and administrative question (if P&G-USA was in fact given by US a deemed paid tax credit in required amount?) Second, Sec 24(b)(1) of NIRC does not in fact require that the deemed paid tax credit shall have actually been granted before the applicable dividend tax rate goes down from 35% to 15%. It only requires that the US shall allow a credit against taxes due from P&G USA for taxes deemed to have paid in the Phils. This provision of NIRC does not create a tax exemption nor does it provide a tax credit, it is a provision which specifies when a particular reduced tax rate is applicable. Third, position of SCs 2nd division, that the reduced rate is not available until US tax credit is actually given will be circuitous. US deemed paid tax credit cannot be given effect by US tax authorities until Philippine dividend tax at the rate here applicable was actually imposed and collected. This is why BIR issues rulings that tax laws of foreign jurisdictions comply with requirements of Sec 24(b)(1) of NIRC for applicability of 15% rate. Once ruling is rendered, Phil subsidiary withholds at reduced rate. A requirement relating to administrative implementation is not properly imposed as a condition for the applicability as a matter of law, of a particular tax rate. But after recognition of applicability of the reduced rate, nothing prevents BIR from issuing regulations requiring P&G-Phil & others from certifying to them the amount of the deemed paid tax credit. Sec 24(b)(1) of NIRC seeks to promote the in-flow of foreign equity investment in the Phils by reducing the tax cost of earning profits here and increasing net dividends of investor. Foreign investor would not benefit from reduction of Phil dividend rate unless its home country gives it some relief from double taxation by allowing additional tax credits applicable against tax payable to home country. Net effect upon foreign investor was shown arithmetically in case (again, see case). The deemed paid tax credit allowed by Sec 902 of US Tax Code could offset the US corp income tax payanle on dividends remitted by P&G-Phil. The result is that P&G-USA would after US tax credits still wind up with the full amount of dividends remitted to P&G-USA net of Philippine taxes. Take note that under Phil-US Convention with respect to Taxes on Income, the Phils by treaty reduced regular rate of dividend tax to a maximum of 20% of the gross amount of dividends paid to US parent corp. Also, US shall allow to a US parent corp receiving dividends from Phil subisidary a tax credit for the appropriate amount of taxes paid to Phils by subisidary. This is the deemed paid tax credit per Sec 902 of US Tax Code. Since the treaty

The parent corporation is deemed to have paid a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine subsidiary. This reflects economic reality since Phil. corporate income tax was paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. What is under US law, deemed paid by P&G-USA are not phantom taxes but instead Philippine corporate income taxes actually paid here by P&G Phil. Both (i) the tax credit for the Phil dividend tax actually withheld and (ii) the tax credit for the Phil corporate income tax actually paid by P&G-Phil but deemed paid by P&G-USA are tax credits available against the US corporate income tax of P&G-USA. a. To determine if US tax law complies with requirements for applicability of reduced rate, it is necessary: To determine the amount of 20 percentage points dividend tax waived by the Phil govt per NIRC and thus will go to P&G-USA: -See case for computations; basically if you deduct the 15% dividend tax from the 35% dividend tax youll impose, youll get the amount waived by Phil govt. -Court found that for every P100 of pre-tax net income earned by P&G-Phil, P13 dividend tax is waived by Phil government under Sec 24(b)(1) of NIRC. P13 is also the minimum amount of the deemed paid tax credit that US tax law will allow if P&G qualifies for reduced rate. To determine the amount of the deemed paid tax credit which US tax law must allow to P&G-USA

-See case for computation; basically Court used the fraction in US Tax Code; if you get the fraction of: dividends actually remitted/income of P&G-Phils (without the income tax) and then multiply it with the 35% Phil corpo income tax8 -Court found that for every P55.25 of dividend actually remitted (after withholding at 15%) by P&G Phil to US, a tax credit of P29.75 is allowed by Sec 902 of US Tax Code for Phil corporate income tax deemed paid by the parent but actually paid by subsidiary. To ascertain that the amount of the deemed paid tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Phil govt -Since P29.75 (tax credit granted by US) is higher than P13 (dividend tax deemed waived by Phil), Sec 902 of US Tax Code clearly complies with Sec 24(b)(1) of NIRC Court pointed out that its reading of Sec 901 and 902 of the US Tax Code is similar to CIR Planas in a BIR Ruling. US government will allow a credit to the US Corp or recipient of the dividend IN ADDITION to the amount of tax actually withheld, a portion of the

24

Take note, this is different from 35% regular dividend tax

TAXATION 1 LAFORTEZA WEEK 7: d2014

made 20% max rate, there is still differential or additional reduction of 5 percentage points which compliance of Sec 902 US Tax Code with the requirements of Sec 24(b)(1) NIRC, makes available in respect of dividends from Phil subsidiary. DISPOSITION: P&G entitled to Refund. WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs. VOTE: Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.

of the disputed 15% to the private respondent. This is because the amount of tax credit purportedly being allowed is not fixed or ascertained, hence we do not know whether or not the tax credit contemplated is within the limits set forth in the law. While the mathematical computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from a basic defect, that is we have no way of knowing or checking the figure used as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit was really intended. In the interpretation of tax statutes, it is axiomatic that as between the interest of multinational corporations and the interest of our own government, it would be far better, in the absence of definitive guidelines, to favor the national interest. As correctly pointed out by the Solicitor General: . . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid by the foreign taxing authority, the host country. In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of PMC-U.S.A. would be reduced to fifteen (15%) percent if & only if reciprocally PMC-U.S.A's home country, the United States, not only would allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the fifteen (15%) percentage-point portion of the thirty five (35%) percent Phil. dividend tax actually paid or accrued but also would allow a foreign tax "sparing" credit for the twenty (20%)' percentage-point portion spared, waived, forgiven or otherwise deemed as if paid by the Phil. govt. by virtue of the "tax credit sparing" proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240). The U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S. corporate taxpayers, whether directly or indirectly. Nowhere under a statute or under a tax treaty, does the U.S. government recognize much less permit any foreign tax credit for spared or ghost taxes, as in reality the U.S. foreign-tax credit mechanism under Sections 901-905 of the U.S. Intemal Revenue Code does not apply to phantom dividend taxes in the form of dividend taxes waived, spared or otherwise considered "as if" paid by any foreign taxing authority, including that of the Philippine government. Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from P&G-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its parent company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines. Tax refunds are in the nature of tax exemptions. They are to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by

Bidin, concurring. Cruz, concurring. Paras Padilla, Melencio-Herrera, Davide, Jr., Regalado, dissent. DISSENTING OPINION (Paras): On Real Party in Interest: Private respondent, as withholding agent is not the real party in interest. P&G-Phil only insures the collection of dividend income taxes due to the Philippine government from the taxpayer, P&G-US. It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims that in case of an overpayment (or claim for refund) the agent must be given the right to sue the Commissioner by itself (that is, the agent here is also a real party in interest). He further claims that to deny this right would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the agent the obtaining of a refund is a RIGHT. While every obligation has a corresponding right (and vice-versa), the obligation to pay the complete tax has the corresponding right of the government to demand the deficiency; and the right of the agent to demand a refund corresponds to the government's duty to refund. Certainly, the obligation of the withholding agent to pay in full does not correspond to its right to claim for the refund. It is evident therefore that the real party in interest in this claim for reimbursement is the principal (the mother corporation) and NOT the agent. Petitioner CIRs failure to raise before the CTA the issue on real party in interest shouldnt prejudice the government because it can never be in estoppel (esp. in taxes). The errors or omissions of certain administrative officers should never be allowed to jeopardize the government's financial position. On P&G-USAs tax credit While apparently, a tax-credit is given, there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law-87-834 that would justify tax return

25

TAXATION 1 LAFORTEZA WEEK 7: d2014

Fernan, C.J., is on leave.

the clearest grant of organic or statute law . . . and cannot be permitted to exist upon vague implications. The tax credit appertaining to remittances abroad of dividend earned here in the Philippines was amplified in PD 369 promulgated in 1975, the purpose of which was to "encourage more capital investment for large projects." And its ultimate purpose is to decrease the tax liability of the corporation concerned. But this granting of a preferential right is premised on reciprocity, without which there is clearly a derogation of our country's financial sovereignty. No such reciprocity has been proved, nor does it actually exist. Since the guiding philosophy behind international trade is free flow of goods and services, the principal objective of international taxation is to see through this ideal by way of feasible taxation arrangements which recognize each country's sovereignty in the matter of taxation, the need for revenue and the attainment of certain policy objectives. A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of double taxation (i.e., taxing an item more than once) arises because of global movement of goods and services. Double taxation also occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable items by the country of source or location (source or situs rule) and the taxation of the same items by the country of residence or nationality of the taxpayer (domiciliary or nationality principle). An item may, therefore, be taxed in full in the country of source because it originated there, and in another country because the recipient is a resident or citizen of that country. If the taxes in both countries are substantial and no tax relief is offered, the resulting double taxation would serve as a discouragement to the activity that gives rise to the taxable item. As a way out of double taxation, countries enter into tax treaties. A tax treaty is a bilateral convention (but may be made multilateral) entered into between sovereign states for purposes of eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents or nationals. A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item of deduction. Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be derived therefrom. A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious to encourage foreign investments. For instance, if the usual tax rate is 35% but a concession rate accrues to the country of the investor rather than to the investor himself. To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted or reduced are considered as having been fully paid. (see case for computation)

Wander should not result in the reversal of this decision because: 1) Not stare decisis. It was promulgated on the same day the decision of the Second Division was promulgated, and while Wander has attained finality this is simply because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account by said Third Division. 2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said: "More pregnant than anything else is that the court shall be right."

4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case the B.I.R. desires to charge 35% indicates that the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of the B.I.R. 5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is evident that without reciprocity the desired consequences of the tax credit under P.D. No. 369 would be rendered unattainable. 6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been presented, and therefore even were we inclined to grant the tax credit claimed, we find ourselves unable to compute the proper amount thereof. 7) P&G not proper party to bring case (Sorry mahaba, masyadong maraming alam ang justices sa tax eh. Take note na may concurring opinions pa sina Cruz and Bidin.)

Commissioner of Internal Revenue v. Wander Phils. - Zoilo

26

TAXATION 1 LAFORTEZA WEEK 7: d2014

3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines and the United States, a country with which we had no tax treaty, at the time the taxes herein were collected.