TAX CASES – CORPORATION TAX G.R. No.
160528 October 9, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE AIRLINES, INC., respondent. PANGANIBAN, CJ.: A franchise is a legislative grant to operate a public utility. Like those of any other statute, the ambiguous provisions of a franchise should be construed in accordance with the intent of the legislature. In the present case, Presidential Decree 1590 granted Philippine Airlines an option to pay the lower of two alternatives: (a) "the basic corporate income tax based on PAL’s annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code" or (b) "a franchise tax of two percent of gross revenues." Availment of either of these two alternatives shall exempt the airline from the payment of "all other taxes," including the 20 percent final withholding tax on bank deposits. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, challenging the September 30, 2003 Decision of the Court of 3 4 Appeals (CA) in CA-GR SP No. 67970. The CA reversed the June 13, 2001 Decision and the November 13, 2001 Resolution of the Court of Tax Appeals (CTA) in CTA Case No. 5824. The assailed CA Decision disposed as follows: "WHEREFORE, the petition is GRANTED, and [the] Commissioner of Internal Revenue is hereby directed to refund to the [respondent] the amount of P731,190.45 representing the 20% final withholding tax collected and deducted by depository banks on the petitioner’s interest 5 income or, in the alternative, to allow the [respondent] a tax credit for the same amount." The Facts The CA narrates the facts thus: "[Respondent] Philippine Airlines, Inc. (PAL) is a domestic corporation organized in accordance with the laws of the Republic of the Philippines, while [Petitioner] Commissioner of Internal Revenue (CIR) is in-charge of the assessment and collection of the 20% final tax on interest on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, imposed on domestic corporation under Sec. 24 (e) (1) [now Sec. 27 (D) (1)] of the National Internal Revenue Code (NIRC). "On November 5, 1997, *respondent’s+ AVP -Revenue Operations and Tax Services Officer, Atty. Edgardo P. Curbita, filed with the Office of the then Commissioner of Internal Revenue, Mdm. Liwayway Vinzons-Chato, a written request for refund of the amount of P2,241,527.22 which represents the total amount of 20% final withholding tax withheld from the [respondent] by various withholding agent banks, and which amount includes the 20% final withholding tax withheld by the United Coconut Planters Bank (UCPB) and Rizal Commercial Banking Corporation (RCBC) for the period starting March 1995 through February 1997. "On December 4, 1997, the *respondent’s+ AVP-Revenue Operations and Tax Services Officer again filed with [petitioner] CIR another written request for refund of the amount of P1,048,047.23, representing the total amount of 20% final withholding tax withheld by various depository banks of the [respondent] which amount includes the 20% withholding tax withheld by the Philippine National Bank (PNB), Equitable Banking Corporation (EBC), and the Jade Progressive Savings & Mortgage Bank (JPSMB) for the period starting March 1995 through November 1997. "The amounts, subject of this petition, and which represent the 20% final withholding tax allegedly erroneously withheld and remitted to the BIR by the aforesaid banks may be summarized as follows: Bank Period Covered Source Interest income on prime savings deposit Interest income on government securities and/or commercial papers Interest income on FBTB and Treasury Bills placements Interest income on PNBIG savings account Interest income on Treasury Bills placement Interest income on deposits Amount
Jan. 9, 1997 – Feb. 21, 1997
Jan. 6, 1997 – Feb. 28, 1997
Feb. 19, 1997 – Nov. 14, 1997
Jan. 3, 1997 – Feb. 28, 1997
JPSMB Jan. 1, 1997 – Feb. 28, 1997
"*Petitioner+ CIR failed to act on the *respondent’s+ request for refund; thus, a petition was filed before the CTA on April 23, 1999."
Ruling of the Court of Appeals As stated earlier. 13.’ "The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes. When respondent availed itself of the basic corporate income tax as its chosen tax liability." Two points are evident from this provision. that is. the CTA held that the "in lieu of all other taxes" proviso implied the existence of something for which a substitution 16 would be made.The Petition has no merit. royalties. payment of the final 8 withholding tax is deemed part of this liability and therefore not refundable. or collected by any municipal. allegedly gave respondent the option to pay either its corporate income tax under the provisions of the NIRC or a franchise tax of two percent of its gross revenues. To be exempt from final withholding taxes. The CA held that PAL was bound to pay only the corporate income tax or the franchise tax. Section 13 of Presidential Decree No. the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax: ‘(a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code. The CIR argues that the "in lieu of all other taxes" proviso is a mere incentive that applies only when PAL actually pays something. 1590 exempts respondent from paying all other taxes. Sole Issue: Tax Liability of PAL The resolution of the instant case hinges on the interpretation of Section 13 of PAL’s franchise. established. Respondent chose to pay its basic corporate income tax. as computed under the National Internal Revenue Code. Interpretation of PAL’s Franchise According to the CA and PAL. which. mail. it was not eligible for exemption from other taxes. hence. payment of the latter cannot mean an exemption from the former. 14 provincial. without distinction a s to transport or non-transport operations. the "other taxes in lieu of all other taxes" proviso includes final withholding taxes. Second. imposed. x x x. provided. In consideration of the franchise and rights hereby granted. and freight revenues from its outgoing flights shall be subject to this tax." Had respondent paid the two percent franchise tax. levied. or ‘(b) A franchise tax of two percent (2%) of the gross revenues derived by the grantee from all sources. it became exempt from final withholding taxes." The applicable laws (PAL’s franchise and the Tax Code) do not define the terms "basic corporate income tax. This zero tax liability should neither be taken against respondent nor deprive it of the exemption granted by 11 the law. Hence. First. royalties and 9 other fees of any kind. city. after considering the factors allowed by law. the tax paid is "in lieu of all other taxes" imposed by all government entities in the country." Since it chose to pay its corporate income tax.Ruling of the Court of Tax Appeals The CTA ruled that Respondent PAL was not entitled to the refund.
. or description. this Petition. PAL’s franchis e. and other fees and charges of any kind. respondent should now be exempt from paying all other taxes including 12 the final withholding tax. that with respect to international air-transport service. 1590 applies even if there were in fact no taxes paid under any of subsections (A) and (B) of the said 13 decree. which states in part: "SEC. only the gross passenger. On the other hand." On the other hand. 17 either the basic corporate income tax or the franchise tax. Subsection (a). 10 resulted in a zero tax liability. 1590. now or in the future. Construing Subsection (a) of Section 13 of PD 1590 Vis-à-vis the Corporate Income Tax PAL availed itself of PD 1590. then the final withholding taxes would have been considered as "other taxes. duties. Payment of either tax would be in lieu of all "other taxes. Having chosen to pay its corporate income tax liability. the Court of Appeals reversed the Decision of the CTA. or b) a franchise tax of two percent based on its gross revenues. Final withholding taxes come under basic corporate income tax liability. as consideration for the franchise. whichever is lower. duties. Because of the zero tax liability of respondent under the basic corporate 18 income tax system. The Issue The sole issue raised by petitioner is stated in this wise: "The Court of Appeals erred on a question of law ruling that the ‘in lieu of all other taxes’ provision in Section 13 of PD No. assessed." The Court’s Ruling . Section 13 of Presidential Decree No. PAL should have paid the franchise tax of two percent. PAL is liable to pay either a) its basic corporate income tax based on its net taxable income. the crux of which hinged on the terms "basic corporate income tax" and "annual 19 net taxable income. license. "annual net taxable income" is computed in accordance with the provisions of the National Internal Revenue Code. which would have been in lieu of all other taxes including the final withholding tax. registration. nature. or national authority or government agency. Section 13.
It can reasonably be contemplated that PD 1590 sought to assist the finances of the government corporation in the form of lower taxes. Basic Corporate Income Tax Based on Annual Net Taxable Income To repeat. When respondent operates at a loss (as in the instant case). However. which reads as follows: "Section 27. the taxes on improperly accumulated earnings. the "basic corporate income tax" identified in Section 13 (a) of the franchise relates to the general rate of 35 percent as stipulated in Section 27 of the Tax Code. and royalties derived from sources within the 21 Philippines. which (as earlier discussed) is computed by subtracting allowable deductions and exemptions from gross income. as follows: 1) 20 percent on the interests on currency bank deposits. — Except as otherwise provided in this Code. annuities. PAL was owned and operated by the government at the time the franchise was last amended.]" Taxable income means the pertinent items of gross income specified in the Tax Code. Being a domestic corporation. less the deductions and/or personal and additional 27 exemptions. therefore. has two components: the general rate of 35 percent. authorized for these types of income. interests. x x x. Rates of Income Tax on Domestic Corporations . then. By basing the tax rate on the annual net taxable income. the pertinent provision in the case at bar reads: "basic corporate income tax based on the grantee’s annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code." The NIRC also imposes final taxes on certain passive incomes. The definition of gross income is broad enough to include all passive incomes subject to specific rates or final taxes. but the exercise of its option.
. an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation. the rates for foreign corporations. which is 26 subject to the specific final tax of 20 percent. PD 1590 necessarily recognized the situation in which taxable income may result in a negative amount and thus translate into a zero tax liability. including compensation for services. they are no longer included in the computation of gross income. dividends." The Court has already illustrated that. or 20 existing under the laws of the Philippines x x x. rents. the conduct of trade or business or the exercise of a profession. It is not the fact of tax payment that exempts it. since these passive incomes are already subject to different rates and taxed finally at source. other monetary benefits from deposit substitutes. royalties.The statutory basis for the income tax on corporations is found in Sections 27 to 30 of the National Internal Revenue Code of 1997 under Chapter IV: "Tax on Corporations. trust funds and similar arrangements. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. the corporations exempt from tax. Section 34 enumerates the allowable deductions. dealings in property. PAL is subject to Section 27. organized in. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. and the specific final rates for certain passive incomes. the basis for the tax rate is respondent’s annual net taxable income. and 4) 6 percent on the gain presumed to be realized on the sale or disposition of lands and buildings treated as capital 24 25 assets. Section 35. and Section 30. which determines taxable income. a refund is in order. thus. under the Tax Code. which is not disputed. Computation of Taxable Income Under the Tax Code Note that the tax liability of PAL under the option it chose (Item "a" of Section 13 of PD 1590) is to be "computed in accordance with the provisions of the National Internal Revenue Code. and a partner’s distributive shar e in the net income of a general professional partnership. in this instance. Under Subsection (a). gross income means income derived from whatever source. "Substitution Theory" of the CIR Untenable A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes" proviso is a mere incentive that applies only when PAL actually pays something. if any. 3) 10 percent on income derived by a depositary bank under the expanded foreign currency deposit 23 system. pensions." as follows: "(a) The basic corporate income tax based on the grantee’s annual net taxable income computed in accordance with the provisio ns of the National Internal Revenue Code[. Section 28. A corporate income tax liability. "taxable income" does not include passive income subjected to final withholding taxes. personal and additional exemptions. no taxes are due. it has a lower tax liability than that provided by Subsection (b). Under Section 32 of the Tax Code. PAL has the option to choose the alternative that results in lower taxes. Clearly. prizes and winnings. 2) 5 percent and 10 percent on the net capital gains realized from the sale of shares of stock in a domestic corporation not 22 traded in the stock exchange. The final 20 percent taxes disputed in the present case a re not covered under Section 13 (a) of PAL’s franchise. PAL’s request for a refund in the present case pertains to the passive income on bank depo sits." Section 27 enumerates the rate of income tax on domestic corporations.— "(A) In General. Section 29. Notably. These final taxes are withheld at source.
‘x x x x x x x x x
5 4 1 2
." While the Court recognizes the general rule that the grant of tax exemptions is strictly construed against the taxpayer and in favor of the 31 taxing power. Petitioners. Unable to obtain affirmative response from petitioner. The Court is bound to effectuate the lawmakers’ intent. There is no substantial distinction between a zero tax and a one-peso tax liability. RA 7432 unconditionally grants a tax credit to all covered entities. 67439. the Resolution appealed from is AFFIRMED in toto. In said decision. Respondent. The intent is the vital part. "On February 12.00. which is the controlling factor in interpreting a statute.
G. For the said period. No. The intention of the legislature in enacting a law is the law itself. whereas a zero liability arising from its losses would not. if no tax has been paid to the government. x x x.: The 20 percent discount required by the law to be given to senior citizens is a tax credit. this Court has held that the soul of the law is intent: "The intent of a statute is the law." The assailed Resolution denied petitioner’s Motion for Reconsideration. before the tax is computed. Moreover.769. The Facts The CA narrated the antecedent facts as follows: "Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. Intent is the spirit which gives life to a legislative enactment. Thus. 2003 Resolution of the Court of Appeals (CA) in CA-GR SP No. seeking to set aside the August 29. erroneously or illegally. whether the recovery of the tax is made by means of a claim for refund or tax credit. The assailed Decision reads as follows: "WHEREFORE. although it may not be consistent with the strict letter of the statute.’ "From January to December 1996. Determining whether this tax exemption is wise or advantageous is outside the realm of judicial power. Significantly. Basic is the rule that administrative regulations cannot amend or revoke the law.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior citizens in compliance with [R. 2002 Decision and the August 3 11. SO ORDERED. and the primary rule of construction is to ascertain and give effect to the intent. A tax credit is used by a private establishment only after the tax has been computed. vs. In 1996. the *CTA+ justified its ruling with the following ratiocination: ‘x x x. "On January 16. respondent granted twenty (20%) percent sales discount to qualified senior citizens on their purchases of medicines pursuant to Republic Act No. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court. 2005 COMMISSIONER OF INTERNAL REVENUE. the Petition is DENIED. 1998. Courts will not follow the letter of a statute when it leads away from the true intent and purpose of the legislature and to conclusions inconsistent with the general purpose of the act. respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition for Review.] 7432 and its Implementing Rules and Regulations. tax refund or tax credit is unavailing. In construing statutes the proper course is to start out and follow the true intent of the legislature and to adopt that sense which harmonizes best with 30 the context and promotes in the fullest manner the apparent policy and objects of the legislature. premises considered. 2001. respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred net losses from its operations. This matter is addressed to the sound discretion of the lawmaking department of government. a tax deduction.] it must be first established that there was an actual collection and receipt by the government of the tax sought to be recovered. respondent filed with petitioner a claim for tax refund/credit in the amount of P904. or if no amount is due and collectible from the taxpayer. WHEREFORE. CENTRAL LUZON DRUG CORPORATION. the essence of the law.A. before recovery is allowed[. the provisions of the revenue regulation that withdraw or modify such grant are void. 1997. [R. No costs. and must be enforced when ascertained. it operated six (6) drugstores under the business name and style ‘Mercury Drug.R.] 7432. the amount allegedly representing the 20% sales discount granted by respondent to qualified senior citizens totaled P904. not merely a tax deduction from the gross income or gross sale of the establishment concerned. the Tax Court rendered a Decision dismissing respondent’s Petition for lack of merit. 159647 April 15.The fallacy of the CIR’s argument is evident from the fact that the payment of a measly sum of one peso would suffice to exem pt PAL from other taxes. PANGANIBAN.769. J.A. No pronouncement as to costs. "On April 15. Its franchise exempts it from paying any tax other than the option it chooses: either the "basic corporate income tax" or the two percent gross revenue tax. Section 13 of the franchise of respondent leaves no room for interpretation. If a statute is valid it is to have effect according to the purpose and intent of the lawmaker.
A tax credit differs from a tax deduction. Commissioner of Internal Revenue’ promulgated on May 31. on the other. The standards and mechanics for the grant of a refund or credit under these situations are different from that under Sec. The Court’s Ruling . Without that liability. before. We take exception to the CTA’s sweeping but unfounded statement that ‘both tax refun d and tax credit are modes of recovering taxes which are either erroneously or illegally paid to the govern ment. Atax deduction. such credit is not tantamount to an 8 unintended benefit from the law.
. 17 Examples of tax credits are withheld taxes.defined as a subtraction "from income 18 for tax purposes. 2001.A. or that of excess input tax paid by a VAT-registered person. if not entirely confuse. there ought to be a tax liability before the tax creditcan be applied. x x x."
These two issues may be summed up in only one: whether respondent. Hence this Petition. any tax credit application will be useless.39. The [CTA]. However. "Whether the Court of Appeals erred in holding that respondent is entitled to a refund. 4[.038. payments of estimated tax." An example of a tax deduction is any of the allowable deductions enumerated in Section 34 of the Tax Code. (RA) 7432 required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax credit. or that of excise tax paid on goods locally produced or manufactured but actually exported.R. It reasoned that Republic Act No. including -. In other words. may still claim the 20 percent sales discount as a tax credit. One of these is tax deduction -. a tax credit reduces the tax due. is yet another instance of a 7 tax credit and it does not in any way refer to illegally collected or erroneously paid taxes. 7432. if there is no tax liability. despite incurring a net loss. A tax credit is used only after the tax has been computed.’ "Respondent lodged a Motion for Reconsideration.a)] of R.’ Tax refunds or credits do not exclusively pertain to illegally collected or erroneously paid taxes as they may be other circumstances where a refund is warranted. to begin with.The Petition is not meritorious. Sec. even though an establishment operates at a loss? We answer in the affirmative. Sec. Tax Liability Required for Tax Credit Since a tax credit is used to reduce directly the tax that is due. To think of the former as the latter is to avoid. While the grant is mandatory. Tax credit should be understood in relation to other tax concepts. The Issues Petitioner raises the following issues for our consideration: "Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount as a tax credit instead of as a deduction from gross income or gross sales. SP No. no existing obligation to the government. it could logically be deduced that tax credit is premised on the existence of tax liability on the part of taxpayer.whenever applicable -. Moreover. But can such credit be claimed. 229 clearly does not apply in the instant case because the tax sought to be refunded or credite d by petitioner was not erroneously paid or illegally collected. reduces the income 22 23 that is subject to tax in order to arrive at taxable income. as will be presented shortly. Sole Issue: Claim of 20 Percent Sales Discount as Tax Credit Despite Net Loss Section 4a) of RA 7432 grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase of medicine from any 11 12 private establishment in the country. but rather a just compensation for the taking of private property for public use. 229. There will be no reason for deducting the latter when there is. The tax refund provided under Section 229 deals exclusively with illegally collected or erroneously paid taxes but there are other possible situations. The latter may then claim the cost of the discount as a tax credit. the existence of a tax credit or its grant by law is not the same as the availment or use of such credit.the income 21 tax that is determined after applying the corresponding tax rates to taxable income. and investment tax credits. to wit: ‘However. granted respondent’s motion for reconsideration and ordered herein petitioner to issue a Tax Credit Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the CA+ in CA G. in its assailed resolution. 60057 entitled ‘Central [Luzon] Drug Corporation vs. Tax Credit versus Tax Deduction Although the term is not specifically defined in our Tax Code. a tax deduction. such as the refund of excess estimated corporate quarterly income tax paid. tax credit is not available.’" Ruling of the Court of Appeals The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit certificate in favor of respondent in the reduced amount of P903.‘Prescinding from the above. tax credit generally refers to an amount that is "subtracted directly from 14 15 16 one’s total tax liability. the availment or use is not. On the one hand." It is an "allowance against the tax itself" or "a deduction from what is owed" by a taxpayer to the government." or an amount that is "allowed by law to reduce income prior to [the] application of the tax rate to compute the amount 19 20 of tax which is due. the issue.
even though no prior tax payments have been made. In the meantime.as well as the one earlier mentioned -. a one and a half percent input tax credit that is merely presumptive is allowed. But it breathes. For example. Nevertheless. Section 34(C)(3). a VAT (Value-Added Tax). the irrefutable fact remains that. In contrast. Apparently.in computing for the donor’s tax due.not necessarily paid -. has been previously paid to the latter. the amount of creditable input taxes due that are not directly and entirely attributable to any one of these transactions shall be proportionately allocated on the basis of the volume of sales.registered person engaging in transactions -. No tax. Prior Tax Payments Not Required for Tax Credit While a tax liability is essential to the availment or use of any tax credit. or the transitional input tax determined in accordance with Section 111(A).If a net loss is reported by. under RA 7432. there are also tax treaties and special laws that grant or allow tax credits. the tax credit may still be deducted from a future. categorically allows as credits.not necessarily paid by -. Besides. and further conditioned upon payment by the taxpayer of any tax found due. not as a deduction from the corresponding tax liability. Under the treaties in which the tax credit method is used as a relief to avoid double taxation. in computing the estate tax due.is higher than the actual VAT paid on the said items. and no other taxes are currently due from. since there is no tax liability that calls for its application. no prior tax payments are needed for the use of the tax credit. tax liability. Section 34(C)(5) provides that for such taxes incurred but not paid. More important. but the tax paid in the former is merely allowed as a credit against the tax levied in the 29 latter. Indeed.subject to certain limitations -. Although this tax credit benefit is available. a business establishment. the imposition of a final withholding tax rate on cash and/or property dividends received by a nonresident foreign corporation from a domestic corporation is subjected to the condition that a foreign tax credit will be given by the 27 domiciliary country in an amount equivalent to taxes that are merely deemed paid.for estate taxes paid to a foreign country. For the purchase of primary agricultural products used as inputs -. it is not our government but the domiciliary country that credits against the income tax payable to the latter by the foreign corporation. the tax to be 28 foregone or spared. materials and 25 supplies. under Section 112(A). It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed. in this provision. for the existence or grant solely of such credit. there will obviously be no tax liability 24 against which any tax credit can be applied. without which it does not have any use.
. upon petitioner’s redetermination of it. not the state of residence. Clearly from this provision.shows that the prior payment of taxes is not a requisite. No tax is actually paid prior to the availment of such credit. the amount of income taxes merely incurred -.is also allowed a tax credit that includes a ratable portion of any input tax not directly attributable to either activity. when such amount -. The latter type may in fact be an amount equivalent to only eight percent of the value of a VAT-registered person’s beginning inventory of goods. In Section 111(B). it need not move.the government 26 and attributable to such sales.such VAT-registered person in the course of trade or business.either in the processing of sardines. the tax credit refers to an input tax that is either due only or given a value by mere comparison with the VAT actually paid -. a tax credit may be allowed. Section 86(E) allows a tax credit -. neither a tax liability nor a prior tax payment is needed. a VAT-registered person whose sales are zero-rated or effectively zero-rated may. again. even though no taxes have been previously paid. or in the manufacture of refined sugar and cooking oil -and for the contract price of public work contracts entered into with the government. On the contrary. Also found in Section 101(C) is a similar provision for donor’s taxes -. even though no prior tax payments are not required. even if not made to our government. therefore. against the income tax imposable under Title II. Congress has granted without conditions a tax credit benefit to all covered establishments. mackerel and milk. in relation to Section 34(C)(7)(b).again not necessarily paid to -.by a domestic corporation during a taxable year in any foreign country.then later prorated. Moreover. Although true. this provision actually refers to the tax credit as a condition only for the imposition of a lower tax rate. For the establishment to choose the immediate availment of a tax credit will be premature and impracticable. prior tax payments are not. Where a taxpayer is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales.again when paid to a foreign country -. simply because no reduction of taxes can instantly be effected. payment is made to the state of source. to the extent that the input taxes have not been applied against output taxes. it need not be used by losing ventures. The Tax Code is in fact replete with provisions granting or allowing tax credits. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen. apply for the issuance of a tax credit certificate for the amount of creditable input taxes merely due -. in such sum as may be required. This input tax may either be the VAT on the purchase or importation of goods or services that is merely due from -. not a present. income that is taxed in the state of source is also taxable in the state of residence. subject to the condition precedent that the taxpayer shall simply give a bond with sureties satisfactory to and approved by petitioner. in availing of such tax credit for VAT purposes. Under Section 110. this provision -. Specifically. By its nature.as computed -. In addition to the above-cited provisions in the Tax Code. The tax credits in both instances allude to the prior payment of taxes.whether or not subject to the VAT -.
issued pursuant thereto.along with sales 56 57 returns. The term sales discounts is not expressly defined in the Tax Code. chain or functional discounts. justified by savings in packaging. and produces no material errors over time. the tax credit represents the amount of such discount.is most widely used. In turn. it is in business parlance "a deduction or lowering of an amount of money. akin to a trade discount is a functional discount." It is also called a volume or bulk discount. the most common of which is that affecting the income 39 statement or financial report upon which theincome tax is based. however. Finally. because the accounts receivable and sales figures that arise from sales discounts.is deducted from gross sales to come up with the gross income. there can also be tax credit incentives. the incentives provided for in Article 48 of Presidential Decree No. 43 44 shipping. only the net amounts of the invoices -. Regarding this matter. not the existence or grant. or five or ten percent of the net local content of exports. a private establishment reporting a net loss in its financial statements is no different from another that presents a net income.known as the gross method -. where no tax is due." To be more 37 precise. However. especially a price.from gross sales to arrive atnet sales. Even a chain discount -. provide the procedures for its availment. because it is simple." In business there are many kinds of discount." In ordinary business language. and the prices 47 at which the purchased goods may be resold are also suggested. allowances and cost of goods sold -. In order to avail of such credits under the said law and still achieve its objectives." This role usually involves warehousing or advertising. include tax credits equivalent to either five 30 percent of the net value earned. for example. no prior tax payments are necessary.is 48 recorded at net." or "a reduction from the full amount or value of 38 something. net of the said discounts. To illustrate. under the net method used in recording trade. is indefensible. but one provision adverts to amounts whose sum -. Based on this discussion. profit or margin derived
45 40 36 33
.a series of discounts from one list price -. It is "a supplier’s price discount given to a purchaser based on the *latter’s+ role in 49 the *former’s+ distribution system. This type of presentation is resorted to. However. (PD) 1789. Sections 2. the CA 31 correctly held that the availment under RA 7432 did not require prior tax payments by private establishments concerned. First. However." Also referred to as a sales discount on the part of the seller and a purchase discount on the part of the buyer. did not necessitate the existence of a tax liability. since the purchase or sale is already 46 valued at the net price actually charged the buyer.i and 4 of Revenue Regulations No. of a tax credit. the definition given by petitioner is erroneous.after the 54 discounts have been deducted -. is one granted by business establishments to credit customers for their prompt payment. A "percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by wholesalers to retailers" is known as a trade discount. we 32 do not agree with its finding that the carry-over of tax creditsunder the said special law to succeeding taxable periods.are recorded in the books of accounts and reflected in the financial statements. rebates 51 and other similar expenses -. is a "reduction in price allowed for purchases made in large quantities. However. n/30. for the losing establishment to immediately apply such credit. The examples above show that a tax liability is certainly important in the availment or use. (BP) 391. To deny such credit. No entry for it need be made in the manual or computerized books of accounts. because the transactions themselves involving both accounts receivable and sales have already been entered into. allowances. we find that the nature of a sales discount is peculiar. as amended by Batas Pambansa Blg. Business Discounts Deducted from Gross Sales A cash discount. This manner of recording credit sales -. despite the plain mandate of the law and the regulations carrying out that mandate. since the law itself accords that unconditional benefit. From all the foregoing instances. 2-94 Erroneous RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. It refers to tax credit as the amount representing the 20 percent discount that "shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or 35 other percentage tax purposes. and even their application against internal revenue taxes. Both are entitled to the tax credit provided for under RA 7432. a discount is an "abatement or reduction made from the gross amount or value of anything. it is evident that prior tax payments are not indispensable to the availment of a tax credit. Applying generally accepted accounting principles (GAAP) in 50 the country.as well as from quantity.are recorded in the 52 manual and computerized books of accounts and reflected in the financial statements at the gross amounts of the invoices. -. It is a "reduction in 41 price offered to the purchaser if payment is made within a shorter period of time than the maximum time specified. the Implementing 34 Rules and Regulations. Thus. this type of discount is reflected in the income statement as a line item deducted -. The purpose for the discount is to encourage trading or increase sales. it may be expressed in such 42 terms as "5/10. will be an improvident usance.Under special laws that particularly affect businesses. the manner by which the discount shall be credited against taxes has not been clarified by the revenue regulations. more convenient to apply than the net 53 method." A quantity discount.along with returns. volume or bulk discounts -. and handling. A separate line item 55 cannot be shown. By ordinary acceptation.
Prompt payment is not the reason for (although a necessary consequence of) such grant. it cannot 67 engraft additional requirements not contemplated by the legislature. In other words. the tax credit benefit is not the same as a sales discount. While determinative only of the VAT. these two provisions affirm that sales discounts are amounts that are always deductible from gross sales. this benefit cannot and should not be treated as a tax deduction. or any similar taxpayer. because such discount is given -. "neither does it impose a duty on the part of the government to sit back and allow an important facet of tax 73 collection to be at the sole control and discretion of the taxpayer.from business. It is.immediately upon 61 perfection of the sale. In the present case.when claimed -. erroneous or improper. under the revenue regulations promulgated by our tax authorities. but to limit the benefit to a sales discount -. To stress. the word may in the text of the statute implies that the availability of the tax credit benefit is neither unrestricted nor 72 mandatory. even for purposes of computing the income tax. Our tax authorities fill in the details that "Congress may not have the opportunity or competence to 65 provide. the monetary effect of the privilege may be the same as that resulting from a sales discount.and the net amount thereof collected -." Conversely. plain and simple. therefore. What RA 7432 grants the senior citizen is a mere discount privilege. the real and compelling reason for the private establishment giving the discount is that the law itself makes it mandatory. Although prompt payment is made for an arm’s-length transaction by the senior citizen. Where the law does not distinguish." The regulations these authorities issue are relied upon by taxpayers. sales discountsthat are granted and indicated in the invoices at the time of sale -. be stricken down. a discount is not necessarily a sales discount. After all. Yet. In another provision therein. (RR) 2-94 define tax credit as the 20 percent discount deductible from gross income for income tax purposes. The option to avail of the tax credit benefit depends upon the existence of a tax liability. A "regulation adopted pursuant to law is law." In the scheme of judicial tax administration. This contrived definition is improper. Laws Not Amended by Regulations Second. the tax authorities have given the term tax credit in Sections 2. Ubi lex non distinguit. therefore. alter or restrict the provisions of the law it administers. It is a cardinal rule that courts "will and should respect the contemporaneous construction placed upon a statute by the executive officers 63 whose duty it is to enforce it x x x. Availment of Tax Credit Voluntary Third. the need for certainty and predictability in the 64 implementation of tax laws is crucial. The administrative agency issuing these regulations may not enlarge. however.which is not even identical to the discount privilege that is granted by law -." For the tax authorities to compel respondent to deduct the 20 percent
71 68 69
. Courts. nec nos distinguere debemus. In case of conflict. the income tax is computed. considering that the latter has to be deducted from gross sales in order to compute the gross income in theincome statement and cannot be deducted again. In fact. expected that for each retail sale made under this law. the effect is different from a simple reduction in price that results from such discount. this benefit has been erroneously likened and confined to a sales discount. the law cannot be amended by a mere regulation. Reason for the Senior Citizen Discount: The Law. the latter provision also appears as a suitable reference point for income tax purposes already embraced in the former. As mentioned earlier. Sections 2. will not uphold these authorities’ interpretations when clearly absurd. There is no absolute right conferred upon respondent.may be excluded from the gross sales within the same quarter they were 59 given. Not Prompt Payment A distinguishing feature of the implementing rules of R A 7432 is the private establishment’s outright deduction of the discount from the 60 invoice price of the medicine sold to the senior citizen. When the law says that the cost of the discount may be claimed as a tax credit. to a private establishment. the law must prevail.shall be treated as a reduction from any tax liability. a regulation or any portion thereof 70 not adopted pursuant to law is no law and has neither the force nor the effect of law. To repeat from our earlier discourse. a regulation that "operates to create a rule out of harmony with 62 the statute is a mere nullity".does not define it at all and serves no useful purpose. it means that the amount -. The definition must. However. the effect of a sales discount on the income statement and income tax return of an establishment covered by RA 7432 is different from that resulting from the availment or use of its tax credit benefit. not a sales discount or any of the above discounts in particular. to avail itself of the tax credit remedy whenever it chooses. or from gross sales for VAT or other percentage tax purposes.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides.i and 4 of Revenue Regulations No. In effect. While the former is a deduction before. the latter is a deduction after. who are certain that these will be followed by the 66 courts. Their interpretation has muddled up the intent of Congress in granting a mere discount privilege. it cannot prevail. the tax credit benefit under RA 7432 is related to a sales discount.and that do not depend upon the happening of any future event -. the discount period lasts no more than a day. not a sales discount. the privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the private establishment granting the discount. To be sure. and a tax credit for a simple discount privilege should not be automatically treated like a sales discount. To a senior citizen. we ought not to distinguish.
RA 7432 does not give respondent the unfettered right to avail itself of the credit whenever it pleases. then the tax credit can easily be applied. Respondent is given two options -either to claim or not to claim the cost of the discounts as a tax credit. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State.discount from either its gross income or its gross sales is. Worse. the business continues to operate at a loss and no other taxes are due. profit-generating businesses will be put in a better position if they avail themselves of tax credits denied those that are losing.i and 4 of RR 2-94. Neither does it allow our tax administrators to expand or contract the legislative mandate. rather than as a deduction from gross income. Sections 2. Equivalent to the payment of property taken by the State. Operating at a loss through no fault of its own. plain and free from ambiguity. it may even ignore the credit and simply consider the gesture as an act of beneficence. and no administrative body can alter that fact. the power to tax 83 has indeed become a most effective tool to realize social justice. an expression of its social conscience. and if all its sales come from retail purchases by senior citizens. but rather from the private establishments concerned." For this reason. Tax measures are but 81 82 "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for apublic purpose.a of RA 7432 means is that the tax credit benefit is merely permissive. "The ‘plain meaning rule’ or verba legis in statutory construction is thus applicable x x x. and the equitable distribution of wealth. In fact. therefore. We quote from those deliberations as follows:
. the credit cannot be used and will just have to be carried over and revalidated accordingly. not imperative. not a deduction. public benefit." Tax Credit Benefit Deemed Just Compensation Fourth. it will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from either its gross income or its gross sales. a just compensation for income that is taken away from respondent becomes necessary. The same effect is expected if its mark-up is less than 20 percent. a private establishment that merely breaks even -. if not improper. Besides. were it not for RA 7432.when not done within a reasonable time from the grant of the discounts -. public welfare. public welfare. no cash outlay is required from the government for the availment or use of such credit. the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for 77 public use. Granting that there is a tax liability and respondent claims such cost as a tax credit. In effect. thus compelling it to close shop. respondent becomes entitled to a just compensation. it must be given its literal meaning and applied 76 without attempted interpretation.will surely start to incur losses because of such discounts. If. Grant of Tax Credit Intended by the Legislature Fifth. but also to blatantly contravene the law itself. To put it differently." Sections 2. however. Congress has allowed all private establishments a simple tax credit. because no taxes are due from the latter. it will realize that thetax credit limitation under RR 2-94 is inutile. This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given. What Section 4. 1992 of the Bicameral Conference Committee Meeting on Social Justice. social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. it is the existence or the lack of a tax liability that determines whether the cost of the discounts can be used as a tax credit. which finalized RA 7432. Accordingly. These objectives are consonant with the constitutional policy of making "health x x x services available to all the 87 88 people at affordable cost" and of giving "priority for the needs of the x x x elderly. respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt. The social justice consecrated in our [C]onstitution [is] not 84 intended to take away rights from a person and give them to another who is not entitled thereto. As a result of the 20 percent discount imposed by RA 7432.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Furthermore. and public convenience. The deliberations on February 5. the taxation power can also be used as an implement for the exercise of the power of eminent domain. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned. If there is 75 none.without the discounts yet -.cannot be considered as just compensation. however. Where the words of a statute are clear. The concept of public use is no longer confined to the traditional notion of use by the public. through the certificate. but also to the promptness in its release." In recent years. not only to make an imposition without basis in law. such issuance -. disclose the true intent of our legislators to treat the sales discounts as a tax credit. of the equivalent amount it needs to cope with the reduction 79 in its revenues. In other words. RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole and to establish a program 86 beneficial to them. It is in the tax credit that our legislators find support to realize social justice. While it is a declared commitment under Section 1 of RA 7432. the credit can never be applied and will be lost altogether. In fact. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. but held synonymous with public 78 interest. contradict these constitutional policies and statutory objectives. Aside from the observation we have already raised earlier. The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong.
By the way. From all establishments. You want to insert that? THE CHAIRMAN (Rep. RA 7432 is a special law that should prevail over the Tax Code -. ANGARA. Special Law Over General Law Sixth and last. 'di pa ba naisama natin? SEN. so. Oho. Unico). Letter A. REP. SEN. THE CHAIRMAN. SEN. (Rep. et cetera. ANGARA. the earlier special and the later general -. (Rep. I think we have to put in also a provision here about the deductions from taxable income of that private hospitals. Unico). AQUINO Okay. Yung ang proposal ni Senator Shahani. SEN. Kaya lang po sir. THE CHAIRMAN.provided that private establishments may claim the cost as a tax credit. AQUINO.the fact that one is special and the other is general creates a presumption that the special is to be considered 91 92 as remaining an exception to the general. Puwede na. recreation centers. Hindi pa. Yung about the private hospitals. about deductions from taxable income. Ganon ba 'yon? REP. as private hospitals lang. So. AQUINO."
. "x x x [T]he rule is that on a specific matter 90 the special law shall prevail over the general law. All establishments covered siguro? SEN. As a tax credit [rather] than a kuwan . Okay. Tax credit. SEN. Dahil kung government. ADVENTO. they don't need to claim it. REP. Sa kuwan lang yon. puwede na po nating hindi isama yung mga less deductions ng taxable income. AQUINO. ANGARA. Alisin na natin 'Yung kuwan kung ganon. To capture that thought. Yah. e. REP. Restaurant lodging houses. Unico). Singit na po ba yung 15% on credit. Tama. Unico). Oo. Can we go back to Section 4 ha? REP. "[w]here there are two statutes. Unico) Ah. tax credit. AQUINO. Ano ba yung establishments na covered? SEN.the terms of the general broad enough to include the matter provided for in the special -. hindi pa. I think we incorporated there a provision na . Hospitals ba o lahat ng establishments na covered. Yah could be allowed as deductions in the perpetrations of (inaudible) income. ANGARA. Oo. THE CHAIRMAN. Oo. AQUINO. provided that. ANGARA. I-tax credit na lang natin para walang cash-out ano? REP. Sige Okay. Unico). ANGARA. provided that said establishments .a general law. Yung isiningit natin? MS. ADVENTO. the private hospitals can claim the expense as a tax credit.on the responsibility of the private hospitals and drugstores. ANGARA. (Rep. before that ano. general in its terms and not expressly repealing a prior special statute. THE CHAIRMAN. (Rep. ANGARA." "It is a canon of statutory construction that a later statute. one as a general law of the land. Okay. SEN.deduction. ANGARA. the other as the law of a particular case. hindi ba? SEN. will ordinarily not affect 93 the special provisions of such earlier statute. SEN. and mga discounts po nila affecting government and public institutions. (Rep. THE CHAIRMAN. ANGARA. Di subject to style na lang sa Letter A"."THE CHAIRMAN (Rep. ANGARA." In addition. we'll say the grant of 20% discount from all establishments et cetera. (inaudible/did not use the microphone). SEN. AQUINO. Unico). di ba ganon 'yan? MS. REP. In the case of private hospitals they got the grant of 15% discount. which shall be resorted to only to supply deficiencies in the former.
The first question we must settle is whether R. and therefore remains an exception to.00 by reason of its abandonment as dry holes of several of its oil wells. holding that the margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses. ESSO for its part appealed the CTA decision denying its claims for the refund of the margin fees P102. the CIR also denied the claims of ESSO for refund of the overpayment of its 1959 and 1960 income taxes.994. On the claimed legislative intent. THE COMMISSIONER OF INTERNAL REVENUE. If it is a revenue measure. During its two and a half years of existence. then the requirement of prior tax payments under certain provisions of the latter. there was still an overpayment by P39. as part of its ordinary and necessary business expenses. It was. for a total of P434. On May 4. the CR assessed ESSO a deficiency income tax for the year 1960.787. This claim was disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. 1989. in the amount of P367.246. This provides that all taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade. it claimed the refund of P39. the Tax Code -. payable out of the General Fund.In CTA Case No. 2609 was nothing less than a revival of the 17% excise tax on foreign exchange imposed by R. disallowing the claimed deduction for the margin fees paid.03.92 for 1960 but sustained its claim for P39.00.00.A.00 for 1959 and P434. by applying the tax credit of P221. petitioner. When the former states that a tax credit may be claimed.00 only.234.246. 1964. the margin fees paid by the petitioner to the Central Bank on its profit remittances to its New York head office should be deductible from ESSO's gross income under Sec.92. On August 13. the CTA denied petitioner's claim for refund of P102. No pronouncement as to costs.94 as overpayment on the interest on its deficiency income tax.92 for 1960. for the same reason.RA 7432 is an earlier law not expressly repealed by.92 in 1960. cannot be made to apply. as discussed 94 above. properly originated in the House of Representatives.a later law. the amount it had spent for drilling and exploration of its petroleum concessions. the budget for 1959-1960. After trial.1961 to April 18. representing excess interest.00 for 1959 and P434.00 for 1959 and P434. Standard-Vacuum Oil Company). It was enacted by Congress as such and. The petitioner maintains that margin fees are taxes and cites the background and legislative history of the Margin Fee Law showing that R. who insisted on charging the 18% interest on the entire amount of the deficiency tax. vs. plus 18% interest thereon of P66.: On appeal before us is the decision of the Court of Tax Appeals denying petitioner's claims for refund of overpaid income taxes of P102. SO ORDERED..787.226. business or profession are deductible from gross income.033.944.
G.04. II .033. 1964. The assailed Decision and Resolution of the Court of Appeals AFFIRMED. L-28502.00 but only on the amount of P146. ESSO appealed to the CTA and sought the refund of P102.A.961. This claim was denied by the CIR. Garcia to Congress as part of. the CIR granted a tax credit of P221. 2009.238.647.279. No provision of any revenue regulation can supplant or modify the acts of Congress.787. ESSO settled this deficiency assessment on August 10.246. The deficiency arose from the disallowance of the margin fees of Pl. INC. It argued that the 18% interest should have been imposed not on the total deficiency of P367. 30(c) of the National Internal Revenue Code. Also claimed as ordinary and necessary expenses in the same return was the amount of P340. 1251 and 1558 respectively. 1251.A. is a police measure or a revenue measure.033. promulgated on April 18. ESSO. the measure was one of the major sources of revenue used to finance the ordinary operating expenditures of the government.92 for the period from April 18. Neither can the instances of or references to a tax deduction under the Tax Code be made to restrict RA 7432.92.1965. G.00 for 1959. 601. significantly.R.94 as excess interest.234.00 representing its overpayment on its income tax for 1959 and paying under protest the additional amount of P213. Additionally. Nos.232.00. L-28508-9 July 7. (formerly. No. pointed out that —
. J. and in order to balance.232. On August 5.234. ESSO then filed an amended return where it asked for the refund of P323. CRUZ.72 paid by ESSO to the Central Bank on its profit remittances to its New York head office.93 for 1960 in CTA Cases No. In CTA Case No. petitioner ESSO deducted from its gross income for 1959. respondent.201. 1964. entitled An Act to Authorize the Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange.R. 1558. representing margin fees it had paid to the Central Bank on its profit remittances to its New York head office. It also claimed an overpayment of its tax by P434. the difference between the total deficiency and its tax credit of P221. 1989 ESSO STANDARD EASTERN. 1964. the Court of Tax Appeals. This was a revenue measure formally proposed by President Carlos P. I .94 for 1960. That is the issue now before us. the Petition is hereby DENIED. This portion of the decision was appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v. contending that the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense.246.822. ESSO argued that even if the amount paid as margin fees were not legally deductible. WHEREFORE. moreover. quoting established principles.
such as limiting non-essential imports. in order that they may properly interpret the legislative intent. its main function is to control the exchange rate without changing the par value of the peso as fixed in the Bretton Woods Agreement Act. As a matter of fact. ESSO prays that if margin fees are not taxes. Earlier.L. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. including a reasonable allowance for salaries or other compensation for personal services actually rendered. the Court laid down the rules on the deductibility of business expenses. the Court stated through Justice Jose P. Bengzon: A margin levy on foreign exchange is a form of exchange control or restriction designed to discourage imports and encourage exports. the language of which is plain and unambiguous. though in connection with a different levy. the same idea was expressed. v. since such legislative history may only be resorted to for the purpose of solving doubt. and rentals or other payments required to be made as a condition to the continued use or possession. are applied to strengthen the Central Bank's international reserve.] Apart from the above consideration. the expenses deductible are the necessary expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclusively. Commissioner of Internal Revenue . Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs. as we have seen. The different measures of exchange control or restriction cover different phases of foreign exchange transactions. may be resorted to as an aid in the interpretation of a statute which is ambiguous or of doubtful meaning. A tax is a levy for the purpose of providing revenue for government operations. Alternatively. But it is also well-settled jurisprudence that only in extremely doubtful matters of interpretation does the legislative history of an act of Congress become important. there may be no resort to the legislative history of the enactment of a statute.B. exchange restrictions have come to serve various purposes. and ultimately. or the history of the passage of the law through the legislature. protecting domestic industry and when combined with the use of multiple currency rates providing a source of revenue to the government. the margin levy is part of the rate of exchange as fixed by the government. the immediate impact is on the rate of foreign exchange. for the purpose of the trade or business. — In the case of a non-resident alien individual or a foreign corporation. 328. actual proceedings of the legislature. the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30(a) (1) of the National Internal Revenue
4 3 2
. i. For a member nation is not supposed to alter its exchange rate (at par value) to correct a merely temporary disequilibrium in its balance of payments. not for the purpose of creating it. Deductions from gross income in computing net income there shall be allowed as deductions (a) Expenses: (1) In general. while the proceeds of the 20% retention. In Caltex (Phil. As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not form part of the exchange rate. (2) Expenses allowable to non-resident alien individuals and foreign corporations. the control is on the amount of foreign exchange allowable. As previously adverted to. 30. [50 Am. traveling expenses while away from home in the pursuit of a trade or business.We are not unmindful of the rule that opinions expressed in debates. In the case of Atlas Consolidated Mining and Development Corporation v. they should nevertheless be considered necessary and ordinary business expenses and therefore still deductible from its gross income. Originally adopted to cope with balance of payment pressures. while the proceeds of the margin fee are applied to strengthen our country's international reserves. thus: The principle is recognized that when a taxpayer claims a deduction. through Justice J. there are at least two cases where we have held that a margin fee is not a tax but an exaction designed to curb the excessive demands upon our international reserve.) Inc.. coincident with. The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows: SEC. and in any way connected with. in Chamber of Agriculture and Natural Resources of the Philippines v. By its nature. of property to which the taxpayer has not taken or is not taking title or in which he has no equity. In the case of the margin levy. Central Bank. We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the power of taxation. suffice it to state that We have already held the contrary for the reason that a tax is levied to provide revenue for government operations. Jur. in quantitative restriction. The fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites States. The courts may take into consideration the facts leading up to. 'curtail any excessive demand upon the international reserve' in order to stabilize the currency. in fact. steps taken in the enactment of a law. he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. Reyes: Neither do we find merit in the argument that the 20% retention of exporter's foreign exchange constitutes an export tax.e. Acting Commissioner of Customs. the passage of the act. and are in many developing countries regarded as a more or less inevitable concomitant of their economic development programs.
The intention of the taxpayer often may be the controlling fact in making the determination. The taxpayer in every instance has the burden of justifying 5 the allowance of any deduction claimed. in order to be deductible under this section of the statute. There is thus no hard and fast rule on the matter. While it is true that there is a number of decisions in the United States delving on the interpretation of the terms 'ordinary and necessary' as used in the federal tax laws. this Court has never attempted to define with precision the terms 'ordinary and necessary. Similarly. the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself.. ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. is AFFIRMED. the payment may be unique or non-recurring to the particular taxpayer affected. then. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. having assumed an expense properly attributable to its head office. but certainly not in the Philippines. for its disposal abroad. otherwise. WHEREFORE. the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York. expenses for the remittance of funds after they have already been earned by petitioner's branch in the Philippines for the disposal of its Head Office in New York which is already another distinct and separate income taxpayer. They were expenses incurred in the disposition of said incomes. an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business. certain guiding principles worthy of serious consideration in the proper adjudication of conflicting claims. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. the margin fees are not expenses in connection with the production or earning of petitioner's incomes in the Philippines. he must substantially prove by evidence or records the deductions claimed under the law. SO ORDERED. we hold that the Court of Tax Appeals did not err when it held on this issue as follows: Considering the foregoing test of what constitutes an ordinary and necessary deductible expense.' An item of expenditure. In the light of the above explanation. it may be asked: Were the margin fees paid by petitioner on its profit remittance to its Head Office in New York appropriate and helpful in the taxpayer's business in the Philippines? Were the margin fees incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in the Philippines? Obviously not. The public respondent is correct when it asserts that "the paramount rule is that claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations . with costs against the petitioner. to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense.92 for 1960. x x x Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office in New York. must fall squarely within its language.
. it can never be said therefore that the margin fees were appropriate and helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. not only must the taxpayer meet the business test. The term 'ordinary' does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often. the same will be disallowed.. which in turn depends on the extent and permanency of the work accomplished by the expenditure. (2) it must be paid or incurred within the taxable year.which allows a deduction of 'all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. which is a separate and distinct income taxpayer from the branch in the Philippines. namely: (1) the expense must be ordinary and necessary. We come." It is clear that ESSO. Ordinarily. As stated in the Lopez case. three conditions are imposed. and (3) it must be paid or incurred in carrying on a trade or business. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business. In addition. .' There are however.00 for 1959 and P434. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction. the decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102.234. no adequate or satisfactory definition of those terms is possible.246. If at all. This is error. cannot now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances.