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Taxation I

Atty. Rowena Mari, CPA

1. Bagatsing vs. Committee on Privatization et al.

GR No. 112399, 14 July 1995
PETRON was originally registered with the Securities and Exchange Commission (SEC) in 1966 under the corporate
name "Esso Philippines, Inc." (ESSO) as a subsidiary of Esso Eastern, Inc. and Mobil Petroleum Company, Inc.
In 1973, at the height of the world-wide oil crisis brought about by the Middle East conflicts, the Philippine government
acquired ESSO through the PNOC. ESSO became a wholly-owned company of the government under the corporate
name PETRON and as a subsidiary of PNOC.
In acquiring PETRON, the government aimed to have a buffer against the vagaries of oil prices in the international
market. It was felt that PETRON can serve as a counterfoil against price manipulation that might go unchecked if all
the oil companies were foreign-owned. Indeed, PETRON helped alleviate the energy crises that visited the country
from 1973 to 1974, 1979 to 1980, and 1990 to 1991.
On December 2, 1991, President Fidel V. Ramos noted that "[t]he privatization program has proven successful and
beneficial to the economy in terms of expanding private economic activity, improving investment climate, broadening
ownership base and developing capital markets, and generating substantial revenues for priority government
expenditure," but "[t]here is still much potential for harnessing private initiative to undertake in behalf of government
certain activities which can be more effectively and efficiently undertaken by the private sector" (G.R. No.
112399, Rollo, p. 31).
In its meeting held on September 9, 1992, the PNOC Board of Directors approved Specific Thrust No. 6 and moved "to
bring to the attention of the Administration the need to privatize Petron whether or not there will be deregulation [of the
oil industry]" (G.R. No. 112399, Rollo p. 67).
In a letter dated October 21, 1992, Secretary Ramon R. Del Rosario, as Chairman of the Committee on Privatization,
endorsed to President Ramos the proposal of PNOC to "privatize 65% of the stock of Petron, open to both foreign as
well as domestic investors." Secretary Del Rosario added: "The entry of foreign investors in this field is expected to
result in improved technology and know-how and will enable Petron to have access to international information network
as well as access to external markets and refining contracts" (G.R. No. 112399,Rollo, p. 72).
On April 1, 1993, the GCMCC recommended to COP the privatization of only 65% of the capital stock of PETRON,
instead of the 100% privatization previously recommended.
On June 10, 1993, in a letter addressed to Secretary Ernesto C. Leung, the COP Chairman, President Ramos
approved the privatization of PETRON up to a maximum of 65% of its capital stock.
The Petron Privatization Working Committee (PWC) was thus formed. It finalized a privatization strategy with 40% of
the shares to be sold to a strategic partner and 20% to the general public through the initial public offering and
employees stock option plan.
The Commission on Audit (COA) was consulted as to the valuation methodologies and privatization process. The
privatization plan was also presented to the COP on July 23, 1993, and to the President on July 31, 1993 for their
The invitation to bid was published in several newspapers of general circulation, both local and foreign. The deadline
for the submission of proposals was set for December 15, 1993 at 5:00 P.M.

In a meeting of the Petron PWC held on December 15, 1993 at 12:00 noon, it decided that Westmont Holdings
(WESTMONT) was disqualified from participating in the bidding for its alleged failure to comply with the technical and
financial requirements for a strategic partner.

At 6:30 P.M., the other two bids were opened. The bid of ARAMCO was for US$502 million while the bid of
PETRONAS was for US$421 million. The PNOC Board of Directors then passed Resolution No. 866, S. 1993,
declaring ARAMCO the winning bidder.


Taxation I

Atty. Rowena Mari, CPA

On December 16, 1993, respondent Monico Jacob, in his capacity as President and Chief Executive Officer of PNOC,
endorsed to the COP the bid of ARAMCO for approval. The COP gave its approval on the same day. Also on the same
day, Manuel Estrella filed a complaint in behalf of WESTMONT with PNOC, questioning the award of the 40% block of
Petron shares to ARAMCO. The COP answered Estrella's letter on January 14, 1994, explaining why WESTMONT's
bid was returned unopened.
On February 3, 1994, PNOC and ARAMCO signed the Stock Purchase Agreement and on March 4, 1994, the two
companies signed the Shareholders' Agreement.
(1) Does the petitioners have locus standi to file the present action?
(2) Can the subjects of privatization only be non-performing assets of the government?
(3) Can the courts review the act of privatization by PNOC?
(4) Is there a failure of a public bidding when only one bidder qualifies?

(1) Yes, the petitioners can bring the action in their capacity as taxpayers under the doctrine laid down
in Kilosbayan, Inc. v. Guingona, 232 SCRA 110 (1994). Under said ruling, taxpayers may question contracts
entered into by the national government or government-owned or controlled corporations alleged to be in
contravention of the law. As long as the ruling in Kilosbayan on locus standi is not reversed, we have no
choice but to follow it and uphold the legal standing of petitioners as taxpayers to institute the present action.
(2) No, To say that only non-performing assets should be the subject of privatization does not conform with the
realities of economic life. In the world of business and finance, it is difficult to sell a business in dire, financial
distress. As entrepreneur Don Eugenio Lopez used to advert to his younger executives: "Don't buy
headaches. Don't even accept them if they are offered to you on a silver platter." It is only in a fire sale that
the government can expect to get rid of its non-performing assets, more so if the sequencing pattern insisted
by petitioners (initial public offering of 10% block to small investors) is followed. While Proclamation No. 50
mandates that non-performing assets should promptly be sold, it does not prohibit the disposal of the other
kinds of assets, whether performing, necessary or appropriate.
(3) No, The decision of PNOC to privatize PETRON and the approval of the COP of such privatization, being
made in accordance with Proclamation No. 50, cannot be reviewed by this Court. Such acts are exercises of
the executive function as to which the Court will not pass judgment upon or inquire into their wisdom (Llamas
v. Orbos, 202 SCRA 844 [1991]).
(4) No, a failure of bidding takes place is defined in Circular No. 89-296 of the Commission on Audit, which
prescribes the "Audit Guidelines on the Divestment or Disposal of Property and other Assets of the National
Government Agencies and Instrumentalities, Local Government Units and Government-Owned or Controlled
Corporations and their Subsidiaries."
Under said COA Circular, there is a failure of bidding when: 1) there is only one offeror; or (2) when all the
offers are non-complying or unacceptable.
In the case at bench, there were three offerors: SAUDI ARAMCO, PETRONAS and WESTMONT.
While two offerors were disqualified, PETRONAS for submitting a bid below the floor price and WESTMONT
for technical reasons, not all the offerors were disqualified. To constitute a failed bidding under the COA
Circular, all the offerors must be disqualified.

Petitions are dismissed.


Taxation I

Atty. Rowena Mari, CPA

2. Philex Mining Corp. vs. Commissioner of Internal Revenue, CA, CTA

GR No. 125704, August 28, 1998
Facts: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals affirming
the Court of Tax Appeals decision ordering it to pay the amount of P110.7 M as excise tax
liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
interest from 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.
Philex protested the demand for payment of the tax liabilities stating that it has pending
claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the
amount of P120 M plus interest. Therefore these claims for tax credit/refund should be
applied against the tax liabilities.

Issue: Can there be an off-setting between the tax liabilities vis-a-vis claims of tax refund of the

Ruling: No. Philex's claim is an outright disregard of the basic principle in tax law that taxes are
the lifeblood of the government and so should be collected without unnecessary hindrance.
Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection
system. Too simplistic, it finds no support in law or in jurisprudence. To be sure, Philex cannot be
allowed to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for
refund or credit against the government which has not yet been granted.Taxes cannot be subject
to compensation for the simple reason that the government and the taxpayer are not creditors
and debtors of each other. There is a material distinction between a tax and debt. Debts are due
to the Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity. xxx There can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The collection
of a tax cannot await the results of a lawsuit against the government.

3. Commissioner of Internal Revenue vs. Proctor and Gamble Phils. Corp. and
GR No. 66838, April 15, 1988
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes
down to 15% ONLY IF the country of domicile of the foreign stockholder corporation shall allow
such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against
the tax payable to the domiciliary country by the foreign stockholder corporation. However, such
tax credit for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount
equivalent to 20 percentage points.

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


Taxation I

Atty. Rowena Mari, CPA

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

RULING: YES. P&G Philippines is entitled.

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

4. Commissioner of Internal Revenue vs. CA, CTA and YMCA Phils.

G.R. No. 124041, October 14, 1998
FACTS: Private Respondent YMCA is a non-stock, non-profit institution, which conducts various
programs and activities that are beneficial to the public, especially the young people, pursuant
to its religious, educational and charitable objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from

leasing out a portion of its premises to small shop owners, like restaurants and canteen
operators, and P44,259.00 from parking fees collected from non-members.

On July 2, 1984, the commissioner of internal revenue (CIR) issued an assessment to

private respondent, in the total amount of P415,615.01 including surcharge and
interest, for deficiency income tax, deficiency expanded withholding taxes on rentals
and professional fees and deficiency withholding tax on wages.

Private respondent formally protested the assessment and, as a supplement to its

basic protest, filed a letter dated October 8, 1985.

In reply, the CIR denied the claims of YMCA.

CTA issued this ruling in favor of the YMCA. CA affirmed.

Petitioner argues that while the income received by the organizations enumerated in Section 27 (now Section 30) of the
NIRC is, as a rule, exempted from the payment of tax "in respect to income received by them as such," the exemption
does not apply to income derived from any of their properties, real or personal, or from any of their activities conducted
for profit, regardless of the disposition made of such income. "Rental income derived by a tax-exempt organization
from the lease of its properties, real or personal, [is] not, therefore, exempt from income taxation, even if such income
is exclusively used for the accomplishment of its objectives."
ISSUE: Whether or not the income derived from rentals of real property owned by YMCA is subject to income tax.


Taxation I

Atty. Rowena Mari, CPA


Income of whatever kind and character of non-stock non-profit organizations from any
of their properties, real or personal, or from any of their activities conducted for profit,
regardless of the disposition made of such income, shall be subject to the tax imposed
under the NIRC.

Rental income derived by a tax-exempt organization from the lease of its properties,
real or personal, is not exempt from income taxation, even if such income is
exclusively used for the accomplishment of its objectives.

Because taxes are the lifeblood of the nation, the Court has always applied the
doctrine of strict in interpretation in construing tax exemptions (Commissioner of
Internal Revenue v. Court of Appeals, 271 SCRA 605, 613, April 18, 1997). Furthermore,
a claim of statutory exemption from taxation should be manifest and unmistakable
from the language of the law on which it is based. Thus, the claimed exemption must
expressly be granted in a statute stated in a language too clear to be mistaken
(Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and Court of
Appeals, G.R. No. 117359, p. 15 July 23, 1998).

Verba legis non est recedendum. The law does not make a distinction. The rental
income is taxable regardless of whence such income is derived and how it is used or
disposed of. Where the law does not distinguish, neither should we.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Constitution,
claiming that it is a non-stock, non-profit educational institution whose revenues and
assets are used actually, directly and exclusively for educational purposes so it is
exempt from taxes on its properties and income.

This is without merit since the exemption provided lies on the payment of property tax,
and not on the income tax on the rentals of its property. The bare allegation alone that
one is a non-stock, non-profit educational institution is insufficient to justify its
exemption from the payment of income tax.

For the YMCA to be granted the exemption it claims under the above provision, it must
prove with substantial evidence that (1) it falls under the classification non-stock, nonprofit educational institution; and (2) the income it seeks to be exempted from taxation
is used actually, directly, and exclusively for educational purposes. Unfortunately for
respondent, the Court noted that not a scintilla of evidence was submitted to prove
that it met the said requisites.


Taxation I

Atty. Rowena Mari, CPA

In leasing its facilities to small shop owners and in operating parking spaces, YMCA
does not engage in any profit-making business. These activities conducted on YMCA's
property were aimed not only at fulfilling the needs and requirements of its members
as part of YMCA's youth program but, more importantly, at raising funds to finance the
multifarious projects of the Association.

In order to claim exemption from income tax, a corporation or association

must show that it is organized and operated exclusively for religious,
charitable, scientific, athletic, cultural or educational purposes or for the
rehabilitation of veterans, and that no part of its income inures to the
benefit of any private stockholder or individual.

The majority, if not all, of the income of the organizations covered by the exemption
provided in Sec. 27, pars. (g) and (h), of the NIRC are derived from their properties, real
or personal. If we are to interpret the last paragraph of Sec. 27 to the effect that all
income of whatever kind from the properties of said organization, real or personal, are
taxable, even if not conducted for profit, then Sec. 27, pars. (g) and (h), would be
rendered ineffective and nugatory. (so last paragraph applies only those income
derived from these properties for profit)

In YMCA of Manila v. Collector of Internal Revenue this Court categorically held and found YMCA to be an
educational institution exclusively devoted to educational and charitable purposes and not operated for profit. We ruled
therein that YMCA cannot be said to be an institution used exclusively for religious purposes or an institution devoted
exclusively for charitable purposes or an institution devoted exclusively to educational purposes, but it can be truthfully
said that it is an institution used exclusively for all three purposes (religious, charitable and educational) and that, as
such, it is entitled to be exempted from taxation.

5. Serafica vs. The Treasurer of Ormoc City et al.

G.R. No. L-24813, April 25, 1969
Plaintiff, Dr. Hermenegildo Serafica, seeks a declaration of nullity of Ordinance No. 13,
Series of 1964, of Ormoc City, imposing a "tax of five pesos (P5.00) for every one thousand
(1,000) board feet of lumber sold at Ormoc City by any person, partnership, firm, association,
corporation, or entities", pursuant to which the Treasurer of said City levied on and collected
from said plaintiff, as owner of the Serafica Sawmill, the aggregate sum of P1,837.84, as tax
on 367,568 board feet of lumber sold, in said City, during the third quarter of 1964. After
appropriate proceedings, the lower court rendered judgment upholding the validity of said
ordinance and denying the relief prayed for by Dr. Serafica.
Plaintiff assails this ordinance as null and void upon the grounds that: (1) the Charter of
Ormoc City (Republic Acts Nos. 179 and 429) authorizes the same to "regulate", but not to
"tax" lumber yards; (2) the ordinance in question imposes, in effect, double taxation, because
the business of lumberyard is already regulated under said Charter and the sale of lumber is
"a mere incident to the business of lumber yard"; (3) the tax imposed is "unfair, unjust,
arbitrary, unreasonable, oppressive and contrary to the principles of taxation"; and (4) "the
public was not heard and given a chance to air its views" thereon.

Issue: Is Ordinance No. 13, s. 1964 of Ormoc City valid?

Ruling: YES.
As to the first ground for the nullification of said Ord. No. 13, Court held in Ormoc Sugar
Co. v. Municipal Board of Ormoc City, that the taxing power of the City of Ormoc, under
section of the Local Autonomy Act 2 is "broad" and "sufficiently plenary to cover everything,
excepting those mentioned therein". It should be noted that in said case of Ormoc Sugar Co.,
We upheld the validity of a sales tax.
As to the second ground, suffice it to say that regulation and taxation are two different things,
the first being an exercise of police power, whereas the latter is not, apart from the fact that
double taxation is not prohibited in the Philippines.

As to the third ground, it is premised upon the fact that the tax in question is imposed
regardless of the class of lumber sold, although there are several categories thereof,
commanding different prices. Plaintiff has not proven, however, or even alleged the prices
corresponding to each category, so that, like the lower court, We have no means to ascertain
the accuracy of the conclusion drawn by him, and must, accordingly, rely upon the
presumption that the City Council had merely complied with its duty and that the ordinance is
valid, unless and until the contrary has been duly established.


Taxation I

Atty. Rowena Mari, CPA

As to the fourth ground, is based upon Provincial Circular No. 24 of the Department of
Finance, dated March 31, 1960, suggesting that, "in the enactment of tax ordinances .. under
the Local Autonomy Act ... where practicable, public hearings be held wherein the views of
the public ... may be heard." This is, however, a mere suggestion, compliance with which is
not obligatory, so that failure to act in accordance therewith cannot and does not affect the
validity of the tax ordinance.
Petition appealed from affirmed with cost against plaintiff.