xCIR vs.

MARUBENI

11FEB
GR No. 137377| J. Puno

Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting
the 1985 deficiency income, branch profit remittance and contractors taxes from
Marubeni Corp after finding the latter to have properly availed of the tax amnesty
under EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in general import and export trading,
financing and construction, is duly registered in the Philippines with Manila branch
office. CIR examined the Manila branchs books of accounts for fiscal year ending
March 1985, and found that respondent had undeclared income from contracts with
NDC and Philphos for construction of a wharf/port complex and ammonia storage
complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several
deficiency taxes. CIR claims that the income respondent derived were income from
Philippine sources, hence subject to internal revenue taxes. On Sept 1986, respondent
filed 2 petitions for review with CTA: the first, questioned the deficiency income,
branch profit remittance and contractors tax assessments and second questioned
the deficiency commercial brokers assessment.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85,
and that taxpayers who wished to avail this should on or before Oct 31, 1986.
Marubeni filed its tax amnesty return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41s scope to include estate and donors taxes
under Title 3 and business tax under Chap 2, Title 5 of NIRC, extended the period of
availment to Dec 15, 1986 and stated those who already availed amnesty under EO
41 should file an amended return to avail of the new benefits. Marubeni filed a
supplemental tax amnesty return on Dec 15, 1986.
CTA found that Marubeni properly availed of the tax amnesty and deemed
cancelled the deficiency taxes. CA affirmed on appeal.

Issue:
W/N Marubeni is exempted from paying tax

Held:
Yes.

1. On date of effectivity

CIR claims Marubeni is disqualified from the tax amnesty because it falls under the
exception in Sec 4b of EO 41:
Sec. 4. Exceptions.The following taxpayers may not avail themselves of the
amnesty herein granted: xxx b) Those with income tax cases already filed in Court as
of the effectivity hereof;
Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30,
1986, a case had already been filed and was pending before the CTA and Marubeni
therefore fell under the exception. However, the point of reference is the date of
effectivity of EO 41 and that the filing of income tax cases must have been made
before and as of its effectivity.
EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed
with CTA on Sept 26, 1986. When EO 41 became effective, the case had not yet
been filed. Marubeni does not fall in the exception and is thus, not disqualified from
availing of the amnesty under EO 41 for taxes on income and branch profit
remittance.
The difficulty herein is with respect to the contractors tax assessment (business tax)
and respondents availment of the amnesty under EO 64, which expanded EO 41s
coverage. When EO 64 took effect on Nov 17, 1986, it did not provide for exceptions
to the coverage of the amnesty for business, estate and donors taxes. Instead,
Section 8 said EO provided that:
Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary
to or inconsistent with this amendatory Executive Order shall remain in full force and
effect.
Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its
date of effectivity. The general rule is that an amendatory act operates
prospectively. It may not be given a retroactive effect unless it is so provided
expressly or by necessary implication and no vested right or obligations of contract
are thereby impaired.
2. On situs of taxation
Marubeni contends that assuming it did not validly avail of the amnesty, it is still not
liable for the deficiency tax because the income from the projects came from the
Offshore Portion as opposed to Onshore Portion. It claims all materials and
equipment in the contract under the Offshore Portion were manufactured and
completed in Japan, not in the Philippines, and are therefore not subject to Philippine
taxes.
(BG: Marubeni won in the public bidding for projects with government corporations
NDC and Philphos. In the contracts, the prices were broken down into a Japanese
Yen Portion (I and II) and Philippine Pesos Portion and financed either by OECF or by
suppliers credit. The Japanese Yen Portion I corresponds to the Foreign Offshore
Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to

the Philippine Onshore Portion. Marubeni has already paid the Onshore Portion, a
fact that CIR does not deny.)
CIR argues that since the two agreements are turn-key, they call for the supply of
both materials and services to the client, they are contracts for a piece of work and
are indivisible. The situs of the two projects is in the Philippines, and the materials
provided and services rendered were all done and completed within the territorial
jurisdiction of the Philippines. Accordingly, respondents entire receipts from the
contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should
be subjected to contractors tax (a tax on the exercise of a privilege of selling
services or labor rather than a sale on products).
Marubeni, however, was able to sufficiently prove in trial that not all its work was
performed in the Philippines because some of them were completed in Japan (and
in fact subcontracted) in accordance with the provisions of the contracts. All services
for the design, fabrication, engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and completed in Japan.
These services were rendered outside Philippines taxing jurisdiction and are therefore
not subject to contractors tax. Petition denied.

Commissioner v. CTA and Smith Kline & French Overseas 127 SCRA 9

This case is about the refund of a 1971 income tax amounting to P324+k. Smith Kline
and French Overseas Company, a multinational firm domiciled in Philadelphia,
Pennsylvania, is licensed to do business in the Philippines. It is engaged in the
importation, manufacture and sale of pharmaceuticals, drugs and chemicals.
In its 1971 original ITR, Smith Kline declared a net taxable income of P1.4+M and paid
P511+k as tax due. Among the deductions claimed from gross income was P501+k as
its share of the head office overhead expenses. However, in its amended return filed
on March 1, 1973, there was an overpayment of P324+k arising from underdeduction
of home office overhead. It made a formal claim for the refund of the alleged
overpayment.
In October, 1972, Smith Kline received from its international independent auditors an
authenticated certification to the effect that the Philippine share in the unallocated
overhead expenses of the main office for the year ended December 31, 1971 was
actually P1.4+M.On April 2, 1974, without awaiting the action of the Commissioner of
Internal Revenue on its claim, Smith Kline filed a petition for review with the CTA. The
CTA ordered the CIR to refund the overpayment or grant a tax credit to Smith Kline.
The Commissioner appealed to the SC.

HELD: The governing law is found in section 37 of the old NIRC which reads:

Xxx (b) Net income from sources in the Philippines. From the items of gross income
specified in subsection (a) of this section there shall be deducted the expenses,
losses, and other deductions properly apportioned or allocated thereto and a
ratable part of any expenses, losses, or other deductions which cannot definitely be
allocated to some item or class of gross income. The remainder, if any, shall be
included in full as net income from sources within the Philippines.
Revenue Regulations No. 2 of the Department of Finance contains the following
provisions on the deductions to be made to determine the net income from
Philippine sources: SEC. 160. Apportionment of deductions. From the items
specified in section 37(a), as being derived specifically from sources within the
Philippines there shall be deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any other expenses,
losses or deductions which can not definitely be allocated to some item or class of
gross income. The remainder shall be included in full as net income from sources
within the Philippines. The ratable part is based upon the ratio of gross income from
sources within the Philippines to the total gross income.
"Example: A non-resident alien individual whose taxable year is the calendar year,
derived gross income from all sources for 1939 of P180,000, including therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use of patents within the Philippines 12,000
Gain from sale of real property located within the Philippines 11,000

Total P36,000
========
that is, one-fifth of the total gross income was from sources within the Philippines. The
remainder of the gross income was from sources without the Philippines, determined
under section 37(c).
The expenses of the taxpayer for the year amounted to P78k.. Of these expenses the
amount of P8k is properly allocated to income from sources within the Philippines and
the amount of P40k is properly allocated to income from sources without the
Philippines.
The remainder of the expense, P30k cannot be definitely allocated to any class of
income. A ratable part thereof, based upon the relation of gross income from sources
within the Philippines to the total gross income, shall be deducted in computing net
income from sources within the Philippines. Thus, there are deducted from the P36k of
gross income from sources within the Philippines expenses amounting to P14k
[representing P8k properly apportioned to the income from sources within the
Philippines and P6k a ratable part (1/5) of the expenses which could not be allocated
to any item or class of gross income]. The remainder, P22k, is the net income from
sources within the Philippines.

Thus, it is manifest that where an expense is clearly related to the production of

Philippine-derived income or to Philippine operations (e.g. salaries of Philippine
personnel, rental of office building in the Philippines), that expense can be deducted
from the gross income acquired in the Philippines without resorting to apportionment.
The overhead expenses incurred by the parent company in connection with finance,
administration, and research and development, all of which directly benefit its
branches all over the world, including the Philippines, fall under a different category
however. These are items which cannot be definitely allocated or identified with the
operations of the Philippine branch. For 1971, the parent company of Smith Kline
spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the
regulations, Smith Kline can claim as its deductible share a ratable part of such
expenses based upon the ratio of the local branch's gross income to the total gross
income, worldwide, of the multinational corporation.
The weight of evidence bolsters Smith Klines position that the amount of P1.4+M
represents the correct ratable share, the same having been computed pursuant to
section 37(b) and section 160. Therefore, it is entitled to a refund.

CIR vs. British Overseas Airways Corporation (BOAC)

Post under case digests, Taxation at Sunday, February 26, 2012 Posted by
Schizophrenic Mind
Facts: British Overseas Airways Corp (BOAC) is a 100% British Government-owned
corporation engaged in international airlinebusiness and is a member of the Interline
Air Transport Association, and thus, it operates air transportation services and sells
transportation tickets over the routes of the other airline members.

From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines
and thus, did not carry passengers and/or cargo to or from the Philippines but
maintained a general sales agent in the Philippines - Warner Barnes & Co. Ltd. and
later, Qantas Airways - which was responsible for selling BOAC tickets covering
passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency
income taxes against BOAC.

Issue: Whether the revenue derived by BOAC from ticket sales in the Philippines,
constitute income of BOAC from Philippine sources, and accordingly taxable.

Held: 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. Herein, the
sale of tickets in the Philippines is the activity that produced the income. The tickets

exchanged hands here and payment for fareswere also made here in the Philippine
currency.

The situs 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. PD 68, in relation to PD 1355,
ensures that international airlines are taxed on their income from Philippine sources.
The 2 1/2% tax on gross billings is an income tax. If it had been intended as an excise
tax or percentage tax, it would have been placed under Title V of the Tax Code
covering taxes on business.