Professional Documents
Culture Documents
Incometaxation FTcases
Incometaxation FTcases
SARMIENTO, J.:p
Central in this controversy is the issue as to whether or not a taxpayer who
merely states as a footnote in his income tax return that a sum of money that he
erroneously received and already spent is the subject of a pending litigation and
there did not declare it as income is liable to pay the 50% penalty for filing a
fraudulent return.
This question is the subject of the petition for review before the Court of the
portion of the Decision 1 dated July 27, 1983 of the Court of Tax Appeals (CTA) in
C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in
his capacity as Commissioner of Internal Revenue," which orders the deletion of
the 50% surcharge from Javier's deficiency income tax assessment on his
income for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the
Commissioner's Motion for Reconsideration 3 and Motion for New Trial 4 on the
deletion of the 50% surcharge assessment or imposition.
The pertinent facts as are accurately stated in the petition of private respondent
Javier in the CTA and incorporated in the assailed decision now under review,
read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the
petitioner (private respondent herein), received from the Prudential
Bank and Trust Company in Pasay City the amount of
US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa,
From this, it can hardly be said that there was actual and intentional
fraud, consisting of deception willfully and deliberately done or
resorted to by petitioner (private respondent) in order to induce the
Government to give up some legal right, or the latter, due to a false
return, was placed at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities. (Aznar vs. Court of
Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519),
because petitioner literally "laid his cards on the table" for
respondent to examine. Error or mistake of fact or law is not fraud.
(Insular Lumber vs. Collector, L-7100, April 28, 1956.). Besides,
Section 29 is not too plain and simple to understand. Since the
question involved in this case is of first impression in this jurisdiction,
under the circumstances, the 50% surcharge imposed in the
deficiency assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's
ruling, elevated the matter to us, by the present petition, raising the main issue as
to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50%
FRAUD PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not
appeal the decision which held him liable for the basic deficiency income tax
(excluding the 50% surcharge for fraud)." However, he submitted in the
same memorandum"that the issue may be raised in the case not for the purpose
of correcting or setting aside the decision which held him liable for deficiency
income tax, but only to show that there is no basis for the imposition of the
surcharge." This subsequent disavowal therefore renders moot and academic the
posturings articulated in as Comment 10 on the non-taxability of the amount he
erroneously received and the bulk of which he had already disbursed. In any
event, an appeal at that time (of the filing of the Comments) would have been
already too late to be seasonable. The petitioner, through the office of the
Solicitor General, stresses that:
xxx xxx xxx
Under the then Section 72 of the Tax Code (now Section 248 of the 1988
National Internal Revenue Code), a taxpayer who files a false return is liable to
pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in
case payment has been made on the basis of the return filed before the
discovery of the falsity or fraud.
We are persuaded considerably by the private respondent's contention that there
is no fraud in the filing of the return and agree fully with the Court of Tax Appeals'
interpretation of Javier's notation on his income tax return filed on March 15,
1978 thus: "Taxpayer was the recipient of some money from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation
that it was an "error or mistake of fact or law" not constituting fraud, that such
notation was practically an invitation for investigation and that Javier had literally
"laid his cards on the table." 13
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax
return was discussed in this manner:
. . . The fraud contemplated by law is actual and not constructive. It
must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up
some legal right. Negligence, whether slight or gross, is not
equivalent to the fraud with intent to evade the tax contemplated by
law. It must amount to intentional wrong-doing with the sole object of
avoiding the tax. It necessarily follows that a mere mistake cannot
be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes
in making entries in the returns and in the assessment, respectively,
under the inventory method of determining tax liability, it would be
unfair to treat the mistakes of the petitioner as tainted with fraud and
those of the respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion and the mere
understatement of a tax is not itself proof of fraud for the purpose of tax
evasion. 15
NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public respondent
Court of Tax Appeals, promulgated September 26, 1977 1 denying petitioners'
claim for tax refunds, and order the Commissioner of Internal Revenue to refund
to them their income taxes which they claim to have been erroneously or illegally
paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
Petitioners are Filipino citizens and employees of Procter and
Gamble, Philippine Manufacturing Corporation, with offices at
Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is
a subsidiary of Procter & Gamble, a foreign corporation based in
or its equivalent. 4 Income can also be though of as flow of the fruits of one's
labor. 5
Petitioners are correct as to their claim that their dollar earnings are NOT receipts
derived from foreign exchange transactions. For a foreign
exchange
error by concluding that since C.B. Circular No. 289 does not apply to
them, the par value of the peso should be the guiding rate used for income tax
purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which came
to them within a specified period of time of two yeas as payment for their
services.
Section 21 of the National Internal Revenue Code, amended up to August 4,
1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby
imposed upon the taxable net income received during each
taxable year from all sources by every individual, whether a
citizen of the Philippines residing therein or abroad or an alien
residing in the Philippines, determined in accordance with the
following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National Internal
Revenue Code, Section 338 thereof empowers the Secretary of Finance to
"promulgate all needful rules and regulations" to effectively enforce its
provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and
41-71 11 were issued to prescribed a uniform rate of exchange from US
dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the
years 1970 and 1971, respectively. Said revenue circulars were a valid exercise
of the authority given to the Secretary of Finance by the Legislature which
enacted the Internal Revenue Code. And these are presumed to be a valid
interpretation of said code until revoked by the Secretary of Finance himself. 12
Petitioners argue that since there were no remittances and acceptances of their
salaries and wages in US dollars into the Philippines, they are exempt from the
coverage of such circulars. Petitioners forget that they are citizens of the
Philippines, and their income, within or without, and in these cases wholly
without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook
any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the
uniform rate of exchange prescribed under the aforestated Revenue
Memorandum Circulars, there is no reason for respondent Commissioner to
refund any taxes to petitioner as said Revenue Memorandum Circulars, being of
long standing and not contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are
the lifeblood of the government" and one of the duties of a Filipino citizen is to
pay his income tax.
WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the
respondent Court of Tax Appeals of petitioners' claims for tax refunds for the
income tax period for 1970 and 1971 is AFFIRMED. Costs against petitioners.
SO ORDERED.
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold
two parcels of land which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on
two lots with areas of 1,124 and 963 square meters located at Greenhills, San
Juan, Rizal. The next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The company sold the two
lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they were coowners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners
resold them to the Walled City Securities Corporation and Olga Cruz Canda
for the total sum of P313,050 (Exh. C and D). They derived from the sale a total
profit of P134,341.88 or P33,584 for each of them. They treated the profit as a
capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive
period, the Commissioner of Internal Revenue required the four petitioners
to pay corporate income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed P37,018 as corporate
income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42%
accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the
sum of P33,584 as a " taxable in full (not a mere capital gain of which is
taxable) and required them to pay deficiency income taxes aggregating
P56,707.20 including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax
on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed
an unregistered partnership or joint venture within the meaning of sections
24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas
Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court
sustained the same. Judge Roaquin dissented. Hence, the instant appeal.
from its profits and assets. St. Luke's had total revenues of P1,730,367,965 or
approximately P1.73 billion from patient services in 1998. 7
St. Luke's contended that the BIR should not consider its total revenues,
because its free services to patients wasP218,187,498 or 65.20% of its 1998
operating income (i.e., total revenues less operating expenses)
ofP334,642,615. 8 St. Luke's also claimed that its income does not inure to the
benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30(E) and (G) of the
NIRC. It argued that the making of profit per se does not destroy its income
tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its
arguments before the CTA that Section 27(B) applies to St. Luke's. The petition
raises the sole issue of whether the enactment of Section 27(B) takes
proprietary non-profit hospitals out of the income tax exemption under
Section 30 of the NIRC and instead, imposes a preferential rate of 10% on
their taxable income. The BIR prays that St. Luke's be ordered to
pay P57,659,981.19 as deficiency income and expanded withholding tax for 1998
with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the
treatment and withholding of a part of its income, 9 as well as the payment of
surcharge and delinquency interest. There is no ground for this Court to
undertake such a factual review. Under the Constitution 10 and the Rules of
Court, 11 this Court's review power is generally limited to "cases in which only an
error or question of law is involved." 12 This Court cannot depart from this
limitation if a party fails to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First
Division Decision dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby
PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT assessment
issued by respondent against petitioner in the amount of P110,000.00 is
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself
stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary,
being allegedly self-serving, to show the nature of the 'Other Income-Net' x x
x." 28 This is not a case of overlooking or failing to consider relevant evidence.
The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no
other evidence aside from the self-serving affidavit executed by [the] witnesses
[of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay
the 25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay
the deficiency tax within the time prescribed for its payment in the notice of
assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount
of P6,275,370.38 in the dispositive portion of the CTA First Division Decision
includes only deficiency interest under Section 249(A) and (B) of the NIRC and
not delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis--vis Section 30(E)
and (G) on the income tax exemption of charitable and social welfare
institutions. The 10% income tax rate under Section 27(B) specifically
pertains to proprietary educational institutions and proprietary non-profit
hospitals. The BIR argues that Congress intended to remove the exemption that
non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977,
which is now substantially reproduced in Section 30(E) of the NIRC of
1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational
institutions and hospitals which are non-profit shall pay a tax of ten percent (10%)
on their taxable income except those covered by Subsection (D) hereof:
Provided, That if the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income derived by such
We
hold that Section 27(B) of the NIRC does NOT remove the
income tax exemption of proprietary non-profit hospitals
under Section 30(E) and (G). Section 27(B) on one hand, and Section
30(E) and (G) on the other hand, can be construed together without the removal
of such tax exemption. The effect of the introduction of Section 27(B) is to
subject the taxable income of two specific institutions, namely, proprietary
non-profit educational institutions 36 and proprietary non-profit hospitals,
among the institutions covered by Section 30, to the 10% preferential rate
under Section 27(B) instead of the ordinary 30% corporate rate under the
last paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the
income of (1) proprietary non-profit educational institutions and (2)
proprietary non-profit hospitals. The only qualifications for hospitals are
that they must be proprietary and non-profit. "Proprietary"
means private, following the definition of a "proprietary educational institution"
as "any private school maintained and administered by private individuals
or groups" with a government permit. "Non-profit" means no net income
or asset accrues to or benefits any member or specific person, with all the
net income or asset devoted to the institution's purposes and all its
activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal
Revenue v. Club Filipino Inc. de Cebu,37 this Court considered as non-profit
a sports club organized for recreation and entertainment of its stockholders and
members. The club was primarily funded by membership fees and dues. If it had
profits, they were used for overhead expenses and improving its golf
course. 38 The club was non-profit because of its purpose and there was no
evidence that it was engaged in a profit-making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was
not charitable. The Court defined "charity" in Lung Center of the Philippines
v. Quezon City 40 as "a gift, to be applied consistently with existing laws, for
the benefit of an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion, by assisting
them to establish themselves in life or [by] otherwise lessening the burden
of government." 41 A non-profit club for the benefit of its members fails this test.
is essentially a gift to an
indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and
services to the public which would otherwise fall on the shoulders of government.
Thus, as a matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the government is
compensated by its relief from doing public works which would have been funded
by appropriations from the Treasury. 42
exemption restricts the collection of taxes necessary for the existence of the
government.
The Court in Lung Center declared that the Lung Center of the Philippines
is a charitable institution for the purpose of exemption from real property
taxes. This ruling uses the same premise as Hospital de San Juan 45 and Jesus
Sacred Heart College 46 which says that receiving income from paying
patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it derives
income from paying patients, whether out-patient, or confined in the hospital,
or receives subsidies from the government, so long as the money received
is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons
managing or operating the institution. 47
For REAL PROPERTY TAXES, the incidental generation of income is
permissible because the test of exemption is the USE of the property. The
Constitution provides that "[c]haritable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation." 48 The test of
exemption is not strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property in a certain way,
i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of
its lot for commercial purposes. The effect of failing to meet the use
not define a charitable institution, but requires that the institution "actually, directly
and exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A NON-STOCK corporation or association;
(2) ORGANIZED EXCLUSIVELY for charitable purposes;
(3) OPERTED EXCLUSIVELY for charitable purposes; and
(4) NO part of its NET INCOME OR ASSET shall belong to or inure to
the benefit of any member, organizer, officer or any specific person.
Even if St. Luke's meets the test of charity, a charitable institution is not ipso facto
tax exempt.
exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for
charitable purposes. Likewise, to be exempt from income taxes, Section
30(G) of the NIRC requires that the institution be "operated exclusively" for
social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words
"organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities conducted
for profit regardless
P1,730,367,965.00
OPERATING EXPENSES
Professional care of patients
Administrative
Household and Property
P1,016,608,394.00
287,319,334.00
91,797,622.00
P1,395,725,350.00
P334,642,615.00
100%
Free Services
-218,187,498.00 -65.20%
P116,455,117.00
OTHER INCOME
17,482,304.00
34.80%
P133,937,421.00
them. Tax exemptions for charitable institutions should therefore be limited to institutions
beneficial to the public and those which improve social welfare. A profit-making entity
should not be allowed to exploit this subsidy to the detriment of the government and
other taxpayers.
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the
NIRC to be completely tax exempt from all its income. However, it remains a
proprietary non-profit hospital under Section 27(B) of the NIRC as long as it
does not distribute any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St. Luke's, as a
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.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court
if Tax Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in
favor of the YMCA:
xxx [T]he leasing of private respondents facilities to small shop owners, to restaurant and
canteen operators and the operation of the parking lot are reasonably incidental to and
reasonably necessary for the accomplishment of the objectives of the [private
respondents]. It appears from the testimonies of the witnesses for the [private respondent]
particularly Mr. James C. Delote, former accountant of YMCA, that these facilities were
leased to members and that they have to service the needs of its members and their
guests. The Rentals were minimal as for example, the barbershop was only charged P300
per month. He also testified that there was actually no lot devoted for parking space but
the parking was done at the sides of the building. The parking was primarily for members
with stickers on the windshields of their cars and they charged P.50 for nonmembers. The rentals and parking fees were just enough to cover the costs of operation
and maintenance only. The earning[s] from these rentals and parking charges including
those from lodging and other charges for the use of the recreational facilities constitute
[the] bulk of its income which [is] channeled to support its many activities and attainment
of its objectives. As pointed out earlier, the membership dues are very insufficient to
support its program. We find it reasonably necessary therefore for [private respondent] to
make [the] most out [of] its existing facilities to earn some income. It would have been
different if under the circumstances, [private respondent] will purchase a lot and convert
it to a parking lot to cater to the needs of the general public for a fee, or construct a
building and lease it out to the highest bidder or at the market rate for commercial
purposes, or should it invest its funds in the buy and sell of properties, real or
personal. Under these circumstances, we could conclude that the activities are already
profit oriented, not incidental and reasonably necessary to the pursuit of the objectives of
the association and therefore, will fall under the last paragraph of section 27 of the Tax
Code and any income derived therefrom shall be taxable.
Considering our findings that [private respondent] was not engaged in the business of
operating or contracting [a] parking lot, we find no legal basis also for the imposition of
[a] deficiency fixed tax and [a] contractors tax in the amount[s] of P353.15
and P3,129.73, respectively.
xxxxxxxxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractors Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not
to exceed three (3) years pursuant to Section 51 (e)(2) & (3) of the National Internal
Revenue Code effective as of 1984.[5]
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals
(CA). In its Decision of February 16, 1994, the CA [6] initially decided in favor of the CIR
and disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra
Valley College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that the
leasing of petitioners (herein respondent) facilities to small shop owners, to restaurant
and canteen operators and the operation of the parking lot are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the petitioners,' and
the income derived therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the
assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractors Tax P 3,129.23, &
1980 Deficiency Income Tax P372,578.20,
but the same is AFFIRMED in all other respect.[7]
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being supported
by substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent
from the income on rentals of small shops and parking fees [are] in accord with the
applicable law and jurisprudence.[8]
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed
itself and promulgated on September 28, 1995 its first assailed Resolution which, in part,
reads:
The Court cannot depart from the CTAs findings of fact, as they are supported by
evidence beyond what is considered as substantial.
xxxxxxxxx
The second ground raised is that the respondent CTA did not err in saying that the rental
from small shops and parking fees do not result in the loss of the exemption. Not even the
petitioner would hazard the suggestion that YMCA is designed for profit. Consequently,
the little income from small shops and parking fees help[s] to keep its head above the
water, so to speak, and allow it to continue with its laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and in
accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTAs
decision is AFFIRMED in toto.[9]
The internal revenue commissioners own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this
petition for review under Rule 45 of the Rules of Court.[10]
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of
private respondent from rentals of small shops and parking fees [is] exempt from
taxation.[11]
This Courts Ruling
The Petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the
factual findings of the CTA. On the other hand, petitioner argues that the CA merely
reversed the rulingof the CTA that the leasing of private respondents facilities to small
shop owners, to restaurant and canteen operators and the operation of parking lots are
reasonably incidental to and reasonably necessary for the accomplishment of the
objectives of the private respondent and that the income derived therefrom are tax
exempt.[12] Petitioner insists that what the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA.[13] The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when
supported by substantial evidence, will not be disturbed on appeal unless it is shown that
the said court committed gross error in the appreciation of facts. [14] In the present case,
this Court finds that the February 16, 1994 Decision of the CA did not deviate from this
rule. The latter merely applied the law to the facts as found by the CTA and ruled on the
issue raised by the CIR: Whether or not the collection or earnings of rental income from
the lease of certain premises and income earned from parking fees shall fall under the last
paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended. [15]
Clearly, the CA did not alter any fact or evidence. It merely resolved the
aforementioned issue, as indeed it was expected to. That it did so in a manner different
from that of the CTA did not necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has
been held that [t]here is a question of law in a given case when the doubt or difference
arises as to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or falsehood of alleged facts. [16] In the present
case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely
applied the law to the facts. That its interpretation or conclusion is different from that of
the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real
estate subject to tax? At the outset, we set forth the relevant provision of the NIRC:
SEC. 27. Exemptions from tax on corporations. -- The following organizations shall not
be taxed under this Title in respect to income received by them as such -xxxxxxxxx
(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;
xxxxxxxxx
Notwithstanding the provision in the preceding paragraphs, the income of whatever kind
and character of the foregoing organization 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 this Code. (as amended by Pres.
Decree No. 1457)
Petitioners argues that while the income received by the organizations enumerated in
Section 27 (now Section 26) 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 xxx from any if their properties, real or personal, or from any of their activities
conducted for profit, regardless, of the disposition made of such income xxx.
Petitioner adds that rented 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. [17] We
agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the
doctrine of strict interpretation in construing tax exemptions.[18] 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. [19]
In the instant case, the exemption claimed by the YMCA is expressly disallowed by
the very wording of the last paragraph of then Section 27 of the NIRC which mandates
that the income of exempt organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to tax the rent income f the YMCA from
its rental property,[20] the Court is duty-bound to abide strictly by its literal meaning and to
refrain from resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its
express terms must be applied.[21] Parenthetically, a consideration of the question of
construction must not even begin, particularly when such question is on whether to apply
a strict construction or a literal one on statutes that grant tax exemptions to religious,
charitable and educational propert[ies] or institutions.[22]
The last paragraph of Section 27, the YMCA argues, should be subject to the
qualification that the income from the properties must arise from activities conducted for
profit before it may be considered taxable.[23] This argument is erroneous. As previously
stated, a reading of said paragraph ineludibly shows that the income from any property of
exempt organizations, as well as that arising from any activity it conducts for profit, is
taxable. The phrase any of their activities conducted for profit does not qualify the word
properties. This makes income from the property of the organization taxable,
regardless of how that income is used -- whether for profit or for lofty non-profit
purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed
reversible error when it allowed, on reconsideration, the tax exemption claimed by
YMCA on income it derived from renting out its real property, on the solitary but
unconvincing ground that the said income is not collected for profit but is merely
incidental to its operation. The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how it used or disposed
of. Where the law does not distinguish, neither should we.
Constitutional Provisions
on Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits
that Article VI, Section 28 of par. 3 of the 1987 Constitution, [24] exempts charitable
institutions from the payment not only of property taxes but also of income tax from any
source.[25] In support of its novel theory, it compares the use of the words charitable
institutions, actually and directly in the 1973 and the 1987 Constitutions, on the hand; and
in Article VI Section 22, par. 3 of the 1935 Constitution, on the other hand.[26]
Private respondent enunciates three points. First, the present provision is divisible
into two categories: (1) [c]haritable institutions, churches and parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries, the incomes of which are, from
whatever source, all tax-exempt;[27] and (2) [a]ll lands, buildings and improvements
actually and directly used for religious, charitable or educational purposes, which are
exempt only from property taxes.[28]Second, Lladoc v. Commissioner of Internal Revenue,
[29]
which limited the exemption only to the payment of property taxes, referred to the
provision of the 1935 Constitution and not to its counterparts in the 1973 and the 1987
Constitutions.[30] Third, the phrase actually, directly and exclusively used for religious,
charitable or educational purposes refers not only to all lands, buildings and
improvements, but also to the above-quoted first category which includes charitable
institutions like the private respondent.[31]
The Court is not persuaded. The debates, interpellations and expressions of opinion
of the framers of the Constitution reveal their intent which, in turn, may have guided the
people in ratifying the Charter.[32] Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner,
who is now a member of this Court, stressed during the Concom debates that xxx what is
exempted is not the institution itself xxx; those exempted from real estate taxes are lands,
buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes.[33] Father Joaquin G. Bernas, an eminent authority on
the Constitution and also a member of the Concom, adhered to the same view that the
exemption created by said provision pertained only to property taxes.[34]
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that [t]he tax
exemption covers property taxes only."[35] Indeed, the income tax exemption claimed by
private respondent finds no basis in Article VI, Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter,
claiming that the YMCA 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. [37] We reiterate that private
respondent is exempt from the payment of property tax, but not income tax on the
rentals from its property. The bare allegation alone that it is a non-stock, non-profit
educational institution is insufficient to justify its exemption from the payment of income
tax.
[36]
not given any proof that it is an educational institution, or that of its rent income is
actually, directly and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private
respondent. It appreciates the nobility its cause. However, the Courts power and function
are limited merely to applying the law fairly and objectively. It cannot change the law or
bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its
role and invading the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But
the Court regrets that, given its limited constitutional authority, it cannot rule on the
wisdom or propriety of legislation. That prerogative belongs to the political departments
of government.Indeed, some of the member of the Court may even believe in the wisdom
and prudence of granting more tax exemptions to private respondent. But such belief,
however well-meaning and sincere, cannot bestow upon the Court the power to change or
amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals
dated September 28, 1995 and February 29, 1996 are hereby dated February 16, 1995
is REVERSEDand SET ASIDE. The Decision of the Court of Appeals dated February
16, 1995 isREINSTATED, insofar as it ruled that the income tax. No pronouncement as
to costs.
SO ORDERED.
In its quarterly income tax return for year 2000, SMI-Ed Philippines
subjected the entire gross sales of its properties to 5% final tax on PEZA
registered corporations. SMI-Ed Philippines paid taxes amounting
to P44,677,500.00.11
On February 2, 2001, after requesting the cancellation of its PEZA
registration and amending its articles of incorporation to shorten its
corporate term, SMI-Ed Philippines filed an administrative claim for the
refund ofP44,677,500.00 with the Bureau of Internal Revenue (BIR). SMIEd
Philippines alleged that the amountwas erroneously paid. It also indicated the
refundable amount in its final income tax return filed on March 1, 2001. It also
alleged that it incurred a net loss of P2,233,464,538.00.12
The BIR did not act on SMI-Ed Philippines claim, which prompted the latter
to file a petition for review before the Court of Tax Appeals on September 9,
2002.13
The Court of Tax Appeals Second Division denied SMI-Ed Philippines claim
for refund in the decision dated December 29, 2004.14
The Court of Tax Appeals Second Division found that SMI-Ed Philippines
administrative claim for refund and the petition for review with the Court of Tax
Appeals were filed within the two-year prescriptive period. 15 However, fiscal
incentives given to PEZA-registered enterprises may be availed only by
PEZA-registered enterprises that had already commenced
operations.16 Since SMI-Ed Philippines had not commenced operations, it
was not entitled to the incentives of either the income tax holiday or the 5%
preferential tax rate.17 Payment of the 5% preferential tax amounting
to P44,677,500.00 was erroneous.18
After finding that SMI-Ed Philippines sold properties that were capital assets
under Section 39(A)(1) of the National Internal Revenue Code of 1997, the Court
of Tax Appeals Second Division subjected the sale of SMIEd Philippines assets
to 6% capital gains tax under Section 27(D)(5) of the same Code and Section 2
of Revenue Regulations No. 8-98.19 It was found liable for capital gains tax
amounting to P53,613,000.00.20 Therefore, SMIEd Philippines must still pay the
balance of P8,935,500.00 as deficiency tax,21 "which respondent should perhaps
look into."22 The dispositive portion of the Court of Tax Appeals Second Divisions
decision reads:
WHEREFORE, premises considered, the instant petition is hereby DENIED.
SO ORDERED.23
The Court of Tax Appeals denied SMI-Ed Philippines motion for reconsideration
in its June 15, 2005 resolution.24
On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court
of Tax Appeals En Banc.25 It argued that the Court of Tax Appeals Second
Division erroneously assessed the 6% capital gains tax on the sale of SMI-Ed
Philippines equipment, machineries, and buildings.26 It also argued that the Court
of Tax Appeals Second Division cannot make an assessment at the first
instance.27 Even if the Court of Tax Appeals Second Division has such power, the
period to make an assessment had already prescribed.28
In the decision promulgated on November 3, 2006, the Court of Tax Appeals En
Banc dismissed SMI-Ed Philippines petition and affirmed the Court of Tax
Appeals Second Divisions decision and resolution.29 The dispositive portion of
the Court of Tax Appeals En Bancs decision reads:
WHEREFORE, finding no reversible error to reverse the assailed Decision
promulgated on December 29, 2004 and the Resolution dated June 15, 2005, the
instant petition for review is hereby DISMISSED. Accordingly, the assailed
Decision and Resolution are hereby AFFIRMED. SO ORDERED.30
SMI-Ed Philippines filed a petition for review before this court on December 27,
2006,31 praying for the grant of its claim for refund and the reversal of the Court
of Tax Appeals En Bancs decision.32
SMI-Ed Philippines assigned the following errors:
A. The honorable CTA En Banc grievously erred and acted beyond its
jurisdiction when it assessed for deficiency tax in the first instance.
B. Even assuming that the honorable CTA En Banc has the right to make
an assessment against the petitioner-appellant, it grievously erred in
collection, it refers the determination of the taxes due from a taxpayer under
the National Internal Revenue Code of 1997.
The power and duty to assess national internal revenue taxes are lodged
with the BIR.44 Section 2 of the National Internal Revenue Code of 1997
provides:
SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of
Internal Revenue shall be under the supervision and control of the Department of
Finance and its powers and duties shall comprehend the assessment and
collection ofall national internal revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines connected therewith, including
the execution of judgments in all cases decided in its favor by the Court of Tax
Appeals and the ordinary courts. The Bureau shall give effect to and administer
the supervisory and police powers conferred to it by this Code or other laws.
(Emphasis supplied) The BIR is not mandated to make an assessment relative to
every return filed with it. Tax returns filed with the BIR enjoy the presumption that
these are in accordance with the law.45 Tax returns are also presumed correct
since these are filed under the penalty of perjury.46 Generally, however, the BIR
assesses taxes when it appears, after a return had been filed, that the taxes paid
were incorrect,47 false,48 or fraudulent.49 The BIR also assesses taxes when taxes
are due but no return is filed.50 Thus:
SEC. 6. Power of the Commissioner to Make assessments and Prescribe
additional Requirements for Tax Administration and Enforcement.
(A) Examination of Returns and Determination of Tax Due. - After a return has
been filed as required under the provisions of this Code, the Commissioner or his
duly authorized representative may authorize the examination of any taxpayer
and the assessment of the correct amount of tax: Provided, however; That failure
to file a return shall not prevent the Commissioner from authorizing the
examination of any taxpayer.The tax or any deficiency tax so assessed shall be
paid upon notice and demand from the Commissioner or from his duly authorized
representative.
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure
to file a return, the tax may be assessed, or a preceeding in court for the
collection of such tax may be filed without assessment, at any time within ten
(10) years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for the collection
thereof. (Emphasis supplied)
The Court of Tax Appeals has no power to make an assessment at the first
instance. On matters such as tax collection, tax refund, and others related
to the national internal revenue taxes, the Court of Tax Appeals jurisdiction
is appellate in nature.
Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125,51 as amended by
Republic Act No. 9282,52 provide that the Court of Tax Appeals reviews decisions
and inactions of the Commissioner of Internal Revenue in disputed assessments
and claims for tax refunds. Thus: SEC. 7. Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction toreview by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a
denial[.] (Emphasis supplied) Based on these provisions, the following
must be present for the Court of Tax Appeals to have jurisdiction over a
case involving the BIRs decisions or inactions:
a) A case involving any of the following:
i. Disputed assessments;
The self-assessing and voluntarily paying taxpayer, however, may later find that
he or she has erroneously paid taxes. Erroneously paid taxes may come in the
form of amounts that should not have been paid. Thus, a taxpayer may find that
he or she has paid more than the amount that should have been paid under the
law. Erroneously paid taxes may also come in the form of tax payments for the
wrong category of tax. Thus, a taxpayer may find that he or she has paid a
certain kind of tax that he or she is not subject to.
In these instances, the taxpayer may ask for a refund. If the BIR fails to act
on the request for refund, the taxpayer may bring the matter to the
Court of Tax Appeals.
From the taxpayers self-assessment and tax payment up to his or her request
for refund and the BIRs inaction, the BIRs participation is limited to the receipt of
the taxpayers payment. The BIR does not make an assessment; the BIR issues
no decision; and there is no dispute yet involved. Since there is no BIR
assessment yet, the Court of Tax Appeals may NOT determine the amount
of taxes due from the taxpayer. There is also no decision yet to review.
However, there was INACTION on the part of the BIR. That inaction is within
the Court of Tax Appeals jurisdiction.
In other words, the Court of Tax Appeals may acquire jurisdiction over cases
even if they do not involve BIR assessments or decisions.
In this case, the Court of Tax Appeals jurisdiction was acquired because
petitioner brought the case on appeal before the Court of Tax Appeals after
the BIR had failed to act on petitioners claim for REFUND of
ERRONEOUSLY paid taxes. The Court of Tax Appeals did not acquire
jurisdiction as a result of a disputed assessment of a BIR decision.
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to
6% capital gains tax or other taxes at the first instance. The Court of Tax Appeals
has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In
stating that petitioners transactions are subject to capital gains tax, however, the
Court of Tax Appeals was NOT making an assessment. It was merely
determining the PROPER CATEGORY of tax that petitioner should have
paid, in view of its claim that it erroneously imposed upon itself and paid the 5%
final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have
paid is an incidental matter necessary for the resolution of the principal
issue, which is whether petitioner was entitled to a refund.54
The issue of petitioners claim for tax refund is intertwined with the issue of the
proper taxes that are due from petitioner. A claim for tax refund carries the
assumption that the tax returns filed were correct.55 If the tax return filed was not
proper, the correctness of the amount paid and, therefore, the claim for refund
become questionable. In that case, the court must determine if a taxpayer
claiming refund of erroneously paid taxes is more properly liable for taxes other
than that paid.
In South African Airways v. Commissioner of Internal Revenue,56 South
African Airways claimed for refund of its erroneously paid 2% taxes on its gross
Philippine billings. This court did not immediately grant South Africans claim for
refund. This is because although this court found that South African Airways was
not subject to the 2% tax on its gross Philippine billings, this court also found
that it was subject to 32% tax on its taxable income.57
In this case, petitioners claim that it erroneously paid the 5% final tax is an
admission that the quarterly tax return it filed in 2000 was improper. Hence,
to determine if petitioner was entitled to the refund being claimed, the
Court of Tax Appeals has the duty to determine if petitioner was indeed not
liable for the 5% final tax and, instead, liable for taxes other than the 5%
final tax. As in South African Airways, petitioners request for refund can neither
be granted nor denied outright without such determination.58
If the taxpayer is found liable for taxes other than the erroneously paid 5%
final tax, the amount of the taxpayers liability should be computed and
deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be
collected in a case involving solely the issue of the taxpayers entitlement
to refund. The question of tax deficiency is distinct and unrelated to the question
of petitioners entitlement to refund.
within the ECOZONE shall be remitted tothe national government. This five
percent (5%) shall be shared and distributed as follows:
a. Three percent (3%) to the national government;
b. One percent (1%) to the localgovernment units affected by the
declaration of the ECOZONE inproportion to their population, land area,
and equal sharing factors; and
c. One percent (1%) for the establishment of a development fund to be
utilized for the development of municipalities outside and contiguous to
each ECOZONE: Provided, however, That the respective share of the
affected local government units shall be determined on the basis of the
following formula:
1. Population - fifty percent (50%);
2. Land area - twenty-five percent (25%); and
3. Equal sharing - twenty-five percent (25%). (Emphasis supplied)
Based on these provisions, the fiscal incentives and the 5% preferential tax
rate are available only to businesses operating within the Ecozone.60 A
business is considered in operation when it starts entering into commercial
transactions that are not merely incidental to but are related to the
purposes of the business. It is similar to the definition of "doing business," as
applied in actions involving the right of foreign corporations to maintain court
actions. In Mentholatum Co. Inc., et al. v. Mangaliman, et al.,61 this court said that
the terms "doing" or "engaging in" or "transacting" business":
. . . impl[y] a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of, the
purpose and object of its organization.62 Petitioner never started its operations
since its registration on June 29, 199863 because of the Asian financial
crisis.64 Petitioner admitted this.65 Therefore, it cannot avail the incentives
provided under Republic Act No. 7916. It is not entitled to the preferential tax rate
of 5% on gross income in lieu of all taxes. Because petitioner is not entitled to a
preferential rate, it is subject to ordinary tax rates under the National Internal
Revenue Code of 1997.
III
Imposition of capital gains tax
The Court of Tax Appeals found that petitioners sale of its properties is subject to
capital gains tax.
For petitioners properties to be subjected to capital gains tax, the
properties must form part of petitioners capital assets.
Section 39(A)(1) of the National Internal Revenue Code of 1997 defines "capital
assets":
SEC. 39. Capital Gains and Losses. (A) Definitions.- As used in this Title (1) Capital Assets.- the term capital assets means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock
in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable
year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade orbusiness, or property used in the trade or
business, of a character which is subject to the allowance for depreciation
provided in Subsection (F) of Section 34; or real property used in trade or
business of the taxpayer. (Emphasis supplied) Thus, "capital assets" refers to
taxpayers property that is NOT any of the following:
1. Stock in trade;
2. Property that should be included inthe taxpayers inventory at the close
of the taxable year;
3. Property held for sale in the ordinary course of the taxpayers business;
4. Depreciable property used in the trade or business; and
Since petitioner had not started its operations, it was also not subject to
the minimum corporate income tax of 2% on gross income.70 Therefore,
petitioner is not liable for any income tax.
IV
Prescription
Section 203 of the National Internal Revenue Code of 1997 provides that as a
general rule, the BIR has three (3) years from the last day prescribed by law
for the filing of a return to make an assessment. If the return is filed beyond
the last day prescribed by law for filing, the three-year period shall run from
the actual date of filing. Thus:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as
provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return
is filed beyond the period prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For purposes of this Section, a return
filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day.
This court said that the prescriptive period to make an assessment of
internal revenue taxes is provided "primarily to safeguard the interests of
taxpayers from unreasonable investigation."71 This court explained in
Commissioner of Internal Revenue v. FMF Development Corporation72 the
reason behind the provisions on prescriptive periods for tax assessments:
Accordingly, the government must assess internal revenue taxes on time so as
not to extend indefinitely the period of assessment and deprive the taxpayer of
the assurance that it will no longer be subjected to further investigation for taxes
after the expiration of reasonable period of time.73
Rules derogating taxpayers right against prolonged and unscrupulous
investigations are strictly construed against the government.74
[T]he law on prescription should be interpreted in a way conducive to bringing
about the beneficent purpose of affording protection to the taxpayer within the
City, and covered by Transfer Certificate of Title (TCT) No. V13790.4 In its Complaint, petitioner averred that pursuant to Republic
Act (RA) No. 8974, otherwise known as An Act to Facilitate the
Acquisition of Right-Of-Way, Site or Location for National Government
Infrastructure Projects and for other Purposes, the property sought to
be expropriated shall be used in implementing the construction of the
North Luzon Expressway (NLEX)- Harbor Link Project (Segment 9)
from NLEX to MacArthur Highway, Valenzuela City.5cralawred
Petitioner duly deposited to the Acting Branch Clerk of Court the
amount of P420,000.00 representing 100% of the zonal value of the
subject property. Consequently, in an Order6 dated May 27, 2011, the
RTC ordered the issuance of a Writ of Possession and a Writ of
Expropriation for failure of respondent, or any of her representatives,
to appear despite notice during the hearing called for the purpose.
In another Order7 dated June 21, 2011, the RTC appointed the
following members of the Board of Commissioners for the
determination of just compensation: (1) Ms. Eunice O. Josue, Officerin-Charge, RTC, Branch 270, Valenzuela City; (2) Atty. Cecilynne R.
Andrade, Acting Valenzuela City Assessor, City Assessors Office,
Valenzuela City; and (3) Engr. Restituto Bautista, of Brgy. Bisig,
Valenzuela City. However, the trial court subsequently revoked the
appointment of the Board for their failure to submit a report as to the
fair market value of the property to assist the court in the
determination of just compensation and directed the parties to submit
their respective position papers.8 Thereafter, the case was set for
hearing giving the parties the opportunity to present and identify all
evidence in support of their arguments therein.
According to the RTC, the records of the case reveal that petitioner
adduced evidence to show that the total amount deposited is just, fair,
and equitable. Specifically, in its Position Paper, petitioner alleged that
pursuant to a Certification issued by the Bureau of Internal Revenue
(BIR), Revenue Region No. 5, the zonal value of the subject property
subject to the payment of all unpaid real property taxes and other
relevant taxes, if there be any;
4) Plaintiff is likewise ordered to pay the defendant consequential
damages which shall include the value of the transfer tax necessary
for the transfer of the subject property from the name of the
defendant to that of the plaintiff;
5) The Office of the Register of Deeds of Valenzuela City, Metro Manila
is directed to annotate this Decision in Transfer Certificate of Title
No. V-13790 registered under the name of Arlene R. Soriano.
cralawlawlibrary
Let a certified true copy of this decision be recorded in the Registry of
Deeds of Valenzuela City.
Records of this case show that the Land Bank Managers Check Nos.
0000016913 dated January 21, 2011 in the amount of Php400,000.00
and 0000017263 dated April 28, 2011 in the amount of Php20,000.00
issued by the Department of Public Works and Highways (DPWH) are
already stale. Thus, the said Office is hereby directed to issue another
Managers Check in the total amount Php420,000.00 under the name
of the Office of the Clerk of Court, Regional Trial Court, Valenzuela City
earmarked for the instant case.10cralawlawlibrary
Petitioner filed a Motion for Reconsideration maintaining that pursuant
to Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013,
which took effect on July 1, 2013, the interest rate imposed by the
RTC on just compensation should be lowered to 6% for the instant
case falls under a loan or forbearance of money.11 In its Order12 dated
March 10, 2014, the RTC reduced the interest rate to 6% per annum
not on the basis of the aforementioned Circular, but on Article 2209 of
the Civil Code, viz.:
However, the case of National Power Corporation v. Honorable
Zain B. Angas is instructive.
In the aforementioned case law, which is similar to the instant case,
the Supreme Court had the occasion to rule that it is well-settled that
the aforequoted provision of Bangko Sentral ng Pilipinas Circular
applies only to a loan or forbearance of money, goods or credits.
However, the term judgments as used in Section 1 of the Usury Law
and the previous Central Bank Circular No. 416, should be interpreted
to mean only judgments involving loan or forbearance of money, goods
or credits, following the principle of ejusdem generis. And applying
said rule on statutory construction, the general term judgments can
refer only to judgments in cases involving loans or forbearance of any
money, goods, or credits. Thus, the High Court held that, Art. 2209
of the Civil Code, and not the Central Bank Circular, is the law
applicable.
Art. 2009 of the Civil Code reads:
If the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the absence of stipulation,
the legal interest, which is six per cent per annum.
Further in that case, the Supreme Court explained that the transaction
involved is clearly not a loan or forbearance of money, goods or credits
but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the
interest adjudged by the trial court is in the nature of indemnity for
damages. The legal interest required to be paid on the amount of just
compensation for the properties expropriated is manifestly in the form
of indemnity for damages for the delay in the payment thereof. It
ultimately held that Art. 2209 of the Civil Code shall apply.13
On May 12, 2014, petitioner filed the instant petition invoking the
following arguments:
I.
RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST OF 6% PER
provision of the 1997 NIRC, showing that it should be respondentseller who shall be liable for the documentary stamp tax due on the
sale of the subject property, its rejection of the payment of the same
could have been sustained.
WHEREFORE, premises considered, the instant petition
is PARTIALLY GRANTED. The Decision and Order, dated November
15, 2013 and March 10, 2014, respectively, of the Regional Trial Court,
Valenzuela City, Branch 270, in Civil Case No. 140-V-10 are
hereby MODIFIED, in that the imposition of interest on the
payment of just compensation as well as the award of
consequential damages are deleted. In addition, respondent
Arlene R. Soriano is ORDERED to pay for the capital gains tax
due on the transfer of the expropriated property, while the
documentary stamp tax, transfer tax, and registration fee shall
be for the account of petitioner.
SO ORDERED.cralawlawlibrary
Fixed Income indicate that the interest income or discount earned on the
proposed zerocoupon bonds would be subject to the prevailing withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than its face
value (or at a deep discount), with the face value repaid at the time of
maturity.14 It does not make periodic interest payments, or have socalled
"coupons," hence the term zero-coupon bond.15 However, the discount to face
value constitutes the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGOs
letters dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the
tax treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed
by then Commissioner ofInternal Revenue Ren G. Baez confirmed that the
PEACe Bonds would not be classified as deposit substitutes and would not be
subject to the corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must be
obtained from twenty (20) or more individuals or corporate lenders at any one
time. In the light of your representation that the PEACe Bonds will be issued only
to one entity, i.e., Code NGO, the same shall not be considered as "deposit
substitutes" falling within the purview of the above definition. Hence, the
withholding tax on deposit substitutes will not apply.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001
was subsequently reiterated in BIR Ruling No. 035-200119 dated August 16, 2001
and BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the
2001 Rulings). In sum, these rulings pronounced that to be able to determine
whether the financial assets, i.e., debt instruments and securities are deposit
substitutes, the "20 or more individual or corporate lenders" rule must apply.
Moreover, the determination of the phrase "at any one time" for purposes of
determining the "20 or more lenders" is to be determined at the time of the
original issuance. Such being the case, the PEACe Bonds were not to be treated
as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo
Sergio G. Edeza (Former Treasurer Edeza) questioned the propriety of issuing
the bonds directly to a special purpose vehicle considering that the latter was not
a Government Securities Eligible Dealer (GSED).22 Former Treasurer Edeza
recommended that the issuance of the Bonds "be done through the
ADAPS"23 and that CODE-NGO "should get a GSED to bid in [sic] its behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury
Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury
announced that "P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be
auctioned on October 16, 2001[.]"26 The notice stated that the Bonds "shall be
issued to not morethan 19 buyers/lenders hence, the necessity of a manual
auction for this maiden issue."27 It also required the GSEDs to submit their bids
not later than 12 noon on auction date and to disclose in their bid submissions
the names of the institutions bidding through them to ensure strict compliance
with the 19 lender limit.28 Lastly, it stated that "the issue being limitedto 19
lenders and while taxable shall not be subject to the 20% final withholding
[tax]."29
On October 12, 2001, the Bureau of Treasury released a memo30 on the
"Formula for the Zero-Coupon Bond." The memo stated inpart that the formula (in
determining the purchase price and settlement amount) "is only applicable to the
zeroes that are not subject to the 20% final withholding due to the 19
buyer/lender limit."31
A day before the auction date or on October 15, 2001, the Bureau of Treasury
issued the "Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be
Issued on October 16, 2001" (Auction Guidelines).32 The Auction Guidelines
reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding
tax as the issue will be limited to a maximum of 19 lenders in the primary market
(pursuant to BIR Revenue Regulation No. 020 2001)."33The Auction Guidelines,
for the first time, also stated that the Bonds are "[e]ligible as liquidity reserves
(pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year
zero-coupon bonds.35 Also on the same date, the Bureau of Treasury issued
another memorandum36 quoting excerpts of the ruling issued by the Bureau of
Internal Revenue concerning the Bonds exemption from 20% final withholding
tax and the opinion of the Monetary Board on reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was
very wide, from as low as 12.248% to as high as 18.000%.39 Nonetheless, the
Bureau of Treasury accepted the auction results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was
declared as the winning bidder having tendered the lowest bids.42 Accordingly, on
October 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds at
yield-to-maturity of 12.75% to RCBC for approximately P10.17 billion,43 resulting
in a discount of approximately P24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting
Agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the
Issue Manager and Lead Underwriter for the offering of the PEACe
Bonds.45RCBC Capital agreed to underwrite46 on a firm basis the offering,
distribution and sale of the 35 billion Bonds at the price
of P11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODENGO represented that "[a]ll income derived from the Bonds, inclusive of premium
on redemption and gains on the trading of the same, are exempt from all forms of
taxation as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31
May 2001 and 16 August 2001, respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an issue
price of P11,995,513,716.51. Petitioners purchased the PEACe Bonds on
different dates.49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a
20% FWT on the Government Bonds and directing the BTr to withhold said final
tax at the maturity thereof, [allegedly without] consultation with Petitioners as
bond holders, and without conducting any hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in response to a query
of the Secretary of Finance on the proper tax treatment of the discount or interest
income derived from the Government Bonds."51 The Bureau of Internal Revenue,
citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No.
007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13,
2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be
subject to 20% Final Tax on interest income from deposit substitutes. It is now
settled that all treasury bonds (including PEACe Bonds), regardless of the
number of purchasers/lenders at the time of origination/issuance are considered
deposit substitutes. In the case of zero-coupon bonds, the discount (i.e.
difference between face value and purchase price/discounted value of the bond)
is treated as interest income of the purchaser/holder. Thus, the Php 24.3 interest
income should have been properly subject to the 20% Final Tax as provided in
Section 27(D)(1) of the Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was
not able tocollect the final tax on the discount/interest income realized by RCBC
as a result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling No.
007-04 dated July 16, 2004 effectively modifies and supersedes the 2001
Rulings by stating that the [1997] Tax Code is clear that the "term public means
borrowing from twenty (20) or more individual or corporate lenders at any one
time." The word "any" plainly indicates that the period contemplated is the entire
term of the bond, and not merely the point of origination or issuance. . . . Thus,
by taking the PEACe bonds out of the ambit of deposits [sic] substitutes and
exempting it from the 20% Final Tax, an exemption in favour of the PEACe
Bonds was created when no such exemption is found in the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued
by the Philippine Dealing System Holdings Corporation and Subsidiaries ("PDS
Group"). The Memo provides that in view of the pronouncement of the DOF and
the BIR on the applicability of the 20% FWT on the Government Bonds, no
transferof the same shall be allowed to be recorded in the Registry of Scripless
Securities ("ROSS") from 12 October 2011 until the redemption payment date on
18 October 2011. Thus, the bondholders of record appearing on the ROSS as of
18 October 2011, which include the Petitioners, shall be treated by the BTr asthe
beneficial owners of such securities for the relevant [tax] payments to be
imposed thereon."56
On October 17, 2011, replying to anurgent query from the Bureau of Treasury,
the Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying
that the final withholding tax due on the discount or interest earned on the
PEACe Bonds should "be imposed and withheld not only on RCBC/CODE NGO
but also [on] all subsequent holders of the Bonds."58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or
mandamus (with urgent application for a temporary restraining order and/or writ
of preliminary injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining order
(TRO)60 "enjoining the implementation of BIR Ruling No. 370-2011 against the
[PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on
interest income there from shall be withheld by the petitioner banks and placed in
escrow pending resolution of [the] petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court
to intervene and to admit petition-in-intervention62 dated October 27, 2011, which
was granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with
Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO."64 They
alleged that on the same day that the temporary restraining order was issued, the
Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts
corresponding to the 20% final withholding tax on interest income, and that the
Bureau of Treasury refused to release the amounts corresponding to the 20%
final withholding tax.65On November 15, 2011, this court directed respondents to:
"(1) SHOW CAUSE why they failed to comply with the October 18, 2011
resolution; and (2) COMPLY with the Courts resolution in order that petitioners
may place the corresponding funds in escrow pending resolution of the
petition."66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit
attached petition-in-intervention with comment on the petitionin-intervention of
RCBC and RCBC Capital).67 The motion was granted by this court on November
22, 2011.68
On December 1, 2011, public respondents filed their compliance.69 They
explained that: 1) "the implementation of [BIR Ruling No. 370-2011], which has
already been performed on October 18, 2011 with the withholding of the 20%
final withholding tax on the face value of the PEACe bonds, is already fait
accompli . . . when the Resolution and TRO were served to and received by
respondents BTr and National Treasurer [on October 19, 2011]";70 and 2) the
withheld amount has ipso facto become public funds and cannot be disbursed or
released to petitioners without congressional appropriation.71 Respondents
further aver that"[i]nasmuch as the . . . TRO has already become moot . . . the
condition attached to it, i.e., that the 20% final withholding tax on interest income
therefrom shall be withheld by the banks and placed in escrow . . .has also been
rendered moot[.]"72
On December 6, 2011, this court noted respondents' compliance.73
On February 22, 2012, respondents filed their consolidated comment74 on the
petitions-in-intervention filed by RCBC and RCBC Capital and On November 27,
2012, petitioners filed their "Manifestation with Urgent Reiterative Motion (To
Direct Respondents to Comply with the Temporary Restraining Order)."75
On December 4, 2012, this court: (a) noted petitioners manifestation with urgent
reiterative motion (to direct respondents to comply with the temporary restraining
order); and (b) required respondents to comment thereon.76
Respondents comment77 was filed on April 15,2013, and petitioners filed their
reply78 on June 5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to
20% final withholding tax under the 1997 National Internal Revenue Code.
Related to this question is the interpretation of the phrase "borrowing from
twenty (20) or more individual or corporate lenders at any one time" under
Section 22(Y) of the 1997 National Internal Revenue Code, particularly on
whether the reckoning of the 20 lenders includes trading of the bonds in
the secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the
government or the Bureau of Internal Revenue is estopped from imposing
and/or collecting the 20% final withholding tax from the face value of these
Bonds
a. Will the imposition of the 20% final withholding tax violate the nonimpairment clause of the Constitution?
b. Will it constitute a deprivation of property without due process of
law?
c. Will it violate Section 245 of the 1997 National Internal Revenue
Code on non-retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting through
the BTr, the Government is obligated . . . to pay the face value amount of PhP35
Billion upon maturity without any deduction whatsoever."79They add that "the
Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively
and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a
mere eleven (11) days before maturity and after several, consistent categorical
declarations that such bonds are exempt from the 20% FWT, without violating
due process"80 and the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the Bonds, they had
the right to expect that they would receive the full face value of the Bonds upon
maturity, in view of the 2001 BIR Rulings.82 "[R]egardless of whether or not the
2001 BIR Rulings are correct, the fact remains that [they] relied [on] good faith
thereon."83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes
as defined under Section 22(Y) of the 1997 National Internal Revenue Code
because there was only one lender (RCBC) to whom the Bureau of Treasury
issued the Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings
"erroneously interpreted that the number of investors that participate in the
secondary market is the determining factor in reckoning the existence or nonexistence of twenty (20) or more individual or corporate lenders."85 Furthermore,
they contend that the Bureau of Internal Revenue unduly expanded the definition
of deposit substitutes under Section 22 of the 1997 National Internal Revenue
Code in concluding that "the mere issuance of government debt instruments and
securities is deemed as falling within the coverage of deposit
level of regulatory risk for contracts entered into by the Philippine Government is
high,"104 thus resulting in higher interestrate for government-issued debt
instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent
Commissioner of Internal Revenue "gravely and seriously abused her discretion
in the exercise of her rule-making power"106 when she issued the assailed 2011
BIR Ruling which ruled that "all treasury bonds are deposit substitutes
regardless of the number of lenders, in clear disregard of the requirement of
twenty (20)or more lenders mandated under the NIRC."107 They argue that "[b]y
her blanket and arbitrary classification of treasury bonds as deposit substitutes,
respondent CIR not only amended and expanded the NIRC, but effectively
imposed a new tax on privately-placed treasury bonds."108Petitioners-intervenors
RCBC and RCBC Capital further argue that the 2011 BIR Ruling will cause
substantial impairment of their vested rights109 under the Bonds since the ruling
imposes new conditions by "subjecting the PEACe Bonds to the twenty percent
(20%) final withholding tax notwithstanding the fact that the terms and conditions
thereof as previously represented by the Government, through respondents BTr
and BIR, expressly state that it is not subject to final withholding tax upon their
maturity."110 They added that "[t]he exemption from the twenty percent (20%) final
withholding tax [was] the primary inducement and principal consideration for
[their] participat[ion] in the auction and underwriting of the PEACe Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend
that respondent Commissioner of Internal Revenue violated their rights to due
process when she arbitrarily issued the 2011 BIR Ruling without prior notice and
hearing, and the oppressive timing of such ruling deprived them of the
opportunity to challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds,
petitioners-intervenors RCBC and RCBC Capital claim that respondents Bureau
of Treasury and CODE-NGO should be held liable "as [these] parties explicitly
represented . . . that the said bonds are exempt from the final withholding tax."113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the
implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA 3782011] will have pernicious effects on the integrity of existing securities, which is
contrary to the State policies of stabilizing the financial system and of developing
capital markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No.
DA 378-2011 are "invalid because they contravene Section 22(Y) of the 1997
[NIRC] when the said rulings disregarded the applicability of the 20 or more
lender rule to government debt instruments"[;]115 (b) "when [it] sold the PEACe
Bonds in the secondary market instead of holding them until maturity, [it]
derived . . . long-term trading gain[s], not interest income, which [are] exempt . . .
under Section 32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption privilege
relating to the issuance of the PEACe Bonds . . . partakes of a contractual
commitment granted by the Government in exchange for a valid and material
consideration [i.e., the issue price paid and savings in borrowing cost derived by
the Government,] thus protected by the non-impairment clause of the 1987
Constitution"[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly
revoke the 2001 BIR Rulings since no notice of revocation was issued to [it],
RCBC and [RCBC Capital] and petitioners[-bondholders], nor was there any BIR
administrative guidance issued and published[.]"118 CODE-NGO additionally
argues that impleading it in a Rule 65 petition was improper because: (a) it
involves determination of a factual question;119 and (b) it is premature and states
no cause of action as it amounts to an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners direct resort to this court to challenge the
2011 BIR Ruling violates the doctrines of exhaustion of administrative remedies
and hierarchy ofcourts, resulting in a lack of cause of action that justifies the
dismissal of the petition.121 According to them, "the jurisdiction to review the
rulings of the [Commissioner of Internal Revenue], after the aggrieved party
exhausted the administrative remedies, pertains to the Court of Tax
Appeals."122 They point out that "a case similar to the present Petition was [in
fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351
[and] entitled, Rizal Commercial Banking Corporation and RCBC Capital
Corporation vs. Commissioner of Internal Revenue, et al."123
Respondents further take issue on the timeliness of the filing of the petition and
petitions-in-intervention.124 They argue that under the guise of mainly assailing
the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR
Rulings, of which the attack is legally prohibited, and the petition insofar as it
seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time
pursuant to Rule 65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe
Bonds is not a trading gain but interest income subject to income tax.126 They
explain that "[w]ith the payment of the PhP35 Billion proceeds on maturity of the
PEACe Bonds, Petitioners receive an amount of money equivalent to about
PhP24.8 Billion as payment for interest. Such interest is clearly an income of the
Petitioners considering that the same is a flow of wealth and not merely a return
of capital the capital initially invested in the Bonds being approximately
PhP10.2 Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the PEACe
Bonds does not constitute an impairment of the obligations of contract,
respondents aver that: "The BTr has no power to contractually grant a tax
exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be
considered a material term of the Bonds"[;]128 "[t]here has been no change in the
laws governing the taxability of interest income from deposit substitutes and said
laws are read into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret
the term "deposit substitute" in accordance with the letter and spirit of the Tax
Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the
Government as the latter performed its obligations to the bondholders in
full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was
between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the
PEACe Bonds."132
Similarly, respondents counter that the withholding of "[t]he 20% final withholding
tax on the PEACe Bonds does not amount to a deprivation of property without
due process of law."133 Their imposition of the 20% final withholding tax is not
arbitrary because they were only performing a duty imposed by law;134 "[t]he 2011
BIR Ruling is an interpretative rule which merely interprets the meaning of
deposit substitutes [and upheld] the earlier construction given to the termby the
2004 and 2005 BIR Rulings."135 Hence, respondents argue that "there was no
need to observe the requirements of notice, hearing, and publication[.]"136
Nonetheless, respondents add that "there is every reason to believe that
Petitioners all major financial institutions equipped with both internal and
On the prayer for the temporary restraining order, respondents argue that this
order "could no longer be implemented [because] the acts sought to be enjoined
are already fait accompli."149 They add that "to disburse the funds withheld to the
Petitioners at this time would violate Section 29[,] Article VI of the Constitution
prohibiting money being paid out of the Treasury except in pursuance of an
appropriation made by law[.]"150 "The remedy of petitioners is to claim a tax
refund under Section 204(c) of the Tax Code should their position be upheld by
the Honorable Court."151
Respondents also argue that "the implementation of the TRO would violate
Section 218 of the Tax Code in relation to Section 11 of Republic Act No. 1125
(as amended by Section 9 of Republic Act No. 9282) which prohibits courts,
except the Court of Tax Appeals, from issuing injunctions to restrain the collection
of any national internal revenue tax imposed by the Tax Code."152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital,
and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997
National Internal Revenue Code when it declared that all government debt
instruments are deposit substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
It constitutes a unilateral amendment of a material term (tax
exempt status) in the Bonds, represented by the government as an
inducement and important consideration for the purchase of the
Bonds;
b) It constitutes deprivation ofproperty without due process because
there was no prior notice to bondholders and hearing and
publication;
c) It violates the rule on non-retroactivity under the 1997 National
Internal Revenue Code;
Procedural Issues
Non-exhaustion of
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative
rulings are reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Cases. -The power to interpret the provisions of this Code and other tax laws
shall be under the exclusive and original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the relief
prayed for, [then] special civil actions are generally not entertained."153 The
remedy within the administrative machinery must be resorted to first and pursued
to its appropriate conclusion before the courts judicial power can be sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of
administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its
flexibility is called upon by the peculiarity and uniqueness of the factual and
circumstantial settings of a case. Hence, it is disregarded (1) when there is a
violation of due process, (2) when the issue involved is purely a legal
question,155 (3) when the administrative action is patently illegal amounting to lack
or excess of jurisdiction,(4) when there is estoppel on the part of the
administrative agency concerned,(5) when there is irreparable injury, (6) when
the respondent is a department secretary whose acts as an alter ego of the
President bears the implied and assumed approval of the latter, (7) when to
require exhaustion of administrative remedies would be unreasonable, (8) when
it would amount to a nullification of a claim, (9) when the subject matter is a
private land in land case proceedings, (10) when the rule does not provide a
plain, speedy and adequate remedy, (11) when there are circumstances
indicating the urgency of judicial intervention.156 (Emphasis supplied, citations
omitted)
The exceptions under (2) and (11)are present in this case. The question involved
is purely legal, namely: (a) the interpretation of the 20-lender rule in the definition
of the terms public and deposit substitutes under the 1997 National Internal
Revenue Code; and (b) whether the imposition of the 20% final withholding tax
on the PEACe Bonds upon maturity violates the constitutional provisions on nonimpairment of contracts and due process. Judicial intervention is likewise urgent
with the impending maturity of the PEACe Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no application when
the exhaustion will result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR
Ruling would be a futile exercise because it was upon the request of the
Secretary of Finance that the 2011 BIR Ruling was issued by the Bureau of
Internal Revenue. It appears that the Secretary of Finance adopted the
Commissioner of Internal Revenues opinions as his own.158 This position was in
fact confirmed in the letter159 dated October 10, 2011 where he ordered the
Bureau of Treasury to withhold the amount corresponding to the 20% final
withholding tax on the interest or discounts allegedly due from the bondholders
on the strength of the 2011 BIR Ruling. Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The
questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in
connection with the implementation of the 1997 National Internal Revenue Code
on the taxability of the interest income from zero-coupon bonds issued by the
government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as
amended by Republic Act No. 9282,160 such rulings of the Commissioner of
Internal Revenue are appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the National Internal
Revenue or other laws administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party
adversely affected by a decision, ruling or inaction of the Commissioner of
Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of Agriculture or the Central
Board of Assessment Appeals or the Regional Trial Courts may file an appeal
with the CTA within thirty (30) days after the receipt of such decision or rulingor
after the expiration of the period fixed by law for action as referred toin Section
7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding
involving matters arising under the National Internal Revenue Code, the Tariff
and Customs Code or the Local Government Code shall be maintained, except
as herein provided, until and unless an appeal has been previously filed with the
CTA and disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v.
Blaquera,162 this court emphasized the jurisdiction of the Court of Tax Appeals
over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari,
however, let it be stressed that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to
the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or
opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section
245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and
regulations. The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code.
hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction over
the . . . petition and decide the same on its merits in viewof the significant
constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt
disposition of the matter."166
Here, the nature and importance of the issues raised167 to the investment and
banking industry with regard to a definitive declaration of whether government
debt instruments are deposit substitutes under existing laws, and the novelty
thereof, constitute exceptional and compelling circumstances to justify resort to
this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but
also any other financial instrument or product that may be issued and traded in
the market. Due to the changing positions of the Bureau of Internal Revenue on
this issue, there isa need for a final ruling from this court to stabilize the
expectations in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies
and hierarchy of courts had been rendered moot by this courts issuance of the
temporary restraining order enjoining the implementation of the 2011 BIR Ruling.
The temporary restraining order effectively recognized the urgency and necessity
of direct resort to this court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal
Revenue Code, a final withholdingtax at the rate of 20% is imposed on interest
on any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements. These
provisions read:
SEC. 24. Income Tax Rates.
....
SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. ....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from
any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines shall be subject to a final income tax at the
rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation from a depository bank under
the expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest income.
(Emphasis supplied)
This tax treatment of interest from bank deposits and yield from deposit
substitutes was first introduced in the 1977 National Internal Revenue Code
through Presidential Decree No. 1739168 issued in 1980. Later, Presidential
Decree No. 1959, effective on October 15, 1984, formally added the definition of
deposit substitutes, viz:
(y) Deposit substitutes shall mean an alternative form of obtaining funds from
the public, other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own account, for the purpose
of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer.These promissory notes,
repurchase agreements, certificates of assignment or participation and similar
instrument with recourse as may be authorized by the Central Bank of the
Philippines, for banks and non-bank financial intermediaries or by the Securities
and Exchange Commission of the Philippines for commercial, industrial, finance
companies and either non-financial companies: Provided, however, that only debt
instruments issued for inter-bank call loans to cover deficiency in reserves
against deposit liabilities including those between or among banks and quasibanks shall not be considered as deposit substitute debt instruments. (Emphasis
supplied)
obligations, or financing their own needs or the needs of their agent or dealer.
These instruments may include, but need not be limited to, bankers
acceptances, promissory notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the Bangko Sentral ng
Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5)
days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit
substitute debt instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined
"public" to mean "twenty (20) or more individual or corporate lenders at any one
time." Hence, the number of lenders is determinative of whether a debt
instrument should be considered a deposit substitute and consequently subject
to the 20% final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the
BTr issued the Government Bonds."169 On the other hand, respondents theorize
that the word "any" "indicates that the period contemplated is the entire term of
the bond and not merely the point of origination or issuance[,]"170 such that if the
debt instruments "were subsequently sold in secondary markets and so on,
insuch a way that twenty (20) or more buyers eventually own the instruments,
then it becomes indubitable that funds would be obtained from the "public" as
defined in Section 22(Y) of the NIRC."171 Indeed, in the context of the financial
market, the words "at any one time" create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units
(households and business firms that have savings or excess funds) flow to the
deficit units (mainly business firms and government that need funds to finance
their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial
assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and
bonds. Fund suppliers earn a return on their investment; the return is necessary
to ensure that funds are supplied to the financial markets.172
"The financial markets that facilitate the transfer of debt securities are commonly
classified by the maturity of the securities[,]"173 namely: (1) the money market,
which facilitates the flow of short-term funds (with maturities of one year or less);
and (2) the capital market, which facilitates the flow of long-term funds (with
maturities of more than one year).174
Whether referring to money marketsecurities or capital market securities,
transactions occur either in the primary market or in the secondary
market.175 "Primary markets facilitate the issuance of new securities. Secondary
markets facilitate the trading of existing securities, which allows for a change in
the ownership of the securities."176 The transactions in primary markets exist
between issuers and investors, while secondary market transactions exist among
investors.177
"Over time, the system of financial markets has evolved from simple to more
complex ways of carrying out financial transactions."178 Still, all systems perform
one basic function: the quick mobilization of money from the lenders/investors to
the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect
finance; and (3) indirect finance.180
With direct financing, the "borrower and lender meet each other and exchange
funds in returnfor financial assets"181(e.g., purchasing bonds directly from the
company issuing them). This method provides certain limitations such as: (a)
"both borrower and lender must desire to exchange the same amount of funds at
the same time"[;]182 and (b) "both lender and borrower must frequently incur
substantial information costs simply to find each other."183
In semidirect financing, a securities broker or dealer brings surplus and deficit
units together, thereby reducing information costs.184 A Broker185 is "an individual
or financial institution who provides information concerning possible purchases
and sales of securities. Either a buyer or a seller of securities may contact a
broker, whose job is simply to bring buyers and sellers together."186 A
dealer187 "also serves as a middleman between buyers and sellers, but the dealer
actually acquires the sellers securities in the hope of selling them at a later time
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain
realized from the trading of the bonds before their maturity date, which is the
difference between the selling price of the bonds in the secondary market and
the price at which the bonds were purchased by the seller; and (2) gain realized
by the last holder of the bonds when the bonds are redeemed at maturity, which
is the difference between the proceeds from the retirement of the bonds and the
price atwhich such last holder acquired the bonds. For discounted
instruments,like the zero-coupon bonds, the trading gain shall be the excess of
the selling price over the book value or accreted value (original issue price plus
accumulated discount from the time of purchase up to the time of sale) of the
instruments.206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenues interpretation as expressed in the three 2001
BIR Rulings is not consistent with law.207 Its interpretation of "at any one time" to
mean at the point of origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the
2004 and 2005 BIR Rulings) that "all treasury bonds . . . regardlessof the number
of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes."208 Being the subject of this petition, it is, thus, declared void because
it completely disregarded the 20 or more lender rule added by Congress in the
1997 National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private corporations
when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act.
Their constituent provisions must be read together, endeavoring to make every
part effective, harmonious, and sensible.209 That construction which will leave
every word operative will be favored over one that leaves some word, clause, or
sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue
in charge of executing the 1997 National Internal Revenue Code is an
authoritative construction ofgreat weight, but the principle is not absolute and
may be overcome by strong reasons to the contrary. If through a
In view of the foregoing, there is no need to pass upon the other issues raised by
petitioners and petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon the
parties affected."224 Moreover, service may be made personally or by mail.225 And,
"[p]ersonal service is complete upon actual delivery [of the order.]"226This courts
temporary restraining order was received only on October 19, 2011, or a day
after the PEACe Bonds had matured and the 20% final withholding tax on the
interest income from the same was withheld.
Publication of news reports in the print and broadcast media, as well as on the
internet, is not a recognized mode of service of pleadings, court orders, or
processes. Moreover, the news reports227 cited by petitioners were posted
minutes before the close of office hours or late in the evening of October 18,
2011, and they did not givethe exact contents of the temporary restraining order.
"[O]ne cannot be punished for violating an injunction or an order for an injunction
unless it is shown that suchinjunction or order was served on him personally or
that he had notice of the issuance or making of such injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or
herself by withholding the tax due"229 and return the amount of the tax withheld
should it be finally determined that the income paid is not subject to
withholding.230 Hence, respondent Bureau of Treasury was justified in withholding
the amount corresponding to the 20% final withholding tax from the proceeds of
the PEACe Bonds, as it received this courts temporary restraining order only on
October 19, 2011, or the day after this tax had been withheld.
Respondents retention of the
amounts withheld is a defiance
of the temporary restraining
order
Respondent Bureau of Treasurys Journal Entry Voucher No. 11-1010395244 dated October 18, 2011 submitted to this court shows:
Account
Code
Debit Amount
442-360
35,000,000,000.00
198-001
30,033,792,203.59
Due to BIR
412-002
4,966,207,796.41
Credit
Amount
(Peace Bonds) 10 yr
directive. There was no legal obstacle to the release of the 20% final withholding
tax to petitioners. Congressional appropriation is not required for the servicing of
public debts in view of the automatic appropriations clause embodied in
Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel
retirement premiums, government service insurance, and other similar fixed
expenditures, (b) principal and interest on public debt, (c) national government
guarantees of obligations which are drawn upon, are automatically appropriated:
provided, that no obligations shall be incurred or payments made from funds thus
automatically appropriated except as issued in the form of regular budgetary
allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National
Treasury not otherwise appropriated, such amounts as may be necessary to
effect payments on foreign or domestic loans, or foreign or domestic loans
whereon creditors make a call on the direct and indirect guarantee of the
Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to
government-owned or controlled corporations and/or government financial
institutions;
b. government-owned or controlled corporations and/or government
financial institutions the proceeds of which were relent to public or private
institutions;
c. government-owned or controlled corporations and/or financial
institutions and guaranteed by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government owned
or controlled corporations and/or government financial institutions.
The amount of P35 billion that includes the monies corresponding to 20% final
withholding tax is a lawfuland valid obligation of the Republic under the
Government Bonds. Since said obligation represents a public debt, the release of
the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used
for the payment of Government Bonds may be lawfully taken from the continuing
appropriation out of any monies in the National Treasury and is not required to be
the subject of another appropriation legislation: SEC. 2. The Secretary of Finance
shall cause to be paid out of any moneys in the National Treasury not otherwise
appropriated, or from any sinking funds provided for the purpose by law, any
interest falling due, or accruing, on any portion of the public debt authorized by
law. He shall also cause to be paid out of any such money, or from any such
sinking funds the principal amount of any obligations which have matured, or
which have been called for redemption or for which redemption has been
demanded in accordance with terms prescribed by him prior to date of issue. . .
In the case of interest-bearing obligations, he shall pay not less than their face
value; in the case of obligations issued at a discount he shall pay the face value
at maturity; or if redeemed prior to maturity, such portion of the face value as is
prescribed by the terms and conditions under which such obligations were
originally issued. There are hereby appropriated as a continuing appropriation
out of any moneys in the National Treasury not otherwise appropriated, such
sums as may be necessary from time to time to carry out the provisions of this
section. The Secretary of Finance shall transmit to Congress during the first
month of each regular session a detailed statement of all expenditures made
under this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for
Treasury bills and bonds shall be made through the National Treasurys account
with the Bangko Sentral ng Pilipinas, to wit:
Section 38. Demand Deposit Account. The Treasurer of the Philippines
maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas to
which all proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245,
as amended, shall be credited and all payments for redemption of Treasury Bills
and Bonds shall be charged.1wphi1
Regarding these legislative enactments ordaining an automatic appropriations
provision for debt servicing, this court has held:
DUMAGUETE CATHEDRAL
CREDIT COOPERATIVE
[DCCCO], Represented by
Felicidad L. Ruiz, its General
Manager,
Petitioner,
-versusCOMMISSIONER OF
INTERNAL REVENUE,
Promulgated:
Respondent.
January 22, 2010
x------------------------------------------------------------------x
DECISION
The clashing interests of the State and the taxpayers are again pitted against each
other. Two basic principles, the States inherent power of taxation and its declared policy of
fostering the creation and growth of cooperatives come into play. However, the one that
embodies the spirit of the law and the true intent of the legislature prevails.
This Petition for Review on Certiorari under Section 11 of Republic Act (RA) No. 9282,
in relation to Rule 45 of the Rules of Court, seeks to set aside the December 18, 2007
Decision[2] of the Court of Tax Appeals (CTA), ordering petitioner to pay deficiency withholding
taxes on interest from savings and time deposits of its members for taxable years 1999 and 2000,
pursuant to Section 24(B)(1) of the National Internal Revenue Code of 1997 (NIRC), as well as
the delinquency interest of 20% per annum under Section 249(C) of the same Code. It also
assails the April 11, 2008 Resolution[3] denying petitioners Motion for Reconsideration.
[1]
Factual Antecedents
Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative
duly registered with and regulated by the Cooperative Development Authority (CDA). [4] It was
established on February 17, 1968[5] with the following objectives and purposes: (1) to increase
the income and purchasing power of the members; (2) to pool the resources of the members by
encouraging savings and promoting thrift to mobilize capital formation for development
activities; and (3) to extend loans to members for provident and productive purposes.[6] It has the
power (1) to draw, make, accept, endorse, guarantee, execute, and issue promissory notes,
mortgages, bills of exchange, drafts, warrants, certificates and all kinds of obligations and
instruments in connection with and in furtherance of its business operations; and (2) to issue
bonds, debentures, and other obligations; to contract indebtedness; and to secure the same with a
mortgage or deed of trust, or pledge or lien on any or all of its real and personal properties.[7]
On November 27, 2001, the Bureau of Internal Revenue (BIR) Operations Group
Deputy Commissioner, Lilian B. Hefti, issued Letters of Authority Nos. 63222 and 63223,
authorizing BIR Officers Tomas Rambuyon and Tarcisio Cubillan of Revenue Region No. 12,
Bacolod City, to examine petitioners books of accounts and other accounting records for all
internal revenue taxes for the taxable years 1999 and 2000.[8]
Proceedings before the BIR Regional Office
On June 26, 2002, petitioner received two Pre-Assessment Notices for deficiency
withholding taxes for taxable years 1999 and 2000 which were protested by petitioner onJuly 23,
2002.[9] Thereafter, on October 16, 2002, petitioner received two other Pre-Assessment Notices
for deficiency withholding taxes also for taxable years 1999 and 2000.[10] The deficiency
withholding taxes cover the payments of the honorarium of the Board of Directors, security and
janitorial services, legal and professional fees, and interest on savings and time deposits of its
members.
On October 22, 2002, petitioner informed BIR Regional Director Sonia L. Flores that it
would only pay the deficiency withholding taxes corresponding to the honorarium of the Board
of Directors, security and janitorial services, legal and professional fees for the year 1999 in the
amount of P87,977.86, excluding penalties and interest.[11]
In another letter dated November 8, 2002, petitioner also informed the BIR Assistant
Regional Director, Rogelio B. Zambarrano, that it would pay the withholding taxes due on the
honorarium and per diems of the Board of Directors, security and janitorial services,
commissions and legal & professional fees for the year 2000 in the amount of P119,889.37,
excluding penalties and interest, and that it would avail of the Voluntary Assessment and
Abatement Program (VAAP) of the BIR under Revenue Regulations No. 17-2002.[12]
On November 29, 2002, petitioner availed of the VAAP and paid the amounts
ofP105,574.62 and P143,867.24[13] corresponding to the withholding taxes on the payments for
the compensation, honorarium of the Board of Directors, security and janitorial services, and
legal and professional services, for the years 1999 and 2000, respectively.
On April 24, 2003, petitioner received from the BIR Regional Director, Sonia L. Flores,
Letters of Demand Nos. 00027-2003 and 00026-2003, with attached Transcripts of Assessment
and Audit Results/Assessment Notices, ordering petitioner to pay the deficiency withholding
taxes, inclusive of penalties, for the years 1999 and 2000 in the amounts of P1,489,065.30
and P1,462,644.90, respectively.[14]
Proceedings before the Commissioner of Internal Revenue
On May 9, 2003, petitioner protested the Letters of Demand and Assessment Notices
with the Commissioner of Internal Revenue (CIR).[15] However, the latter failed to act on the
protest within the prescribed 180-day period. Hence, on December 3, 2003, petitioner filed a
Petition for Review before the CTA, docketed as C.T.A. Case No. 6827.[16]
Proceedings before the CTA First Division
The case was raffled to the First Division of the CTA which rendered its Decision
on February 6, 2007, disposing of the case in this wise:
IN VIEW OF ALL THE FOREGOING, the Petition for Review is hereby
PARTIALLY GRANTED. Assessment Notice Nos. 00026-2003 and 00027-2003
are hereby MODIFIED and the assessment for deficiency withholding taxes on
the honorarium and per diems of petitioners Board of Directors, security and
janitorial services, commissions and legal and professional fees are hereby
CANCELLED. However, the assessments for deficiency withholding taxes on
interests are hereby AFFIRMED.
Accordingly, petitioner is ORDERED TO PAY the respondent the
respective amounts of P1,280,145.89 and P1,357,881.14 representing deficiency
withholding taxes on interests from savings and time deposits of its members for
the taxable years 1999 and 2000. In addition, petitioner is ordered to pay the 20%
delinquency interest from May 26, 2003 until the amount of deficiency
withholding taxes are fully paid pursuant to Section 249 (C) of the Tax Code.
SO ORDERED.[17]
Dissatisfied, petitioner moved for a partial reconsideration, but it was denied by the First
Division in its Resolution dated May 29, 2007.[18]
Proceedings before the CTA En Banc
On July 3, 2007, petitioner filed a Petition for Review with the CTA En Banc,
interposing the lone issue of whether or not petitioner is liable to pay the deficiency
withholding taxes on interest from savings and time deposits of its members for taxable years
1999 and 2000, and the consequent delinquency interest of 20% per annum.[20]
[19]
Finding no reversible error in the Decision dated February 6, 2007 and the Resolution
dated May 29, 2007 of the CTA First Division, the CTA En Banc denied the Petition for
Review[21] as well as petitioners Motion for Reconsideration.[22]
The CTA En Banc held that Section 57 of the NIRC requires the withholding of tax at
source. Pursuant thereto, Revenue Regulations No. 2-98 was issued enumerating the income
payments subject to final withholding tax, among which is interest from any peso bank deposit
and yield, or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements x x x. According to the CTA En Banc, petitioners business falls under the phrase
similar arrangements; as such, it should have withheld the corresponding 20% final tax on the
interest from the deposits of its members.
Issue
Hence, the present recourse, where petitioner raises the issue of whether or not it is liable
to pay the deficiency withholding taxes on interest from savings and time deposits of its
members for the taxable years 1999 and 2000, as well as the delinquency interest of 20% per
annum.
Petitioners Arguments
Petitioner argues that Section 24(B)(1) of the NIRC which reads in part, to wit:
SECTION 24. Income Tax Rates.
xxxx
(B) Rate of Tax on Certain Passive Income:
(1)
Interests, Royalties, Prizes, and Other Winnings. A final tax
at the rate of twenty percent (20%) is hereby imposed upon the amount of interest
from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements; x x x
applies only to banks and not to cooperatives, since the phrase similar arrangements is preceded
by terms referring to banking transactions that have deposit peculiarities.Petitioner thus posits
that the savings and time deposits of members of cooperatives are not included in the
enumeration, and thus not subject to the 20% final tax. To bolster its position, petitioner cites
BIR Ruling No. 551-888[23] and BIR Ruling [DA-591-2006][24]where the BIR ruled that interests
from deposits maintained by members of cooperative are not subject to withholding tax under
Section 24(B)(1) of the NIRC. Petitioner further contends that pursuant to Article XII, Section
15 of the Constitution[25] and Article 2 of Republic Act No. 6938 (RA 6938) or the Cooperative
Code of the Philippines,[26]cooperatives enjoy a preferential tax treatment which exempts their
members from the application of Section 24(B)(1) of the NIRC.
Respondents Arguments
As a counter-argument, respondent invokes the legal maxim Ubi lex non distinguit nec
nos distinguere debemos (where the law does not distinguish, the courts should not
distinguish). Respondent maintains that Section 24(B)(1) of the NIRC applies to cooperatives as
the phrase similar arrangements is not limited to banks, but includes cooperatives that are
depositaries of their members. Regarding the exemption relied upon by petitioner, respondent
adverts to the jurisprudential rule that tax exemptions are highly disfavored and
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. In this
connection, respondent likewise points out that the deficiency tax assessments were issued
against petitioner not as a taxpayer but as a withholding agent.
Our Ruling
The petition has merit.
Petitioners invocation of BIR Ruling No.
551-888, reiterated in BIR Ruling [DA-5912006], is proper.
On November 16, 1988, the BIR declared in BIR Ruling No. 551-888 that cooperatives
are not required to withhold taxes on interest from savings and time deposits of their
members. The pertinent BIR Ruling reads:
November 16, 1988
BIR RULING NO. 551-888
24 369-88 551-888
Gentlemen:
This refers to your letter dated September 5, 1988 stating that you are a
corporation established under P.D. No. 175 and duly registered with the Bureau of
Cooperatives Development as full fledged cooperative of good standing with
Certificate of Registration No. FF 563-RR dated August 8, 1985; and that one of
your objectives is to provide and strengthen cooperative endeavor and extend
assistance to members and non-members through credit scheme both in cash and
in kind.
Based on the foregoing representations, you now request in effect a ruling as to
whether or not you are exempt from the following:
1.
2.
3.
In reply, please be informed that Executive Order No. 93 which took effect on
March 10, 1987 withdrew all tax exemptions and preferential privileges e.g.,
income tax and sales tax, granted to cooperatives under P.D. No. 175 which were
previously withdrawn by P.D. No. 1955 effective October 15, 1984 and restored
by P.D. No. 2008 effective January 8, 1986.However, implementation of said
Executive Order insofar as electric, agricultural, irrigation and waterworks
cooperatives are concerned was suspended until June 30, 1987.(Memorandum
Order No. 65 dated January 21, 1987 of the President) Accordingly, your tax
exemption privilege expired as of June 30, 1987. Such being the case, you are
now subject to income and sales taxes.
Moreover, under Section 72(a) of the Tax Code, as amended, every employer
making payment of wages shall deduct and withhold upon such wages a tax at the
rates prescribed by Section 21(a) in relation to section 71, Chapter X, Title II, of
the same Code as amended by Batas Pambansa Blg. 135 and implemented by
Revenue Regulations No. 6-82 as amended. Accordingly, as an employer you are
required to withhold the corresponding tax due from the compensation of your
employees.
Furthermore, under Section 50(a) of the Tax Code, as amended, the tax imposed
or prescribed by Section 21(c) of the same Code on specified items of income
shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 51 of the Tax
Code, as amended. Such being the case, and since interest from any Philippine
currency bank deposit and yield or any other monetary benefit from deposit
substitutes are paid by banks, you are not the party required to withhold the
corresponding tax on the aforesaid savings account and time deposits of your
members. (Underscoring ours)
Very truly yours,
(SGD.) BIENVENIDO A. TAN, JR.
Commissioner
The CTA First Division, however, disregarded the above quoted ruling in determining
whether petitioner is liable to pay the deficiency withholding taxes on interest from the deposits
of its members. It ratiocinated in this wise:
This Court does not agree. As correctly pointed out by respondent in his
Memorandum, nothing in the above quoted resolution will give the conclusion
that savings account and time deposits of members of a cooperative are taxexempt. What is entirely clear is the opinion of the Commissioner that the proper
party to withhold the corresponding taxes on certain specified items of income is
the payor-corporation and/or person. In the same way, in the case of interests
earned from Philippine currency deposits made in a bank, then it is the bank
which is liable to withhold the corresponding taxes considering that the bank is
the payor-corporation. Thus, the ruling that a cooperative is not the proper party to
withhold the corresponding taxes on the aforementioned accounts is
correct. However, this ruling does not hold true if the savings and time deposits
are being maintained in the cooperative, for in this case, it is the cooperative
such cooperatives dealing with nonmembers shall enjoy the following tax
exemptions; x x x.
This exemption extends to members of cooperatives. It must be emphasized that
cooperatives exist for the benefit of their members. In fact, the primary objective of every
cooperative is to provide goods and services to its members to enable them to attain increased
income, savings, investments, and productivity.[30] Therefore, limiting the application of the tax
exemption to cooperatives would go against the very purpose of a credit cooperative. Extending
the exemption to members of cooperatives, on the other hand, would be consistent with the
intent of the legislature. Thus, although the tax exemption only mentions cooperatives, this
should be construed to include the members, pursuant to Article 126 of RA 6938, which
provides:
ART. 126. Interpretation and Construction. In case of doubt as to the meaning of
any provision of this Code or the regulations issued in pursuance thereof, the
same shall be resolved liberally in favor of the cooperatives and their members.
We need not belabor that what is within the spirit is within the law even if it is not within
the letter of the law because the spirit prevails over the letter.[31] Apropos is the ruling in the case
of Alonzo v. Intermediate Appellate Court,[32] to wit:
But as has also been aptly observed, we test a law by its results; and
likewise, we may add, by its purposes. It is a cardinal rule that, in seeking the
meaning of the law, the first concern of the judge should be to discover in its
provisions the intent of the lawmaker. Unquestionably, the law should never be
interpreted in such a way as to cause injustice as this is never within the legislative
intent. An indispensable part of that intent, in fact, for we presume the good
motives of the legislature, is to render justice.
Thus, we interpret and apply the law not independently of but in
consonance with justice. Law and justice are inseparable, and we must keep them
so. To be sure, there are some laws that, while generally valid, may seem arbitrary
when applied in a particular case because of its peculiar circumstances. In such a
situation, we are not bound, because only of our nature and functions, to apply
them just the same, [is] slavish obedience to their language. What we do instead is
find a balance between the word and the will, that justice may be done even as the
law is obeyed.
Nachura, JJ.
ISABELA CULTURAL
CORPORATION, Promulgated:
Respondent.
February 12, 2007
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax
on its claimed deduction for security services as shown by the various payment orders
and confirmation receipts it presented as evidence. The dispositive portion of the CTAs
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No.
FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79, inclusive
of surcharges and interest, both for the taxable year 1986, are hereby
CANCELLED and SET ASIDE.
SO ORDERED.[9]
Petitioner filed a petition for review with the Court of Appeals, which affirmed the
CTA decision,[10] holding that although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only in
1986 when ICC received the billing statements for said services. It further ruled that ICC
did not understate its interest income from the promissory notes of Realty Investment,
Inc., and that ICC properly withheld and remitted taxes on the payments for security
services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant
petition contending that since ICC is using the accrual method of accounting, the
expenses for the professional services that accrued in 1984 and 1985, should have been
declared as deductions from income during the said years and the failure of ICC to do so
bars it from claiming said expenses as deduction for the taxable year 1986. As to the
alleged deficiency interest income and failure to withhold expanded withholding tax
assessment, petitioner invoked the presumption that the assessment notices issued by the
BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained
the deduction of the expenses for professional and security services from ICCs gross
income; and (2) held that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc; and that ICC withheld the required 1% withholding tax
from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must have been paid or incurred during
the taxable year; (c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be supported by receipts, records or other
pertinent papers.[11]
The requisite that it must have been paid or incurred during the taxable year is
further qualified by Section 45 of the National Internal Revenue Code (NIRC) which
states that: [t]he deduction provided for in this Title shall be taken for the taxable year in
which paid or accrued or paid or incurred, dependent upon the method of
accounting upon the basis of which the net income is computed x x x.
Accounting methods for tax purposes comprise a set of rules for determining when
and how to report income and deductions. [12] In the instant case, the accounting method
used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as deduction from income for the
succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other
allowable deductions for the current year but failed to do so cannot deduct the same for
the next year.[13]
The accrual method relies upon the taxpayers right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which characterizes
the cash method of accounting. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability.Similarly, liabilities are
accrued when fixed and determinable in amount, without regard to indeterminacy merely
of time of payment.[14]
For a taxpayer using the accrual method, the determinative question is, when do
the facts present themselves in such a manner that the taxpayer must recognize income or
expense? The accrual of income and expense is permitted when the all-events test has
been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount
of such income or liability be determined with reasonable accuracy.However, the test
does not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains uncertain,
if its basis is unchangeable; the test is satisfied where a computation may be unknown,
but is not as much as unknowable, within the taxable year. The amount of liability does
not have to be determined exactly; it must be determined with reasonable
accuracy. Accordingly, the term reasonable accuracy implies something less than an
exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew,
or could reasonably be expected to have known, at the closing of its books for the
taxable year.[16] Accrual method of accounting presents largely a question of fact;
such that the taxpayer bears the burden of proof of establishing the accrual of an
item of income or deduction.[17]
Corollarily, it is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority; and one who claims an exemption must be able to justify the same by the
clearest grant of organic or statute law. An exemption from the common burden cannot be
permitted to exist upon vague implications. And since a deduction for income tax
purposes partakes of the nature of a tax exemption, then it must also be strictly construed.
[18]
In the instant case, the expenses for professional fees consist of expenses for legal
and auditing services. The expenses for legal services pertain to the 1984 and 1985 legal
and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, and for reimbursement of the expenses of said firm in connection with ICCs tax
problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its
counsel since the 1960s.[19] From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to have reasonably known
the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year
when they could have been claimed as deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due
diligence could have inquired into the amount of their obligation to the firm, especially so
that it is using the accrual method of accounting. For another, it could have reasonably
determined the amount of legal and retainer fees owing to its familiarity with the rates
charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and
that the taxpayer bears the burden of establishing the accrual of an expense or
income. However, ICC failed to discharge this burden. As to when the firms performance
of its services in connection with the 1984 tax problems were completed, or whether ICC
exercised reasonable diligence to inquire about the amount of its liability, or whether it
does or does not possess the information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact which ICC never established. It
simply relied on the defense of delayed billing by the firm and the company, which under
the circumstances, is not sufficient to exempt it from being charged with knowledge of
the reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense deductions in
1986. This is so because ICC failed to present evidence showing that even with only
reasonable accuracy, as the standard to ascertain its liability to SGV & Co. in the year
1985, it cannot determine the professional fees which said company would charge for its
services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the taxable year
1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly
deducted from its gross income for the said year and were therefore properly disallowed
by the BIR.
As to the expenses for security services, the records show that these expenses were
incurred by ICC in 1986[20] and could therefore be properly claimed as deductions for the
said year.
Anent the purported understatement of interest income from the promissory notes
of Realty Investment, Inc., we sustain the findings of the CTA and the Court of Appeals
that no such understatement exists and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is indeed no stipulation
between the latter and ICC on the application of compounded interest. [21] Under Article
1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should
not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly
withheld the required withholding tax from its claimed deductions for security services
and remitted the same to the BIR is supported by payment order and confirmation
receipts.[22] Hence, the Assessment Notice for deficiency expanded withholding tax was
properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of
P333,196.86 for deficiency income tax should be cancelled and set aside but only insofar
as the claimed deductions of ICC for security services. Said Assessment is valid as to the
BIRs disallowance of ICCs expenses for professional services. The Court of Appeals
cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of P4,897.79
for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30,
2005 Decision of the Court of Appeals in CA-G.R. SP No. 78426, isAFFIRMED with
the MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which
disallowed the expense deduction of Isabela Cultural Corporation for professional and
security services, is declared valid only insofar as the expenses for the professional fees
of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural
Corporations liability under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.
EN BANC
COMMISSIONER
INTERNAL REVENUE,
Petitioner,
OF G. R. No. 163653
-versus-
FILINVEST
DEVELOPMENT
CORPORATION,
Respondent.
x-------------------------------------x
COMMISSIONER
INTERNAL REVENUE,
Petitioner,
G. R. No. 167689
OF Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
-versusPERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
FILINVEST
DEVELOPMENT VILLARAMA, JR.,
CORPORATION,
PEREZ,
Respondent.
MENDOZA, and
SERENO,* JJ.
Promulgated:
July 19, 2011
x----------------------------------------------------------------------------------------------- x
DECISION
PEREZ, J.:
Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45
of the 1997 Rules of Civil Procedure are the decisions rendered by the Court of Appeals
(CA) in the following cases: (a) Decision dated 16 December 2003 of the then Special
Fifth Division in CA-G.R. SP No. 72992;[1] and, (b) Decision dated 26 January 2005 of
the then Fourteenth Division in CA-G.R. SP No. 74510.[2]
The Facts
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI),
respondent Filinvest Development Corporation (FDC) is a holding company which also
owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI).On 29 November
1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both
transferred in favor of the latter parcels of land appraised atP4,306,777,000.00. In
exchange for said parcels which were intended to facilitate development of medium-rise
residential and commercial buildings, 463,094,301 shares of stock of FLI were issued to
FDC and FAI.[3] As a result of the exchange, FLIs ownership structure was changed to the
extent reflected in the following tabular prcis, viz.:
Stockholde Number and Percentage Number
of Number and Percentage
r
of Shares Held Prior to Additional
of Shares Held After the
the Exchange
Shares Issued Exchange
FDC
2,537,358,000 67.42%
42,217,000
FAI
00
OTHERS
1,226,177,000 32.58%
2,579,575,000 61.03%
1,226,177,000 29.01%
---------------
On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR)
to the effect that no gain or loss should be recognized in the aforesaid transfer of real
properties. Acting on the request, the BIR issued Ruling No. S-34-046-97 dated 3
February 1997, finding that the exchange is among those contemplated under Section 34
(c) (2) of the old National Internal Revenue Code (NIRC) [4] which provides that (n)o gain
or loss shall be recognized if property is transferred to a corporation by a person in
exchange for a stock in such corporation of which as a result of such exchange said
person, alone or together with others, not exceeding four (4) persons, gains control of
said corporation."[5] With the BIRs reiteration of the foregoing ruling upon the 10
February 1997 request for clarification filed by FLI, [6] the latter, together with FDC and
FAI, complied with all the requirements imposed in the ruling.[7]
On various dates during the years 1996 and 1997, in the meantime, FDC also extended
advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation
(DSCC) and Filinvest Capital, Inc. (FCI). [8] Duly evidenced by instructional letters as
well as cash and journal vouchers, said cash advances amounted to P2,557,213,942.60 in
1996[9] and P3,360,889,677.48 in 1997.[10] On 15 November 1996, FDC also entered into
a Shareholders Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a
Singapore-based joint venture company called Filinvest Asia Corporation (FAC), tasked
to develop and manage FDCs 50% ownership of its PBCom Office Tower Project (the
Project). With their equity participation in FAC respectively pegged at 60% and 40% in
the Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in said
joint venture company to RHPLs subscription worth P433.8 million. Having paid its
subscription by executing a Deed of Assignment transferring to FAC a portion of its
rights and interest in the Project worth P500.7 million, FDC eventually reported a net loss
of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.[11]
On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay
deficiency income and documentary stamp taxes, plus interests and compromise
penalties,[12] covered by the following Assessment Notices, viz.: (a) Assessment Notice
No. SP-INC-96-00018-2000 for deficiency income taxes in the sum ofP150,074,066.27
for 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for deficiency documentary
stamp taxes in the sum of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC97-00019-2000 for deficiency income taxes in the sum of P5,716,927.03 for 1997; and
(d) Assessment Notice No. SP-DST-97-00021-2000 for deficiency documentary stamp
taxes in the sum of P5,796,699.40 for 1997.[13] The foregoing deficiency taxes were
assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it
executed with FAI and FLI, on the dilution resulting from the Shareholders Agreement
FDC executed with RHPL as well as the arms-length interest rate and documentary stamp
taxes imposable on the advances FDC extended to its affiliates.[14]
On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for
deficiency income taxes in the sum of P1,477,494,638.23 for the year 1997.[15]Covered by
Assessment Notice No. SP-INC-97-0027-2000,[16] said deficiency tax was also assessed
on the taxable gain purportedly realized by FAI from the Deed of Exchange it executed
with FDC and FLI.[17] On 26 January 2000 or within the reglementary period of thirty
(30) days from notice of the assessment, both FDC and FAI filed their respective requests
for reconsideration/protest, on the ground that the deficiency income and documentary
stamp taxes assessed by the BIR were bereft of factual and legal basis. [18] Having
submitted the relevant supporting documents pursuant to the 31 January 2000 directive
from the BIR Appellate Division, FDC and FAI filed on 11 September 2000 a letter
requesting an early resolution of their request for reconsideration/protest on the ground
that the 180 days prescribed for the resolution thereof under Section 228 of the NIRC was
going to expire on 20 September 2000.[19]
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve
their request for reconsideration/protest within the aforesaid period, FDC and FAI filed
on 17 October 2000 a petition for review with the Court of Tax Appeals (CTA) pursuant
to Section 228 of the 1997 NIRC. Docketed before said court as CTA Case No. 6182, the
petition alleged, among other matters, that as previously opined in BIR Ruling No. S-34046-97, no taxable gain should have been assessed from the subject Deed of Exchange
since FDC and FAI collectively gained further control of FLI as a consequence of the
exchange; that correlative to the CIR's lack of authority to impute theoretical interests on
the cash advances FDC extended in favor of its affiliates, the rule is settled that interests
cannot be demanded in the absence of a stipulation to the effect; that not being
promissory notes or certificates of obligations, the instructional letters as well as the cash
and journal vouchers evidencing said cash advances were not subject to documentary
stamp taxes; and, that no income tax may be imposed on the prospective gain from the
supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC
both prayed that the subject assessments for deficiency income and documentary stamp
taxes for the years 1996 and 1997 be cancelled and annulled.[20]
On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in
question should not be considered tax free since, with the resultant diminution of its
shares in FLI, FDC did not gain further control of said corporation. Likewise calling
attention to the fact that the cash advances FDC extended to its affiliates were interest
free despite the interest bearing loans it obtained from banking institutions, the CIR
invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations No.
2, Section 179 (b) and (c), gave him "the power to allocate, distribute or apportion
income or deductions between or among such organizations, trades or business in order to
prevent evasion of taxes." The CIR justified the imposition of documentary stamp taxes
on the instructional letters as well as cash and journal vouchers for said cash advances on
the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94 which
provide that loan transactions are subject to said tax irrespective of whether or not they
are evidenced by a formal agreement or by mere office memo. The CIR also argued that
FDC realized taxable gain arising from the dilution of its shares in FAC as a result of its
Shareholders' Agreement with RHPL.[21]
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and
Issues[22] which was admitted in the 16 February 2001 resolution issued by the CTA. With
the further admission of the Formal Offer of Documentary Evidence subsequently filed
by FDC and FAI[23] and the conclusion of the testimony of Susana Macabelda anent the
cash advances FDC extended in favor of its affiliates, [24] the CTA went on to render the
Decision dated 10 September 2002 which, with the exception of the deficiency income
tax on the interest income FDC supposedly realized from the advances it extended in
favor of its affiliates, cancelled the rest of deficiency income and documentary stamp
taxes assessed against FDC and FAI for the years 1996 and 1997, [25] thus:
WHEREFORE, in view of all the foregoing, the court finds the
instant petition partly meritorious. Accordingly, Assessment Notice No. SP-
Finding that the collective increase of the equity participation of FDC and FAI in
FLI rendered the gain derived from the exchange tax-free, the CTA also ruled that the
increase in the value of FDC's shares in FAC did not result in economic advantage in the
absence of actual sale or conversion thereof. While likewise finding that the documents
evidencing the cash advances FDC extended to its affiliates cannot be considered as loan
agreements that are subject to documentary stamp tax, the CTA enunciated, however, that
the CIR was justified in assessing undeclared interests on the same cash advances
pursuant to his authority under Section 43 of the NIRC in order to forestall tax
evasion. For persuasive effect, the CTA referred to the equivalent provision in the Internal
Revenue Code of theUnited States (IRC-US), i.e., Sec. 482, as implemented by Section
1.482-2 of 1965-1969 Regulations of the Law of Federal Income Taxation.[27]
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for
review docketed before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997
Rules of Civil Procedure. Calling attention to the fact that the cash advances it extended
to its affiliates were interest-free in the absence of the express stipulation on interest
required under Article 1956 of the Civil Code, FDC questioned the imposition of an
arm's-length interest rate thereon on the ground, among others, that the CIR's authority
under Section 43 of the NIRC: (a) does not include the power to impute imaginary
interest on said transactions; (b) is directed only against controlled taxpayers and not
against mother or holding corporations; and, (c) can only be invoked in cases of
understatement of taxable net income or evident tax evasion. [28] Upholding FDC's
position, the CA's then Special Fifth Division rendered the herein assailed decision dated
16 December 2003,[29] the decretal portion of which states:
In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:
THE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE COURT OF TAX APPEALS AND IN HOLDING
THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS
AFFILIATES ARE NOT SUBJECT TO INCOME TAX.[35]
In G.R. No. 167689, on the other hand, petitioner proffers the following issues for
resolution:
I
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE
ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE
OF SHARES OF STOCK FOR PROPERTY AMONG FILINVEST
DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG,
INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED
(FLI) MET ALL THE REQUIREMENTS FOR THE NONRECOGNITION OF TAXABLE GAIN UNDER SECTION 34 (c) (2)
OF THE OLD NATIONAL INTERNAL REVENUE CODE (NIRC)
(NOW SECTION 40 (C) (2) (c) OF THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF
INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO
ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS
SUBJECT TO DOCUMENTARY STAMP TAXES UNDER SECTION
180 OF THE NIRC.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE
INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS IN FAC
IS NOT TAXABLE.[36]
The Courts Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition in
G.R. No. 167689 impressed with partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding that
theoretical interests can be imputed on the advances FDC extended to its affiliates in
1996 and 1997 considering that, for said purpose, FDC resorted to interest-bearing fund
borrowings from commercial banks. Since considerable interest expenses were deducted
by FDC when said funds were borrowed, the CIR theorizes that interest income should
likewise be declared when the same funds were sourced for the advances FDC extended
to its affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of
Revenue Regulation No. 2, the CIR maintains that it is vested with the power to allocate,
distribute or apportion income or deductions between or among controlled organizations,
trades or businesses even in the absence of fraud, since said power is intended to prevent
evasion of taxes or clearly to reflect the income of any such organizations, trades or
businesses. In addition, the CIR asseverates that the CA should have accorded weight and
respect to the findings of the CTA which, as the specialized court dedicated to the study
and consideration of tax matters, can take judicial notice of US income tax laws and
regulations.[37]
Admittedly, Section 43 of the 1993 NIRC[38] provides that, (i)n any case of two or
more organizations, trades or businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or indirectly by the same
interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or
allocate gross income or deductions between or among such organization, trade or
business, if he determines that such distribution, apportionment or allocation is necessary
in order to prevent evasion of taxes or clearly to reflect the income of any such
organization, trade or business. In amplification of the equivalent provision [39] under
Commonwealth Act No. 466,[40] Sec. 179(b) of Revenue Regulation No. 2 states as
follows:
Determination of the taxable net income of controlled
taxpayer. (A)DEFINITIONS. When used in this section
(1)
The term organization includes any kind, whether it be a
sole proprietorship, a partnership, a trust, an estate, or a corporation or
association, irrespective of the place where organized, where operated, or
where its trade or business is conducted, and regardless of whether
domestic or foreign, whether exempt or taxable, or whether affiliated or
not.
(2)
The terms trade or business include any trade or
business activity of any kind, regardless of whether or where organized,
whether owned individually or otherwise, and regardless of the place where
carried on.
(3)
The term controlled includes any kind of control, direct
or indirect, whether legally enforceable, and however exercisable or
exercised. It is the reality of the control which is decisive, not its form or
mode of exercise. A presumption of control arises if income or deductions
have been arbitrarily shifted.
(4)
The term controlled taxpayer means any one of two or
more organizations, trades, or businesses owned or controlled directly or
indirectly by the same interests.
(5)
The term group and group of controlled taxpayers means
the organizations, trades or businesses owned or controlled by the same
interests.
(6)
The term true net income means, in the case of a
controlled taxpayer, the net income (or as the case may be, any item or
element affecting net income) which would have resulted to the controlled
taxpayer, had it in the conduct of its affairs (or, as the case may be, any item
or element affecting net income) which would have resulted to the
controlled taxpayer, had it in the conduct of its affairs (or, as the case may
be, in the particular contract, transaction, arrangement or other act) dealt
with the other members or members of the group at arms length.It does not
mean the income, the deductions, or the item or element of either, resulting
to the controlled taxpayer by reason of the particular contract, transaction,
or arrangement, the controlled taxpayer, or the interest controlling it, chose
to make (even though such contract, transaction, or arrangement be legally
binding upon the parties thereto).
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax
Code is to place a controlled taxpayer on a tax parity with an uncontrolled
taxpayer, by determining, according to the standard of an uncontrolled
taxpayer, the true net income from the property and business of a controlled
taxpayer. The interests controlling a group of controlled taxpayer are
assumed to have complete power to cause each controlled taxpayer so to
conduct its affairs that its transactions and accounting records truly reflect
the net income from the property and business of each of the controlled
taxpayers. If, however, this has not been done and the taxable net income
are thereby understated, the statute contemplates that the Commissioner of
Internal Revenue shall intervene, and, by making such distributions,
apportionments, or allocations as he may deem necessary of gross income
or deductions, or of any item or element affecting net income, between or
among the controlled taxpayers constituting the group, shall determine the
true net income of each controlled taxpayer. The standard to be applied in
every case is that of an uncontrolled taxpayer. Section 44 grants no right to
a controlled taxpayer to apply its provisions at will, nor does it grant any
right to compel the Commissioner of Internal Revenue to apply its
provisions.
share of the gross income of general professional partnership. [43] While it has been held
that the phrase "from whatever source derived" indicates a legislative policy to include all
income not expressly exempted within the class of taxable income under our laws, the
term "income" has been variously interpreted to mean "cash received or its equivalent",
"the amount of money coming to a person within a specific time" or "something distinct
from principal or capital."[44] Otherwise stated, there must be proof of the actual or, at the
very least, probable receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR.
Our circumspect perusal of the record yielded no evidence of actual or possible
showing that the advances FDC extended to its affiliates had resulted to the interests
subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC
had resorted to borrowings from commercial banks, the CIR had adduced no concrete
proof that said funds were, indeed, the source of the advances the former provided its
affiliates. While admitting that FDC obtained interest-bearing loans from commercial
banks,[45] Susan Macabelda - FDC's Funds Management Department Manager who was
the sole witness presented before the CTA - clarified that the subject advances were
sourced from the corporation's rights offering in 1995 as well as the sale of its investment
in Bonifacio Land in 1997.[46]More significantly, said witness testified that said advances:
(a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their
operational and capital expenditures; and, (b) were all temporarily in nature since they
were repaid within the duration of one week to three months and were evidenced by mere
journal entries, cash vouchers and instructional letters.[47]
Even if we were, therefore, to accord precipitate credulity to the CIR's bare
assertion that FDC had deducted substantial interest expense from its gross income, there
would still be no factual basis for the imputation of theoretical interests on the subject
advances and assess deficiency income taxes thereon. More so, when it is borne in mind
that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due
unless it has been expressly stipulated in writing. Considering that taxes, being burdens,
are not to be presumed beyond what the applicable statute expressly and clearly declares,
[48]
the rule is likewise settled that tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.[49] Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to
tax laws and the provisions of a taxing act are not to be extended by implication. [50] While
it is true that taxes are the lifeblood of the government, it has been held that their
assessment and collection should be in accordance with law as any arbitrariness will
negate the very reason for government itself.[51]
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the
imposition of deficiency income taxes on the transfer FDC and FAI effected in exchange
for the shares of stock of FLI. With respect to the Deed of Exchange executed between
FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently provides as follows:
Sec. 34. Determination of amount of and recognition of gain or
loss.xxxx
(c) Exception x x x x
No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for shares of stock in such
corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four persons, gains control of said
corporation; Provided, That stocks issued for services shall not be
considered as issued in return of property.
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties,
[52]
the requisites for the non-recognition of gain or loss under the foregoing provision are
as follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares of
stock for property/ies of the transferor; (c) the transfer is made by a person, acting alone
or together with others, not exceeding four persons; and, (d) as a result of the exchange
the transferor, alone or together with others, not exceeding four, gains control of the
transferee.[53] Acting on the 13 January 1997 request filed by FLI, the BIR had, in fact,
acknowledged the concurrence of the foregoing requisites in the Deed of Exchange the
former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97. [54] With the
BIR's reiteration of said ruling upon the request for clarification filed by FLI, [55] there is
also no dispute that said transferee and transferors subsequently complied with the
requirements provided for the non-recognition of gain or loss from the exchange of
property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC.[56]
Then as now, the CIR argues that taxable gain should be recognized for the exchange
considering that FDC's controlling interest in FLI was actually decreased as a result
thereof. For said purpose, the CIR calls attention to the fact that, prior to the exchange,
FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital
stock. Upon the issuance of 443,094,000 additional FLI shares as a consequence of the
exchange and with only 42,217,000 thereof accruing in favor of FDC for a total of
2,579,575,000 shares, said corporations controlling interest was supposedly reduced to
61%.03 when reckoned from the transferee's aggregate 4,226,629,000 outstanding
shares. Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on
the other hand, FAI's acquisition of 420,877,000 FLI shares as a result of the exchange
purportedly resulted in its control of only 9.96% of said transferee corporation's
4,226,629,000 outstanding shares. On the principle that the transaction did not qualify as
a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that
taxable gain in the sum ofP263,386,921.00 should be recognized on the part of FDC and
in the sum ofP3,088,711,367.00 on the part of FAI.[57]
The paucity of merit in the CIR's position is, however, evident from the categorical
language of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not
be recognized in case the exchange of property for stocks results in the control of the
transferee by the transferor, alone or with other transferors not exceeding four
persons. Rather than isolating the same as proposed by the CIR, FDC's 2,579,575,000
shares or 61.03% control of FLI's 4,226,629,000 outstanding shares should, therefore, be
appreciated in combination with the 420,877,000 new shares issued to FAI which
represents 9.96% control of said transferee corporation.Together FDC's 2,579,575,000
shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000
shares or 70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly
defined as "ownership of stocks in a corporation possessing at least fifty-one percent of
the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6)
[c] of the 1993 NIRC, the exchange of property for stocks between FDC FAI and FLI
clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the same provision.
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then
Supreme Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their
book Tax Law and Jurisprudence, opined that said provision could be inapplicable if
control is already vested in the exchangor prior to exchange. [58] Aside from the fact that
that the 10 September 2002 Decision in CTA Case No. 6182 upholding the tax-exempt
status of the exchange between FDC, FAI and FLI was penned by no less than Justice
Acosta himself,[59] FDC and FAI significantly point out that said authors have
acknowledged that the position taken by the BIR is to the effect that "the law would apply
even when the exchangor already has control of the corporation at the time of the
exchange."[60] This was confirmed when, apprised in FLI's request for clarification about
the change of percentage of ownership of its outstanding capital stock, the BIR opined as
follows:
Please be informed that regardless of the foregoing, the transferors,
Filinvest Development Corp. and Filinvest Alabang, Inc. still gained control
of Filinvest Land, Inc. The term 'control' shall mean ownership of stocks in
a corporation by possessing at least 51% of the total voting power of all
classes of stocks entitled to vote. Control is determined by the amount of
stocks received, i.e., total subscribed, whether for property or for services
by the transferor or transferors. In determining the 51% stock ownership,
only those persons who transferred property for stocks in the same
transaction may be counted up to the maximum of five (BIR Ruling No.
547-93 dated December 29, 1993.[61]
At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by
the CIR is more apparent than real. As the uncontested owner of 80% of the outstanding
shares of FAI, it cannot be gainsaid that FDC ideally controls the same percentage of the
420,877,000 shares issued to its said co-transferor which, by itself, represents 7.968% of
the outstanding shares of FLI. Considered alongside FDC's 61.03% control of FLI as a
consequence of the 29 November 1996 Deed of Transfer, said 7.968% add up to an
aggregate of 68.998% of said transferee corporation's outstanding shares of stock which
is evidently still greater than the 67.42% FDC initially held prior to the exchange. This
much was admitted by the parties in the 14 February 2001 Stipulation of Facts,
Documents and Issues they submitted to the CTA. [62] Inasmuch as the combined
ownership of FDC and FAI of FLI's outstanding capital stock adds up to a total of
70.99%, it stands to reason that neither of said transferors can be held liable for
deficiency income taxes the CIR assessed on the supposed gain which resulted from the
subject transfer.
On the other hand, insofar as documentary stamp taxes on loan agreements and
promissory notes are concerned, Section 180 of the NIRC provides follows:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the government
or any of its instrumentalities, certificates of deposit bearing interest
and others not payable on sight or demand. On all loan agreements
signed abroad wherein the object of the contract is located or used in the
Philippines; bill of exchange (between points within the Philippines),
drafts, instruments and securities issued by the Government or any of its
instrumentalities or certificates of deposits drawing interest, or orders for
the payment of any sum of money otherwise than at sight or on demand, or
on all promissory notes, whether negotiable or non-negotiable, except bank
notes issued for circulation, and on each renewal of any such note, there
shall be collected a documentary stamp tax of Thirty centavos (P0.30) on
each two hundred pesos, or fractional part thereof, of the face value of any
such agreement, bill of exchange, draft, certificate of deposit or
note: Provided, That only one documentary stamp tax shall be imposed on
either loan agreement, or promissory notes issued to secure such loan,
whichever will yield a higher tax:Provided however, That loan
agreements or promissory notes the aggregate of which does not exceed
Two hundred fifty thousand pesos (P250,000.00) executed by an individual
for his purchase on installment for his personal use or that of his family
and not for business, resale, barter or hire of a house, lot, motor vehicle,
appliance or furniture shall be exempt from the payment of documentary
stamp tax provided under this Section.
When read in conjunction with Section 173 of the 1993 NIRC, [63] the foregoing provision
concededly applies to "(a)ll loan agreements, whether made or signed in the Philippines,
or abroad when the obligation or right arises from Philippine sources or the property or
object of the contract is located or used in the Philippines." Correlatively, Section 3 (b)
and Section 6 of Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. For purposes of these Regulations, the
following term shall mean:
(b) 'Loan agreement' refers to a contract in writing where one of the parties
delivers to another money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid. The term
subject to documentary stamp tax. Such being the case, said inter-office
memo evidencing the lendings or borrowings which is neither a form of
promissory note nor a certificate of indebtedness issued by the corporationaffiliate or a certificate of obligation, which are, more or less, categorized
as 'securities', is not subject to documentary stamp tax imposed under
Section 180, 174 and 175 of the Tax Code of 1997, respectively.Rather, the
inter-office memo is being prepared for accounting purposes only in order
to avoid the co-mingling of funds of the corporate affiliates.
In its appeal before the CA, the CIR argued that the foregoing ruling was later modified
in BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-office memos
evidencing lendings or borrowings extended by a corporation to its affiliates are akin to
promissory notes, hence, subject to documentary stamp taxes. [64] In brushing aside the
foregoing argument, however, the CA applied Section 246 of the 1993 NIRC [65] from
which proceeds the settled principle that rulings, circulars, rules and regulations
promulgated by the BIR have no retroactive application if to so apply them would be
prejudicial to the taxpayers.[66]Admittedly, this rule does not apply: (a) where the taxpayer
deliberately misstates or omits material facts from his return or in any document required
of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different from the facts on which the ruling
is based; or (c) where the taxpayer acted in bad faith. [67] Not being the taxpayer who, in
the first instance, sought a ruling from the CIR, however, FDC cannot invoke the
foregoing principle on non-retroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA and the
CA erred in invalidating the assessments issued by the CIR for the deficiency
documentary stamp taxes due on the instructional letters as well as the journal and cash
vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997. In
Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum
of P6,400,693.62 for documentary stamp tax, P3,999,793.44 in interests and P25,000.00
as compromise penalty, for a total of P10,425,487.06.Alongside the sum
of P4,050,599.62 for documentary stamp tax, the CIR similarly assessed P1,721,099.78
in interests and P25,000.00 as compromise penalty in Assessment Notice No. SP-DST97-00021-2000 or a total of P5,796,699.40. The imposition of deficiency interest is
justified under Sec. 249 (a) and (b) of the NIRC which authorizes the assessment of the
same at the rate of twenty percent (20%), or such higher rate as may be prescribed by
regulations, from the date prescribed for the payment of the unpaid amount of tax until
full payment.[68] The imposition of the compromise penalty is, in turn, warranted under
Sec. 250[69] of the NIRC which prescribes the imposition thereof in case of each failure to
file an information or return, statement or list, or keep any record or supply any
information required on the date prescribed therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA and the CA
for invalidating the Assessment Notice issued by the CIR for the deficiency income taxes
FDC is supposed to have incurred as a consequence of the dilution of its shares in
FAC. Anent FDCs Shareholders Agreement with RHPL, the record shows that the parties
were in agreement about the following factual antecedents narrated in the 14 February
2001 Stipulation of Facts, Documents and Issues they submitted before the CTA,[70] viz.:
1.11. On November 15, 1996, FDC entered into a Shareholders Agreement
(SA) with Reco Herrera Pte. Ltd. (RHPL) for the formation of a joint
venture company named Filinvest Asia Corporation (FAC) which is based
in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7, Answer).
1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked
to develop and manage the 50% ownership interest of FDC in its PBCom
Office Tower Project (Project) with the Philippine Bank of
Communications (par. 6.12, Petition; par. 7, Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity participation
of FDC and RHPL in FAC was 60% and 40% respectively.
1.14. In accordance with the terms of the SA, FDC subscribed to P500.7
million worth of shares of stock representing a 60% equity participation in
FAC. In turn, RHPL subscribed to P433.8 million worth of shares of stock
of FAC representing a 40% equity participation in FAC.
1.15. In payment of its subscription in FAC, FDC executed a Deed
of Assignment transferring to FAC a portion of FDCs right and interests in
the Project to the extent of P500.7 million.
1.16. FDC reported a net loss of P190,695,061.00 in its Annual
Income Tax Return for the taxable year 1996.[71]
Alongside the principle that tax revenues are not intended to be liberally
construed,[72] the rule is settled that the findings and conclusions of the CTA are accorded
great respect and are generally upheld by this Court, unless there is a clear showing of a
reversible error or an improvident exercise of authority.[73] Absent showing of such error
here, we find no strong and cogent reasons to depart from said rule with respect to the
CTA's finding that no deficiency income tax can be assessed on the gain on the supposed
dilution and/or increase in the value of FDC's shareholdings in FAC which the CIR, at
any rate, failed to establish. Bearing in mind the meaning of "gross income" as above
discussed, it cannot be gainsaid, even then, that a mere increase or appreciation in the
value of said shares cannot be considered income for taxation purposes. Since a mere
advance in the value of the property of a person or corporation in no sense constitute the
income specified in the revenue law, it has been held in the early case of Fisher vs.
Trinidad,[74] that it constitutes and can be treated merely as an increase of capital. Hence,
the CIR has no factual and legal basis in assessing income tax on the increase in the value
of FDC's shareholdings in FAC until the same is actually sold at a profit.
WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R.
No. 163653 is DENIED for lack of merit and the CAs 16 December 2003 Decision in
G.R. No. 72992 is AFFIRMED in toto. The CIRs petition in G.R. No. 167689
is PARTIALLY GRANTED and the CAs 26 January 2005 Decision in CA-G.R. SP No.
74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-9700021-2000 issued for deficiency documentary stamp taxes due on the instructional
letters as well as journal and cash vouchers evidencing the advances FDC extended to its
affiliates are declared valid.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on (a)
the arms-length interest from said advances; (b) the gain from FDCs Deed of Exchange
with FAI and FLI; and (c) income from the dilution resulting from FDCs Shareholders
Agreement with RHPL is, however, upheld.
SO ORDERED.
- versus -
COMMISSIONER OF INTERNAL
REVENUE,
Respondent.
Promulgated:
February 16, 2010
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July
19, 2007 Decision[1] and October 30, 2007 Resolution[2] of the Court of Tax Appeals
(CTA) En Banc in CTA E.B. Case No. 210, entitled South African Airways v.
Commissioner of Internal Revenue. The assailed decision affirmed the Decision dated
May 10, 2006[3] and Resolution dated August 11, 2006[4] rendered by the CTA First
Division.
The Facts
Petitioner South African Airways is a foreign corporation organized and existing under
and by virtue of the laws of the Republic of South Africa. Its principal office is located
at Airways Park, Jones Road, Johannesburg International Airport, South Africa. In
the Philippines, it is an internal air carrier having no landing rights in the
country. Petitioner has a general sales agent in the Philippines, Aerotel Limited
Corporation (Aerotel). Aerotel sells passage documents for compensation or commission
for petitioners off-line flights for the carriage of passengers and cargo between ports or
points outside the territorial jurisdiction of the Philippines. Petitioner is not registered
with the Securities and Exchange Commission as a corporation, branch office, or
partnership. It is not licensed to do business in thePhilippines.
For the taxable year 2000, petitioner filed separate quarterly and annual income tax
returns for its off-line flights, summarized as follows:
For Passenger
Sub-total
For Cargo
Sub-total
TOTAL
Period
1 Quarter
2nd Quarter
3rd Quarter
4th Quarter
st
st
1 Quarter
2nd Quarter
3rd Quarter
4th Quarter
Date Filed
May 30, 2000
August 29, 2000
November 29, 2000
April 16, 2000
May 30, 2000
August 29, 2000
November 29, 2000
April 16, 2000
PhP
PhP
PhP
PhP
2.5% Gross
Phil. Billings
222,531.25
424,046.95
422,466.00
453,182.91
1,522,227.11
81,531.00
50,169.65
36,383.74
37,454.88
205,539.27
1,727,766.38
Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue,
Revenue District Office No. 47, a claim for the refund of the amount of PhP 1,727,766.38
as erroneously paid tax on Gross Philippine Billings (GPB) for the taxable year 2000.
Such claim was unheeded. Thus, on April 14, 2003, petitioner filed a Petition for Review
with the CTA for the refund of the abovementioned amount. The case was docketed as
CTA Case No. 6656.
On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack
of merit. The CTA ruled that petitioner is a resident foreign corporation engaged in trade
or business in the Philippines. It further ruled that petitioner was not liable to pay tax on
its GPB under Section 28(A)(3)(a) of the National Internal Revenue Code (NIRC) of
1997. The CTA, however, stated that petitioner is liable to pay a tax of 32% on its income
derived from the sales of passage documents in thePhilippines. On this ground, the CTA
denied petitioners claim for a refund.
Petitioners Motion for Reconsideration of the above decision was denied by the CTA
First Division in a Resolution dated August 11, 2006.
Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim
for a refund of its tax payment on its GPB. This was denied by the CTA in its assailed
decision. A subsequent Motion for Reconsideration by petitioner was also denied in the
assailed resolution of the CTA En Banc.
Hence, petitioner went to us.
The Issues
the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign corporations,
such as itself, on all income from sources within thePhilippines. Petitioners interpretation
of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international carrier that does
not maintain flights to or from the Philippines, thereby having no GPB as defined, it is
exempt from paying any income tax at all. In other words, the existence of Sec. 28(A)(3)
(a) according to petitioner precludes the application of Sec. 28(A)(1) to it.
Its argument has no merit.
First, the difference cited by petitioner between the 1939 and 1997 NIRCs with
regard to the taxation of off-line air carriers is more apparent than real.
We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical
term, exempt all international air carriers from the coverage of Sec. 28(A)(1) of the 1997
NIRC. Certainly, had legislatures intentions been to completely exclude all international
air carriers from the application of the general rule under Sec. 28(A)(1), it would have
used the appropriate language to do so; but the legislature did not. Thus, the logical
interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer,
then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a)
does not apply, a resident foreign corporation, whether an international air carrier or not,
would be liable for the tax under Sec. 28(A)(1).
Clearly, no difference exists between British Overseas Airways and the instant
case, wherein petitioner claims that the former case does not apply. Thus,British
Overseas Airways applies to the instant case. The findings therein that an off-line air
carrier is doing business in the Philippines and that income from the sale of passage
documents here is Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress in
amending the definition of GPB is to exempt off-line air carriers from income tax by
citing the pronouncements made by Senator Juan Ponce Enrile during the deliberations
on the provisions of the 1997 NIRC. Such pronouncements, however, are not controlling
on this Court. We said in Espino v. Cleofe:[8]
A cardinal rule in the interpretation of statutes is that the meaning
and intention of the law-making body must be sought, first of all, in the
words of the statute itself, read and considered in their natural, ordinary,
commonly-accepted and most obvious significations, according to good and
not have flights to and from the Philippines but nonetheless earn income from other
activities in the country will be taxed at the rate of 32% of such income.
As to the denial of petitioners claim for refund, the CTA denied the claim on the
basis that petitioner is liable for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus,
petitioner raises the issue of whether the existence of such liability would preclude their
claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a). In answer to petitioners
motion for reconsideration, the CTA First Division ruled in its Resolution dated August
11, 2006, thus:
On the fourth argument, petitioner avers that a deficiency tax
assessment does not, in any way, disqualify a taxpayer from claiming a tax
refund since a refund claim can proceed independently of a tax assessment
and that the assessment cannot be offset by its claim for refund.
Petitioners argument is erroneous. Petitioner premises its argument
on the existence of an assessment. In the assailed Decision, this Court did
not, in any way, assess petitioner of any deficiency corporate income tax.
The power to make assessments against taxpayers is lodged with the
respondent. For an assessment to be made, respondent must observe the
formalities provided in Revenue Regulations No. 12-99. This Court merely
pointed out that petitioner is liable for the regular corporate income tax by
virtue of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to
speak of.[12]
Precisely, petitioner questions the offsetting of its payment of the tax under Sec.
28(A)(3)(a) with their liability under Sec. 28(A)(1), considering that there has not yet
been any assessment of their obligation under the latter provision. Petitioner argues that
such offsetting is in the nature of legal compensation, which cannot be applied under the
circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other;
[13]
creditors and debtors of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off.
Verily, petitioners argument is correct that the offsetting of its tax refund with its
alleged tax deficiency is unavailing under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals,[14] however, granted
the offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in
denying petitioners supplemental motion for reconsideration alleging
bringing to said courts attention the existence of the deficiency income and
business tax assessment against Citytrust. The fact of such deficiency
assessment is intimately related to and inextricably intertwined with the
right of respondent bank to claim for a tax refund for the same year. To
award such refund despite the existence of that deficiency assessment is an
absurdity and a polarity in conceptual effects. Herein private respondent
cannot be entitled to refund and at the same time be liable for a tax
deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax
return is valid, that is, the facts stated therein are true and correct. The
deficiency assessment, although not yet final, created a doubt as to and
constitutes a challenge against the truth and accuracy of the facts
stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of
1977, which was the applicable law when the claim of Citytrust was filed,
provides that (w)hen an assessment is made in case of any list, statement, or
return, which in the opinion of the Commissioner of Internal Revenue was
false or fraudulent or contained any understatement or undervaluation, no
tax collected under such assessment shall be recovered by any suits unless
it is proved that the said list, statement, or return was not false nor
fraudulent and did not contain any understatement or undervaluation; but
this provision shall not apply to statements or returns made or to be made in
good faith regarding annual depreciation of oil or gas wells and mines.
Be that as it may, this Court is unable to affirm the assailed decision and resolution
of the CTA En Banc on the outright denial of petitioners claim for a refund. Even though
petitioner is not entitled to a refund due to the question on the propriety of petitioners tax
return subject of the instant controversy, it would not be proper to deny such claim
without making a determination of petitioners liability under Sec. 28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while
Sec. 28(A)(1) is based on taxable income, that is, gross income less deductions and
exemptions, if any. It cannot be assumed that petitioners liabilities under the two
provisions would be the same. There is a need to make a determination of petitioners
liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax
deficiency exists. The assailed decision fails to mention having computed for the tax due
under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to establish
petitioners taxable income. There is a necessity to receive evidence to establish such
amount vis--vis the claim for refund. It is only after such amount is established that a tax
refund or deficiency may be correctly pronounced.
WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007
Resolution of the CTA En Banc in CTA E.B. Case No. 210 are SET ASIDE. The instant
case is REMANDED to the CTA En Banc for further proceedings and appropriate
action, more particularly, the reception of evidence for both parties and the corresponding
disposition of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment in
this Decision.
SO ORDERED.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British
Airways.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari
of the joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373
and 2561, dated 26 January 1983, which set aside petitioner's assessment of
deficiency income taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71,
respectively, as well as its Resolution of 18 November, 1983 denying
reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing
under the laws of the United Kingdom It is engaged in the international airline
business and is a member-signatory of the Interline Air Transport Association
(IATA). As such it operates air transportation service and sells transportation
tickets over the routes of the other airline members. During the periods covered
by the disputed assessments, it is admitted that BOAC had no landing rights for
traffic purposes in the Philippines, and was not granted a Certificate of public
convenience and necessity to operate in the Philippines by the Civil Aeronautics
Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962,
when it was granted a temporary landing permit by the CAB. Consequently, it did
not carry passengers and/or cargo to or from the Philippines, although during the
period covered by the assessments, it maintained a general sales agent in the
Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways
which was responsible for selling BOAC tickets covering passengers and
cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)
assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income
taxes covering the years 1959 to 1963. This was protested by BOAC.
Subsequent investigation resulted in the issuance of a new assessment, dated
16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.
BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79,
which claim was denied by the CIR on 16 February 1972. But before said denial,
BOAC had already filed a petition for review with the Tax Court on 27 January
1972, assailing the assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests,
and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount
of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as
compromise penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National Internal Revenue
Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be
countermanded and set aside. In a letter, dated 16 February 1972, however, the
CIR not only denied the BOAC request for refund in the First Case but also reissued in the Second Case the deficiency income tax assessment for
P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise
penalty under Section 74 of the Tax Code. BOAC's request for reconsideration
was denied by the CIR on 24 August 1973. This prompted BOAC to file the
Second Case before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision
reversing the CIR. The Tax Court held that the proceeds of sales of BOAC
passage tickets in the Philippines by Warner Barnes and Company, Ltd., and
later by Qantas Airways, during the period in question, do not constitute BOAC
income from Philippine sources "since no service of carriage of passengers or
freight was performed by BOAC within the Philippines" and, therefore, said
income is not subject to Philippine income tax. The CTA position was that income
from transportation is income from services so that the place where services are
rendered determines the source. Thus, in the dispositive portion of its Decision,
the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79,
and to cancel the deficiency income tax assessments against BOAC in the
amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues,
thus:
1. Whether or not the revenue derived by private respondent British
Overseas Airways Corporation (BOAC) from sales of tickets in the
Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and,
accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a
resident foreign corporation doing business in the Philippines or has
an office or place of business in the Philippines.
3. In the alternative that private respondent may not be considered a
resident foreign corporation but a non-resident foreign corporation,
then it is liable to Philippine income tax at the rate of thirty-five per
cent (35%) of its gross income received from all sources within the
Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or
business within the Philippines or having an office or place of
business therein.
(i) The term "non-resident foreign corporation" applies to a foreign
corporation not engaged in trade or business within the Philippines
and not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is
no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the
business organization. 2 "In order that a foreign corporation may be regarded as
doing business within a State, there must be continuity of conduct and intention
to establish a continuous business, such as the appointment of a local agent, and
not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a
general sales agent in the Philippines, That general sales agent, from 1959 to
1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently
allocating to the various airline companies on the basis of their participation in the
services rendered through the mode of interline settlement as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities
were in exercise of the functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its main activity, is the
very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business
in the Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation subject to tax upon
its total net income received in the preceding taxable year from all sources within
the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or
existing under the laws of any foreign country, except a foreign fife
insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales
of tickets by BOAC in the Philippines constitutes income from Philippine sources
and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
and conditions set forth thereon. The ordinary ticket issued to members of the
traveling public in general embraces within its terms all the elements to constitute
it a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income
from sources within the Philippines, namely: (1) interest, (21) dividends, (3)
service, (4) rentals and royalties, (5) sale of real property, and (6) sale of
personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from
sources within the Philippines. Section 37, by its language, does not intend the
enumeration to be exclusive. It merely directs that the types of income listed
therein be treated as income from sources within the Philippines. A cursory
reading of the section will show that it does not state that it is an all-inclusive
enumeration, and that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from
transportation is income for services, with the result that the place where the
services are rendered determines the source; and since BOAC's service of
transportation is performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under our income tax
laws. The Tax Court upholds that stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative
of the source of income or the site of income taxation. Admittedly, BOAC was an
off-line international airline at the time pertinent to this case. The test of taxability
is the "source"; and the source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases were
sold in the Philippines and the revenue therefrom was derived from a activity
regularly pursued within the Philippines. business a And even if the BOAC tickets
sold covered the "transport of passengers and cargo to and from foreign
cities", 12 it cannot alter the fact that income from the sale of tickets was derived
from the Philippines. The word "source" conveys one essential idea, that of
origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only
to the fiscal years covered by the questioned deficiency income tax assessments
in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to
EN BANC
CHAMBER OF REAL G.R. No. 160756
ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.
March 9, 2010
x------------------------------------------------x
DECISION
CORONA, J.:
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 62001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 72003, all of which prescribe the rules and procedures for the collection
of CWT on the sale of real properties categorized as ordinary
assets. Petitioner contends that these revenue regulations are contrary
to law for two reasons: first, they ignore the different treatment by RA
8424 of ordinary assets and capital assets and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to
base the CWT on the gross selling price or fair market value of the real
properties classified as ordinary assets.
OVERVIEW OF
PROVISIONS
THE
ASSAILED
(1)
(2)
(3)
(4)
(1)
(2)
xxx x
xxxx
x
Exempt
1.5%
regulations.
Exempt
of
Five
Pesos
1.5%
5.0%
On February 11, 2003, RR No. 7-2003 [8] was promulgated, providing for
the guidelines in determining whether a particular real property is a
capital or an ordinary asset for purposes of imposing the MCIT, among
others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or
other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of
real properties shall, unless otherwise exempt, be
subject to applicable taxes imposed under the Code,
depending on whether the subject properties are
classified as capital assets or ordinary assets;
a.
(ii)
c.
(ii)
EXISTENCE
OF
CONTROVERSY
JUSTICIABLE
Respondents aver that the first three requisites are absent in this
case.According to them, there is no actual case calling for the exercise
of judicial power and it is not yet ripe for adjudication because
In any event, this Court has the discretion to take cognizance of a suit
which does not satisfy the requirements of an actual case, ripeness or
legal standing when paramount public interest is involved. [19] The
questioned MCIT and CWT affect not only petitioners but practically all
domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to
society make it proper for us to take cognizance of this petition. [20]
CONCEPT AND RATIONALE OF THE
MCIT
Second, the law allows the carrying forward of any excess of the
MCIT paid over the normal income tax which shall be credited against
the normal income tax for the three immediately succeeding years. [27]
Third, since certain businesses may be incurring genuine
repeated losses, the law authorizes the Secretary of Finance to
suspend the imposition of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and legitimate business
reverses.[28]
Even before the legislature introduced the MCIT to the Philippine
taxation system, several other countries already had their own system
of minimum corporate income taxation. Our lawmakers noted that
most developing countries, particularly Latin American and Asian
countries, have the same form of safeguards as we do. As pointed out
during the committee hearings:
We disagree.
The U.S. Court declared that the congressional intent to ensure that
corporate taxpayers would contribute a minimum amount of taxes was
a legitimate governmental end to which the AMT bore a reasonable
relation.[55]
American courts have also emphasized that Congress has the power to
condition, limit or deny deductions from gross income in order to arrive
at the net that it chooses to tax.[56] This is because deductions are a
matter of legislative grace.[57]
normal net income. Obviously, it may well be the case that the MCIT
would be less than the net income of the corporation which posts a
zero or negative taxable income.
(B)
Accordingly, at the end of the year, the taxpayer/seller shall file its
income tax return and credit the taxes withheld (by the withholding
agent/buyer) against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other
hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed
on its net income.
The use of the GSP/FMV as basis to determine the withholding
taxes
is
evidently
for
purposes
of
practicality
and
convenience. Obviously, the withholding agent/buyer who is obligated
to withhold the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of the taxable
year. Instead, said withholding agents knowledge and privity are
limited only to the particular transaction in which he is a party. In such
a case, his basis can only be the GSP or FMV as these are the only
factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.
NO BLURRING OF DISTINCTIONS
BETWEENORDINARY
ASSETS
AND CAPITAL ASSETS
same manner as capital assets. Final withholding tax (FWT) and CWT
are distinguished as follows:
FWT
CWT
b)The
liability
for payment of the tax
rests primarily on the
payor as a withholding
agent.
b) Payee of income is
required to report the
income and/or pay the
difference between the tax
withheld and the tax due on
the income. The payee also
has the right to ask for a
refund if the tax withheld is
more than the tax due.
TO
(B) Withholding
of Creditable
Tax at
Source.
The
[Secretary] may, upon the recommendation of the [CIR],
require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in
the Philippines, by payor-corporation/persons as provided
for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall
be credited against the income tax liability of the taxpayer
for the taxable year.(Emphasis supplied)
On the other hand, Section 57(B) provides that the Secretary can
require a CWT on income payable to natural or juridical persons,
residing in the Philippines.There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily
said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT
while Section 57(B) pertains to CWT. The former covers the kinds of
passive income enumerated therein and the latter encompasses any
income other than those listed in 57(A). Since the law itself makes
distinctions, it is wrong to regard 57(A) and 57(B) in the same way.
NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS
Petitioner avers that the imposition of CWT on GSP/FMV of real
estate classified as ordinary assets deprives its members of their
property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result,
the government is collecting tax from net income not yet gained or
earned.
Again, it is stressed that the CWT is creditable against the tax due from
the seller of the property at the end of the taxable year. The seller will
be able to claim a tax refund if its net income is less than the taxes
withheld. Nothing is taken that is not due so there is no confiscation of
property repugnant to the constitutional guarantee of due
process. More importantly, the due process requirement applies to the
power to tax.[79] The CWT does not impose new taxes nor does it
increase taxes.[80] It relates entirely to the method and time of
payment.
Petitioner protests that the refund remedy does not make the
CWT less burdensome because taxpayers have to wait years and may
even resort to litigation before they are granted a refund. [81] This
argument is misleading. The practical problems encountered in
claiming a tax refund do not affect the constitutionality and validity of
the CWT as a method of collecting the tax.
Petitioner complains that the amount withheld would have
otherwise been used by the enterprise to pay labor wages, materials,
cost of money and other expenses which can then save the entity from
having to obtain loans entailing considerable interest expense.
Petitioner also lists the expenses and pitfalls of the trade which add to
NO
VIOLATION
PROTECTION
OF
EQUAL
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their
manner of doing business is not much different from that of a real
estate enterprise. Like a manufacturing concern, a real estate business
is involved in a continuous process of production and it incurs costs
and expenditures on a regular basis. The only difference is that goods
produced by the real estate business are house and lot units. [84]
Again, we disagree.
CONCLUSION
The renowned genius Albert Einstein was once quoted as saying [the]
hardest thing in the world to understand is the income tax. [92] When a
party questions the constitutionality of an income tax measure, it has
to contend not only with Einsteins observation but also with the vast
and well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge
its burden of convincing the Court that the imposition of MCIT and CWT
is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
SO ORDERED.
For the fiscal year that ended 31 March 2000, respondent filed on 17July 2000 its
Tentative Corporate Income Tax Return, reflecting a creditable tax withheld for
the fourth quarter amounting to P524,957.00, and a zero taxable income for said
year. Hence, respondent filed on 16 July 2001 a written claim for refund before
the petitioner.
As a consequence thereof, respondent received on 10 September 2001the Letter
of Authority No. 200000002247 from the Bureau of Internal Revenue (BIR) Large
Taxpayers Service, dated 3 September 2001,authorizing the revenue officers
named therein to examine respondents books of accounts and other accounting
records for the purpose of evaluating respondents "Claim for Refund on
Creditable Withholding Tax Income Tax" covering the fiscal year ending 31
March 2000.
Numerous correspondences between respondent and the Group Supervisor of
the BIR Large Taxpayers Service, the revenue officers examining its accounting
records, and the Chief of LT Audit & Investigation Division I of the BIR ensued,
particularly as to the submission of various supporting documents and
presentation of records.
On 16 July 2003, respondent received a "Summary of Creditable Withholding Tax
at Source Certified by RAD Fiscal Year Ending March 31,2000," together with a
computation labeled "Compromise Penalties for Late Filing of Return." Likewise,
on same date, respondent received a letter dated 8 July 2003 issued by the Chief
of LT Audit & Investigation Division I, informing the former that the results of the
investigation of its claim for refund on creditable withholding tax for fiscal year
ending 31 March 2000had already been submitted, and that an informal
conference was set on 17July 2003 to be held on the latters office.
On 11 August 2003, respondent received from the same revenue officers a
computation of their initial deficiency MCIT assessment in the amount
of P537,477,867.64. Consequently, respondent received on 20October 2003 a
Preliminary Assessment Notice and Details of Assessment issued by the Large
Taxpayers Service dated 22 September 2003, assessing respondent deficiency
MCIT including interest, in the aggregate amount ofP315,566,368.68. A written
protest to said preliminary assessment was filed by respondent on 3 November
2003.
(d) Since the income tax return of respondent reflected a zero taxable
income for the fiscal year ending 31 March 2000,obviously being lower
than the 2% franchise tax, its choice of the former is definitely a better
alternative as basis for its tax liability to the government;5
(e) The basic corporate income tax mentioned in Section 13 of PD1590
does not refer to the MCIT under Section 27(E) of the NIRC of 1997, as
amended, but particularly to the applicable rate of 32% income tax under
Section 27(A) of the same Code, on the taxable income of domestic
corporations;
(f) The MCIT is regarded to belong to "other taxes" as it was not included
in the choices provided by the franchise. To hold otherwise would be to
give another option to respondent which is evidently not within the ambit of
PD 1590;6
(g) The "in lieu of all other taxes" clause under Section 13 of respondents
legislative franchise exempts it from all taxes necessary in the conduct of
its business covered by the franchise, except the tax on its real property for
which respondent is expressly made payable;7 and
(h) The rationale or purpose for the exemption from all other taxes except
the income tax and real property tax granted to respondent upon the
payment of the basic corporate income tax or the 2% franchise tax is that
such tax exemption is part of inducement for the acceptance of the
franchise and the rendition of public service by the grantee.8
Simply put, it pronounced that the only qualification provided for in the law is the
option given to respondent to choose between the taxes which will yield the
lesser liability. Thus, if as a result of the exercise of the option, the respondent
ends up without any tax liability, it should not be held liable for any other tax,
such as the MCIT, except for real property tax.9
On 30 January 2007, the CTA Second Division denied petitioners Motion for
Reconsideration for lack of merit.10
Aggrieved, petitioner appealed to the CTA En Banc by filing a Petition for Review
pursuant to Section 18 of Republic Act (RA) No. 9282(should be RA No. 1125, as
amended by RA No. 9282)11 on 1 March 2007,docketed as CTA EB No. 271.12
Lastly, there is no provision in RA No. 842416 which provides and specifies that
the MCIT shall be in addition to the taxes for which respondent is liable. To rule
otherwise would be violative of Section 24 of PD 1590 which states that
respondents franchise may only be modified, amended, or repealed expressly by
a special law or decree that shall specifically modify, amend or repeal the
franchise or any section or provision thereof. Therefore, in the absence of a law
expressly repealing PD1590 at the time the subject assessment was issued and
for the period covered by the assessment, respondents tax exemption privilege
under the "in lieu of all other taxes" clause of Section 13 thereof must be applied.
Upon denial of petitioners Motion for Reconsideration of the 19 July2007
Decision of the CTA En Banc, it filed this Petition for Review on Certiorari before
this Court seeking the reversal of the aforementioned Decision and the 23 August
2007 Resolution17 rendered in CTA EB No. 271.
The Issues
The issues submitted before this Court for consideration are as follows:
(1) Whether or not the CTA En Banc erred in holding that the MCIT is
properly categorized as "other taxes" pursuant to respondents charter; and
(2) Whether or not the CTA En Banc erred in ruling that respondent is not
liable for the 2% MCIT deficiency for the fiscal year ending 31March
2000.18
The above mentioned issues may be consolidated and restated as follows:
whether or not the CTA En Banc erred when it affirmed the cancellation of
Assessment Notice No. INC-FY-99-2000-000085 and Formal Letter of Demand
issued by petitioner against respondent for the payment of deficiency MCIT in the
amount of P326,778,723.35, covering the fiscal year ending 31 March 2000.
In support thereof, petitioner submits the following arguments: (a) respondent
clearly opted to be covered by the income tax provision of the NIRC of 1997, as
amended; hence, it is covered by the MCIT provision of the same Code and
liable to pay the same; (b) the MCIT does not belong to the category of "other
taxes" which may enable respondent to avail of the "in lieu of all other taxes"
clause under Section 13 of PD 1590 because it is a category of an income tax
pursuant to Section 27 (E) (1) of the NIRC of 1997,as amended; (c) the MCIT
The term "gross revenue" is herein defined as the total gross income earned by
the grantee; (a) transport, nontransport, and other services; (b) earnings realized
from investments in money-market placements, bank deposits, investments in
shares of stock and other securities, and other investments; (c) total gains net of
total losses realized from the disposition of assets and foreign-exchange
transactions; and (d) gross income from other sources. (Emphasis supplied)
From the foregoing provisions, during the lifetime of the franchise of respondent,
its taxation shall be strictly governed by two fundamental rules, to wit: (1)
respondent shall pay the Government either the basic corporate income tax or
franchise tax, whichever is lower; and (2) the tax paid by respondent, under
either of these alternatives, shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges, except only real property tax.
Parenthetically, the basic corporate income tax of respondent shall be based on
its annual net taxable income, computed in accordance with the NIRC of 1997,
as amended. PD 1590 also explicitly authorizes respondent, in the computation
of its basic corporate income tax, to: (1) depreciate its assets twice as fast the
normal rate of depreciation;19 and (2) carry over deduction from taxable income
any net loss incurred in any year up to five years following the year of such loss.20
The franchise tax, on the other hand, shall be 2% of the gross revenues derived
by respondent from all sources, whether transport or nontransport operations.
However, with respect to international air-transport service, the franchise tax shall
only be imposed on the gross passenger, mail, and freight revenues of
respondent from its outgoing flights.21
Accordingly, considering the foregoing precepts, this Court had the opportunity to
finally settle this matter and categorically enunciated in Commissioner of Internal
Revenue v. Philippine Airlines, Inc.,22 that respondent cannot be subjected to
MCIT for the following reasons:
First, Section 13(a) of [PD] 1590 refers to "basic corporate income tax." In
Commissioner of Internal Revenue v. Philippine Airlines, Inc.,23 the Court already
settled that the "basic corporate income tax, "under Section 13(a) of [PD] 1590,
relates to the general rate of 35%(reduced to 32% by the year 2000) as
stipulated in Section 27(A) of the NIRC of 1997.
Section 13(a) of [PD] 1590 requires that the basic corporate income tax be
computed in accordance with the NIRC. This means that PAL shall compute its
basic corporate income tax using the rate and basis prescribed by the NIRC of
1997 for the said tax. There is nothing in Section 13(a) of [PD] 1590 to support
the contention of the CIR that PAL is subject to the entire Title II of the NIRC of
1997, entitled "Tax on Income."
Second, Section 13(a) of Presidential Decree No. 1590 further provides that the
basic corporate income tax of PAL shall be based on its annual net taxable
income. This is consistent with Section 27(A) of the NIRC of 1997, which
provides that the rate of basic corporate income tax, which is 32% beginning 1
January 2000, shall be imposed on the taxable income of the domestic
corporation.
Taxable income is defined under Section 31 of the NIRC of 1997as the pertinent
items of gross income specified in the said Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such types of income
by the same Code or other special laws.
The gross income, referred to in Section 31, is described in Section32 of the
NIRC of 1997 as income from whatever source, including compensation for
services; the conduct of trade or business or the exercise of profession; dealings
in property; interests; rents; royalties; dividends; annuities; prizes and winnings;
pensions; and a partners distributive share in the net income of a general
professional partnership.
Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may
be arrived at by subtracting from gross income deductions authorized, not just by
the NIRC of 1997, but also by special laws. [PD] 1590 may be considered as one
of such special laws authorizing PAL, in computing its annual net taxable income,
on which its basic corporate income tax shall be based, to deduct from its gross
income the following: (1) depreciation of assets at twice the normal rate; and (2)
net loss carry-over up to five years following the year of such loss.
In comparison, the 2% MCIT under Section 27 (E) of the NIRC of 1997 shall be
based on the gross income of the domestic corporation. The Court notes that
gross income, as the basis for MCIT, is given a special definition under Section
27(E) (4) of the NIRC of 1997, different from the general one under Section 34 of
the same Code.
According to the last paragraph of Section 27 (E) (4) of the NIRC of 1997, gross
income of a domestic corporation engaged in the sale of service means gross
receipts, less sales returns, allowances, discounts and cost of services. "Cost of
services" refers to all direct costs and expenses necessarily incurred to provide
the services required by the customers and clients including (a) salaries and
employee benefits of personnel, consultants, and specialists directly rendering
the service; and (b) cost of facilities directly utilized in providing the service, such
as depreciation or rental of equipment used and cost of supplies. Noticeably,
inclusions in and exclusions/deductions from gross income for MCIT purposes
are limited to those directly arising from the conduct of the taxpayers business. It
is, thus, more limited than the gross income used in the computation of basic
corporate income tax.
In light of the foregoing, there is an apparent distinction under the NIRC of 1997
between taxable income, which is the basis for basic corporate income tax under
Section 27(A); and gross income, which is the basis for the MCIT under Section
27(E). The two terms have their respective technical meanings, and cannot be
used interchangeably. The same reasons prevent this Court from declaring that
the basic corporate income tax, for which PAL is liable under Section 13(a) of
[PD] 1590, also covers MCIT under Section 27(E) of the NIRC of 1997, since the
basis for the first is the annual net taxable income, while the basis for the second
is gross income.
Third, even if the basic corporate income tax and the MCIT are both income
taxes under Section 27 of the NIRC of 1997, and one is paid in place of the other,
the two are distinct and separate taxes.
The Court again cites Commissioner of Internal Revenue v. Philippine Airlines,
Inc.,24 wherein it held that income tax on the passive income of a domestic
corporation, under Section 27(D) of the NIRC of 1997, is different from the basic
corporate income tax on the taxable income of a domestic corporation, imposed
by Section 27(A), also of the NIRC of 1997. Section 13 of [PD] 1590 gives PAL
the option to pay basic corporate income tax or franchise tax, whichever is lower;
and the tax so paid shall be in lieu of all other taxes, except real property tax. The
income tax on the passive income of PAL falls within the category of "allot her
taxes" from which PAL is exempted, and which, if already collected, should be
refunded to PAL.
The Court herein treats MCIT in much the same way. Although both are income
taxes, the MCIT is different from the basic corporate income tax, not just in the
rates, but also in the bases for their computation. Not being covered by Section
13(a) of [PD] 1590,which makes PAL liable only for basic corporate income tax,
then MCIT is included in "all other taxes" from which PAL is exempted.
That, under general circumstances, the MCIT is paid in place of the basic
corporate income tax, when the former is higher than the latter, does not mean
that these two income taxes are one and the same. The said taxes are merely
paid in the alternative, giving the Government the opportunity to collect the higher
amount between the two. The situation is not much different from Section 13 of
[PD] 1590, which reversely allows PAL to pay, whichever is lower of the basic
corporate income tax or the franchise tax. It does not make the basic corporate
income tax in distinguishable from the franchise tax.
Given the fundamental differences between the basic corporate income tax and
the MCIT, presented in the preceding discussion, it is not baseless for this Court
to rule that, pursuant to the franchise of PAL, said corporation is subject to the
first tax, yet exempted from the second.
Fourth, the evident intent of Section 13 of [PD] 1520 (sic) is to extend to PAL tax
concessions not ordinarily available to other domestic corporations. Section 13 of
[PD] 1520 (sic) permits PAL to pay whichever is lower of the basic corporate
income tax or the franchise tax; and the tax so paid shall be in lieu of all other
taxes, except only real property tax. Hence, under its franchise, PAL is to pay the
least amount of tax possible.
Section 13 of [PD] 1520 (sic) is not unusual. A public utility is granted special tax
treatment (including tax exceptions/exemptions) under its franchise, as an
inducement for the acceptance of the franchise and the rendition of public service
by the said public utility. In this case, in addition to being a public utility providing
air-transport service, PAL is also the official flag carrier of the country.
The imposition of MCIT on PAL, as the CIR insists, would result in a situation that
contravenes the objective of Section 13 of [PD] 1590. In effect, PAL would not
just have two, but three tax alternatives, namely, the basic corporate income tax,
MCIT, or franchise tax. More troublesome is the fact that, as between the basic
corporate income tax and the MCIT, PAL shall be made to pay whichever is
higher, irrefragably, in violation of the avowed intention of Section 13 of [PD]
1590 to make PAL pay for the lower amount of tax.
Fifth, the CIR posits that PAL may not invoke in the instant case the "in lieu of all
other taxes" clause in Section 13 of [PD] No. 1520 (sic),if it did not pay anything
at all as basic corporate income tax or franchise tax. As a result, PAL should be
made liable for "other taxes" such as MCIT. This line of reasoning has been
dubbed as the Substitution Theory, and this is not the first time the CIR raised the
same. The Court already rejected the Substitution Theory in
Commissioner of Internal Revenue v. Philippine Airlines, Inc.,25 to wit:
"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.
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. Either option excludes the
payment of other taxes and dues imposed or collected by the national or the local
government. PAL has the option to choose the alternative that results in lower
taxes. It is not the fact of tax payment that exempts it, but the exercise of its
option.
Under Subsection (a), the basis for the tax rate is respondents annual net
taxable income, which (as earlier discussed) is computed by subtracting
allowable deductions and exemptions from gross income. By basing the tax rate
on the annual net taxable income, PD 1590 necessarily recognized the situation
in which taxable income may result in a negative amount and thus translate into
a zero tax liability.
Notably, PAL was owned and operated by the government at the time the
franchise was last amended. It can reasonably be contemplated that PD 1590
sought to assist the finances of the government corporation in the form of lower
taxes. When respondent operates at a loss(as in the instant case), no taxes are
due; in this instances, it has a lower tax liability than that provided by Subsection
(b).
The fallacy of the CIRs argument is evident from the fact that the payment of a
measly sum of one peso would suffice to exempt PAL from other taxes, whereas
a zero liability arising from its losses would not. There is no substantial distinction
between a zero tax and a one-peso tax liability. (Emphasis theirs)
Based on the same ratiocination, the Court finds the Substitution Theory
unacceptable in the present Petition.
The CIR alludes as well to Republic Act No. 9337, for reasons similar to those
behind the Substitution Theory. Section 22 of Republic Act No. 9337, more
popularly known as the Expanded Value Added Tax(E-VAT) Law, abolished the
franchise tax imposed by the charters of particularly identified public utilities,
including [PD] 1590 of PAL. PAL may no longer exercise its options or
alternatives under Section 13 of [PD] 1590, and is now liable for both corporate
income tax and the 12% VAT on its sale of services. The CIR alleges that
Republic Act No. 9337reveals the intention of the Legislature to make PAL share
the tax burden of other domestic corporations.
The CIR seems to lose sight of the fact that the Petition at bar involves the
liability of PAL for MCIT for the fiscal year ending 31March 2001. Republic Act
No. 9337, which took effect on 1 July 2005,cannot be applied retroactively and
any amendment introduced by said statute affecting the taxation of PAL is
immaterial in the present case.
And sixth, [PD] 1590 explicitly allows PAL, in computing its basic corporate
income tax, to carry over as deduction any net loss incurred in any year, up to
five years following the year of such loss. Therefore, [PD] 1590 does not only
consider the possibility that, at the end of a taxable period, PAL shall end up with
zero annual net taxable income (when its deductions exactly equal its gross
income), as what happened in the case at bar, but also the likelihood that PAL
shall incur net loss (when its deductions exceed its gross income). If PAL is
subjected to MCIT, the provision in [PD] 1590 on net loss carry-over will be
rendered nugatory. Net loss carry-over is material only in computing the annual
net taxable income to be used as basis for the basic corporate income tax of
PAL; but PAL will never be able to avail itself of the basic corporate income tax
option when it is in a net loss position, because it will always then be compelled
to pay the necessarily higher MCIT.
Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done
without contravening [PD] 1520 (sic).
Between [PD] 1520 (sic), on one hand, which is a special law specifically
governing the franchise of PAL, issued on 11 June 1978;and the NIRC of 1997,
on the other, which is a general law on national internal revenue taxes, that took
effect on 1 January 1998, the former prevails. The rule is that on a specific
matter, the special law shall prevail over the general law, which shall be resorted
to only to supply deficiencies in the former. In addition, where there are two
statutes, the earlier special and the later general the terms of the general broad
enough to include the matter provided for in the special the fact that one is
special and the other is general creates a presumption that the special is to be
considered as remaining an exception to the general, one as a general law of the
land, the other as the law of a particular case. It is a canon of statutory
construction that a later statute, general in its terms and not expressly repealing
a prior special statute, will ordinarily not affect the special provisions of such
earlier statute.
xxxx
The MCIT was a new tax introduced by Republic Act No.8424. Under the
doctrine of strict interpretation, the burden is upon the CIR to primarily prove that
the new MCIT provisions of the NIRC of 1997, clearly, expressly, and
unambiguously extend and apply to PAL, despite the latters existing tax
exemption. To do this, the CIR must convince the Court that the MCIT is a basic
corporate income tax, and is not covered by the "in lieu of all other taxes" clause
of [PD] 1590. Since the CIR failed in this regard, the Court is left with no choice
but to consider the MCIT as one of "all other taxes," from which PAL is exempt
under the explicit provisions of its charter. (Emphasis supplied)
Based on the foregoing pronouncements, it is clear that respondent is exempt
from the MCIT imposed under Section 27(E) of the NIRC of 1997,as amended.
Thus, respondent cannot be held liable for the assessed deficiency MCIT
of P326,778,723.35 for fiscal year ending 31 March 2000.1wphi1
FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly
organized and existing under the laws of Japan and duly licensed to engage in
business under Philippine laws with branch office at the 4th Floor, FEEMI
Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of
the Court of Tax Appeals 1dated February 12, 1986 denying its claim for refund or
tax credit in the amount of P229,424.40 representing alleged overpayment of
branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific
Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity
investments in AG&P of Manila. For the first quarter of 1981 ending March 31,
AG&P declared and paid cash dividends to petitioner in the amount of P849,720
and withheld the corresponding 10% final dividend tax thereon. Similarly, for the
third quarter of 1981 ending September 30, AG&P declared and paid P849,720
as cash dividends to petitioner and withheld the corresponding 10% final
dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo,
Japan, net not only of the 10% final dividend tax in the amounts of P764,748 for
the first and third quarters of 1981, but also of the withheld 15% profit remittance
tax based on the remittable amount after deducting the final withholding tax of
10%. A schedule of dividends declared and paid by AG&P to its stockholder
Marubeni Corporation of Japan, the 10% final intercorporate dividend tax and the
15% branch profit remittance tax paid thereon, is shown below:
1981
Cash Dividends
Paid
FIRST
QUARTER
(three
months
ended
3.31.81) (In
Pesos)
THIRD
QUARTER
(three
months
ended
9.30.81)
849,720.44
849,720.00 1,699,440.00
84,972.00
TOTAL OF
FIRST and
THIRD
quarters
84,972.00
169,944.00
764,748.00
764,748.00 1,529,496.00
114,712.20
114,712.20
Net Amount
Remitted to
Petitioner
650,035.80
650,035.80 1,300,071.60
229,424.40 3
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax
of P114,712.20 for the first quarter of 1981 were paid to the Bureau of Internal
Revenue by AG&P on April 20, 1981 under Central Bank Receipt No. 6757880.
Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit
remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau
of Internal Revenue by AG&P on August 4, 1981 under Central Bank
Confirmation Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid
15% branch profit remittance on cash dividends declared and remitted to
petitioner at its head office in Tokyo in the total amount of P229,424.40 on April
20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip,
Gorres, Velayo and Company, sought a ruling from the Bureau of Internal
Revenue on whether or not the dividends petitioner received from AG&P are
effectively connected with its conduct or business in the Philippines as to be
considered branch profits subject to the 15% profit remittance tax imposed under
Section 24 (b) (2) of the National Internal Revenue Code as amended by
Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only
profits remitted abroad by a branch office to its head office which are
effectively connected with its trade or business in the Philippines are
subject to the 15% profit remittance tax. To be effectively connected
it is not necessary that the income be derived from the actual
operation of taxpayer-corporation's trade or business; it is sufficient
that the income arises from the business activity in which the
corporation is engaged. For example, if a resident foreign
corporation is engaged in the buying and selling of machineries in
the Philippines and invests in some shares of stock on which
dividends are subsequently received, the dividends thus earned are
not considered 'effectively connected' with its trade or business in
this country. (Revenue Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P
are not income arising from the business activity in which Marubeni
is engaged. Accordingly, said dividends if remitted abroad are not
considered branch profits for purposes of the 15% profit remittance
tax imposed by Section 24 (b) (2) of the Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the
Commissioner of Internal Revenue on September 24, 1981, petitioner claimed for
the refund or issuance of a tax credit of P229,424.40 "representing profit tax
remittance erroneously paid on the dividends remitted by Atlantic Gulf and Pacific
Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied
petitioner's claim for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the
15% profit remittance tax as the same were not income earned by a
Philippine Branch of Marubeni Corporation of Japan; and neither is it
subject to the 10% intercorporate dividend tax, the recipient of the
dividends, being a non-resident stockholder, nevertheless, said
dividend income is subject to the 25 % tax pursuant to Article 10 (2)
(b) of the Tax Treaty dated February 13, 1980 between the
Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni
Corporation, Japan is subject to 25 % tax, and that the taxes
withheld of 10 % as intercorporate dividend tax and 15 % as profit
remittance tax totals (sic) 25 %, the amount refundable offsets the
liability, hence, nothing is left to be refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the
refund by the Commissioner of Internal Revenue in its assailed judgment of
February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court
explained:
Whatever the dialectics employed, no amount of sophistry can
ignore the fact that the dividends in question are income taxable to
the Marubeni Corporation of Tokyo, Japan. The said dividends were
distributions made by the Atlantic, Gulf and Pacific Company of
Manila to its shareholder out of its profits on the investments of the
Marubeni Corporation of Japan, a non-resident foreign corporation.
The investments in the Atlantic Gulf & Pacific Company of the
Marubeni Corporation of Japan were directly made by it and the
dividends on the investments were likewise directly remitted to and
received by the Marubeni Corporation of Japan. Petitioner Marubeni
Corporation Philippine Branch has no participation or intervention,
directly or indirectly, in the investments and in the receipt of the
dividends. And it appears that the funds invested in the Atlantic Gulf
& Pacific Company did not come out of the funds infused by the
Marubeni Corporation of Japan to the Marubeni Corporation
Philippine Branch. As a matter of fact, the Central Bank of the
Philippines shall pay a tax equal to thirty-five per cent of the gross
income received during each taxable year from all sources within the
Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of
the Tax Treaty of 1980 concluded between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State may be
taxed in that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting
State of which the company paying the dividends is a resident, and
according to the laws of that Contracting State, but if the recipient is
the beneficial owner of the dividends the tax so charged shall not
exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other
cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from
Philippine sources is therefore the determination of whether it is a resident or a
non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in
trade or business" within the Philippines. Petitioner contends that precisely
because it is engaged in business in the Philippines through its Philippine branch
that it must be considered as a resident foreign corporation. Petitioner reasons
that since the Philippine branch and the Tokyo head office are one and the same
entity, whoever made the investment in AG&P, Manila does not matter at all. A
single corporate entity cannot be both a resident and a non-resident corporation
depending on the nature of the particular transaction involved. Accordingly,
whether the dividends are paid directly to the head office or coursed through its
local branch is of no moment for after all, the head office and the office branch
constitute but one corporate entity, the Marubeni Corporation, which, under both
Philippine tax and corporate laws, is a resident foreign corporation because it is
transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity
as its branch office in the Philippines cannot apply here. This rule is
based on the premise that the business of the foreign corporation is
conducted through its branch office, following the principal agent
relationship theory. It is understood that the branch becomes its
agent here. So that when the foreign corporation transacts business
in the Philippines independently of its branch, the principal-agent
relationship is set aside. The transaction becomes one of the foreign
corporation, not of the branch. Consequently, the taxpayer is the
foreign corporation, not the branch or the resident foreign
corporation.
Corollarily, if the business transaction is conducted through the
branch office, the latter becomes the taxpayer, and not the foreign
corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is a separate and distinct
income taxpayer from the branch in the Philippines. There can be no other logical
conclusion considering the undisputed fact that the investment (totalling 283.260
shares including that of nominee) was made for purposes peculiarly germane to
the conduct of the corporate affairs of Marubeni Japan, but certainly not of the
branch in the Philippines. It is thus clear that petitioner, having made this
independent investment attributable only to the head office, cannot now claim the
increments as ordinary consequences of its trade or business in the Philippines
and avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute
were neither subject to the 15 % profit remittance tax nor to the 10 %
intercorporate dividend tax, the recipient being a non-resident stockholder, they
grossly erred in holding that no refund was forthcoming to the petitioner because
the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan
Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic
rule in taxation that each tax has a different tax basis. While the tax on dividends
is directly levied on the dividends received, "the tax base upon which the 15 %
branch profit remittance tax is imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under
Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer look at the
Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as
reflected in the phrase "shall not exceed." This means that any tax imposable by
the contracting state concerned should not exceed the 25 % limitation and that
said rate would apply only if the tax imposed by our laws exceeds the same. In
other words, by reason of our bilateral negotiations with Japan, we have agreed
to have our right to tax limited to a certain extent to attain the goals set forth in
the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the
transaction in question, the applicable provision of the Tax Code is Section 24 (b)
(1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said section
provides:
(b) Tax on foreign corporations. (1) Non-resident corporations
... (iii) On dividends received from a domestic corporation liable to
tax under this Chapter, the tax shall be 15% of the dividends
received, which shall be collected and paid as provided in Section
53 (d) of this Code, subject to the condition that the country in which
the non-resident foreign corporation is domiciled shall allow a credit
against the tax due from the non-resident foreign corporation, taxes
deemed to have been paid in the Philippines equivalent to 20 %
which represents the difference between the regular tax (35 %) on
corporations and the tax (15 %) on dividends as provided in this
Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a nonresident foreign corporation, as a general rule, is taxed 35 % of its gross income
from all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received
from a domestic corporation (AG&P) on the condition that its domicile state
(Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the
dividends received. This 20 % represents the difference between the regular tax
c)
d)
Income from other related operations includes, but is not limited to:
a) Income from licensed private casinos covered by authorities to
operate issued to private operators;
b) Income from traditional bingo, electronic bingo and other bingo
variations covered by authorities to operate issued to private
operators;
c) Income from private internet casino gaming, internet sports betting
and private mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and
entertainment.
PAGCORs other income that is not connected with the foregoing
operations are likewise subject to corporate income tax under the
NIRC, as amended.
PAGCORs contractees and licensees are entities duly authorized and
licensed by PAGCOR to perform gambling casinos, gaming clubs and
other similar recreation or amusement places, and gaming pools.
These contractees and licensees are subject to income tax under the
NIRC, as amended.
III. FRANCHISE TAX
Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to
a franchise tax of five percent (5%) of the gross revenue or earnings it
(A) Section 13 of R.A. No. 6395 on the exemption from valueadded tax of the National Power Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT
rate imposed on the sales of generated power by generation
companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules
and regulations or parts thereof which are contrary to and
inconsistent with any provisions of this Act are hereby repealed,
amended or modified accordingly.22
When petitioners franchise was extended on June 20, 2007 without
revoking or withdrawing its tax exemption, it effectively reinstated and
reiterated all of petitioners rights, privileges and authority granted
under its Charter. Otherwise, Congress would have painstakingly
enumerated the rights and privileges that it wants to withdraw, given
that a franchise is a legislative grant of a special privilege to a person.
Thus, the extension of petitioners franchise under the same terms and
conditions means a continuation of its tax exempt status with respect
to its income from gaming operations. Moreover, all laws, rules and
regulations, or parts thereof, which are inconsistent with the provisions
of P.D. 1869, as amended, a special law, are considered repealed,
amended and modified, consistent with Section 2 of R.A. No. 9487,
thus:chanroblesvirtuallawlibrary
SECTION 2. Repealing Clause. All laws, decrees, executive orders,
proclamations, rules and regulations and other issuances, or parts
thereof, which are inconsistent with the provisions of this Act, are
hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one
interpretation, the court should adopt such reasonable and beneficial
construction which will render the provision thereof operative and
effective, as well as harmonious with each
other.23chanRoblesvirtualLawlibrary
Given that petitioners Charter is not deemed repealed or amended by
Chico-Nazario, JJ.
JULIANE BAIER-NICKEL, as
represented by Marina Q. Guzman Promulgated:
(Attorney-in-fact)
Respondent. August 29, 2006
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002
Decision[1] of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax
refund of respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision [2] of
the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May
8, 2002 Resolution[3] of the Court of Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is
the President of JUBANITEX, Inc., a domestic corporation engaged in [m]anufacturing,
marketing on wholesale only, buying or otherwise acquiring, holding, importing and
exporting, selling and disposing embroidered textile products.[4] Through JUBANITEXs
General Manager, Marina Q. Guzman, the corporation appointed and engaged the
services of respondent as commission agent.It was agreed that respondent will receive
10% sales commission on all sales actually concluded and collected through her efforts. [5]
In 1995, respondent received the amount of P1,707,772.64, representing her sales
commission income from which JUBANITEX withheld the corresponding 10%
withholding tax amounting to P170,777.26, and remitted the same to the Bureau of
Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax
return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26.[6]
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged
to have been mistakenly withheld and remitted by JUBANITEX to the BIR.Respondent
contended that her sales commission income is not taxable in thePhilippines because the
same was a compensation for her services rendered inGermany and therefore considered
as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA contending that
no action was taken by the BIR on her claim for refund. [7] On June 28, 2000, the CTA
rendered a decision denying her claim. It held that the commissions received by
respondent were actually her remuneration in the performance of her duties as President
of JUBANITEX and not as a mere sales agent thereof. The income derived by respondent
is therefore an income taxable in the Philippines because JUBANITEX is a domestic
corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA,
holding that respondent received the commissions as sales agent of JUBANITEX and not
as President thereof. And since the source of income means the activity or service that
produce the income, the sales commission received by respondent is not taxable in
the Philippines because it arose from the marketing activities performed by respondent
in Germany. The dispositive portion of the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of
Tax Appeals dated June 28, 2000 is hereby REVERSED and SET ASIDE
and the respondent court is hereby directed to grant petitioner a tax refund
in the amount of Php 170,777.26.
SO ORDERED.[8]
Petitioner filed a motion for reconsideration but was denied. [9] Hence, the instant
recourse.
Petitioner maintains that the income earned by respondent is taxable in
thePhilippines because the source thereof is JUBANITEX, a domestic corporation
located in the City of Makati. It thus implied that source of income means the physical
source where the income came from. It further argued that since respondent is the
President of JUBANITEX, any remuneration she received from said corporation should
be construed as payment of her overall managerial services to the company and should
not be interpreted as a compensation for a distinct and separate service as a sales
commission agent.
Respondent, on the other hand, claims that the income she received was payment
for her marketing services. She contended that income of nonresident aliens like her is
subject to tax only if the source of the income is within thePhilippines. Source, according
to respondent is the situs of the activity which produced the income. And since the source
of her income were her marketing activities in Germany, the income she derived from
said activities is not subject to Philippine income taxation.
The issue here is whether respondents sales commission income is taxable in
the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within
thePhilippines.
(1) In General. A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the same
manner as an individual citizen and a resident alien individual, on taxable
income received from all sources within the Philippines. A nonresident
alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a nonresident alien doing business in the
Philippines, Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines. There shall be levied, collected and paid for each
taxable year upon the entire income received from all sources within the
Philippines by every nonresident alien individual not engaged in trade or
business within the Philippines x x x a tax equal to twenty-five percent
(25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or
not engaged in trade or business, are subject to Philippine income taxation on their
income received from all sources within the Philippines. Thus, the keyword in
determining the taxability of non-resident aliens is the incomes source.In construing the
meaning of source in Section 25 of the NIRC, resort must be had on the origin of the
provision.
The first Philippine income tax law enacted by the Philippine Legislature was Act No.
2833,[10] which took effect on January 1, 1920.[11] Under Section 1 thereof, nonresident
aliens are likewise subject to tax on income from all sources within the Philippine
Islands, thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding calendar year
from all sources by every individual, a citizen or resident of the Philippine
Islands, a tax of two per centum upon such income; and a like tax shall be
levied, assessed, collected, and paid annually upon the entire net income
received in the preceding calendar year from all sources within the
Philippine Islands by every individual, a nonresident alien, including
interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of
1916 as amended by U.S. Revenue Law of 1917.[12] Being a law of American origin, the
authoritative decisions of the official charged with enforcing it in the U.S.have peculiar
persuasive force in the Philippines.[13]
The Internal Revenue Code of the U.S. enumerates specific types of income to be
treated as from sources within the U.S. and specifies when similar types of income are to
be treated as from sources outside the U.S. [14] Under the said Code, compensation for
labor and personal services performed in the U.S., is generally treated as income from
U.S. sources; while compensation for said services performed outside the U.S., is treated
as income from sources outside the U.S. [15] A similar provision is found in Section 42 of
our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services performed
in thePhilippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without
thePhilippines;
The following discussions on sourcing of income under the Internal Revenue Code
of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources only: (1)
capital and/or (2) labor; and/or (3) the sale of capital assets. While the three
elements of this attempt at definition need not be accepted as all-inclusive,
they serve as useful guides in any inquiry into whether a particular item is
from sources within the United Statesand suggest an investigation into the
nature and location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should
be decisive; if it is done in this country, the income should be from sources
within theUnited States. If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country, the
income should be from sources within the United States. If the income is
from the sale of capital assets, the place where the sale is made should be
likewise decisive.
Much confusion will be avoided by regarding the term source in this
fundamental light. It is not a place, it is an activity or property. As such, it
has a situs or location, and if that situs or location is within the United
majority, the Court would have simply stated that source of income is not the business
activity of BOAC but the place where the person or entity disbursing the income is
located or where BOAC physically received the same. But such was not the import of the
ruling of the Court. It even explained in detail the business activity undertaken by
BOAC in the Philippines to pinpoint the taxable activity and to justify its conclusion that
BOAC is subject to Philippine income taxation. Thus
BOAC, during the periods covered by the subject assessments,
maintained a general sales agent in the Philippines. That general sales
agent, from 1959 to 1971, was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips each trip in the series
corresponding to a different airline company; (3) receiving the fare from the
whole trip; and (4) consequently allocating to the various airline companies
on the basis of their participation in the services rendered through the mode
of interline settlement as prescribed by Article VI of the Resolution No. 850
of the IATA Agreement. Those activities were in exercise of the functions
which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact,
the regular sale of tickets, its main activity, is the very lifeblood of the
airline business, the generation of sales being the paramount objective.
There should be no doubt then that BOAC was engaged in business in
the Philippinesthrough a local agent during the period covered by the
assessments. x x x[21]
xxxx
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 thePhilippines, it is sufficient that the income is derived from activity
within thePhilippines. In BOAC's case, the sale of tickets in
the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here in
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.
as to the sizes of, or designs and fabrics to be used in the finished products as well as
samples of sales orders purportedly relayed to her by clients. However, these documents
do not show whether the instructions or orders faxed ripened into concluded or collected
sales in Germany. At the very least, these pieces of evidence show that while respondent
was in Germany, she sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether these sales were truly
concluded inGermany, respondent presented no such evidence. Neither did she establish
reasonable connection between the orders/instructions faxed and the reported monthly
sales purported to have transpired in Germany.
The paucity of respondents evidence was even noted by Atty. Minerva Pacheco,
petitioners counsel at the hearing before the Court of Tax Appeals. She pointed out that
respondent presented no contracts or orders signed by the customers in Germany to prove
the sale transactions therein.[26] Likewise, in her Comment to the Formal Offer of
respondents evidence, she objected to the admission of the faxed documents bearing
instruction/orders marked as Exhibits R,[27] V, W, and X,[28] for being self serving.[29] The
concern raised by petitioners counsel as to the absence of substantial evidence that would
constitute proof that the sale transactions for which respondent was paid commission
actually transpired outside thePhilippines, is relevant because respondent stayed in
the Philippines for 89 days in 1995. Except for the months of July and September 1995,
respondent was in thePhilippines in the months of March, May, June, and August 1995,
[30]
the same months when she earned commission income for services allegedly
performed abroad. Furthermore, respondent presented no evidence to prove that
JUBANITEX does not sell embroidered products in the Philippines and that her
appointment as commission agent is exclusively for Germany and other European
markets.
In sum, we find that the faxed documents presented by respondent did not
constitute substantial evidence, or that relevant evidence that a reasonable mind might
accept as adequate to support the conclusion [31] that it was in Germany where she
performed the income producing service which gave rise to the reported monthly sales in
the months of March and May to September of 1995. She thus failed to discharge the
burden of proving that her income was from sources outside the Philippines and exempt
from the application of our income tax law. Hence, the claim for tax refund should be
denied.
"WHEREFORE, in view of all the foregoing, Assessment Notice No. DST-99-00000049 demanding payment of the amount of P41,467,887.51, as deficiency
stamp tax for the taxable year 1999 is hereby MODIFIED AND/OR REDUCED
to P41,442,887.51. Consequently, Traders Royal Bank (now Bank of Commerce)
is hereby ordered to pay the above-stated amount, plus interest that have
accrued thereon until the actual date of payment, to the Large Taxpayers
Service, B.I.R. National Office Building, Diliman, Quezon City, within thirty (30)
days from receipt hereof; otherwise, collection thereof shall be effected through
the summary remedies provided by law.
This constitutes the Final Decision of this Office on the matter."6
On April 30, 2004, the Bank of Commerce (BOC) filed a Petition for
Review,7 assigned to the CTA 2nd Division, praying that it be held not liable for
the subject Documentary Stamp Taxes (DST).
As also stipulated by the parties, the issues before the CTA 2nd Division were:
1. Whether [BOC] can be held liable for [TRB]s alleged deficiency [DST]
liability on [its SSD] Accounts for taxable year 1999 in the amount
of P41,442,887.51, inclusive of penalties.
2. Whether TRBs [SSD] Accounts for taxable year 1999 is subject to
[DST].8
In support of the first issue, BOC called the attention of the CTA 2nd Division to
the fact that as stated in Article III of the Purchase and Sale Agreement, it and
Traders Royal Bank (TRB) continued to exist as separate corporations with
distinct corporate personalities. BOC emphasized that there was no merger
between it and TRB as it only acquired certain assets of TRB in return for its
assumption of some of TRBs liabilities.9
Ruling of the CTA 2nd Division
In a Decision10 dated August 31, 2006, the CTA 2nd Division dismissed the
petition for lack of merit. It held that the Special Savings Deposit (SSD) account
in issue is subject to DST because its nature and substance are akin to that of a
certificate of deposit bearing interest, which under the then Section 180 of the
National Internal Revenue Code (NIRC), is subject to DST.
As for BOCs liability, the CTA 2nd Division said that since the issue of nonmerger between BOC and TRB was not raised in the administrative level, it could
not be raised for the first time on appeal. The CTA 2nd Division also noted how
BOC "actively participated in the proceedings before the administrative body
without questioning the legitimacy of the proper party in interest."11
When its Motion for Reconsideration12 was denied13 on January 8, 2007, BOC
filed a Petition for Review14 before the CTA En Banc, adducing the following
grounds:
THE HOLDING OF THE HONORABLE SECOND DIVISION THAT [BOC]
IS DEEMED TO HAVE ADMITTED THAT IT IS THE PROPER PARTY
ASSESSED BY THE [CIR] BECAUSE IT DID NOT RAISE THE ISSUE OF
MERGER IN THE LETTER OF PROTEST FILED WITH THE [CIR] IS
WITHOUT BASIS AND VIOLATES ELEMENTARY RULES OF DUE
PROCESS.
THE HONORABLE SECOND DIVISION ERRED IN HOLDING THAT
TRBS SSD ACCOUNTS FOR TAXABLE YEAR 1999 ARE SUBJECT TO
[DST] UNDER THEN SECTION 180 OF THE TAX CODE.15
Ruling of the CTA En Banc
on BOCs Petition for Review
On June 27, 2007, the CTA En Banc affirmed the CTA 2nd Divisions Decision
and Resolution, ruling that BOC was liable for the DST on TRBs SSD accounts. 16
Citing this Courts decision in International Exchange Bank v. Commissioner of
Internal Revenue,17 the CTA En Banc said that the CTA 2nd Division was correct
when it deemed TRBs SSD accounts to be certificates of deposit bearing
interest, subject to DST under Section 180 of the NIRC, as they involved
deposits, which though may be withdrawn anytime, earned a higher rate of
interest when kept in the bank for a specified number of days.18
Proceeding then to what it considered to be the pivotal issue, the CTA En Banc,
agreeing with the decision of the CTA 2nd Division, held that BOC was liable for
the DST on the subject SSD accounts. The CTA En Banc also noted that BOC
was inconsistent in its position, for claiming that it was the one that filed the
protest letter with the BIR, in its Petition for Review before the CTA 2nd Division
and Pre-Trial Brief, while stating that it was TRB that filed the protest letter, in its
Joint Stipulation of Facts and Issues. The CTA En Banc added that it would not
be unfair to hold BOC liable for the subject DST as TRB constituted an Escrow
Fund in the amount of Fifty Million Pesos (P50,000,000.00) to answer for all
claims against TRB, which are excluded from the Agreement.19
Undaunted, BOC filed before the CTA En Banc a Motion for Reconsideration20 of
its June 27, 2007 Decision, positing the following grounds for reconsideration:
I
There was no merger between [BOC] and [TRB] as already decided by this
Honorable Court in a decision dated 18 June 2007; hence [BOC] cannot be held
liable for the tax liability of [TRB.]
II
[BOC] could not have raised the issue of non-merger of [BOC] and [TRB] in the
proceedings before the [CIR] because it was never a party to the proceedings
before the [CIR]. Contrary to the Courts findings, the issue of non-merger is no
longer an issue but a fact stipulated by both parties.
III
The [CIR]s decision holding [BOC] liable for TRBs tax liability is void since
[BOC] was not a party to the proceedings before the [CIR].21
Ruling of the CTA En Banc
on BOCs Motion for Reconsideration
On September 17, 2007, the CTA En Banc, in its Amended Decision, reversed
itself and ruled that BOC could not be held liable for the deficiency DST of TRB
on its SSD accounts. The dispositive portion of the CTA En Banc s Amended
Decision reads:
WHEREFORE, [BOC]s Motion for Reconsideration is hereby GRANTED. The
Decision in the case at bar promulgated on June 27, 2007 is REVERSED. The
appealed Decision in C.T.A. Case No. 6975 is SET ASIDE and a new one is
hereby ENTERED finding petitioner Bank of Commerce NOT LIABLE for the
The CTA En Banc also reiterated its ruling in its Amended Decision, that BOC
could not be held liable for the deficiency DST on the SSD accounts of TRB, in
consonance with the Resolution of the CTA 1st Division in the Traders Royal
Bank case; and BIR Ruling No. 10-2006, which has not been shown to have
been revoked or nullified by the CIR.36
With the foregoing disquisition rendering the issue on the Escrow Fund moot, the
CTA En Banc found no more reason to discuss it.37
Unsuccessful in its Motion for Reconsideration, the CIR is now before this Court,
praying for the reinstatement of the CTA 2nd Divisions August 31, 2006 Decision,
which found BOC liable for the subject DST. The CIR posits the following
grounds in its Petition for Review:
I.
THE DEFICIENCY ASSESSMENT OF TRADERS ROYAL BANK (TRB) CAN BE
ENFORCED AND COLLECTED AGAINST RESPONDENT BANK OF
COMMERCE (BOC) BECAUSE THE LATTER ASSUMED THE OBLIGATIONS
AND LIABILITIES OF TRB PURSUANT TO THE PURCHASE AND SALE
AGREEMENT EXECUTED BETWEEN THEM AND THE APPLICABLE LAW ON
MERGER OF CORPORATIONS (SECTION 80 OF THE CORPORATION
CODE).
II.
THE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN REVERSING
ITS PREVIOUS DECISION WHICH AFFIRMED THE ASSESSMENT AND
ENFORCEMENT OF DEFICIENCY TAXES BY PETITIONER AGAINST
RESPONDENT, CONTRARY TO LAW AND JURISPRUDENCE.38
In response, BOC presented in its Comment,39 the following grounds in support
of its prayer that the CIRs petition be denied:
I. THE PETITION FOR REVIEW DID NOT RAISE QUESTIONS OF LAW.
II. THE COURT OF TAX APPEALS EN BANC WAS CORRECT AND DID NOT
COMMIT GRAVE ABUSE OF DISCRETION WHEN IT FOUND RESPONDENT
NOT LIABLE FOR THE SUBJECT TAX BECAUSE:
that there was no merger or consolidation between the two entities. Further,
[BOC] claims that the deficiency [DST] amounting to P27,698,562.92 for the
taxable years 1996 and 1997 of [TRB] was not one of the liabilities assumed by
[BOC] in the Purchase and Sale Agreement.
After carefully evaluating the records, the [CTA 1st Division] agrees with [BOC]
for the following reasons:
First, a close reading of the Purchase and Sale Agreement shows the following
self-explanatory provisions:
a) Items in litigation, both actual and prospective, against [TRB] are
excluded from the liabilities to be assumed by the Bank of Commerce
(Article II, paragraph 2); and
b) The Bank of Commerce and Traders Royal Bank shall continue to exist
as separate corporations with distinct corporate personalities (Article III,
paragraph 1).
Second, aside from the foregoing, the Purchase and Sale Agreement does not
contain any provision that the [BOC] acquired the identified assets of [TRB]
solely in exchange for the latters stocks. Merger is defined under Section 40 (C)
(6)(b) of the Tax Code as follows:
"b) The term "merger" or "consolidation", when used in this Section, shall be
understood to mean: (i) the ordinary merger or consolidation, or (ii) the
acquisition by one corporation of all or substantially all the properties of another
corporation solely for stock: Provided, [t]hat for a transaction to be regarded as a
merger or consolidation within the purview of this Section, it must be undertaken
for a bona fide business purpose and not solely for the purpose of escaping the
burden of taxation: x x x."
Since the purchase and sale of identified assets between the two companies
does not constitute a merger under the foregoing definition, the Bank of
Commerce is considered an entity separate from petitioner. Thus, it cannot be
held liable for the payment of the deficiency DST assessed against
petitioner.41 (Citation omitted.)
Thus, when the CTA En Banc took into consideration the above ruling in its
Amended Decision, it necessarily affirmed the findings of the CTA 1st Division
and found them to be correct. This Court likewise finds the foregoing ruling to be
correct. The CTA 1st Division was spot on when it interpreted the Purchase and
Sale Agreement to be just that and not a merger.
The Purchase and Sale Agreement, the document that is supposed to have tied
BOC and TRB together, was replete with provisions that clearly stated the intent
of the parties and the purpose of its execution, viz:
1. Article I of the Purchase and Sale Agreement set the terms of the assets sold
to BOC, while Article II was about the consideration for those assets. Moreover, it
was explicitly stated that liabilities not included in the Consolidated Statement of
Condition were excluded from the liabilities BOC was to assume, to wit:
ARTICLE II
CONSIDERATION: ASSUMPTION OF LIABILITIES
In consideration of the sale of identified recorded assets and properties covered
by this Agreement, [BOC] shall assume identified recorded TRBs liabilities
including booked contingent liabilities as listed and referred to in its Consolidated
Statement of Condition as of August 31, 2001, in the total amount of PESOS:
TEN BILLION FOUR HUNDRED ONE MILLION FOUR HUNDRED THIRTY-SIX
THOUSAND (P10,401,436,000.00), provided that the liabilities so assumed shall
not include:
xxxx
2. Items in litigation, both actual and prospective, against TRB which include but
are not limited to the following:
xxxx
2.3 Other liabilities not included in said Consolidated Statement of
Condition.42 (Emphases supplied.)
2. Article III of the Purchase and Sale Agreement enumerated in no uncertain
terms the effects and consequences of such agreement as follows:
ARTICLE III
EFFECTS AND CONSEQUENCES
The effectivity of this Agreement shall have the following effects and
consequences:
1. [BOC] and TRB shall continue to exist as separate corporations with
distinct corporate personalities;
2. With the transfer of its branching licenses to [BOC] and upon surrender
of its commercial banking license to BSP, TRB shall exist as an ordinary
corporation placed outside the supervisory jurisdiction of BSP. To this end,
TRB shall cause the amendment of its articles and by-laws to delete the
terms "bank" and "banking" from its corporate name and purpose.
3. There shall be no employer-employee relationship between [BOC] and
the personnel and officers of TRB.43 (Emphases supplied.)
Moreover, the second whereas clause, which served as the premise for the
subsequent terms in the agreement, stated that the sale of TRBs assets to BOC
were in consideration of BOCs assumption of some of TRBs liabilities, viz:
WHEREAS, TRB desires to sell and [BOC] desires to purchase identified
recorded assets of TRB in consideration of [BOC] assuming identified recorded
liabilities of TRB x x x.44
The clear terms of the above agreement did not escape the CIR itself when it
issued BIR Ruling No. 10-2006, wherein it was concluded that the Purchase and
Sale Agreement did not result in a merger between BOC and TRB.
In this petition however, the CIR insists that BIR Ruling No. 10-2006 cannot be
used as a basis for the CTA En Bancs Amended Decision, due to BOCs failure,
at the time it requested for such ruling, to inform the CIR of TRBs deficiency DST
assessments for taxable years 1996, 1997, and 1999.45
The CIRs contention is untenable.
A perusal of BIR Ruling No. 10-2006 will show that the CIR ruled on the issue of
merger without any reference to TRBs subject tax liabilities. The relevant
portions of such ruling are quoted below:
One distinctive characteristic for a merger to exist under the second part of
[Section 40(C)(b) of the 1997 NIRC] is that, it is not enough for a corporation to
acquire all or substantially all the properties of another corporation but it is also
necessary that such acquisition is solely for stock of the absorbing corporation.
Stated differently, the acquiring corporation will issue a block of shares equal to
the net asset value transferred, which stocks are in turn distributed to the
stockholders of the absorbed corporation in proportion to the respective share.
After a careful perusal of the facts presented as well as the details of the instant
case, it is observed by this Office that the transaction was purely concerning
acquisition and assumption by [BOC] of the recorded liabilities of TRB. The
[Purchase and Sale] Agreement did not mention with respect to the issuance of
shares of stock of [BOC] in favor of the stockholders of TRB. Such transaction is
absent of the requisite of a stock transfer and same belies the existence of a
merger. As such, this Office considers the Agreement between [BOC] and TRB
as one of "a sale of assets with an assumption of liabilities rather than merger."
xxxx
In the case at bar, [BOC] purchased identified recorded assets and properties of
TRB.1wphi1 In consideration thereof, [BOC] assumed certain liabilities of TRB
which were identified in the Consolidated Statement of Condition as of August
31, 2001. In this wise, the liabilities of TRB assumed by [BOC] were limited only
to those already identified as of August 31, 2001 amounting in all to Ten Billion
Four Hundred One Million Four Hundred Thirty-Six Thousand Pesos (P10,401,
436,000.00) x x x. More so, liabilities that were not assumed by [BOC] should not
be enforced against it. x x x. (Emphasis supplied.)
xxxx
2. Much have been said that the transaction between TRB and [BOC] is not a
merger within the contemplation of Section 40(C)(b) of the Tax Code of 1997. To
reiterate, this Office has ruled in the foregoing discussion that the transaction is
one of sale of assets with assumption of identified recorded liabilities of TRB. As