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CASE DIGESTS IN TAXATION LAW 1, S.Y.

2017-2018

The Power of the Senate to Propose Amendments to Revenue Bills

ARTURO M. TOLENTINO VS SECRETARY OF FINANCE AND COMMISSIONER OF


INTERNAL REVENUE, G.R. NO. 115455, 30 OCTOBER 1995, MENDOZA, J.

Facts: Some of the petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and
Chamber of Real Estate and Builders Association (CREBA)) claimed that R.A. No. 7716 did not
"originate exclusively" in the House of Representatives as required by Art. VI, Sec. 24 of the
Constitution. Although they admit that H. No. 11197 was filed in the House of Representatives
where it passed three readings and that afterward it was sent to the Senate where after first
reading it was referred to the Senate Ways and Means Committee, they complain that the Senate
did not pass it on second and third readings. Instead what the Senate did was to pass its own
version (S. No. 1630) and thereafter approved it. Petitioner Tolentino adds that what the Senate
committee should have done was to amend H. No. 11197 by striking out the text of the bill and
substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a House bill and
the Senate version just becomes the text (only the text) of the House bill."

Issue: Was there a violation of the Constitutional provision requiring all revenue bills to originate
exclusively in the House of Representatives when the Senate passed its own version of the
revenue bill after receiving the proposed revenue bill from the House of Representatives?

Ruling: There is no violation of the Constitution.

Sec. 24, Art. VI of the Constitution provides that “All appropriation, revenue, or tariff bills, xxx
shall originate exclusively in the House of Representatives, but the Senate may propose or concur
with amendments.” What is prohibited is for the bill to originate from the Senate. The bill that
originates from the House need not be the one that should finally be enacted to law. This is so
because the Senate is empowered to propose and concur with amendments following the
coequality of the two chambers of the Congress. Thus, the bill that originates from the House
may undergo some changes during the deliberations in the Senate.

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CASE DIGESTS IN TAXATION LAW 1, S.Y. 2017-2018

Grant of Tax Exemptions; Principle of Uniformity and Equality

ARTURO M. TOLENTINO VS SECRETARY OF FINANCE AND COMMISSIONER OF


INTERNAL REVENUE, G.R. NO. 115455, 30 OCTOBER 1995, MENDOZA, J.

Facts: Petitioners contended that the enactment of R.A. No. 7716 removing the exemption of
press from VAT while maintaining those granted to others discriminates the press and their press
freedom. The respondent argued that other exemptions from the VAT, such as those previously
granted to PAL, petroleum concessionaires, enterprises registered with the Export Processing
Zone Authority, and many more are likewise totally withdrawn, in addition to exemptions which
are partially withdrawn, in an effort to broaden the base of the tax. Moreover, respondents said
that what the constitutional guarantee of free press prohibits are laws which single out the press
or target a group belonging to the press for special treatment or which in any way discriminate
against the press on the basis of the content of the publication, and R.A. No. 7716 is none of
these.

Issues:

A. Is the withdrawal of the tax exemption valid?

B. Is the action violative of the Constitutional principle on uniformity and equality?

Ruling:

A. Yes, the withdrawal of the tax exemption is valid.

The Court held that since the law granted the press a privilege, the law could take back
the privilege anytime without offense to the Constitution. The reason is simple: by
granting exemptions, the State does not forever waive the exercise of its sovereign
prerogative. Indeed, in withdrawing the exemption, the law merely subjects the press to
the same tax burden to which other businesses have long ago been subject to.

B. No, R.A. No. 7716 on the removal of tax exemption from the press adheres to the principle
of uniformity and equality.

Equality and uniformity of taxation means that all taxable articles or kinds of property of
the same class be taxed at the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation. To satisfy this requirement
it is enough that the statute or ordinance applies equally to all persons, forms and
corporations placed in similar situation.

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CASE DIGESTS IN TAXATION LAW 1, S.Y. 2017-2018

Regressive vis-à-vis Progressive System of Taxation

ARTURO M. TOLENTINO VS SECRETARY OF FINANCE AND COMMISSIONER OF


INTERNAL REVENUE, G.R. NO. 115455, 30 OCTOBER 1995, MENDOZA, J.

Facts: CREBA claimed that the Value-Added Tax (VAT) under R.A. No. 7716 imposing a flat rate
of 10% on all taxpayers without regard to their ability to pay is regressive in nature, and, thus,
violates the constitutional provision that the Congress shall “evolve a progressive system of
taxation.”

Issue: Is the imposition of indirect tax, like VAT, regressive? If so, does it violate the
Constitutional provision that Congress shall only enact laws evolving the progressive system of
taxation?

Ruling: Yes, the tax in question is regressive; however, it does not violate the Constitutional
provision on the progressive system of taxation.

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The constitutional provision has been interpreted to mean simply that "direct taxes
are… to be preferred and as much as possible, indirect taxes should be minimized." Indeed, the
mandate to Congress is not to prescribe, but to evolve, a progressive tax system.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In
the case of the VAT, the law minimizes the regressive effects of this imposition by providing for
zero rating of certain transactions.

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CASE DIGESTS IN TAXATION LAW 1, S.Y. 2017-2018

Tax Treaties; Prescriptive period on administrative and judicial claim of tax refund

CBK POWER COMPANY LIMITED VS COMMISSIONER OF INTERNAL REVENUE, G.R.


NO. 193383-84, 14 JANUARY 2015, PERLAS-BERNABE, J.

Facts: CBK Power Limited (CBK Power) is duly organized and existing under the law of the
Philippines. Sometime in 2001, it borrowed money from five foreign banks for which it remitted
interest payments from May 2001 to May 2003. It allegedly withheld final taxes from said
payments and paid the same to the Revenue District Office of the Bureau of Internal Revenue
(BIR). However, according to CBK Power, under the relevant tax treaties between the Philippines
and the respective countries in which each of the banks is a resident, the interest income derived
by the aforementioned banks are subject only to a preferential tax rate of 10%. In 2003, CBK
Power filed a refund of its excess final withholding taxes erroneously withheld and collected for
the years 2001 and 2002 with the BIR Revenue Region. The claim for refund of excess final
withholding taxes in 2003 was subsequently filed in 2005.

On its decision, the Commissioner denied the claim for refund with respect to the excess final
withholding taxes from one of the foreign banks because CBK Power failed to obtain an
International Tax Affairs Division (ITAD) ruling pursuant to RMO No. 1-2000. Further, the
Commissioner assailed the claim for refund on the basis of CBK Power’s failure to exhaust
administrative remedies prior to filing the petition before the CTA First Division.

Issue:

A. Is failure to strictly comply with RMO No. 1-2000 deprive a person or corporation of the
benefit of a tax treaty on claims of refund for erroneously paid final withholding taxes?

B. Is there a failure to exhaust administrative remedies before resorting to judicial action?

Ruling:

A. No, ITAD ruling pursuant to RMO No. 1-2000 is not necessary. The obligation to comply
with tax treaty with other countries must take precedence over the objective of the RMO
No. 1-2000.

The period of application for the availment of tax treaty relief as required by RMO No. 1-
2000 should not operate to divest entitlement to the relief as it would constitute a violation
of the duty required by good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply within the prescribed period
under the administrative issuance would impair the value of the tax treaty. At most, the
application for a tax treaty relief from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief.

Non-compliance with tax treaties has negative implications on international relations, and
unduly discourages foreign investors. While the consequences sought to be prevented by
RMO No. 1-2000 involve an administrative procedure, these may be remedied through
other system management processes. (Deutsche Bank AG Manila Branch vs.
Commissioner of Internal Revenue)

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B. No, CBK Power need not wait for the Commissioner’s ruling before it files its judicial claim
since it only has two (2) years from the payment of the tax within which to file both
administrative and judicial claims.

The National Internal Revenue Code provides:

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or


proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any manner wrongfully
collected without authority, or of any sum alleged to have been excessively or in
any manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two
(2) years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: x x x. (emphases supplied)

Indubitably, CBK Power’s administrative and judicial claims for refund of its excess final
withholding taxes covering taxable year 2003 were filed within the two-year prescriptive
period. WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED.

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CASE DIGESTS IN TAXATION LAW 1, S.Y. 2017-2018

Imposition of tax thru police power and eminent domain; Equal protection clause

DRUGSTORES ASSOCIATION OF THE PHILIPPINES VS NATIONAL COUNCIL ON


DISABILITY AFFAIRS, GR No. 194561, Sep 14, 2016

FACTS: On April 2007, Republic Act No. 9442 was enacted amending R.A. No. 7277 (Magna
Carta for Disabled persons). The Title of R.A. No. 7277 was amended to read as "Magna Carta
for Persons with Disability" and all references on the law to "disabled persons" were amended to
read as "persons with disability" (PWD). Specifically, R.A. No. 9442 granted the PWDs a twenty
(20) percent discount on the purchase of medicine, and a tax deduction scheme was adopted
wherein covered establishments may deduct the discount granted from gross income based on
the net cost of goods sold or services rendered.

On April 23, 2008, the National Council on Disability Affairs (NCDA) issued Administrative Order
(A.O.) No. 1, prescribing guidelines which should serve as a mechanism for the issuance of a
PWD Identification Card (IDC) which shall be the basis for providing privileges and discounts
to bona fide PWDs in accordance with R.A. 9442

On December 9, 2008, the DOF issued Revenue Regulations No. 1-2009 prescribing rules
and regulations to implement R.A. 9442 relative to the tax privileges of PWDs and tax incentives
for establishments granting the discount. Section 4 of Revenue Regulations No. 001-09 states
that drugstores can only deduct the 20% discount from their gross income subject to some
conditions.

On May 20, 2009, the DOH issued A.O. No. 2009-0011 specifically stating that the grant of
20% discount shall be provided in the purchase of branded medicines and unbranded generic
medicines from all establishments dispensing medicines for the exclusive use of the PWDs. It also
detailed the guidelines for the provision of medical and related discounts and special privileges to
PWDs pursuant to R.A. 9442.

On July 28, 2009, petitioners filed a Petition for Prohibition with application for a Temporary
Restraining Order and/or a Writ of Preliminary Injunction before the Court of Appeals to annul
and enjoin the implementation of the following laws:

1) Section 32 of R.A. No. 7277 as amended by R.A. No. 9442;


2) Section 6, Rule IV of the Implementing Rules and Regulations of R.A. No. 9442;
3) NCDA A.O. No. 1;
4) DOF Revenue Regulation No. 1-2009;
5) DOH A.O. No. 2009-0011.

On July 2010, the CA rendered a Decision upholding the constitutionality of R.A. 7277 as
amended, as well as the assailed administrative issuances. CA dismissed petitioners' motion for
reconsideration

Issue:
I. WON THE MANDATED PWD DISCOUNT IS AN INVALID EXERCISE OF THE POWER OF EMINENT
DOMAIN BECAUSE IT FAILS TO PROVIDE JUST COMPENSATION TO PETITIONERS AND OTHER
SIMILARLY SITUATED DRUGSTORES;

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II. WON SECTION 32 OF RA 7277 AS AMENDED BY RA 9442, NCDA AO 1 AND THE OTHER
IMPLEMENTING REGULATIONS VIOLATE THE DUE PROCESS CLAUSE;

III. WON THE DEFINIYION OF “DISABILITIES” UNDER THEN LAW IS VAGUE AND AMBIGUOUS
THAT THE PERSON TASKED W/ IMPLEMENTING WILL UNDOUBTEDLY ARRIVE AT DIFFERENT
INTERPRETATIONS

IV. WON VIOLATED THE EQUAL PROTECTION CLAUSE BECAUSE IT SINGLES OUT DRUGSTORES
TO BEAR THE BURDEN OF THE DISCOUNT

Ruling:
Petition denied.

(1) Valid Exercise of Police Power

Citing Carlos Superdrug Corporation et al. v. DSWD:

The law is a legitimate exercise of police power which, similar to the power of eminent domain,
has general welfare for its object….
Police power as an attribute to promote the common good would be diluted considerably if on
the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged
confiscatory effect of the provision in question, there is no basis for its nullification in view of the
presumption of validity which every law has in its favor.

R.A. No. 9442 which amended R.A. No. 7277 grants incentives and benefits including a twenty
percent (20%) discount to PWDs in the purchase of medicines; fares for domestic air, sea and
land travels including public railways and skyways; recreation and amusement centers including
theaters, food chains and restaurants.35 This is specifically stated in Section 4 of the IRR of R.A.
No. 9442. Hence, it has a valid subject considering that the concept of public use is no longer
confined to the traditional notion of use by the public, but held synonymous with public interest,
public benefit, public welfare, and public convenience. As in the case of senior citizens, the
discount privilege to which the PWDs are entitled is actually a benefit enjoyed by the general
public to which these citizens belong.

(2) Does not violate Due Process


Petitioners aver that Section 32 of R.A. No. 7277 as amended is unconstitutional and void for
violating the due process clause since entitlement to the 20% discount is allegedly merely based
on any of the three documents mentioned in the provision, namely: (i) an identification card
issued by the city or municipal mayor or the barangay captain of the place where the PWD resides;
(ii) the passport of the PWD; or (iii) transportation discount fare identification card issued by
NCDA. Thus, maintain that none of the said documents has any relation to a medical finding of
disability, and the grant of the discount is allegedly without any process for the determination of
a PWD in accordance with law.

Sec. 32 must be read with NCDA A.O. No. 1:

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…the applicant must first secure a medical certificate issued by a licensed private or government
physician that will confirm his medical or disability condition. If an applicant is an employee with
apparent disability, a "certificate of disability" issued by the head of the business establishment
or the head of the non-governmental organization is needed for him to be issued a PWD-IDC. For
a student with apparent disability, the "school assessment" issued by the teacher and signed by
the school principal should be presented to avail of a PWD-ID.

Likewise, DOH A.O. No. 2009-11 prescribes additional guidelines:


To avail of the discount, the PWD must not only present his I.D. but also the doctor's prescription
stating, among others, the generic name of the medicine, the physician's address, contact number
and professional license number, professional tax receipt number and narcotic license number, if
applicable.

(3) Not Vague and Ambiguous


Aside from the definitions of a "person with disability" or "disabled persons" under Section 4 of
R.A. No. 7277 as amended by R.A. No. 9442 and in the IRR of RA 9442, NCDA A.O. No. 1 also
provides:

Identification Cards shall be issued to any bona fide PWD with permanent disabilities due
to any one or more of the following conditions: psychosocial, chronic illness, learning,
mental, visual, orthopedic, speech and hearing conditions. This includes persons suffering
from disabling diseases resulting to the person's limitations to do day to day activities as
normally as possible such as but not limited to those undergoing dialysis, heart disorders,
severe cancer cases and such other similar cases resulting to temporary or permanent
disability.

(4) Does not violate Equal Protection Clause


Equality guaranteed under the equal protection clause is equality under the same conditions and
among persons similarly situated; it is equality among equals, not similarity of treatment of
persons who are classified based on substantial differences in relation to the object to be
accomplished.

All that is required of a valid classification is that it be reasonable, which means that
the classification should be based on substantial distinctions which make for real
differences, that it must be germane to the purpose of the law; that it must not be
limited to existing conditions only; and that it must apply equally to each member of
the class. This Court has held that the standard is satisfied if the classification or
distinction is based on a reasonable foundation or rational basis and is not palpably
arbitrary.

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(Relate to the Drugstore Assoc. of the Phil. vs. NCDA)

MANILA MEMORIAL PARK V. SECRETARY (DPWH) & SECRETARY (DF)


G.R. NO. 175356, 03 DECEMBER 2013

FACTS: On April 23, 1992, RA 7432 (Seniors Citizens Act) was passed into law granting 20%
discounts from all establishments relative to utilization of transportation services, hotels and
similar lodging establishments, restaurants and recreation centers and purchase of medicine
anywhere in the country, Provided, That private establishments may claim the cost as tax credit.

However, on August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to
implement RA 7432.

(1) Sections 2(i) of which provides for: The definition of a Tax credit which refers to
the amount representing the 20% discount granted to a qualified senior citizen by all
establishments which discount shall be deducted by the said establishments from their
gross income for income tax purposes and from their gross sales for value-added tax
or other percentage tax purposes and;
(2) Section 4 of RR No. 02-94 which provides for the recording/bookkeeping
requirements for private establishments requiring them to keep separate and accurate
records of sales made to senior citizens.

In CIR v. Central Luzon Drug Corp, 496 Phil 307 (2005), the Court declared Sections 2(i)
and 4 of RR No. 02-94 as erroneous because these contravene RA 7432 that specifically allow
private establishments to claim a tax credit the amount of discounts they grant. In turn the IRR
issued pursuant thereto provide for the procedures for its availment. To deny such credit, despite
the plain mandate of the law and the regulations carrying out that mandate, is indefensible.

In effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived
definition is improper, considering that the latter (discount) has to be deducted from gross sales
in order to compute the gross income in the income statement and cannot be deducted again,
even for purposes of computing the income tax. When the law says that the cost of the discount
may be claimed as a tax credit, it means that the amount when claimed shall be treated as a
reduction from any tax liability, plain and simple. The option to avail of the tax credit benefit
depends upon the existence of a tax liability, but to limit the benefit to a sales discount which is
not even identical to the discount privilege that is granted by law does not define it at all and
serves no useful purpose. The definition must, therefore, be stricken down.

On February 26, 2004, RA 9257 or the Expanded Senior Citizens Act amended
certain provisions of RA 7432, granting 20% discount to qualified senior citizens and the
establishments may claim the discounts granted as tax deduction based on the net cost of the
goods sold or services rendered: Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted. Provided,
further, That the total amount of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue Code, as amended.

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The Secretary of Finance issued RR No. 4-2006 and the DSWD issued its own IRR for their
implementation of the tax provision of RA 9257.

STATEMENT OF THE CASE

Petitioners feeling aggrieved by the tax deduction scheme, petitioners prayed that
Section 4 of RA 9257 and the IRR issued by DSWD and the DOF be declared
unconstitutional insofar as these allow business establishments to claim the 20%
discount given to senior citizens as a tax deduction.

Note: The tax deduction scheme does not fully reimburse petitioners for the discount privilege
accorded to senior citizens. This is because the discount is treated as a deduction, a tax-
deductible expense that is subtracted from the gross income and results in a lower
taxable income. Being a tax deduction, the discount does not reduce taxes owed on a peso for
peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of
the discount as a deduction reduces the net income of the private establishments concerned.

ISSUE: Is Section 4 of RA No. 9257 and its Implementing Rules and Regulations, insofar as they
provide that the 20% discount to Senior Citizens may be claimed as tax deduction by the private
establishments unconstitutional?

HELD: Yes. This is because it is justified under the police power of the state.

A tax deduction does not offer full reimbursement of the senior citizen discount. As such,
it would not meet the definition of just compensation. Having said that, this raises the question
of whether the State, in promoting the health and welfare of a special group of citizens, can
impose upon private establishments the burden of partly subsidizing a government program.
Court agreed.

As a form of reimbursement, the law provides that business establishments extending the
twenty percent discount to senior citizens may claim the discount as a tax deduction. The law is
a legitimate exercise of police power which, similar to the power of eminent domain, has general
welfare for its object.

While the Constitution protects property rights, petitioners must accept the realities of
business and the State, in the exercise of police power, can intervene in the operations of a
business which may result in an impairment of property rights in the process.

Undeniably, the success of the senior citizens program rests largely on the support
imparted by petitioners and the other private establishments concerned. This being the case, the
means employed in invoking the active participation of the private sector, in order to achieve the
purpose or objective of the law, is reasonably and directly related.

Without sufficient proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the
continued implementation of the same would be unconscionably detrimental to petitioners, the
Court will refrain from quashing a legislative act. Carlos Superdrug Corp v. DSWD, 553 Phil. 120
(2007). Note that court ruled that petitioners in Carlos Superdrug case failed to prove that the
20% discount is arbitrary, oppressive or confiscatory.

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(Relate to the Drugstore Assoc. of the Phil. vs. NCDA)

SOUTHERN LUZON DRUG CORPORATION VS. THE DEPARTMENT OF SOCIAL


WELFARE AND DEVELOPMENT, THE NATIONAL COUNCIL FOR THE
WELFARE OF DISABLED PERSONS, THE DEPARTMENT OF FINANCE, and THE
BUREAU OF INTERNAL, April 25, 2017, G.R. No. 199669

FACTS: On April 23, 1992, R.A. No. 7432 entitled “An Act to Maximize the Contribution of Senior
Citizens to Nation Building, Grant Benefits and Special Privileges and For Other Purposes,” was
enacted. Under the said law, a senior citizen, who must be at least 60 years old and has an annual
income of not more than P60, 000 may avail of the privileges, one of which is 20% discount on
the purchase of medicines.

To recoup the amount given as discount to qualified senior citizens, covered establishments can
claim an equal amount as tax credit which can be applied against the income tax due from them.

On February 26, 2004, then President GMA signed R.A. No. 9257, amending some provisions of
R.A. No. 7432. The new law retained the 20% discount on the purchase of medicines but removed
the annual income ceiling thereby qualifying all senior citizens to the privileges under the law.
Further, R.A. No. 9257 modified the tax treatment of the discount granted to senior citizens, from
tax credit to tax deduction from gross income, computed based on the net cost of goods sold or
services rendered.

The change in the tax treatment of the discount given to senior citizens did not sit well with some
drug store owners and corporations, claiming it affected the profitability of their business. Thus,
on January 13, 2005, Carlos Superdrug, together with other operating drugstores in the
Philippines, filed a Petition for Prohibition with Prayer for TRO and/or Preliminary Injunction before
this court assailing the constitutionality of Section 4(a) of R.A. 9257 primarily on the ground that
it amounts to taking of private property without payment of just compensation. The court upheld
the constitutionality of the assailed provision, holding that the same is a legitimate exercise of
police power.

A motion for reconsideration was filed by Carlos Superdrug, which the Court denied with finality
on August 21, 2007.

Meanwhile, on March 24, 1992, R.A. No. 7277 pertaining to the “Magna Carta for Disabled
Persons” was enacted, codifying the rights and privileges of PWDs. Thereafter, on April 30, 2007,
R.A. No. 9442 was enacted, amending R.A. No. 7288. One of the salient amendments in the law
is the insertion of Chapter 8 in Title 2 thereof, which enumerates the other privileges and
incentives of PWDs, including the grant of 20% discount on the purchase of medicines. Similar
to R.A. No. 9257, covered establishments shall claim the discounts given to PWDs as tax
deductions from the gross income, based on the net cost of goods sold or services rendered.

On February 26, 2008, Petitioner Southern Luzon filed a Petition for Prohibition with Application
for TRO and/or Writ of Preliminary Injunction with the CA, seeking to declare as unconstitutional
Section 4(a) of R.A. No. 9257 and Section 32 of R.A. No. 9442, insofar as these provisions only
allow tax deduction on the gross income based on the net cost of goods sold or services rendered
as compensation to private establishments for the 20% discount that they are required to grant

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to senior citizens and PWDs. Further, petitioner prayed that the respondents be permanently
enjoined from implementing the assailed provisions.

On June 17, 2011, the CA dismissed the petition, reiterating the ruling of the Court in Carlos
Superdrug. The petitioner filed it Motion for Reconsideration but the same was denied.

ISSUES:
1. Whether or not the case is barred by stare decisis
2. Whether or not the assailed provisions are constitutional

HELD:
1. No. The Court held that petitioner had the good sense of including questions that had not
been raised or deliberated in the former case of Carlos Superdrug, i.e., validity of the 20%
discount granted to PWDs, the supposed vagueness of the provisions of R.A. No. 9442
and violation of the equal protection clause.

Nonetheless, the Court finds nothing in the instant case that merits a reversal of the earlier
ruling of the Court in Carlos Superdrug. There is a very slim difference between the issues
in Carlos Superdrug and the instant case with respect to the nature of the senior citizen
discount. In both cases, it is apparent that what the petitioners are ultimately questioning
is not the grant of the senior citizen discount per se, but the manner by which they were
allowed to recoup the said discount. In particular, they are protesting the change in the
tax treatment of the senior citizen discount from tax credit to being merely a deduction
from gross income, which they claimed to have significantly reduced their profits.

2. Yes. The assailed provisions are constitutional.

AS TO THE ISSUE ON TAKING OF PRIVATE PROPERTY:

The petitioner claims that the change in the tax treatment of the discount is illegal, as it
constitutes taking without just compensation. The Court is not swayed. To begin with, the
issue of just compensation finds no relevance in the instant case as it had already been
made clear in Carlos Superdug that the power being exercised by the State in the
imposition of senior citizen discount was its police power. Unlike in the exercise of the
power of eminent domain, just compensation is not required in wielding police power.

The subjects of R.A. Nos. 9257 and 9442, i.e., senior citizens and PWDs are individuals
whose well-being is a recognized public duty. As a public duty, the responsibility for their
care devolves upon the concerted efforts of the State, the family and the community.

Covered establishments are also provided with a mechanism to recoup the amount of
discounts they grant. It is provided in the assailed provisions that establishments may
claim the discounts as tax deduction based on the net cost of the goods sold or services
rendered. Basically, whatever amount was given as discount, covered establishments may
claim an equal amount as an expense or tax deduction. Apparently, petitioner seeks tax
incentive and not merely a return of the amount given as discounts.

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Clearly, the effect of the subject laws in the financial standing of covered companies
depends largely on how they respond and forge a balance between profitability and their
sense of social responsibility. The adaptation is entirely up to them and they are not
powerless to make adjustments to accommodate the subject legislations.

Petitioner argues that the law is confiscatory in the sense that the State takes away a
portion of its supposed profits. To reiterate, the subject provisions only affect the
petitioner’s right to profit and not earned profits. The right to profit is merely an inchoate
and not a vested right or an entitlement that has accrued on the person or entity such
that its invasion warrants compensation.

AS TO THE EXERCISE OF LEGISLATIVE POWER:

It is within the legislature’s prerogative to enact laws which it deems sufficient to address
a specific public concern. In the process of legislation, a bill undergoes close scrutiny of
the members of Congress and necessarily has to surpass the arguments hurdled against
its passage. The legislature may also grant rights and impose burdens. Here, petitioner
failed to show that RA Nos. 9257 and 9442, under the guise of regulation, allow undue
interference in an otherwise legitimate business.

AS TO VIOLATION OF THE EQUAL PROTECTION CLAUSE:

Petitioner argues that the subject laws filed to distinguish between those who have the
capacity to pay and those who do not, in granting the 20% discount. R.A. No. 9257, in
particular, removed the income qualification in R.A. No. 7432 of P60,000 per annum before
a senior citizen may be entitled to the 20% discount.

To recognize all senior citizens as a group, without distinction as to income, is a valid


classification. The Constitution itself considered the elderly as a class of their own and
deemed it a priority to address their needs. When the Constitution declared its intention
to prioritize the predicament of the underprivileged sick, elderly, disabled, women, and
children, it did not make any reservation as to income, race, religion or any other personal
circumstances. It was a blanket privilege afforded the group of citizens in the enumeration
in view of the vulnerability of their class.

There is also no question that the grant of mandatory discount is germane to the purpose
of R.A. Nos. 9257 and 9442, that is, to adopt an integrated and comprehensive approach
to health development and make essential goods and other social services available to all
the people at affordable cost, with special priority given to the elderlies and the disabled,
among others. The privileges granted by the laws ease their concerns and allow them to
live more comfortably.

WHEREFORE, in view of the foregoing disquisition, Section 4(a) of Republic Act No.
9257 and Section 32 of Republic Act No. 9442 are hereby declared CONSTITUTIONAL.

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Tax exemption of charitable and educational institution

COMMISSIONER OF INTERNAL REVENUE V. DE LA SALLE UNIVERSITY, INC.


GR NO. 196596, G.R. NO. 198841 AND G.R. NO. 198941, NOVEMBER 09, 2016

Facts: Sometime in 2004, the BIR issued to DLSU Letter of Authority (LOA) No. 2794
authorizing its revenue officers to examine the latter's books of accounts and other accounting
records for all internal revenue taxes for the period Fiscal Year Ending 2003 and Unverified Prior
Years.

The BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes: (1)
income tax on rental earnings from restaurants/canteens and bookstores operating within the
campus; (2) value-added tax (VAT) on business income; and (3) documentary stamp tax (DST)
on loans and lease contracts. The BIR demanded the payment of P17,303,001.12, inclusive of
surcharge, interest and penalty for taxable years 2001, 2002 and 2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU
filed on August 3, 2005 a petition for review with the CTA Division

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article
XIV, Section 4 (3) of the Constitution, which reads: All revenues and assets of non-stock, non-
profit educational institutions used actually, directly, and exclusively for educational purposes
shall be exempt from taxes and duties.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The DST on
the loan transactions us cancelled. DLSU is ordered to pay VAT and DST on its lease contracts,
plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of
P18,421,363.53.

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010
decision. On April 6, 2010, the CTA Division denied the Commissioner's motion for
reconsideration while it held in abeyance the resolution on DLSU's motion for reconsideration.

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622)
arguing that DLSU's use of its revenues and assets for non-educational or commercial purposes
removed these items from the exemption coverage under the Constitution.

On May 18, 2010, DLSU formally offered to the


The CTA En Banc partially granted DLSU's petition for review and further reduced its tax
liabilities to P2,554,825.47 inclusive of surcharge

The issue of the LOA's validity was raised during trial; hence, the issue was deemed properly
submitted for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and
that the practice of issuing a LOA covering audit of unverified prior years is prohibited.30 The
prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides
that if the audit includes more than one taxable period, the other periods or years shall be

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specifically indicated in the LOA.

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001
and 2002 are void, but the assessment for taxable year 2003 is valid.

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved
different parties, factual settings, bases of assessments, sets of evidence, and defenses.

The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It held that while
DLSU successfully proved that a portion of its rental income was transmitted and used to pay
the loan obtained to fund the construction of the Sports Complex, the rental income from other
sources were not shown to have been actually, directly and exclusively used for educational
purposes.34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner
(G.R. No. 198941) came to this Court for relief.

The Commissioner submits that Section 30 (H) of the Tax Code states that the income of
whatever kind and character of a non-stock and non-profit educational institution from any of
its properties, real or personal, or from any of its activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed by this Code.
A tax-exempt organization like DLSU is exempt only from property tax but not from income tax
on the rentals earned from property

DLSU invokes the principle of uniformity in taxation, which mandates that for similarly situated
parties, the same set of evidence should be appreciated and weighed in the same manner. The
CTA En Banc erred when it did not similarly appreciate DLSU's evidence as it did to the pieces
of evidence submitted by Ateneo, also a non-stock, non-profit educational institution.

DLSU also invokes the doctrine of constitutional supremacy, which renders any subsequent law
that is contrary to the Constitution void and without any force and effect.56 Section 30 (H) of
the 1997 Tax Code insofar as it subjects to tax the income of whatever kind and character of a
non-stock and non-profit educational institution from any of its properties, real or personal, or
from any of its activities conducted for profit regardless of the disposition made of such income,
should be declared without force and effect in view of the constitutionally granted tax
exemption on "all revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes."57

Issues:
1. Whether DLSU's income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes
2. Whether the entire assessment should be voided because of the defective LOA

Held: Yes. DLSU proved that a portion of its rental income was used actually, directly and
exclusively for educational purposes; and DLSU proved the payment of the DST through its
bank's on-line imprinting machine. The revenues and assets of non-stock, non-profit

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educational institutions proved to have been used actually, directly, and exclusively for
educational purposes are exempt from duties and taxes.

The last paragraph of Section 30 of the Tax Code is without force and effect with respect to
non-stock, non-profit educational institutions, provided, that the non-stock, non-profit
educational institutions prove that its assets and revenues are used actually, directly and
exclusively for educational purposes.

The tax-exemption constitutionally-granted to non-stock, non- profit educational institutions, is


not subject to limitations imposed by law.

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions
is conditioned only on the actual, direct and exclusive use of their assets, revenues and income
for educational purposes.

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational activities
or activities related to the purposes of an educational institution. The phrase all revenues is
unqualified by any reference to the source of revenues. Thus, so long as the revenues and
income are used actually, directly and exclusively for educational purposes, then said revenues
and income shall be exempt from taxes and duties.

When a non-stock, non-profit educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT,
and LBT. On the other hand, when it also shows that it uses its assets in the form of real
property for educational purposes, it shall be exempted from RPT.

We hold that the income and revenues of DLSU proven to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes.

2. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. The LOA does not strictly comply with RMO 43-90 because it includes unverified prior
years. This does not mean, however, that the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable
period is specified in the LOA. DLSU was fully apprised that it was being audited for taxable
year 2003. Corollarily, the assessments for taxable years 2001 and 2002 are void for having
been unspecified on separate LOAs as required under RMO No. 43-90.

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(Already moot and academic; relate to CIR vs. DLSU)

KIM JACINTO-HENARES (BIR COMMISSIONER) VS ST. PAUL COLLEGE OF MAKATI


GR NO. 215383, MAR 08, 2017

FACTS: On 22 July 2013, petitioner Kim S. Jacinto-Henares, acting in her capacity as then
Commissioner of Internal Revenue (CIR), issued RMO No. 20-2013, "Prescribing the Policies and
Guidelines in the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit
Corporations and Associations under Section 30 of the National Internal Revenue Code of 1997,
as Amended."

St. Paul College of Makati (SPCM), a non-stock, non-profit educational institution filed a Civil
Action to Declare Unconstitutional RMO No. 20-2013 with Prayer for Issuance of Temporary
Restraining Order and Writ of Preliminary Injunction before the RTC. Alleging that RMO No. 20-
2013 adds a prerequisite to the requirement under Department of Finance Order No. 137-87 and
makes failure to file an annual information return a ground for a non-stock, nonprofit educational
institution to "automatically lose its income tax-exempt status.

RTC declared RMO No. 20-2013 unconstitutional.


It held that "by imposing the prerequisites alleged by SPCM, and if not complied with by nonstock,
non-profit educational institutions, as diminution of the constitutional privilege, which even
Congress cannot diminish by legislation, and thus more so by the [CIR] who merely exercises
quasi-legislative function." RTC denied the CIR's motion for reconsideration

Issue: WON RMO [NO.] 20-2013 IMPOSES A PREREQUISITE BEFORE A NONSTOCK, NON-
PROFIT EDUCATIONAL INSTITUTION MAY AVAIL OF THE TAX EXEMPTION UNDER SECTION
4(3), ARTICLE XIV OF THE CONSTITUTION.

RULING: Petition denied on the ground of mootness.


That on 25 July 2016, the present CIR Caesar R. Dulay issued RMO No. 44-2016 which amended
RMO No. 20- 2013:
“In line with the Bureau's commitment to put in proper context the nature and tax status
of non-profit, non-stock educational institutions, this Order is being issued to exclude non-
stock, non-profit educational institutions from the coverage of Revenue Memorandum
Order No. 20-2013, as amended.”

With the issuance of RMO No. 44-2016, a supervening event has transpired that rendered this
petition moot and academic, and subject to denial.1âwphi1 The CIR, in her petition, assails the
RTC Decision finding RMO No. 20-2013 unconstitutional because it violated the non-stock, non-
profit educational institutions' tax exemption privilege under the Constitution. However,
subsequently, RMO No. 44-2016 clarified that non-stock, nonprofit educational institutions are
excluded from the coverage of RMO No. 20-2013. Consequently, the RTC Decision no longer
stands, and there is no longer any practical value in resolving the issues raised in this petition.

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Locus standi; Tax Exemption; Legislative Nature of Taxation

SECRETARY OF FINANCE CESAR B. PURISIMA AND CIR COMMISSIONER KIM S.


JACINTO-HENARES VS. REPRESENTATIVE CARMELO F. LAZATIN AND ECOZONE
PLASTIC ENTERPRISES CORPORATION, G.R. NO. 210588, 29 NOVEMBER 2016

Statement of the case: This is a direct recourse from the RTC to this Court under Rule 45 on
pure question of law. The petition seeks the reversal of the November 8, 2013 decision of the
RTC where the RTC declared RR 2-2012 unconstitutional and without force and effect.

Facts: Petitioner Secretary Purisima signed RR 2-2012 on February 17, 2012. The RR requires
the payment of VAT and excise tax on the importation of all petroleum and petroleum products
coming directly from abroad and brought into the Philippines, including Freeport and economic
zones (FEZs). An FEZ locator must first pay the required taxes upon entry into the FEZ of a
petroleum product, and must thereafter prove the use of the petroleum product for the locator's
registered activity in order to secure a credit for the taxes paid.

Carmelo F. Lazatin, in his capacity as Pampanga First District Representative, filed a petition for
prohibition and injunction against the petitioners to annul and set aside RR 2-2012. Lazatin
posits that RA 94007 treats the Clark Special Economic Zone and Clark Freeport Zone (Clark
FEZ) as a separate customs territory and allows tax and duty-free importations of raw materials,
capital and equipment into the zone. Thus, the imposition of VAT and excise tax, even on the
importation of petroleum products into FEZs (like Clark FEZ), directly contravenes the law.

The respondent Ecozone Plastic Enterprises Corporation (EPEC) sought to intervene in the
proceedings as a co-petitioner and accordingly entered its appearance and moved for leave of
court to file its petition-in- intervention.

EPEC claims that, as a Clark FEZ locator, it stands to suffer when RR 2-2012 is implemented.
EPEC insists that RR 2-2012's mechanism of requiring even locators to pay the tax first and to
subsequently claim a credit or to refund the taxes paid effectively removes the locators' tax-
exempt status.

RTC initially issued a TRO to stay the implementation of RR 2-2012. Petitioner Lazatin
amended his original petition, converting it to a petition for declaratory relief. The RTC admitted
the amended petition and allowed EPEC to intervene. In its decision dated November 8, 2013,
the RTC ruled in favor of Lazatin and EPEC stating that:

1) Lazatin and EPEC had legal standing to question the validity of RR 2-2012. Lazatin's
allegation that RR 2-2012 effectively amends and modifies RA 9400 gave him standing
as a legislator: the amendment of a tax law is a power that belongs exclusively to
Congress. Hisllegation, according to the RTC, sufficiently shows how his rights,
privileges, and prerogatives as a member of Congress were impaired by the issuance of
RR 2-2012.

2) RR 2-2012 unconstitutional. RR 2-2012 violates RA 9400 because it imposes taxes that,


by law, are not due in the first place. Since RA 9400 clearly grants tax and duty-free
incentives to Clark FEZ locators, a revocation of these incentives by an RR directly

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contravenes the express intent of the Legislature. In effect, the petitioners encroached
upon the prerogative to enact, amend, or repeal laws, which the Constitution exclusively
granted to Congress.

The petitioners anchor their present petition on two arguments:


1. Respondents have no legal standing, and
2. RR 2-2012 is valid and constitutional.

Issues:

1) Do respondents Lazatin and EPEC have legal standing to bring the action for declaratory
relief?

2) Is RR 2-2012 valid and constitutional?

Ruling:

1) Yes, the respondents have legal standing to file petition for declaratory relief.
Lazatin has legal standing as a legislator. EPEC has legal standing as a Clark
FEZ locator.

The party seeking declaratory relief must have a legal interest in the controversy for the
action to prosper. This interest must be material not merely incidental. It must be an
interest that which will be affected by the challenged decree, law or regulation. It must
be a present substantial interest, as opposed to a mere expectancy or a future,
contingent, subordinate, or consequential interest.

Lazatin has legal standing as a legislator since he filed the petition for declaratory relief
in his capacity as a member of Congress. He alleged that RR 2-2012 directly
contravenes RA 9400, a legislative enactment and thus, the regulation encroached upon
the Congress’ exclusive power to enact, amend, or repeal laws.

EPEC has legal standing as a Clark FEZ locator because the RR relates to the imposition
of VAT and exise tax and applies to all petroleum and petroleum products that are
imported directly from abroad and to the Philippines, including FEZs.

Locus standi is a personal and substantial interest in a case such that the party has
sustained or will sustain direct injury as a result of the challenged governmental act. The
question is whether the challenging party alleges such personal stake in the outcome of
the controversy so as to assure the existence of concrete adverseness that would
sharpen the presentation of issues and illuminate the court in ruling on the constitutional
question posed. The respondents' respective interests in this case are sufficiently
substantial to be directly affected by the implementation of RR 2-2012. The RTC
therefore did not err when it gave due course to Lazatin's petition for declaratory relief
as well as EPEC's petition-in-intervention.

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2) No, RR 2-2012 is invalid and unconstitutional.

On the merits of the case, we rule that RR 2-2012 is invalid and unconstitutional
because of the following reasons:

a) It illegally imposes taxes upon FEZ enterprises, which, by law, enjoy tax-exempt
status, and

b) It effectively amends the law (i.e., RA 7227, as amended by RA 9400) and


thereby encroaches upon the legislative authority reserved exclusively by the
Constitution for Congress.

FEZ enterprises enjoy tax- and duty-free incentives on its importations.

The legislature enacted RA 9400. Under RA 9400 and its Implementing Rules, Clark FEZ
is considered a customs territory separate and distinct from the Philippines customs
territory. Thus, as opposed to importations into and establishments in the Philippines
customs territory, which are fully subject to Philippine customs and tax laws,
importations into and establishments located within the Clark FEZ (FEZ Enterprises)
enjoy special incentives, including tax and duty-free importation. More specifically, Clark
FEZ enterprises shall be entitled to the freeport status of the zone and a 5% preferential
income tax rate on its gross income, in lieu of national and local taxes.

Thus, the Legislature intended FEZs to enjoy tax incentives in general - whether with
respect to the transactions that take place within its special jurisdiction, or the
persons/establishments within the jurisdiction. From this perspective, the tax incentives
enjoyed by FEZ enterprises must be understood to necessarily include the tax exemption
of importations of selected articles into the FEZ.

FEZ enterprises' tax exemptions must be interpreted within the context and in a manner
that promotes the legislative intent of RA 7227 and, by extension, RA 9400. Thus, we
recognized that FEZ enterprises are exempt from both direct and indirect internal
revenue taxes. In particular, they are considered VAT-exempt entities. In line with this
comprehensive interpretation, we rule that the tax exemption enjoyed by FEZ
enterprises covers internal revenue taxes imposed on goods brought into the FEZ,
including the Clark FEZ, such as VAT and excise tax.

RR 2-2012 illegally imposes VAT and excise tax on goods brought into the FEZs.

RR 2-2012 explicitly covers even petroleum and petroleum products imported and/or
brought into the various FEZs in the Philippines. Hence, when an FEZ enterprise brings
petroleum and petroleum products into the FEZ, under RR 2-2012, it shall be considered
an importer liable for the taxes due on these products.

Since the tax exemptions enjoyed by FEZ enterprises under the law extend even to VAT
and excise tax, as we discussed above, it follows and we accordingly rule that the taxes
imposed by Section 3 of RR 2-2012 directly contravene these exemptions. First, the
regulation erroneously considers petroleum and petroleum products brought into a FEZ

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as taxable importations. Second, it unreasonably burdens FEZ enterprises by making


them pay the corresponding taxes - an obligation from which the law specifically
exempts them - even if there is a subsequent opportunity to refund the payments made.

The tax exemption granted to FEZ enterprises is an immunity from tax liability and from
the payment of the tax.

FEZ enterprises bringing goods into the FEZ should not be considered as importers
subject to tax in the same manner that the very act of bringing goods into these special
territories does not make them taxable importations. We emphasize that the exemption
from taxes and duties under RA 9400 are granted not only to importations into the FEZ,
but also specifically to each FEZ enterprise. As discussed, the tax exemption enjoyed by
FEZ enterprises necessarily includes the tax exemption of the importations of selected
articles into the FEZ.

The essence of a tax exemption is the immunity or freedom from a charge or burden to
which others are subjected. It is a waiver of the government's right to collect the
amounts that would have been collectible under our tax laws. Thus, when the law
speaks of a tax exemption, it should be understood as freedom from the imposition and
payment of a particular tax.

Based on this premise, we rule that the refund mechanism provided by RR 2-2012 does
not amount to a tax exemption. Even if the possibility of a subsequent refund exists, the
fact remains that FEZ enterprises must still spend money and other resources to pay for
something they should be immune to in the first place. This completely contradicts the
essence of their tax exemption.

More importantly, we have also recognized that the exemption from local and national
taxes granted under RA 7227, as amended by RA 9400, are ipso facto accorded to FEZs.
In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved
in favor of these special territories.

RR 2-2012 is unconstitutional.
Tax exemptions are granted for specific public interests that the Legislature considers
sufficient to offset the monetary loss in the grant of exemptions. To limit the tax-free
importation privilege of FEZ enterprises by requiring them to pay subject to a refund
clearly runs counter to the Legislature's intent to create a free port where the "free flow
of goods or capital within, into, and out of the zones" is ensured.

Finally, the State's inherent power to tax is vested exclusively in the Legislature. We
have since ruled that the power to tax includes the power to grant tax exemptions.
Thus, the imposition of taxes, as well as the grant and withdrawal of tax exemptions,
shall only be valid pursuant to a legislative enactment.

WHEREFORE, we hereby DISMISS the petition for lack of merit, and accordingly AFFIRM
decision of the Regional Trial Court dated November 8, 2013 2001 in SCA Case No. 12-
410.

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Imposition of crimes and offenses in view of tax evasion and failure to file a return;
Prescriptive period in the exercise of tax assessment and collection by the CIR

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE BIR vs. GMCC UNITED


DEVELOPMENT CORPORATION, JOSE C. GO, AND XU XIAN CHUN, G.R. No. 191856,
December 07, 2016

Statement of the case:


Petition for review on Certiorari assailing the CA decision dated September 8, 2009 (where the
CA denied the petition for Certiorari and approved the DOJ Resolution).

Facts:
BIR National Investigation Division issued a Letter of Authority, authorizing its revenue officers to
examine the books of accounts and other accounting records of GMCC covering taxable years
1998 and 1999. The investigation revealed that in 1998, GMCC, through the company’s president,
Mr. Go, executed two dacion en pago agreements to pay for the obligations of GMCC's sister
companies, Ever Emporium, Inc., Gotesco Properties, Inc. and Ever Price Club, Inc., to Rizal
Commercial Banking Corporation.

GMCC allegedly failed to declare the income it earned from these agreements for taxation
purposes. Moreover, these transactions constituted a donation in favor of GMCC's sister
companies for which GMCC failed to pay the corresponding donor's tax.

The BIR issued a Notice to Taxpayer to GMCC, which GMCC ignored. This prompted the BIR to
issue a Preliminary Assessment Notice. GMCC protested the issuance of the Final Assessment
Notice citing that the period to assess and collect the tax had already prescribed. But the BIR
denied the protest in a Final Decision.

In light of the discovered tax deficiencies, the BIR filed with the Department of Justice a
criminal complaint for violation of Sections in the NIRC, against GMCC, its president, Jose C. Go,
and its treasurer, Xu Xian Chun.

Respondent Go prayed that the complaint be dismissed, arguing, among others, that the action
had already prescribed and that GMCC did not defraud the government. Assuming that the
period to assess had not yet prescribed, GMCC argued that there was nothing to declare since it
earned no income from the dacion en pago transactions. Furthermore, even though the dacion
en pago transactions were not included in the GMCC 1998 Financial Statement, they had been
duly reflected in the GMCC 2000 Financial Statement.

The DOJ dismissed the criminal complaint against the GMCC officers saying that there is no
proof that GMCC defrauded the government. The Bureau went beyond its authority when it
assessed and issued the Letter of Authority knowing that the period to assess had already
lapsed. Moreover, the prosecutor ruled that since GMCC did not gain from the assailed
transactions, the imposition of income, VAT, and donor's taxes were improper.

The BIR filed before the CA a petition for Certiorari. The CA denied the petition and affirmed
the DOJ’s resolution in toto.

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Petitioner BIR is now before this Court, insisting that the Court of Appeals erred in finding that
the applicable period of prescription in its case is the three-year period under Section 203 of the
NIRC and not the ten-year prescriptive period under Section 222.

Issue:
1) Did the CA err in declaring that the Secretary of Justice did not commit grave abuse of
discretion when he found no probable cause and dismissed the tax evasion case against
the respondent officers of GMCC?

2) What is the applicable prescriptive period for the tax assessment; the 10-year period
(for tax evasion) or the 3-year period? (NOT SO SURE IF WE ALREADY REACHED THIS
TOPIC)

Ruling:

1) The CA committed no reversible error in affirming the ruling of the Secretary of Justice
that there was no probable cause to file a tax evasion case against the respondent
officers. Since the assessment for the tax had already prescribed, no proceeding in court
on the basis of such return can be filed.

The petitioner filed a criminal complaint against respondents for violating Articles 254,
255, and 267 of the National Internal Revenue Code.

In ruling that there was no probable cause to indict the respondent officers for the acts
charged, the CA said there was no clear showing that there was deliberate intent on the
part of the respondents to evade payment of the taxes. Both the State Prosecutor and
the CA emphasized that if respondents really intended to evade payment, they would
have omitted the assailed transactions completely in all their financial statements. We
agree.

As it stands, while the dacion en pago transactions were missing in the GMCC 1998
Financial Statement, they had been listed in the GMCC 2000 Financial Statement.
Respondents' act of filing and recording said transactions in their 2000 Financial
Statement belie the allegation that they intended to evade paying their tax liability.
Petitioner's contention that the belated filing is a mere afterthought designed to make it
appear that the nonreporting was not deliberate, does not persuade considering that the
filing of the 2000 Financial Statement was done prior to the issuance of the March 2003
Letter of Authority, which authorized the investigation of GMCC's books.

Absent any indication that the Secretary of Justice gravely abused his discretion in not
finding probable cause for the complaint against respondent officers to prosper, the
dismissal stands.

2) It is the 3-year prescriptive period that applies in this case.

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The power of the CIR to assess and collect taxes is provided under Section 2 of the
NIRC. The Bureau shall give effect to and administer the supervisory and police powers
conferred to it by this Code or other laws.

However, this power to assess and collect taxes is limited by Section 203 of the NIRC:

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.

The Court, in Republic v. Ablaza, explained the purpose behind this limitation:

The law prescribing a limitation of actions for the collection of the income tax is
beneficial both to the Government and to its citizens; to the Government
because tax officers would be obliged to act promptly in the making of
assessment, and to citizens because after the lapse of the period of prescription
citizens would have a feeling of security against unscrupulous tax agents who
will always find an excuse to inspect the books of taxpayers, not to determine
the latter's real liability, but to take advantage of every opportunity to molest
peaceful, law-abiding citizens. Without such a legal defense, taxpayers would
furthermore be under obligation to always keep their books and keep them open
for inspection subject to harassment by unscrupulous tax agents. The law on
prescription being a remedial measure should be interpreted in a way conducive
to bringing about the beneficient purpose of affording protection to the taxpayer
within the contemplation of the Commission which recommend the approval of
the law.

In arguing for the application of the 10-year prescriptive period, petitioner claims that
the tax return in this case is fraudulent and thus, the three-year prescriptive period is
not applicable.

The respondents did not file a fraudulent tax return. They may have erred in reporting
their tax liability when they recorded the assailed transactions in the wrong year, but
such error stemmed from the wrong application of the law and is not an indication of
their intent to evade payment. If there were really an intent to evade payment,
respondents would not have reported and subsequently paid the income tax, albeit in
the wrong year. It is a settled rule that the BIR must show that the return was filed
fraudulently with intent to evade payment.

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As found by the CA, there is no clear and deliberate intent to evade payment of taxes in
relation to the dacion en pago transactions or on the sale transaction with Valencia
Wong. The dacion en pago transactions, though not included in the 1998 Financial
Statement, were properly listed in GMCC's Financial Statement for the year 2000.

For the ten-year period under Section 222(a) to apply, it is not enough that fraud is
alleged in the complaint, it must be established by clear and convincing evidence. The
petitioner, having failed to discharge the burden of proving fraud, cannot invoke Section
222(a).

Having settled that the case falls under Section 203 of the Tax Code, the three-year
prescriptive period should be applied. In GMCC's case, the last day prescribed by law for
filing its 1998 tax return was April 15, 1999.56 The petitioner had three years or until
2002 to make an assessment. Since the Preliminary Assessment was made only on
December 8, 2003, the period to assess the tax had already prescribed.

A reading of Section 203 will show that it prohibits two acts after the expiration of the
three-year period. First, an assessment for the collection of the taxes in the return, and
second, initiating a court proceeding on the basis of such return. The State Prosecutor
was correct in dismissing the complaint for tax evasion since it was clear that the
prescribed return cannot be used as basis for the case.

WHEREFORE, the petition is DENIED. The Decision dated September 8, 2009 and the
Resolution dated March 30, 2010 of the Court of Appeals in CA-GR. SP No. 100380 are
AFFIRMED.

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Tax Exemption

JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES, MARAH


SHARYN M. DE CASTRO AND CRIS P. TENORIO vs. SECRETARY OF FINANCE AND THE
COMMISSIONER OF INTERNAL REVENUE, G.R. No. 184450, January 24, 2017

G.R. No. 184508


SENATOR MANUEL A. ROXAS, Petitioner, v. MARGARITO B. TEVES, IN HIS CAPACITY
AS SECRETARY OF THE DEPARTMENT OF FINANCE AND LILIAN B. HEFTI, IN HER
CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondents.

G.R. No. 184538


TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), REPRESENTED BY ITS
PRESIDENT, DEMOCRITO T. MENDOZA, Petitioner, v. MARGARITO B. TEVES, IN HIS
CAPACITY AS SECRETARY OF THE DEPARTMENT OF FINANCE AND LILIAN B. HEFTI,
IN HER CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE
Respondents.

G.R. No. 185234


SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT ASSOCIATION OF THE
PHILIPPINES, INC. AND ERNESTO G. EBRO, Petitioners, v. MARGARITO B. TEVES, IN
HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF FINANCE AND SIXTO S.
ESQUIVIAS IV, IN HIS CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE, Respondents.

Statement of the case:


Before us are consolidated Petitions for Certiorari, Prohibition and Mandamus, under Rule 65.
These Petitions seek to nullify certain provisions of Revenue Regulation No. (RR) 10-2008. The
RR was issued by the BIR on 24 September 2008 to implement the provisions of R.A. 9504. The
law granted, among others, income tax exemption for minimum wage earners (MWEs), as well
as an increase in personal and additional exemptions for individual taxpayers.

Facts:
R.A. 9504
Senate filed its Senate Committee Report No. 53 on Senate Bill No. (S.B.) 2293.
S.B. 2293 was later on adopted by the House of Representatives as an amendment to H.B. 3971.

R.A. 9504 entitled "National Internal Revenue Code of 1997," was approved and signed into law
by President Arroyo. The following are the salient features of the new law:

1. It increased the basic personal exemption from P20,000 for a single individual, P25,000
for the head of the family, and P32,000 for a married individual to P50,000 for each
individual.
2. It increased the additional exemption for each dependent not exceeding four from
P8,000 to P25,000.
3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from 10% of
gross income to 40% of the gross receipts or gross sales.

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4. It introduced the OSD to corporate taxpayers at no more than 40% of their gross
income.
5. It granted MWEs exemption from payment of income tax on their minimum wage,
holiday pay, overtime pay, night shift differential pay and hazard pay.

Accordingly, R.A. 9504 was published in the Manila Bulletin and Malaya on 21 June 2008. On 6
July 2008, the end of the 15-day period, the law took effect.

RR 10-2008
The BIR issued RR 10-2008, dated 08 July 2008, implementing the provisions of R.A. 9504. The
relevant portions of the said RR read as follows:

SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read


as follows:

Sec. 2.78.1. Withholding of Income Tax on Compensation Income.

xxx Provided, further, that MWEs receiving 'other benefits' exceeding the
P30,000.00 limit shall be taxable on the excess benefits, as well as on his
salaries, wages and allowances, just like an employee receiving compensation
income beyond the SMW.

(B) Exemptions from Withholding Tax on Compensation. - The following income payments
are exempted from the requirements of withholding tax on compensation:

xxx Provided, however, that an employee who receives/earns additional


compensation such as commissions, honoraria, fringe benefits, benefits in
excess of the allowable statutory amount of P30,000.00, taxable allowances
and other taxable income other than the SMW, holiday pay, overtime pay,
hazard pay and night shift differential pay shall not enjoy the privilege of being
a MWE and, therefore, his/her entire earnings are not exempt from income tax,
and consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business,
or practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, holiday pay, overtime pay, night
shift differential pay and hazard pay shall still be exempt from withholding tax.

SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read as follows:

Sec. 2.79. Income Tax Collected at Source on Compensation Income.-

xxx Provided, further, that an employee who receives additional compensation


such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of P30,000.00, taxable allowances and other
taxable income other than the SMW, holiday pay, overtime pay, hazard pay and

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night shift differential pay shall not enjoy the privilege of being a MWE and,
therefore, his/her entire earnings are not exempt from income tax and,
consequently, shall be subject to withholding tax.

G.R. No. 184450


Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for the
prorated application of the personal and additional exemptions for taxable year 2008 to begin
only effective 6 July 2008 for being contrary to Section 4 of RA 9504.

Petitioners argue that the prorated application of the personal and additional exemptions under
RR 10-2008 is not "the legislative intendment in this jurisdiction." They stress that Congress has
always maintained a policy of "full taxable year treatment" as regards the application of tax
exemption laws. They allege further that R.A. 9504 did not provide for a prorated application of
the new set of personal and additional exemptions.

G.R. No. 184508


Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full taxable year
treatment of the income tax benefits of the new law. He relies on what he says is clear legislative
intent In his "Explanatory Note of Senate Bill No. 103," he stresses "the very spirit of enacting
the subject tax exemption law" as follows:

With the poor, every little bit counts, and by lifting their burden of paying income tax, we
give them opportunities to put their money to daily essentials as well as savings.
Minimum wage earners can no longer afford to be taxed and to be placed in
the cumbersome income tax process in the same manner as higher-earning
employees. It is our obligation to ease their burdens in any way we can.

Apart from raising the issue of legislative intent, Senator Roxas brings up the following legal
points to support his case for the full-year application of R.A. 9504's income tax benefits. He says
that the pro rata application of the assailed RR deprives MWEs of the financial relief extended to
them by the law; that Umali v. Estanislao serves as jurisprudential basis for his position that R.A.
9504 should be applied on a full-year basis to taxable year 2008; and that the social justice
provisions of the 1987 Constitution, particularly Articles II and XIII, mandate a full application of
the law according to the spirit of R.A. 9504.

G.R. No. 184538


Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A. 9504
provide for the application of the tax exemption for the full calendar year 2008. It also espouses
the interpretation that R.A. 9504 provides for the unqualified tax exemption of the income of
MWEs regardless of the other benefits they receive. In conclusion, it says that RR 10-2008, which
is only an implementing rule, amends the original intent of R.A. 9504, which is the substantive
law, and is thus null and void.

G.R. No. 185234


Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the Philippines,
Inc., and Ernesto Ebro allege that R.A. 9504 unconditionally grants MWEs exemption from income
tax on their taxable income, as well as increased personal and additional exemptions for other
individual taxpayers, for the whole year 2008. They note that the assailed RR 10-2008 restricts

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the start of the exemptions to 6 July 2008 and provides that those MWEs who received "other
benefits" in excess of P30,000 are not exempt from income taxation. Petitioners believe this RR
is a "patent nullity" and therefore void.

Comment of the OSG


The Office of the Solicitor General (OSG) filed a Consolidated Comment and took the position that
the application of R.A. 9504 was intended to be prospective, and not retroactive. This was
supposedly the general rule under the rules of statutory construction: law will only be applied
retroactively if it clearly provides for retroactivity, which is not provided in this instance.

Issues:
Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may be distilled
into three major ones:

1) Should the increased personal and additional exemptions provided by R.A. 9504 be applied
to the entire taxable year 2008 or prorated, considering that R.A. 9504 took effect only
on 6 July 2008?
2) Is a MWE exempt for the entire taxable year 2008 or from 6 July 2008 only?
3) Are Sections 1 and 3 of RR 10-2008 consistent with the law in providing that an MWE who
receives other benefits in excess of the statutory limit of P30,000 is no longer entitled to
the exemption provided by R.A. 9504?

Ruling:

1) The personal and additional exemptions established by R.A. 9504 should be


applied to the entire taxable year 2008.

Umali vs. Estanislao supports this Court’s stance that RA 9504 should be applied on a full-year
basis for the entire Taxable year 2008. In Umali, Congress enacted R.A. 7167 amending the 1977
NIRC. The amounts of basic personal and additional exemptions given to individual income
taxpayers were adjusted to the poverty threshold level. R.A. 7167 came into law on 30 January
1992, and controversy arose when the CIR promulgated RR 1-92 stating that the regulation shall
take effect on compensation income earned beginning 1 January 1992. The issue posed was
whether the increased personal and additional exemptions could be applied to compensation
income earned or received during calendar year 1991, given that R.A. 7167 came into law only
on 30 January 1992, when taxable year 1991 had already closed.

This Court ruled in the affirmative, considering that the increased exemptions were already
available on or before 15 April 1992, the date for the filing of individual income tax returns.
Further, the law itself provided that the new set of personal and additional exemptions would be
immediately available upon its effectivity. While R.A. 7167 had not yet become effective during
calendar year 1991, the Court found that it was a piece of social legislation that was in part
intended to alleviate the economic plight of the lower-income taxpayers. For that purpose, the
new law provided for adjustments "to the poverty threshold level" prevailing at the time of the
enactment of the law.

R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly intended to afford
immediate tax relief to individual taxpayers, particularly low-income compensation earners.

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Indeed, if R.A. 9504 was to take effect beginning taxable year 2009 or half of the year 2008 only,
then the intent of Congress to address the increase in the cost of living in 2008 would have been
negated.

Therefore, following Umali, the test is whether the new set of personal and additional exemptions
was available at the time of the filing of the income tax return. In other words, while the status
of the individual taxpayers is determined at the close of the taxable year, their personal and
additional exemptions - and consequently the computation of their taxable income - are reckoned
when the tax becomes due, and not while the income is being earned or received.

The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be
computed on the basis of the calendar year. The taxpayer is required to fi1e an income tax return
on the 15th of April of each year covering income of the preceding taxable year. The tax due
thereon shall be paid at the time the return is filed.

It stands to reason that the new set of personal and additional exemptions, adjusted as a form
of social legislation to address the prevailing poverty threshold, should be given effect at the most
opportune time as the Court ruled in Umali.

In the present case, the increased exemptions were already available much earlier than the
required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008,
more than nine months before the deadline for the filing of the income tax return for taxable year
2008. Hence, individual taxpayers were entitled to claim the increased amounts for the entire
year 2008. This was true despite the fact that incomes were already earned or received prior to
the law's effectivity on 6 July 2008.

Even more compelling is the fact that R.A. 9504 became effective during the taxable year in
question. In Umali, the Court ruled that the application of the law was prospective, even if the
amending law took effect after the close of the taxable year in question, but before the deadline
for the filing of the return and payment of the taxes due for that year. Here, not only did R.A.
9504 take effect before the deadline for the filing of the return and payment for the taxes due
for taxable year 2008, it took effect way before the close of that taxable year. Therefore, the
operation of the new set of personal and additional exemption in the present case was all the
more prospective.

The policy in this jurisdiction is full taxable year treatment.


We have perused R.A. 9504, and we see nothing that expressly provides or even suggests a
prorated application of the exemptions for taxable year 2008. On the other hand, the policy of
full taxable year treatment, especially of the personal and additional exemptions, is clear under
Section 35, particularly paragraph C of R.A. 8424 or the 1997 Tax Code.

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -

(A) In General. - For purposes of determining the tax provided in Section 24(A) of this
Title, there shall be allowed a basic personal exemption as follows:

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(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding
additional exemption, as the case may be, in full for such year.

Note that paragraph C does not allow the prorating of the personal and additional exemptions
provided in paragraphs A and B, even in case a status-changing event occurs during the taxable
year. Rather, it allows the fullest benefit to the individual taxpayer. This manner of reckoning the
taxpayer's status for purposes of the personal and additional exemptions clearly demonstrates
the legislative intention; that is, for the state to give the taxpayer the maximum exemptions that
can be availed, notwithstanding the fact that the latter's actual status would qualify only for a
lower exemption if prorating were employed.

We therefore see no reason why we should make any distinction between the income earned
prior to the effectivity of the amendment (from 1 January 2008 to 5 July 2008) and that earned
thereafter (from 6 July 2008 to 31 December 2008) as none is indicated in the law. The principle
that the courts should not distinguish when the law itself does not distinguish squarely applies to
this case.

The prorating of personal and additional exemptions was employed in the 1939 Tax Code,
particulary Section 23(d) of that law.

Therefore, the legislative policy of full taxable year treatment of the personal and additional
exemptions has been in our jurisdiction continuously since 1969. The prorating approach has long
since been abandoned.

We now arrive at this important point: the policy of full taxable year treatment is
established, not by the amendments introduced by R.A. 9504, but by the provisions
of the 1997 Tax Code, which adopted the policy from as early as 1969.

The prorated application of the new set of personal and additional exemptions for the year 2008,
which was introduced by respondents, cannot even be justified under the exception to the canon
of non-delegability; that is, when Congress makes a delegation to the executive branch.46 The
delegation would fail the two accepted tests for a valid delegation of legislative power; the
completeness test and the sufficient standard test.47 The first test requires the law to be complete
in all its terms and conditions, such that the only thing the delegate will have to do is to enforce
it.48 The sufficient standard test requires adequate guidelines or limitations in the law that map
out the boundaries of the delegate's authority and canalize the delegation.49

In this case, respondents went beyond enforcement of the law, given the absence of a provision
in R.A. 9504 mandating the prorated application of the new amounts of personal and additional
exemptions for 2008. Further, even assuming that the law intended a prorated application, there
are no parameters set forth in R.A. 9504 that would delimit the legislative power surrendered by
Congress to the delegate. In contrast, Section 23(d) of the 1939 Tax Code authorized not only
the prorating of the exemptions in case of change of status of the taxpayer, but also authorized
the Secretary of Finance to prescribe the corresponding rules and
regulations.chanroblesvirtuallawlibrary

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2) The MWE is exempt for the entire taxable year 2008.

As in the case of the adjusted personal and additional exemptions, the MWE exemption should
apply to the entire taxable year 2008, and not only from 6 July 2008 onwards.

We see no reason why Umali cannot be made applicable to the MWE exemption, which is
undoubtedly a piece of social legislation. It was intended to alleviate the plight of the working
class, especially the low-income earners.

As it stands, the calendar year 2008 remained as one taxable year for an individual taxpayer.
Therefore, RR 10-2008 cannot declare the income earned by a minimum wage earner from 1
January 2008 to 5 July 2008 to be taxable and those earned by him for the rest of that year to
be tax-exempt. To do so would be to contradict the NIRC and jurisprudence, as taxable income
would then cease to be determined on a yearly basis.

Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the availment of the
MWE's tax exemption and the increased personal and additional exemptions beginning only on 6
July 2008 is in contravention of the law it purports to implement.

A clarification is proper at this point. Our ruling that the MWE exemption is available for the entire
taxable year 2008 is premised on the fact of one's status as an MWE; that is, whether the
employee during the entire year of 2008 was an MWE as defined by R.A. 9504. When the wages
received exceed the minimum wage anytime during the taxable year, the employee necessarily
loses the MWE qualification. Therefore, wages become taxable as the employee ceased to be an
MWE. But the exemption of the employee from tax on the income previously earned as an MWE
remains.

Additionally, on the question of whether one who ceases to be an MWE may still be entitled to
the personal and additional exemptions, the answer must necessarily be yes. The MWE exemption
is separate and distinct from the personal and additional exemptions. One's status as an MWE
does not preclude enjoyment of the personal and additional exemptions. Thus, when one is an
MWE during a part of the year and later earns higher than the minimum wage and becomes a
non-MWE, only earnings for that period when one is a non-MWE is subject to tax. It also
necessarily follows that such an employee is entitled to the personal and additional exemptions
that any individual taxpayer with taxable gross income is entitled.

A different interpretation will actually render the MWE exemption a totally oppressive legislation.
It would be a total absurdity to disqualify an MWE from enjoying as much as P150,000 in personal
and additional exemptions just because sometime in the year, he or she ceases to be an MWE by
earning a little more in wages. Laws cannot be interpreted with such absurd and unjust outcome.
It is axiomatic that the legislature is assumed to intend right and equity in the laws it passes.

Critical, therefore, is how an employee ceases to become an MWE and thus ceases to be entitled
to an MWE's exemption.

3) Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by


effectively declaring that an MWE who receives other benefits in excess of the

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statutory limit of P30,000 is no longer entitled to the exemption provided by


R.A. 9504.

While the Labor Code's definition of "wage" appears to encompass any payments of any
designation that an employer pays his or her employees, the concept of minimum wage is distinct.
"Minimum wage" is wage mandated; one that employers may not freely choose on their own to
designate in any which way.

In Article 99, minimum wage rates are to be prescribed by the Regional Tripartite Wages and
Productivity Boards. In Articles 102 to 105, specific instructions are given in relation to the
payment of wages. They must be paid in legal tender at least once every two weeks, or twice a
month, at intervals not exceeding 16 days, directly to the worker, except in case of force majeure
or death of the worker.

These are the wages for which a minimum is prescribed. Thus, the minimum wage exempted by
R.A. 9504 is that which is referred to in the Labor Code. It is distinct and different from other
payments including allowances, honoraria, commissions, allowances or benefits that an employer
may pay or provide an employee.

Likewise, the other compensation incomes an MWE receives that are also exempted by R.A. 9504
are all mandated by law and are based on this minimum wage. Additional compensation in the
form of overtime pay is mandated for work beyond the normal hours based on the employee's
regular wage.

Those working between ten o'clock in the evening and six o'clock in the morning are required to
be paid a night shift differential based on their regular wage. Holiday/premium pay is mandated
whether one works on regular holidays or on one's scheduled rest days and special holidays. In
all of these cases, additional compensation is mandated, and computed based on the employee's
regular wage.

R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess of the
minimum wage as determined by the wage boards, including the corresponding holiday, overtime,
night differential and hazard pays.

In other words, the law exempts from income taxation the most basic compensation an employee
receives - the amount afforded to the lowest paid employees by the mandate of law. In a way,
the legislature grants to these lowest paid employees additional income by no longer demanding
from them a contribution for the operations of government. This is the essence of R.A. 9504 as
a social legislation. The government, by way of the tax exemption, affords increased purchasing
power to this sector of the working class.

Respondents acknowledge that R.A. 9504 is a social legislation meant for social justice, but they
insist that it is too generous, and that consideration must be given to the fiscal position and
financial capability of the government. While they acknowledge that the intent of the income tax
exemption of MWEs is to free low-income earners from the burden of taxation, respondents, in
the guise of clarification, proceed to redefine which incomes may or may not be granted
exemption. These respondents cannot do without encroaching on purely legislative prerogatives.

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By way of review, this P30,000 statutory ceiling on benefits has its beginning in 1994 under R. A.
7833, which amended then Section 28(b)(8) of the 1977 NIRC. It is substantially carried over as
Section 32(B) (Exclusion from Gross Income) of Chapter VI (Computation of Gross Income) of
Title II (Tax on Income) in the 1997 NIRC (R.A. 8424).

In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable income
received in excess of the minimum wage, but the MWEs will not lose their exemption as such.
Workers who receive the statutory minimum wage their basic pay remain MWEs. The receipt of
any other income during the year does not disqualify them as MWEs. They remain MWEs, entitled
to exemption as such, but the taxable income they receive other than as MWEs may be subjected
to appropriate taxes.

R.A. 9504 must be liberally construed.


We are mindful of the strict construction rule when it comes to the interpretation of tax exemption
laws. The canon, however, is tempered by several exceptions, one of which is when the taxpayer
falls within the purview of the exemption by clear legislative intent. In this situation, the rule of
liberal interpretation applies in favor of the grantee and against the government.

In this case, there is a clear legislative intent to exempt the minimum wage received by an MWE
who earns additional income on top of the minimum wage. As previously discussed, this intent
can be seen from both the law and the deliberations.

The relief afforded by R.A.9504 is thus long overdue. The law must be now given full effect for
the entire taxable year 2008, and without the qualification introduced by RR 10-2008. The latter
cannot disqualify MWEs from exemption from taxes on SMW and on their on his SMW, holiday,
overtime, night shift differential, and hazard pay.

Conclusion
Respondents committed grave abuse of discretion in promulgating Sections 1 and 3 of RR 10-
2008, insofar as they provide for (a) the prorated application of the personal and additional
exemptions for taxable year 2008 and for the period of applicability of the MWE exemption for
taxable year 2008 to begin only on 6 July 2008; and (b) the disqualification of MWEs who earn
purely compensation income, whether in the private or public sector, from the privilege of availing
themselves of the MWE exemption in case they receive compensation-related benefits exceeding
the statutory ceiling of P30,000.

As an aside, we stress that the progressivity of the rate structure under the present Tax Code
has lost its strength. In the main, it has not been updated since its revision in 1997, or for a
period of almost 20 years. The phenomenon of "bracket creep" could be prevented through the
inclusion of an indexation provision, in which the graduated tax rates are adjusted periodically
without need of amending the tax law. The 1997 Tax Code, however, has no such indexation
provision. It should be emphasized that indexation to inflation is now a standard feature of a
modern tax code.102

We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and
Commissioner of Internal Revenue the positive duty to periodically review the other benefits, in
consideration of the effect of inflation thereon, as provided under Section 32(B)(7)(e) entitled
"13th Month Pay and Other Benefits":

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(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation
rate at the end of the taxable year.

This same positive duty, which is also imposed upon the same officials regarding the de minimis
benefits provided under Section 33(C)(4), is a duty that has been exercised several times. The
provision reads:

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:

(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.

WHEREFORE, the Court resolves to

(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and

(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 10-2008:

(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation
income from the privilege of the MWE exemption in case they receive bonuses and
other compensation-related benefits exceeding the statutory ceiling of P30,000;
(ii) Section 3 insofar as it provides for the prorated application of the personal and
additional exemptions under R.A. 9504 for taxable year 2008, and for the period of
applicability of the MWE exemption to begin only on 6 July 2008.

(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue to grant a
refund, or allow the application of the refund by way of withholding tax adjustments, or allow a
claim for tax credits by (i) all individual taxpayers whose incomes for taxable year 2008 were the
subject of the prorated increase in personal and additional tax exemption; and (ii) all MWEs whose
minimum wage incomes were subjected to tax for their receipt of the 13th month pay and other
bonuses and benefits exceeding the threshold amount under Section 32(B)(7)(e) of the 1997 Tax
Code.

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Income Tax

COMMISSIONER OF INTERNAL REVENUE vs. ST. LUKE’S MEDICAL CENTER, INC., G.R.
No. 203514

Statement of the case:


This Petition for Review on Certiorari under Rule 45 assails the May 9, 2012 Decision (where it
was held that SMLC is not liable for deficiency income tax) and the September 17, 2012 Resolution
of the CTA in CTA En Bank Case No. 716 (where they denied CIR’s motion for reconsideration).

Facts: St. Luke’s Medical Center, Inc. (SLMC) received from the BIR Audit Results/Assessment
Notice assessing respondent SLMC deficiency income tax under Section 27(B) of the NIRC for
taxable year 2005 in the amount of ₱78,617,434.54 and for taxable year 2006 in the amount of
₱57,119,867.33.

SLMC filed with petitioner CIR an administrative protest assailing the assessments. SLMC claimed
that as a non-stock, non-profit charitable and social welfare organization under Section 30(E) and
(G) of the 1997 NIRC, as amended, it is exempt from paying income tax.

The CTA and CTA en banc found SLMC not liable for deficiency income tax under Section 27(B)
of the NIRC, since it is exempt from paying income tax under Section 30(E) and (G) of the same
Code. This is so because SLMC complies with all the requisites under Section 30(E) and (G) of
the NIRC and thus, entitled to the tax exemption provided therein.

Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and
195960, entitled CIR v. St. Luke's Medical Center, finding SLMC not entitled to the tax exemption
under Section 30(E) and (G) of the NIRC of 1997 as it does not operate exclusively for charitable
or social welfare purposes insofar as its revenues from paying patients are concerned.

Considering the foregoing, SLMC then filed a Manifestation and Motion informing the Court that
it paid the BIR the amount of basic taxes due for taxable years 1998, 2000-2002, and 2004-2007,
as evidenced by the payment confirmation from the BIR, and that it did not pay any surcharge,
interest, and compromise penalty in accordance with the above-mentioned Decision of the Court.
In view of the payment it made, SLMC moved for the dismissal of the instant case on the ground
of mootness.

Issue: Is SLMC liable for income tax?

Ruling: Yes, SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its
revenues from paying patients are concerned.

It was held in the earlier cases (CIR v. St. Luke's Medical Center, Inc.) 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.

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Section 27 (B) Section 30 (E) and (G)


Proprietary Educational Institutions and The following organizations shall not be taxed
Hospitals. - Proprietary educational under this Title in respect to income received
institutions and hospitals which are by them as such:
nonprofit shall pay a tax of ten percent (10%)
on their taxable income except those covered (E) Non-stock corporation or association
by Subsection (D) hereof: Provided, that if the organized and operated exclusively for
gross income from unrelated trade, business religious, charitable, scientific, athletic, or
or other activity exceeds fifty percent (50%) cultural purposes, or for the rehabilitation of
of the total gross income derived by such veterans, no part of its net income or asset
educational institutions or hospitals from all shall belong to or inures to the benefit of any
sources, the tax prescribed in Subsection (A) member, organizer, officer or any specific
hereof shall be imposed on the entire taxable person;
income.
(G) Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare;

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.' An organization may be considered as non-
profit if it does not distribute any part of its income to stockholders or members. However, despite
its being a tax exempt institution, any income such institution earns from activities conducted for
profit is taxable, as expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity
in the Lung Center case. 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.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements
for a tax exemption are specified by the law granting it. The power of Congress to tax implies the
power to exempt from tax. Congress can create tax exemptions, subject to the constitutional
provision that 'No law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of Congress.' The requirements for a tax exemption are strictly
construed against the taxpayer because an exemption restricts the collection of taxes necessary
for the existence of the government.

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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 outpatient, 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.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution.
Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax.
On the other hand, Section 28(3), Article VI of the Constitution does 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) Operated 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.

Thus, both the organization and operations of the charitable institution must be devoted
'exclusively' for charitable purposes. The operations of the charitable institution generally refer
to its regular activities. Section 30(E) of the NIRC requires that these operations be exclusive to
charity.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is
not ipso facto tax exempt.

To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that
a charitable institution use the property 'actually, directly and exclusively' for charitable purposes.
To be 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.

The last paragraph of Section 30 provides that if a tax exempt charitable institution conducts 'any'
activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. Thus, even if the charitable institution must be 'organized and operated exclusively' for
charitable purposes, it is nevertheless allowed to engage in 'activities conducted for profit' without
losing its tax exempt status for its not-for-profit activities. The only consequence is that the
'income of whatever kind and character' of a charitable institution 'from any of its activities
conducted for profit, regardless of the disposition made of such income, shall be subject to tax.'
Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities
was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the
tax rate is now 10%.

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The Court cannot expand the meaning of the words 'operated exclusively' without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered
any other way.

The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the
clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be 'operated exclusively' for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption
if it earns income from its for-profit activities. Such income from for-profit activities, under the
last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate
rate but now at the preferential 10% rate pursuant to Section 27(B).

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 proprietary non-
profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit
activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is 'a corporation for purely charitable and social welfare purposes' and thus
exempt from income tax. In Michael J Lhuillier, Inc. v. Commissioner of Internal Revenue, the
Court said that 'good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient justification
to delete the imposition of surcharges and interest.'40

A careful review of the pleadings reveals that there is no countervailing consideration for the
Court to revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis, which states
that "[o]nce a case has been decided in one way, any other case involving exactly the same point
at issue x x x should be decided in the same manner,"41 the Court finds that SLMC is subject to
10% income tax insofar as its revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G)
of the 1997 NIRC requires said institution to operate exclusively for charitable or social welfare
purpose. But in case an exempt institution under Section 30(E) or (G) of the said Code earns
income from its for-profit activities, it will not lose its tax exemption. However, its income from
for-profit activities will be subject to income tax at the preferential 10% rate pursuant to Section
27(B) thereof.

However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the instant
Petition has become moot.

WHEREFORE, the Petition is hereby DISMISSED.

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Tax Exemption

COMMISSIONER OF INTERNAL REVENUE, ET. AL. VS. PHILIPPINE AIRLINES, INC.,


GR. NO. 215705-07

FACTS: PAL operates under its franchise (P.D. 1509 – a special law) granted by the Government.
Said franchise provides tax privilege of PAL.

Sec. 131, NIRC - The provision of any special or general law to the contrary
notwithstanding, the importation of cigars and cigarettes, distilled spirits and
wines into the Philippines, even if destined for tax and duty free shops, shall
be subject to all applicable taxes, duties, charges, including excise taxes due
thereon: Provided, however, That this shall not apply to cigars and cigarettes,
distilled spirits and wines brought directly into the duly chartered or legislated
freeports of the Subic Special Economic and Freeport Zone, created under
Republic Act No. 7227; the Cagayan Special Economic Zone and Freeport,
created under Republic Act No. 7922; and the Zamboanga City Special
Economic Zone.

Sec. 6, RA 9334 amended Sec. 131, NIRC - The amendment increased the rates of excise
tax imposed on alcohol and tobacco products. It also removed the exemption from taxes
duties and charges, including excise taxes, on importations of cigars, cigarettes, distilled
spirits, wines and fermented liquor into the Philippines.

PAL's importations of alcohol and tobacco products, which were intended for use in its commissary
supplies during international flights, were subjected to excise taxes. PAL was assessed excise
taxes amounting to a total of P6,329,735.21.

ISSUE: Whether the tax privilege of PAL provided in Section 13 of PD 1590 has been revoked b
Section 131 of the NIRC of 1997, as amended by Section 6 of RA 9334 and thus subjects PAL's
alcohol and tobacco importations for its commissary supplies are subject to excise tax.

HELD: No. Between the provisions under PD 1590 as against the provisions under the NIRC of
1997, as amended by 9334, which is a general law, the former necessary prevails.

Philippine Airlines, Inc. v. Commissioner of Internal Revenue : the "propriety of a tax refund is
hinged on the kind of exemption which forms its basis," declared in no uncertain terms that PAL
has "sufficiently prove[d]" its entitlement to a tax refund of the excise taxes and that
PAL's payment of either the franchise tax or basic corporate income tax in the amount
fixed thereat shall be in lieu of all other taxes or duties, and inclusive of all taxes on all
importations of commissary and catering supplies, subject to the condition of their availability and
eventual use. x x x

On July 1, 2005, Republic Act No. 9337 (RA 9337) took effect thereby further amending certain
provisions of the NIRC. Section 22 o RA 9337 specifically provides as follows:

SEC. 22. Franchises of Domestic Airlines. - The provisions of P.D. No. 1590 on the franchise

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tax of Philippine Airlines, Inc., R.A. No. 7151 on the franchise tax xxx
Xxx or any other franchise agreement or law pertaining to a domestic airline to the contrary
notwithstanding:

(A) The franchise tax is abolished;


(B) The franchisee shall be liable to the corporate income tax;
(C) The franchisee shall register for value-added tax under Section 236, and to account under
Title IV of the National Internal Revenue Code of 1997, as amended, for value-added tax on its
sale of goods, property or services and its lease of property; and
(D) The franchisee shall otherwise remain exempt from any taxes, duties, royalties,
registration, license, and other fees and charges, as may be provided by their
respective franchise agreement.

Upon the amendment of the 1997 NIRC, Section 22 of R.A. 9337 abolished the franchise tax and
subjected PAL and similar entities to corporate income tax and value-added tax (VAT). PAL
nevertheless remains exempt from taxes, duties, royalties, registrations, licenses, and other fees
and charges, provided it pays corporate income tax as granted in its franchise agreement.
Accordingly, PAL is left with no other option but to pay its basic corporate income tax, the payment
of which shall be in lieu of all other taxes, except VAT, and subject to certain conditions provided
in its charter.

It bears to note that the repealing clause of RA 9337 enumerated the laws or provisions of laws
which it repeals. However, there is nothing in the repealing clause, nor in any other provisions of
the said law, which makes specific mention of PD 1590 as one of the act intended to be repealed.
WHEREFORE, the instant petition for review on certiorari is DENIED. The assailed Decision and
Resolution of the Court of Ta Appeals En Banc, dated April 30, 2014 and December 16, 2014,
respectively, in CTA EB Nos. 1029, 1031 and 1032 are AFFIRMED.
SO ORDERED.

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Return; Fraud

COMMISSIONER OF INTERNAL REVENUE VS. PHILIPPINE DAILY INQUIRER, GR. NO.


213943

FACTS: PDI is a corporation engaged in the business of newspaper publication. On August 10


2006, PDI received a letter dated June 30 2006 from Region 020 Large Taxpayers' Service of BTR
for its assessment of Annual ITR for taxable year 2004. BIR, upon its investigation, found that
there was an under declaration of domestic purchases from its suppliers amounting to
P317,705,610.52.

PDI submitted reconciliation reports. PDI executed a Waiver of the Statute of Limitation
consenting to the assessment and/or collection of taxes for the year 2004 which may be found
due after the investigation. Preliminary Assessment Notice (PAN) dated Oct 15 2007 issued by
the BIR-LTAID, PDI was assessed for alleged deficiency income tax and VAT for taxable year
2004.

PDI sought reconsideration of the PAN and expressed its willingness to execute another Waiver,
thus extending BIR's right to assess and/or collect from it until April 30 2008. PDI received a
Formal Letter of Demand dated March 11 2008 and an Audit Result/Assessment Notice from the
BIR, demanding for the payment of alleged deficiency VAT and income tax. PDI in return filed its
protest by way of a petition for review alleging that the 180-day period within which the BIR
should act on its protest had already lapsed.

The CIR alleges that PDI filed a false or fraudulent return.

ISSUE: Is PDI guilty of filing a false or fraudulent return thus granting the application of sec
222, NIRC as exception to sec 203, NIRC?

HELD: NO. Fraud is never imputed. The Court stated that it would not sustain findings of fraud
upon circumstances, which, at most, create only suspicion. The Court added that the mere
understatement of a tax is not itself proof of fraud for the purpose of tax evasion.

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 fraud with
intent to evade the tax contemplated by law.

While the filing of a fraudulent return necessarily implies that the act of the taxpayer was
intentional and done with intent to evade the taxes due, the filing of a false return can be
intentional or due to honest mistake.

In this case, we do not find enough evidence to prove fraud or intentional falsity on the part of
PDL, since the case does not fall under the exceptions, Section 203 of the NIRC should apply.

Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it, either by
conforming to or by disagreeing with the extension. WHEREFORE, we DENY the petition. SO
ORDERED.


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Suspension order against a distressed company also affects taxes, tariffs, and custom
duties

BUREAU OF INTERNAL REVENUE VS. LEPANTO CERAMICS, GR. NO. 224764

FACTS: Lepanto Cermics Inc. (LCI) filed for a corporate rehabilition under the FRIA act of 2010.
LCI alleged that due to the financial difficulties it has been experiencing dating back to the Asian
financial crisis, it had entered into a state of insolvency considering its inability to pay its
obligations as they become due and that its total liabilities amounting to ₱4,213 ,682, 715. 00 far
exceed its total assets worth ₱1,112,723,941.00. Among its liabilities is its tax deficiency in the
amount of at least ₱6,355,368.00

On January 13, 2012, the Rehabilitation Court issued a Commencement Order, which, inter alia:
xxx (c) prohibited LCI from making any payment of its liabilities outstanding as of even
date, except as may be provided under RA 10142; and (d) directed the BIR to file and
serve on LCI its comment or opposition to the petition, or its claims against LCI. Xxx

Despite the foregoing, Misajon, Balbido and Martirez, acting as Assistant Commissioner, Group
Supervisor, and Examiner, respectively, of the BIR's Large Taxpayers Service, sent LCI a notice
of informal conference.

In response, LCI's court-appointed receiver, Roberto L. Mendoza, sent BIR a letter-reply,


reminding the latter of the pendency of LCI's corporate rehabilitation proceedings, as well as the
issuance of a Commencement Order in connection therewith. Undaunted, the BIR sent LCI a
Formal Letter of Demand dated May 9, 2014, requiring LCI to pay deficiency taxes in the amount
of P567,519,348.39.

This prompted LCI to file a petition for indirect contempt against private respondents. LCI
asserted that petitioners' act of pursuing the BIR's claims for deficiency taxes against LCI outside
of the pending rehabilitation proceedings in spite of the Commencement Order issued by the
Rehabilitation Court (RTC Br 35) is a clear defiance of the aforesaid Order. RTC ruled in favor of
LCI. Thus, this instant petition.

ISSUE: Whether or not the RTC Br. 35 correctly found Misajon, Balbido and Martirez to have
defied the Commencement Order and, accordingly, cited them for indirect contempt.

HELD: YES. “Case law has defined corporate rehabilitation as an attempt to conserve and
administer the assets of an insolvent corporation in the hope of its eventual return from financial
stress to solvency.”

The inherent purpose of rehabilitation is to find ways and means to minimize the expenses of the
distressed corporation during the rehabilitation period by providing the best possible framework
for the corporation to gradually regain or achieve a sustainable operating form.

In order to achieve such objectives, Section 16 of RA 10142 provides, inter alia, that upon the
issuance of a Commencement Order - which includes a Stay or Suspension Order - all actions or
proceedings, in court or otherwise, for the enforcement of "claims" against the distressed
company shall be suspended; to wit:

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xxx (1) all claims of the government, whether national or local, including taxes,
tariffs and customs duties xxx

To clarify, however, creditors of the distressed corporation are not without remedy as they may
still submit their claims to the rehabilitation court for proper consideration so that they may
participate in the proceedings, keeping in mind the general policy of the law.

The creditors must ventilate their claims before the rehabilitation court, and any “[a]ttempts to
seek legal or other resource against the distressed corporation shall be sufficient to support a
finding of indirect contempt of court.”

In the case at bar, it is undisputed that LCI filed a petition for corporate rehabilitation. Finding
the same to be sufficient in form and substance, the Rehabilitation Court issued a Commencement
Order dated January 13, 2012 which, inter alia: (a) declared LCI to be under corporate
rehabilitation; (b) suspended all actions or proceedings, in court or otherwise, for the enforcement
of claims against LCI; (c) prohibited LCI from making any payment of its outstanding
liabilities as of even date, except as may be provided under RA 10142; and (d) directed
the BIR to file and serve on LCI its comment or opposition to the petition, or its claims
against LCI.

Despite the foregoing, the BIR, through Misajon, Balbido and Martirez, still opted to send LCI: (a)
a notice of informal conference and (b) a Formal Letter of Demand dated May 9, 2014, requiring
LCI to pay deficiency taxes in the amount of P567,519,348.39, notwithstanding the written
reminder coming from LCI's court-appointed receiver of the pendency of rehabilitation
proceedings concerning LCI and the issuance of a commencement order.

Unmistakably, Misajon, Balbido and Martinez’s foregoing acts are in clear defiance of the
Commencement Order.

WHEREFORE, the petition is DENIED. The Decision dated June 1, 2015 and the Order dated
October 26, 2015 of the Regional Trial Court of Calamba City, Province of Laguna, Branch 35 in
Civil Case No. 4813-2014- C are hereby AFFIRMED.

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Tax Refund

MITSUBISHI CORPORATION MANILA BRANCH VS. CIR,


GR NO. 175772*, 05 JUNE 2017, PERLAS-BERNABE, J.

The governments of Japan and the Philippines executed an Exchange of Notes where the
former agreed to extend ¥40,400,000,000 loan to the latter through the Overseas Economic
Cooperation Fund for the implementation of the Calaca II Coal-fired Thermal Power Plant Project.
Under Paragraph 5(2) of the Exchange of Notes, the Philippine Government, by itself or through
its executing agency, undertook to assume all taxes imposed by the Philippines on Japanese
Contractors engaged in the project.

Due to the need for additional funding, they executed another loan agreement for
¥5,513,000,000.

Meanwhile, the National Power Corporation, the implementing agency, entered into a contract
with Mitsubishi Corporation for the engineering supply, construction, installation, testing, and
commissioning of a steam generator, auxiliaries, and associated civil works for the project, where
the foreign currency portion was funded by the OECF loans. The petitioner completed the project
in December 1995 but was only accepted by NPC in January 1998.

In July 1998, Mitsubishi filed its income tax return for the fiscal year that ended on March 31,
1998 with BIR. Included in the ITR was the P44,288,712 representing income from the OECF-
funded project. It also filed its Monthly Remittance Return of Income Taxes Withheld and remitted
P8,324,100 as BPRT.

In June 2000, petitioner filed with CIR an administrative claim for refund of P52,612,812
representing the erroneously paid income taxes and P8,324,100 as BPRT. Petitioner anchored its
claim for refund on BIR Ruling No. DA-407-98 which interpreted Paragraph 5(2) of the Exchange
of Notes not as grants of direct tax exemption privilege to Japanese firms, therefore not violative
of the Constitutional prohibition against the grants of tax exemption without the concurrence of
the majority of the members of Congress. Instead, it is the Philippine government that is liable
since they assumed the payment of said taxes.

The CTA Division granted the petition and ordered the CIR to refund to Mitsubishi the amounts
erroneously paid because the Philippine government, through the NPC bound itself to assume
petitioner's tax obligations.

However, the CTA En Banc reversed the Division's ruling and declared that Mitsubishi is not
entitled to refund because 1.) petitioner failed to establish that its tax payments were erroneous
under the law to justify the refund, 2.) the Exchange of Notes cannot be considered a valid treaty
because it lacks the concurrence of the Senate and 3.) based on RMC No. 42-99, the petitioner'
she proper remedy is to recover subject taxes from NPC and not from the CIR.

Issues

1. Is Mitsubishi entitled to a refund?


2. If yes, from which government entity should the refund be claimed?

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Ruling

1. Yes, the NIRC grants the CIR the authority to credit or refund taxes which were
erroneously collected by the government.

In this case, the amount of P52,612,812 was erroneously collected from petitioner
because the obligation to pay the same had already been assumed or had been taken on
by the Philippine Government through the Exchange of Notes. Therefore, Mitsubishi was
not exempted from taxes because the obligation remained in existence but such obligation
was shifted to the Philippine Government, through its implementing agency.

The P8,324,100 remitted as BPRT also falls within the ambit of the tax assumption
provision under the Exchange of Notes.

2. The refund should be claimed with the CIR.

The NIRC vests upon the CIR the authority to credit or refund taxes which are erroneously
collected by the government. This specific statutory mandate cannot be overridden by
averse interpretations made through mere administrative issuances such as RMC No. 42-
99 which shifts to the executing agencies the power to refund taxes.

Therefore, Mitsubishi correctly filed its claim for refund under Sections 204 and 229 of the
NIRC to recover the erroneously paid taxes.

Dispositive Portion

WHEREFORE, the petition is GRANTED. The decision dated May 24, 2006 and the Resolution
dated December 4, 2006 of the Court of Tax Appeals En Banc in CTA EB No.5 are hereby reversed
and set aside. The decision dated December 17, 2003 of the CTA in CTA Case No. 6139 is
REINSTATED.

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Tax Assessment; Prescription

COMMISSIONER OF INTERNAL REVENUE VS. SYSTEMS TECHNOLOGY INSTITUTE,


INC., G.R. NO. 220835, CAGUIOA, J, JULY 26, 2017

Facts: STI filed an Amended Annual Income Tax Return for fiscal year 2003 on August 15, 2003;
its Quarterly VAT Returns on July 23, 2002, October 25, 2002, January 24, 2003, and May 23,
2003; and its BIR Form 1601E for EWT from May 10, 2002 to April 15, 2003.

On May 30, 2006, STI's Amiel C. Sangalang signed a Waiver of the Defense of Prescription Under
the Statute of Limitations of the National Internal Revenue Code with the proviso that the
assessment and collection of taxes of fiscal year 2003 shall come "no later than December 31,
2006, which was accepted by Virgilio R. Cembrano of the Large Taxpayers District Officer of
Makati. Another waiver was executed on December 12, 2006 extending the period to assess and
collect the assessed taxes to March 31, 2007. It was also signed by Sangalang and accepted by
Cembrano. A third waiver was executed by the same signatories extending further the period to
June 30, 2007.

On June 28, 2007, STI received a Formal Assessment Notice from the CIR, assessing STI for
deficiency income tax, VAT and EWT for fiscal year 2003, in the aggregate amount of
₱161,835,737.98.

On July 25, 2007, STI filed a request for reconsideration/reinvestigation dated July 23, 2007.

On September 11, 2009, STI received from the CIR the Final Decision on Disputed Assessment
(FDDA) dated August 17, 2009 finding STI liable for deficiency income tax, VAT and EWT in the
lesser amount of ₱124,257,764.20.

On October 12, 2009, STI appealed the FDDA by filing a petition for review with the CTA, which
denied the assessment on the ground of prescription.

The CTA Division found the waivers executed by STI defective for failing to strictly comply with
the requirements. Consequently, the periods for the CIR to assess or collect internal revenue
taxes were never extended; and the subject assessment for deficiency income tax, VAT and EWT
against STI, which the CIR issued beyond the three-year prescriptive period provided by law, was
already barred by prescription.

The CIR appealed to the CTA En Banc, which denied the CIR's petition for lack of merit. It
reiterated that the requirements for the execution of a waiver must be strictly complied with;
otherwise, the waiver will be rendered defective and the period to assess or collect taxes will not
be extended. It further held that the execution of a waiver did not bar STI from questioning the
validity thereof or invoking the defense of prescription.

Issue

Has prescription set in against the assessments for deficiency income tax, deficiency VAT and
deficiency EWT?

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Held

Yes, prescription has already set in.

The Waivers of Statute of Limitations, being defective and invalid, did not extend the CIR's period
to issue the subject assessments. Thus, the right of the government to assess or collect the
alleged deficiency taxes is already barred by prescription.

Section 203 of the NIRC limits the CIR's period to assess and collect internal revenue taxes to 3
years counted from the last day prescribed by law for the filing of the return or from the day the
return was filed, whichever comes later. Thus, assessments issued after the expiration of such
period are no longer valid and effective. The primary reason behind the prescriptive period on
the CIR's right to assess or collect internal revenue taxes is to safeguard the interests of taxpayers
from unreasonable investigation. 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 a reasonable period of time.

The parties likewise did not validly execute a waiver of statute of limitations under Section 222(b)
of the NIRC, as amended. Said provision reads:

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. -


xxxx

(b) If before the expiration of the time prescribed in Section 203 for the assessment of
the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment
after such time, the tax may be assessed within the period agreed upon. The period so
agreed upon may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.
xxxx

To implement the foregoing provisions, the BIR issued RMO 20-90 and RDAO 05-01, outlining the
procedures for the proper execution of a valid waiver, viz.:

1. The waiver must be in the proper form prescribed by RMO 20- 90. The phrase "but not
after __________ 19 _",which indicates the expiry date of the period agreed upon to
assess/collect the tax after the regular three-year period of prescription, should be filled
up.

2. The waiver must be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of its
responsible officials. In case the authority is delegated by the taxpayer to a representative,
such delegation should be in writing and duly notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that
the BIR has accepted and agreed to the waiver.1âwphi1 The date of such acceptance by

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the BIR should be indicated. However, before signing the waiver, the CIR or the revenue
official authorized by him must make sure that the waiver is in the prescribed form, duly
notarized, and executed by the taxpayer or his duly authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau
should be before the expiration of the period of prescription or before the lapse of the
period agreed upon in case a subsequent agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the
docket of the case, the second copy for the taxpayer and the third copy for the Office
accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be
indicated in the original copy to show that the taxpayer was notified of the acceptance of
the BIR and the perfection of the agreement.

These requirements are mandatory and must be strictly followed.

Tested against the requirements of RMO 20-90 the Court agrees with the CTA's finding that the
waivers subject of this case suffer from the following defects:

1. At the time when the first waiver took effect, on June 2, 2006, the period for the CIR
to assess STI for deficiency EWT and deficiency VAT for fiscal year ending March 31, 2003,
had already prescribed. To recall, the CIR only had until April 17, 2006 (for EWT) and May
25, 2006 (for VAT), to issue the subject assessments.

2. STI's signatory to the three waivers had no notarized written authority from the
corporation's board of directors.

3. The waivers in this case did not specify the kind of tax and the amount of tax due.

Considering the defects in the waivers executed by STI, the periods for the CIR to assess or
collect the alleged deficiency income tax, deficiency EWT and deficiency VAT were not extended.
The assessments subject of this case, which were issued by the BIR beyond the three-year
prescriptive, are therefore considered void and of no legal effect. Hence, the CT A committed no
reversible error in cancelling and setting aside the subject assessments on the ground of
prescription.

WHEREFORE, premises considered, the instant petition for review is hereby DENIED. The
Decision dated March 24, 2015 and the Resolution dated September 2, 2015 of the Court of Tax
Appeals En Banc in CTA EB No. 1050 are hereby AFFIRMED.

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Withholding Taxes

EDISON COGENERATION CORPORATION VS CIR


GR No. 201665, Aug. 30, 2017, DEL CASTILLO, J.

On February 2, 2004, Edison (Bataan) Cogeneration Corporation [EBCC] received from the
Commissioner of Internal Revenue (CIR) a Formal Letter of Demand and Final Assessment Notice
dated January 23, 2004 assessing EBCC of deficiency income tax, Value Added Tax (VAT),
withholding tax on compensation, Expanded Withholding Tax (EWT) and Final Withholding Tax
(FWT) for taxable year 2000 in the total amount of P84,868,390.16.

On March 3, 2004, EBCC filed with the CIR a letter-protest dated March 2, 2004 and furnished
the CIR with the required documents. Due to the inaction of the CIR, EBCC elevated the matter
to the CTA.

While the case was pending, EBCC availed itself of the Tax Amnesty Program under Republic Act
(RA) No. 9480. Thus, in a November 7, 2008 Resolution, the CTA Second Division deemed the
Petition partially withdrawn and the case closed and terminated with regard to EBCC's deficiency
income tax and VAT for the year 2000.

On March 18, 2009, the CTA Second Division issued a Resolution setting aside the assessments
against EBCC for deficiency income tax and VAT for the taxable year 2000 in view of its availment
of the Tax Amnesty Program.

Ruling of the Court of Tax Appeals Former Second Division

On November 30, 2010, the CTA Former Second Division rendered a Decision partly granting the
Petition. After reviewing the evidence on record, the CTA Former Second Division found EBCC to
have paid the correct amount of EWT and withholding tax on compensation of its employees. As
to the deficiency FWT, the CTA Former Second Division found EBCC liable to pay FWT in a reduced
amount of P2,232,146.91. It agreed with EBCC that it was not liable for the deficiency FWT
assessment of P7,707,504.96 on interest payments on loan agreements with Ogden Power
International Holdings, Inc. (Ogden) for taxable year 2000 since its liability for interest payment
became due and demandable only on June 1, 2002. Likewise cancelled and set aside were the
deficiency tax assessments on loan interest payment of EBCC to Philippine National Bank and
Security Bank Corporation in the amounts of P346,988.77 and P387,411.46, respectively, as these
had already been remitted by EBCC. Both parties appealed to the CTA En Banc.

Ruling of the Court of Tax Appeals En Banc

On January 30, 2012, the CTA En Banc denied both appeals. It sustained the findings of the CTA
Former Second Division that the assessment over EBCC's FWT on interest payments arising from
its loan from Ogden was without basis as EBCC had no obligation to withhold any taxes on the
interest payment for the year 2000. Under Revenue Regulation (RR) No. 02-98, the obligation to
withhold only accrues when the loan is paid or becomes payable or when it becomes due,
demandable or legally enforceable, whichever comes first. In this case, the obligation to withhold
the interest over the loan only commenced on June 1, 2002. As to the alleged interest payments
on the syndicated loans in dollars, the CTA En Banc noted that EBCC failed to present sufficient

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evidence to prove the remittance of its payment. Thus, the CTA En Banc adopted the computation
of the CTA Former Second Division.

ISSUE

When does the obligation of the payor to deduct and withhold the tax arise?

The CIR's Arguments

As to the cancellation of the assessments against EBCC's FWT on its intercorporate loan from
Ogden, the CIR argues that the assessment enjoys the presumption of validity and may only be
disproved by evidence to the contrary. The CIR contends that EBCC was liable to pay the interest
from the date of the execution of the contract on January 5, 2000, not from the date of the first
payment on June 1, 2002, as the loan agreement clearly indicated that the interest was to be
paid separately from the principal.

EBCC's Arguments

EBCC, on the other hand, asserts that it was not required to withhold FWT at the end of taxable
year 2000 as the interest payment became due and demandable only on June 1, 2002. And even
if the first payment were due on January 4, 2001, such fact would not give rise to any liability for
FWT in the year 2000 under RR No. 02-98. As to the retroactive application of RR No. 12-01, to
allow the retroactive application of the RR No. 12-01 would be a clear violation of EBCC's right to
due process as the Formal Letter of Demand was issued pursuant to the provisions of RR No. 02-
98.

HELD:

RR No.02-98 provides that the term payable refers to the date the obligation becomes due,
demandable or legally enforceable.

Section 2.57.4 of Revenue Regulations No. 2-98 provides:


SEC. 2.57.4. Time of Withholding. - The obligation of the payor to deduct and withhold
the tax under Section 2.57 of these regulations arises at the time an income is paid or
payable, whichever comes first, the term 'payable' refers to the date the obligation
becomes due, demandable or legally enforceable.

Clearly, EBCC's liability for interest payment became due and demandable starting June 1, 2002.
And considering that under RR No. 02-98, the obligation of EBCC to deduct or withhold tax arises
at the time an income is paid or payable, whichever comes first, and considering further that
under the said RR, the term "payable" refers to the date the obligation becomes due, demandable
or legally enforceable, we find no error on the part of the CTA En Banc in ruling that EBCC had
no obligation to withhold any taxes on the interest payment for the year 2000 as the obligation
to withhold only commenced on June 1, 2002, and thus cancelling the assessment for deficiency
FWT on interest payments arising from EBCC's loan from Ogden.

WHEREFORE, the Petitions are hereby DENIED.

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