Taxation Case Digests Part II

TAXATION CASE DIGESTS – PART II
1. Medicard Philippines, Inc. vs. Commissioner of Internal authorized representatives, other tax agents may
Revenue, 822 SCRA 444, G.R. No. 222743 April 5, 2017 not validly conduct any of these kinds of
examinations without prior authority.
FACTS
Upon finding some discrepancies between MEDICARD’s 2. No. The CIR’s interpretation of gross receipts in
Income Tax Returns (ITRs) and VAT Returns, the CIR the present case is patently erroneous for lack of
informed MEDICARD and issued a Letter Notice (LN) in lieu both textual and non-textual support. The CTA
of an LOA and this procedure is authorized under Revenue En Banc overlooked that the definition of gross
Memorandum Order No 30-2003 and 42- 2003. receipts under RR No. 16-2005 merely presumed
that the amount received by an HMO as
According to the CIR, the taxable base of HMOs for VAT membership fee is the HMO’s compensation for
purposes is its gross receipts without any deduction under their services. As a mere presumption, an HMO
Section 4.108.3(k) of Revenue Regulation (RR) No. 16- is, thus, allowed to establish that a portion of the
2005. Citing Commissioner of Internal Revenue v. amount it received as membership fee does NOT
Philippine Health Care Providers, Inc., the CIR argued that actually compensate it but some other person,
since MEDICARD does not actually provide medical and/or which in this case are the medical service
hospital services, but merely arranges for the same, its providers themselves.
services are not VAT exempt.
2. Commissioner of Internal Revenue v Baier-Nickel, G.R.
ISSUE No. 153793, August 29. 2006
1. Whether the absence of Letter of Assessment is FACTS

fatal
2. Whether the amounts that MEDICARD Petitioner maintains that the income earned by
earmarked and eventually paid to the medical respondent is taxable in the Philippines because the
service providers should still form part of its source thereof is JUBANITEX, a domestic corporation
gross receipts for VAT purposes located in the City of Makati. It thus implied that the
source of income means the physical source where the
RULING income came from. It further argued that since
respondent is the President of JUBANITEX, any
1. Yes. The absence of LOA violated MEDICARD’s remuneration she received from said corporation should
right to due process. An LOA is the authority be construed as payment of the overall management
given to the appropriate revenue officer services to the company and should not be interpreted as
assigned to perform assessment functions. It a compensation for distinct and separate service as a sale
empowers or enables said revenue officer to commission agent. Respondent contended that her sales
examine the books of account and other commission income is not taxable in the Philippines
accounting records of a taxpayer for the purpose because the same was a compensation for her services
of collecting the correct amount of tax. An LOA is rendered in Germany and therefore considered as income
premised on the fact that the examination of a from sources outside the Philippines.
taxpayer who has already filed his tax returns is a
power that statutorily belongs only to the CIR ISSUE
himself or his duly authorized representatives.
Whether respondent’s sales commission income is taxable
Based on Sec 6 of the NIRC, it is clear that unless in the Philippines
authorized by the CIR himself or by his duly RULING
authorized representative, through an LOA, an
examination of the taxpayer cannot ordinarily be Yes. Non-resident aliens, whether or not engage in trade
undertaken. The circumstances contemplated or business, are subject to Philippine income taxation on
under Section 6 where the taxpayer may be their income received from all sources within the
assessed through best-evidence obtainable, Philippines. Thus, the keyword in determining the
inventory-taking, or surveillance among others taxability of non-resident aliens is the income’s “source.”
has nothing to do with the LOA. These are simply The Court reiterates the rule that “source of income”
methods of examining the taxpayer in order to relates to the property, activity or service that produced
arrive at the correct amount of taxes. Hence, the income. With respect to rendition of labor or personal
unless undertaken by the CIR himself or his duly service, as in the instant case, it is the place where the
Valenzuela, Alpe, Alaurin, Orcullo, Serrado, Penaserada, Bertulfo Page 1

labor or service was performed that determines the source as having now adopted a gross income, instead
of the income. There is therefore no merit in petitioner’s of as having still retained the net income,
interpretation which equates source of income in labor or taxation scheme. The allowance for deductible
personal service with the residence of the payor or the items, it is true, may have significantly been
place of payment of the income. reduced by the questioned law in comparison
with that which has prevailed prior to the
Having disposed of the doctrine applicable in this case, we amendment; limiting, however, allowable
will now determine whether respondent was able to deductions from gross income is neither
establish the factual circumstances showing that her discordant with, nor opposed to, the net income
income is exempt from Philippine income taxation. The tax concept. The fact of the matter is still that
decisive factual consideration here is not the capacity in various deductions, which are by no means
which respondent received the income, but the sufficiency inconsequential, continue to be well provided
of evidence to prove that the services she rendered were under the new law.
performed in Germany. In the instant case, the Court find 2. A general professional partnership, unlike an
that the faxed documents presented by respondent did ordinary business partnership, is not itself an
not constitute substantial evidence, or that relevant income taxpayer, as the income tax is imposed
evidence that a reasonable mind might accept as adequate not on the professional partnership but on the
to support the conclusion that it was in Germany where partners themselves in their individual
she performed the income producing service which gave capacity.—The Court, first of all, should like to
rise to the reported monthly sales in the months of March correct the apparent misconception that general
and May to September of 1995. She thus failed to professional partnerships are subject to the
discharge the burden of proving that her income was from payment of income tax or that there is a
sources outside the Philippines and exempt from the difference in the tax treatment between
application of our income tax law. Hence, the claim for tax individuals engaged in business or in the practice
refund should be denied. of their respective professions and partners in
3. Tan vs. Del Rosario, Jr., 237 SCRA 324, G.R. No. 109289, general professional partnerships. The fact of the
G.R. No. 109446 October 3, 1994 matter is that a general professional partnership,
unlike an ordinary business partnership (which is
FACTS treated as a corporation for income tax purposes
and so subject to the corporate income tax), is
Petitioners, assailing Section 6 of Revenue Regulations No. not itself an income taxpayer. The income tax is
2-93, argue that public respondents have exceeded their imposed not on the professional partnership,
rule-making authority in applying SNIT to general which is tax exempt, but on the partners
professional partnerships. Petitioner contends that the themselves in their individual capacity computed
title of House Bill No. 34314, progenitor of Republic Act on their distributive shares of partnership
No. 7496, is a misnomer or, at least, deficient for being profits.
merely entitled, “Simplified Net Income Taxation Scheme 3. Section 6 of Revenue Regulation No. 2-93 did not
for the Self-Employed and Professionals Engaged in the alter, but merely confirmed, the above standing
Practice of their Profession. rule as now so modified by Republic Act No.
ISSUE 7496 on basically the extent of allowable
deductions applicable to all individual income
1. Whether or not Republic Act No. 7496 adopt a taxpayers on their non-compensation income.
gross income taxation scheme There is no evident intention of the law, either
2. Whether or not General Professional Partnership before or after the amendatory legislation, to
is subject to income tax place in an unequal footing or in significant
3. Whether or not Sec 6 of RR No. 2-93 is consistent variance the income tax treatment of
with the Tax Code as modified by Republic Act professionals who practice their respective
No. 7496 professions individually and of those who do it
through a general professional partnership.
RULING:
1. On the basis of the above language of the law, it

would be difficult to accept petitioner’s view
that the amendatory law should be considered

4. Madrigal v Rafferty, G.R. No. L-12287, August 7, 5. Obillos v CIR
1918
FACTS
6. LORENZO T. OÑA and HEIRS OF JULIA BUÑALES,
Vicente Madrigal and Susana Paterno were namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B.
legally married prior to January 1, 1914. The OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR.,
marriage was contracted under the provisions of vs.
law concerning conjugal partner-ships (sociedad THE COMMISSIONER OF INTERNAL REVENUE, respondent.
de gananciales) G.R. No. L-19342 May 25, 1972
ISSUE
FACTS:
Whether or not additional income tax should be
Julia Buñales died leaving as heirs her surviving spouse,
divided into two equal parts, because of the
Lorenzo Oña and her five children. A civil case was
conjugal partnership existing between them.
instituted for the settlement of her state, in which Oña
was appointed administrator and later on the guardian of
RULING the three heirs who were still minors when the project for
partition was approved. This shows that the heirs have
No. Income as contrasted with capital or undivided ½ interest in 10 parcels of land, 6 houses and
property is to be the test. The essential money from the War Damage Commission.
difference between capital and income is that
capital is a fund; income is a flow. A fund of Although the project of partition was approved by the
property existing at an instant of time is called Court, no attempt was made to divide the properties and
capital. A flow of services rendered by that they remained under the management of Oña who used
capital by the payment of money from it or any said properties in business by leasing or selling them and
other benefit rendered by a fund of capital in investing the income derived therefrom and the proceeds
from the sales thereof in real properties and securities. As
relation to such fund through a period of time is
a result, petitioners’ properties and investments gradually
called income. Capital is wealth, while income is
increased. Petitioners returned for income tax purposes
the service of wealth. A tax on income is not a their shares in the net income but they did not actually
tax on property. receive their shares because this left with Oña who
invested them.
Paterno has an inchoate right in the property of
Based on these facts, CIR decided that petitioners formed
her husband Madrigal during the lifetime of the
an unregistered partnership and therefore, subject to the
conjugal property. She has an interest in the
corporate income tax, particularly for years 1955 and
ultimate ownership of property acquired as
1956. Petitioners asked for reconsideration, which was
income of the conjugal partnership. Not being
denied hence this petition for review from CTA’s decision.
seized of the separate estate, Paterno cannot
make a separate return in order to receive the
ISSUE:
benefit of the exemption which would arise by
1. W/N there was a co-ownership or an unregistered
reason of the additional tax. As she has no
partnership
estate or income, actually and legally vested in
2. W/N the petitioners are liable for the deficiency
her and entirely distinct from her husband
corporate income tax
property, the income cannot properly be
considered the separate income of the wife for
RULING:
the purpose of the additional tax. The income
tax law does not look on the spouses as
individual partners in an ordinary partnership. 1. Unregistered partnership. The Tax Court found that
instead of actually distributing the estate of the deceased
The higher schedules of the additional tax among themselves pursuant to the project of partition, the
directed at the incomes of the wealthy may not heirs allowed their properties to remain under the
be partially defeated by reliance on provisions in management of Oña and let him use their shares as part of
the common fund for their ventures, even as they paid
our Civil Code dealing with the conjugal
corresponding income taxes on their respective shares. It
partnership and having no application to the
is from the moment petitioners allowed not only the
Income Tax Law.

incomes from their respective shares of the inheritance To begin with, the tax in question is one imposed
but even the inherited properties themselves to be used upon "corporations", which, strictly speaking, are
by Lorenzo T. Oña as a common fund in undertaking distinct and different from "partnerships". When
several transactions or in business, with the intention of our Internal Revenue Code includes
deriving profit to be shared by them proportionally, such "partnerships" among the entities subject to the
act was tantamount to actually contributing such incomes tax on "corporations", said Code must allude,
to a common fund and, in effect, they thereby formed an therefore, to organizations which are not
unregistered partnership within the purview of Sections 24 necessarily "partnerships", in the technical sense
and 84(b) of the Tax Code. of the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax
Before the partition and distribution of the estate of the "duly registered general partnerships," which
deceased, all the income thereof does belong commonly constitute precisely one of the most typical
to all the heirs, obviously, without them becoming thereby forms of partnerships in this jurisdiction.
unregistered co-partners, but it does not necessarily follow Likewise, as defined in section 84(b) of said
that such status as co-owners continues until the Code, "the term corporation includes
inheritance is actually and physically distributed among partnerships, no matter how created or
the heirs, for it is easily conceivable that after knowing organized." This qualifying expression clearly
their respective shares in the partition, they might decide indicates that a joint venture need not be
to continue holding said shares under the common undertaken in any of the standard forms, or in
management of the administrator or executor or of confirmity with the usual requirements of the
anyone chosen by them and engage in business on that law on partnerships, in order that one could be
basis. Withal, if this were to be allowed, it would be the deemed constituted for purposes of the tax on
easiest thing for heirs in any inheritance to circumvent and corporation. Again, pursuant to said section
render meaningless Sections 24 and 84(b) of the National 84(b),the term "corporation" includes, among
Internal Revenue Code. others, "joint accounts,(cuentas en
participacion)" and "associations", none of which
has a legal personality of its own, independent of
that of its members. Accordingly, the lawmaker
2. Yes. For tax purposes, the co-ownership of inherited
could not have regarded that personality as a
properties is automatically converted into an unregistered
condition essential to the existence of the
partnership the moment the said common properties
partnerships therein referred to. In fact, as
and/or the incomes derived therefrom are used as a
above stated, "duly registered general co-
common fund with intent to produce profits for the heirs
partnerships" — which are possessed of the
in proportion to their respective shares in the inheritance
aforementioned personality — have been
as determined in a project partition either duly executed in
expressly excluded by law (sections 24 and 84[b])
an extrajudicial settlement or approved by the court in the
from the connotation of the term "corporation."
corresponding testate or intestate proceeding. The reason
....
is simple. From the moment of such partition, the heirs are
entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to
manage and dispose of as exclusively his own without the It is, therefore, clear to our mind that petitioners herein
intervention of the other heirs, and, accordingly, he constitute a partnership, insofar as said Code is concerned,
becomes liable individually for all taxes in connection and are subject to the income tax for
therewith. If after such partition, he allows his share to be corporations. Judgment affirmed.
held in common with his co-heirs under a single
management to be used with the intent of making profit
ESCRA DOCTRINE:
thereby in proportion to his share, there can be no doubt
that, even if no document or instrument were executed, TAXATION; PARTNERSHIP; WHEN CO-ONWERSHIP
for the purpose, for tax purposes, at least, an unregistered
CONVERTED TO PARTNERSHIP—For tax purposes, the co-
partnership is formed.
ownership of inherited properties is automatically
converted into an unregistered partnership the moment
In Evangelista vs. Collector, 102 Phil. 140, this Court clearly the said common properties and/or the incomes derived
differentiated the concept of partnerships under the Civil
therefrom are used as a common fund with intent to
Code from that of unregistered partnerships which are
produce profits for the heirs in proportion to their
considered as "corporations" under Sections 24 and 84(b)
of the National Internal Revenue Code. Mr. Justice Roberto respective shares in the inheritance as determined in a
Concepcion, now Chief Justice, elucidated on this point project partition either duly executed in an extra-judicial
thus: settlement or approved by the court in the corresponding
testate or intestate proceeding. The reason is simple. From

the moment of such partition, the heirs are entitled introduced to make such land saleable and later
already to their respective definite shares of the estate in it was sold to the public at a profit.
and the incomes thereof, for each of them to manage and  In their joint income tax return for the year 1957
dispose of as exclusively his own without the intervention filed with the Bureau of Internal Revenue on
of the other heirs, and, accordingly, he becomes liable March 31, 1958, petitioners disclosed a profit of
individually for all taxes in connection therewith. If after P31,060.06 realized from the sale of the
subdivided lots, and reported fifty per centum
such partition, he allows his share to be held in common
thereof or P15,530.03 as taxable capital gains.
with his co-heirs under a single management to be used
 Upon an audit and review of the return thus
with the intent of making profits thereby in proportion to
filed, the Revenue examiner adjudged Ursula and
his share, there can be no doubt that, even if no document her spouse as engaged in business as real estate
or instrument were executed for the purpose, for tax dealers , as defined in Section 194 [s] of the
purposes, at least, an unregistered partnership is formed. National Internal Revenue Code, required them
to pay the real estate dealer's tax 2 and assessed
CORPORATION;PARTNERSHIP considered corporation for a deficiency income tax on profits derived from
tax purposes.—for purposes of the tax on corporations, the sale of the lots based on the rates for
the NIRC, includes partnerships-with the exception only of ordinary income.
duly registered general co-partnerships- within the  Tax court upheld the findings of the CIR, hence,
purview of the term “corporation”. the present appeal
Effect on unregistered partnership profits of individual ISSUE:

income tax paid. – The partnership profits distributable to 1. Whether or not petitioners are real estate dealers liable
the partners should be reduced by the amounts of the for real estate dealer's fixed tax; and
income tax assessed against the partnership.
Consequently, each of the petitioners in his individual 2. Whether or not the gains realized from the sale of the
capacity overpaid his income tax for the years in question. lots are taxable in full as ordinary income or capital gains
But as the individual income tax liabilities of petitioners taxable at capital gain rates
are not in issue in the instant proceeding, it is not proper
for the court to pass upon the same.
RULING:
Where the right to refund of overpaid individual income
The issues are closely interrelated and will be taken jointly.
tax has prescribed.—a tax payer who did not pay the tax
due on the income from an unregistered partnership, of
The assets of a taxpayer are classified for income tax
which he is a partner, due to an erroneous belief that no
purposes into ordinary assets and capital assets. Section
partnership, but only a co-ownership, existed between him 34[a] [1] of the National Internal Revenue Code broadly
and his co-heirs, and who due to the payment of the defines capital assets as follows:
individual income tax corresponding to his share in the [1] Capital assets.-The term 'capital assets'
unregistered partnership profits, on the balance, overpaid means property held by the taxpayer [whether
his income tax has the right to be reimbursed what he has or not connected with his trade or business], but
erroneously paid. However, the law is very clear that the does not include, stock in trade of the taxpayer
claim and action for such reimbursement are subject to or other property of a kind which would properly
the bar of prescription. be included, in the inventory of the taxpayer if
on hand at the close of the taxable year, or
7. TOMAS CALASANZ, ET AL., petitioners, vs. THE property held by the taxpayer primarily for sale
COMMISSIONER OF INTERNAL REVENUE and the COURT to customers in the ordinary course of his trade
OF TAX APPEALS, respondents. or business, or property used in the trade or
G.R. No. L-26284 October 8, 1986 business of a character which is subject to the
allowance for depreciation provided in
subsection [f] of section thirty; or real property
FACTS: used in the trade or business of the taxpayer.
 Ursula Calasanz inherited from her father an The statutory definition of capital assets is negative in
agricultural land. nature. If the asset is not among the exceptions, it is a
 In order to liquidate her inheritance, Ursula capital asset; conversely, assets falling within the
Calasanz had the land surveyed and subdivided exceptions are ordinary assets. And necessarily, any gain
into lots. resulting from the sale or exchange of an asset is a capital
 Improvements, such as good roads, concrete
gutters, drainage and lighting system, were

gain or an ordinary gain depending on the kind of asset receivables in comparison with the sales volume of
involved in the transaction. P446,407.00 during the same period signifies that the lots
were sold on installment basis and suggests the number,
However, there is no rigid rule or fixed formula by which it continuity and frequency of the sales. Also of significance
can be determined with finality whether property sold by a is the circumstance that the lots were advertised 13 for
taxpayer was held primarily for sale to customers in the sale to the public and that sales and collection
ordinary course of his trade or business or whether it was commissions were paid out during the period in question.
sold as a capital asset. 6 Although several factors or indices
7 have been recognized as helpful guides in making a SUMMARY RULING:
determination, none of these is decisive; neither is the They are taxable as ordinary income. The activities of
presence nor the absence of these factors conclusive. Each Calasanz are indistinguishable from those invariably
case must in the last analysis rest upon its own peculiar employed by one engaged in the business of selling real
facts and circumstances. estate. One strong factor is the business element of
development which is very much in evidence. They did not
Also a property initially classified as a capital asset may sell the land in the condition in which they acquired it.
thereafter be treated as an ordinary asset if a combination Inherited land which an heir subdivides and makes
of the factors indubitably tend to show that the activity improvements several times higher than the original cost
was in furtherance of or in the course of the taxpayer's of the land is not a capital asset but an ordinary asses.
trade or business. Thus, a sale of inherited real property Thus, in the course of selling the subdivided lots, they
usually gives capital gain or loss even though the property engaged in the real estate business and accordingly the
has to be subdivided or improved or both to make it gains from the sale of the lots are ordinary income taxable
salable. However, if the inherited property is substantially in full.
improved or very actively sold or both it may be treated as
held primarily for sale to customers in the ordinary course
of the heir's business. ESCRA DOCTRINE:
Upon an examination of the facts on record, We are TAXATION-There is no fix formula to determine where a
convinced that the activities of petitioners are piece of property is a capital asset or ordinary asset. ---
indistinguishable from those invariably employed by one However, there is no rigid rule or fixed formula by which it
engaged in the business of selling real estate. can be determined with finality whether property sold by a
taxpayer was held primarily for sale to customers in the
One strong factor against petitioners' contention is the ordinary course of his trade or business or whether it was
business element of development which is very much in sold as a capital asset. Although several factors or indices
evidence. Petitioners did not sell the land in the condition have been recognized as helpful guides in making a
in which they acquired it. While the land was originally determination, none of these is decisive; neither is the
devoted to rice and fruit trees, it was subdivided into presence nor the absence of these factors conclusive. Each
small lots and in the process converted into a residential
case must in the last analysis rest upon its own peculiar
subdivision and given the name Don Mariano Subdivision.
facts and circumstances.
Extensive improvements like the laying out of streets,
construction of concrete gutters and installation of lighting Property initially classified as capital asset may later
system and drainage facilities, among others, were become an ordinary asset and vice versa.—also a property
undertaken to enhance the value of the lots and make
initially classified as a capital asset may thereafter be
them more attractive to prospective buyers. The audited
treated as an ordinary asset if a combination of the factors
financial statements submitted together with the tax
return in question disclosed that a considerable amount indubitably tend to show that the activity was in
was expended to cover the cost of improvements. As a furtherance of or in the course of the taxpayer’s trade or
matter of fact, the estimated improvements of the lots business. Thus, a sale of inherited real property usually
sold reached P170,028.60 whereas the cost of the land is gives capital gain or loss even though the property has to
only P 4,742.66. There is authority that a property ceases be divided or improved or both to make it salable.
to be a capital asset if the amount expended to improve it However, if the inherited property is substantially
is double its original cost, for the extensive improvement improved or very actively sold or both it may be treated as
indicates that the seller held the property primarily for sale held primarily for sale to customers in the ordinary course
to customers in the ordinary course of his business. of the heir’s business.
Another distinctive feature of the real estate business Inherited land which an heir subdivides, and wherein he
discernible from the records is the existence of contracts makes improvements several times higher than the original
receivables, which stood at P395,693.35 as of the year cost of the land, is not a capital asset, but an ordinary
ended December 31, 1957. The sizable amount of asset. ---one strong factor against petitioners’ contention

is the business element of development which is very reduction of attorney’s fees and interest (1% per month)
much in evidence. Petitioners did not sell the land in the from the amount due but the bank refused.
condition in which they acquired it. While the land was
originally devoted to rice and fruit trees, it was subdivided The mortgagors filed a complaint against the bank to
recover the allegedly unlawful and excessive charges. The
into small lots and in the process converted into a
bank asserted that the redemption price reflecting the
residential subdivision and given the name Don Mariano
stipulated interest, charges and/or expenses, is valid, legal
subdivision. Extensive improvements like the laying out of
and in accordance with documents duly signed by the
streets, construction of concrete gutters and installation of mortgagors. The bank further... contended that the claims
lighting system and drainage facilities, among others, were are deemed waived and the mortgagors are already
undertaken to enhance the value of the lots and make estopped from questioning the terms and conditions of
them more attractive to prospective buyers. The audited their contract.
financial statements submitted together with the tax
return in question disclosed that a considerable amount The trial court rendered its decision dismissing the
was expended to cover the cost of improvements. As a complaint and held that plaintiffs-mortgagors are bound
matter of fact, the estimated improvements of the lots by the terms of the mortgage loan. According to the trial
sold reached P170,028.60 whereas the cost of the land is court, plaintiffs-mortagors are estopped from questioning
only P4,742.66. there is authority that a property ceases to the correctness of the redemption price as they had freely
be a capital asset if the amount expended to improve it is and voluntarily signed the letter-agreement prepared by
double its original cost, for the extensive improvement the defendant bank. However, the CA ruled that attorney’s
indicates that the seller held the property primarily for sale fees and liquidated damages were already included in the
to customers in the ordinary course of his business. bid price.
Inherited land which is subdivided and sold on instalments

and advertised for sale is not anymore a capital asset.— ISSUE: WoN the foreclosing mortgagee should pay the
another distinctive feature of the real estate business Capital Gains Tax (CGT) upon the execution of the
discernible from the records is the existence of contracts certificate of sale, and if paid by the mortgagee, whether
receivables, which stood at P395,693.35 as of the year the same should be shouldered by the redemptioner.
ended December 31,1957. The sizable amount of
receivables in comparison with the sales volume of
P446,407.00 during the same period signifies that the lots
were sold on instalment basis and suggests the number, RULING:
continuity and frequency of sales. Also of significance is
NO. there is no legal basis for the inclusion of this charge
the circumstance that the lots were advertised for sale to
in the redemption price. Under Revenue Regulations (RR)
the public and that sales and collection commissions were No. 13-85 (December 12, 1985), every sale or exchange or
paid out during the period in question. other disposition of real property classified as capital asset
under Section 34(a)17 of the Tax Code shall be subject to
the final capital gains tax. The term sale includes pacto de
8. BPI FAMILY SAVINGS BANK, INC., Petitioner, retro and other forms of conditional sale. Section 2.2 of
vs.SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and Revenue Memorandum Order (RMO) No. 29-86 (as
PAULITA S. ALVAREZ, Respondents. G.R. No. 165837 amended by RMO No. 16-88 and as further amended by
RMO Nos. 27-89 and 6-92) states that these conditional
FACTS: sales "necessarily include mortgage foreclosure sales
Supreme Transliner, Inc. represented by its managing (judicial and extrajudicial foreclosure sales)." Further, for
director, Moises Alvarez, and Paulita Alvarez, obtained a real property foreclosed by a bank on or after September
loan of P9.853M from BPI Family Savings Bank with a 714 3, 1986, the capital gains tax and documentary stamp tax
sq. m. lot covered by TCT No. T-79193 in the name of must be paid before title to the property can be
Moises Alvarez and Paulita Alvarez, as collateral. consolidated in favor of the bank.18
For non-payment of the loan, the mortgage was extra RR No. 4-99 issued on March 16, 1999, further amends
judicially foreclosed and the property was sold to the bank RMO No. 6-92 relative to the payment of Capital Gains Tax
as the highest bidder. Before the expiration of the one- and Documentary Stamp Tax on extrajudicial foreclosure
year redemption period, the mortgagors notified the bank sale of capital assets initiated by banks, finance and
of their intention to redeem the property. The mortgagors insurance companies.
requested for the elimination of liquidated damages and

SEC. 3. CAPITAL GAINS TAX. – application if the revocation, modification, or reversal will
be prejudicial to the taxpayers, except in the following
(1) In case the mortgagor exercises his cases:
right of redemption within one year
from the issuance of the certificate of (a) where the taxpayer deliberately
sale, no capital gains tax shall be misstates or omits material facts from
imposed because no capital gains has his return or in any document required
been derived by the mortgagor and no of him by the Bureau of Internal
sale or transfer of real property was Revenue;
realized. x x x
(b) where the facts subsequently
(2) In case of non-redemption, the gathered by the Bureau of Internal
capital gains [tax] on the foreclosure Revenue are materially different from
sale imposed under Secs. 24(D)(1) and the facts on which the ruling is based;
27(D)(5) of the Tax Code of 1997 shall or
become due based on the bid price of
the highest bidder but only upon the (c) where the taxpayer acted in bad
expiration of the one-year period of faith.
redemption provided for under Sec. 6
of Act No. 3135, as amended by Act
In this case, the retroactive application of RR No. 4-99 is
No. 4118, and shall be paid within
thirty (30) days from the expiration of more consistent with the policy of aiding the exercise of
the said one-year redemption period. the right of redemption.
Considering that herein petitioners-mortgagors exercised

SEC. 4. DOCUMENTARY STAMP TAX. – their right of redemption before the expiration of the
statutory one-year period, petitioner bank is not liable to
(1) In case the mortgagor exercises his pay the capital gains tax due on the extrajudicial
right of redemption, the transaction foreclosure sale. There was no actual transfer of title from
shall only be subject to the P15.00 the owners-mortgagors to the foreclosing bank. Hence,
documentary stamp tax imposed
the inclusion of the said charge in the total redemption
under Sec. 188 of the Tax Code of 1997
price was unwarranted and the corresponding amount
because no land or realty was sold or
transferred for a consideration. paid by the petitioners-mortgagors should be returned to
them
(2) In case of non-redemption, the
corresponding documentary stamp tax
shall be levied, collected and paid by SHORTER VERSION OF RULING:
the person making, signing, issuing,
accepting, or transferring the real NO. There is no legal basis for the inclusion of this charge
property wherever the document is in the redemption price. In the foreclosure sale, there is no
made, signed, issued, accepted or actual transfer of the mortgaged real property until after
transferred where the property is the expiration of the one-year redemption period as
situated in the Philippines. x x x provided in Act No.3135 and the title thereto is
(Emphasis supplied.) consolidated in the name of the mortgagee in case of non-
redemption. In the interim, the mortgagor is given the
Although the subject foreclosure sale and redemption took option whether or not to redeem the real property. The
place before the effectivity of RR No. 4-99, its provisions issuance of the Certificate of Sale does not by itself
may be given retroactive effect in this case. transfer ownership.
Section 246 of the NIRC of 1997 states: 9. THE MANILA BANKING CORPORATION v. CIR
G.R. No. 168118 August 28, 2006
SEC. 246. Non-Retroactivity of Rulings. – Any revocation,
modification, or reversal of any of the rules and FACTS:
regulations promulgated in accordance with the preceding
 1961- Manila Banking Corp was incorporated. It
Sections or any of the rulings or circulars promulgated by
engaged in the banking industry until 1987.
the Commissioner shall not be given retroactive

 May 1987- Monetary Board of Bangko Sentral ng corporate income tax on corporations, provides that for
Pilipinas (BSP) issued Resolution # 505 {pursuant purposes of this tax, the date when business operations
to the Central Bank Act (RA 265)} prohibiting
Manila Bank from engaging in business by reason commence is the year in which the domestic corporation
of insolvency. So, Manila Bank ceased operations registered with the BIR. However, under Revenue
and its assets and liabilities were placed under
Regulations No. 4-95, the date of commencement of
charge of a government appointed receiver.
 1998- Comprehensive Tax Reform Act (RA8424) operations of thrift banks, such as herein petitioner, is the
imposed a minimum corporate income tax on date the particular thrift bank was registered with the SEC
domestic and resident foreign corporations.
or the date when the Certificate of Authority to Operate
 Implementing law: Revenue Regulation # 9-98
stating that the law allows a 4year period from was issued to it by the Monetary Board of the BSP,
the time the corporations were registered with whichever comes later.
the BIR during which the minimum corporate
income tax should not be imposed.
 June 23, 1999- BSP authorized Manila Bank to Clearly then, Revenue Regulations No. 4-95, not
operate as a thrift bank. Revenue Regulations No. 9-98, applies to petitioner, being
 NOTE: June 15, 1999 Revenue Regulation #4-95
(pursuant to Thrift Bank Act of 1995) provides a thrift bank. It is, therefore, entitled to a grace period of
that the date of commencement of operations four (4) years counted from June 23, 1999 when it was
shall be understood to mean the date when the
authorized by the BSP to operate as a thrift bank.
thrift bank was registered with SEC or when
Certificate of Authority to Operate was issued by Consequently, it should only pay its minimum corporate
the Monetary Board, whichever comes LATER. income tax after four (4) years from 1999.
 Dec 1999- Manila Bank wrote to BIR requesting
a ruling on whether it is entitled to the 4 year
grace period under RR 9-98. WHEREFORE, we GRANT the petition.
 April 2000- Manila bank filed with BIR annual Respondent Commissioner of Internal Revenue is directed
income tax return for taxable year 1999 and paid
to refund to petitioner bank the sum of P33,816,164.00
33M.
 Feb 2001- BIR issued BIR Ruling 7-2001 stating prematurely paid as minimum corporate income tax.
that Manila Bank is entitled to the 4year grace
period. Since it reopened in 1999, the min.
PERTINENT PROVISIONS:
corporate income tax may be imposed not
earlier than 2002. It stressed that although it had
been registered with the BIR before 1994, but it . Section 27(E) of the Tax Code provides:
ceased operations 1987-1999 due to involuntary
closure.
 Manila Bank, then, filed with BIR for the refund.
Sec. 27. Rates of Income Tax on
 Due to the inaction of BIR on the claim, it filed Domestic Corporations. x x x
with CTA for a petition for review, which was
denied and found that Manila Bank’s payment of (E) Minimum Corporate Income Tax on
33M is correct, since its operations were merely Domestic Corporations. -
interrupted during 1987-1999. CA affirmed CTA.
(1) Imposition of Tax. - A
ISSUE: Whether or not Manila Bank is entitled to a refund minimum corporate income tax of two
of its minimum corporate income tax paid to BIR for 1999. percent (2%) of the gross income as of
the end of the taxable year, as defined
herein, is hereby imposed on a
corporation taxable under this Title,
RULING:
beginning on the fourth taxable year
immediately following the year in
YES. Let it be stressed that Revenue Regulations No. 9-98, which such corporation commenced its
implementing R.A. No. 8424 imposing the minimum business operations, when the

minimum corporate income tax is 2(A) of these regulations, for a period
greater than the tax computed under of five (5) years from the date of
Subsection (A) of this Section for the commencement of operations; while
taxable year. for thrift banks which are already
existing and operating as of the date of
(2) Carry Forward of Excess effectivity of the Act (March 18, 1995),
Minimum Tax. - Any excess of the the tax exemption shall be for a period
minimum corporate income tax over of five (5) years reckoned from the
the normal income tax as computed date of such effectivity.
under Subsection (A) of this Section
shall be carried forward and credited For purposes of these
against the normal income tax for the regulations, date of commencement of
three (3) immediately succeeding operations shall be understood to
taxable years. mean the date when the thrift bank
was registered with the Securities and
xxx Exchange Commission or the date
when the Certificate of Authority to
Operate was issued by the Monetary
Upon the other hand, Revenue Regulation No. 9- Board of the Bangko Sentral ng
98 specifies the period when a corporation becomes Pilipinas, whichever comes later.
subject to the minimum corporate income tax, thus: xxx
9. THE MANILA BANKING CORPORATION vs. CIR

G.R. No. 168118 August 28, 2006
(5) Specific Rules for Determining the
Period When a Corporation Becomes
FACTS:
Subject to the MCIT (minimum
Petitioner MBC was incorporated in 1961 and had engaged
corporate income tax) -
in the commercial banking industry until 1987. On 1987,
the Monetary Board of the Bangko Sentral ng Pilipinas
For purposes of the MCIT, the taxable
(BSP) issued Resolution No. 505, pursuant to Sec. 29 of R.A
year in which business operations
No. 265 (the Central Bank Act), prohibiting petitioner from
commenced shall be the year in which
engaging in business due to insolvency. Thus, it ceased
the domestic corporation registered
operations that year and its assets and liabilities were
with the Bureau of Internal Revenue
placed under a government-appointed receiver.
(BIR).
On 1999, BSP authorized petitioner to operate as a thrift
Firms which were registered with BIR
bank. The next year, it filed with the BIR its annual
in 1994 and earlier years shall be
corporate income tax return and paid P33,816,164.00 for
covered by the MCIT beginning January
taxable year 1999.
1, 1998.
xxx
Prior to the filing of its ITR, MBC sent a letter to the BIR
requesting a ruling on whether it is entitled to the four (4)-
On June 15, 1999, the BIR issued Revenue year grace period reckoned from 1999, since it resumed
Regulation No. 4-95 implementing certain provisions of operations in 1999, it will only pay its minimum corporate
income tax (MCIT) only after four (4) years thereafter.
the said R.A. No. 7906. Section 6 provides:
BIR issued BIR Ruling No. 007-2001 stating that petitioner
is entitled to the four (4)-year grace period. Since it
reopened in 1999, the MCIT may be imposed "not earlier
Sec. 6. Period of exemption. than 2002, i.e. the 4th taxable year beginning 1999."
All thrift banks created and organized
under the provisions of the Act shall be MBC filed with the BIR a claim for refund of said amount
exempt from the payment of all taxes, erroneously paid as MCIT for taxable year 1999. Due to
fees, and charges of whatever nature BIR’s inaction, MBC filed with the CTA a petition for review
and description, except the corporate which was then denied.
income tax imposed under Title II of
the NIRC and as specified in Section ISSUE: WON petitioner is entitled to a 4-year grace period.

HELD: -YES. The intent of Congress relative to the minimum corporate

income tax is to grant a four (4)-year suspension of tax
The CIR maintains that pursuant to R.A. No. 8424, payment to newly formed corporations, since corporations
petitioner should pay its minimum corporate income tax which are starting their business operations have to
beginning January 1, 1998 as it did not close its business stabilize their venture in order to obtain a stronghold in
operations in 1987 but merely suspended the same. Even the industry.
if placed under receivership, its corporate existence was
never affected. Thus, it falls under the category of an In order to allow new corporations to grow and develop at
existing corporation recommencing its banking business the initial stages of their operations, the lawmaking body
operations. Section 27(E) of the Tax Code provides: saw the need to provide a grace period of four years from
their registration before paying their MCIT.
Congress enacted R.A. No. 7906 or the "Thrift Banks Act of

Sec. 27. Rates of Income Tax on Domestic Corporations. – 1995" which provides for the regulation of the
xxx organization and operations of thrift banks. The BIR issued
Revenue Regulation No. 4-95 implementing certain
(E) Minimum Corporate Income Tax on Domestic provisions of the said R.A. No. 7906. Sec. 6 provides:
Corporations. -
Sec. 6. Period of exemption. – All thrift banks
(1) Imposition of Tax. - A minimum corporate created and organized under the provisions of the
income tax of two percent (2%) of the gross Act shall be exempt from the payment of all taxes,
income as of the end of the taxable year, as fees, and charges of whatever nature and
defined herein, is hereby imposed on a description, except the corporate income tax
corporation taxable under this Title, beginning imposed under Title II of the NIRC and as specified in
on the fourth taxable year immediately Section 2(A) of these regulations, for a period of five
following the year in which such corporation (5) years from the date of commencement of
commenced its business operations, when the operations; while for thrift banks which are already
minimum corporate income tax is greater than existing and operating as of the date of effectivity of
the tax computed under Subsection (A) of this the Act (March 18, 1995), the tax exemption shall be
Section for the taxable year. for a period of five (5) years reckoned from the date
of such effectivity.
(2) Carry Forward of Excess Minimum Tax. - Any
excess of the minimum corporate income tax For purposes of these regulations, "date of
over the normal income tax as computed under commencement of operations" shall be understood to
Subsection (A) of this Section shall be carried mean: 1) date when the thrift bank was registered with
forward and credited against the normal the SEC or 2) date when the Certificate of Authority to
income tax for the three (3) immediately Operate was issued by the Monetary Board of the BSP,
succeeding taxable years. whichever comes later.
xxx MBC was registered with the BIR in 1961. But, in 1987, it
was found insolvent and was placed under receivership.
Upon the other hand, Revenue Regulation No. After 12 years, or on June 23, 1999, BSP issued a
9-98 specifies the period when a corporation Certificate of Authority to Operate as a thrift bank. On
becomes subject to the minimum corporate January 21, 1999, it registered with the BIR. Then it filed
income tax, thus: with the SEC its Articles of Incorporation which was
approved on June 22, 1999.
(5) Specific Rules for Determining the Period When
a Corporation Becomes Subject to the MCIT It is clear from the above-quoted provision of Revenue
(minimum corporate income tax) - Regulations No. 4-95 that the date of commencement of
For purposes of the MCIT, the taxable year in operations of a thrift bank is the date it was registered
which business operations commenced shall be with the SEC OR the date when the Certificate of Authority
the year in which the domestic corporation to Operate was issued to it by the Monetary Board of the
registered with the Bureau of Internal Revenue BSP, whichever comes later.
(BIR).
Firms which were registered with BIR in 1994 Revenue Regulations No. 9-98, implementing R.A. No.
and earlier years shall be covered by the MCIT 8424 imposing the minimum corporate income tax on
beginning January 1, 1998. corporations, provides that for purposes of this tax, the

date when business operations commence is the year in Creditable Withholding Tax – Income Tax" covering said
which the domestic corporation registered with the BIR. fiscal year. After a thorough investigation, PAL received a
Formal Letter of Demand and Details of Assessment.
However, under Revenue Regulations No. 4-95, the date
of commencement of operations of thrift banks, such as PAL filed its formal written protest on 13 January 2004
herein petitioner, is the date the particular thrift bank was reiterating the following defenses: (1) that it is exempt
registered with the SEC or the date when the Certificate of from, or is not subject to, the 2% MCIT by virtue of its
Authority to Operate was issued to it by the Monetary charter, Presidential Decree No. (PD) 1590;3 and (2) that
Board of the BSP, whichever comes later. the three-year period allowed by law for the BIR to assess
deficiency internal revenue taxes for the taxable year
Therefore, Revenue Regulations No. 4-95, not Revenue ending 31 March 2000 had already lapsed on 15July 2003.
Regulations No. 9-98, applies to petitioner, being a thrift Since no final action has been taken by petitioner on PAL’s
bank. It is, thus, entitled to a grace period of four (4) years formal written protest, respondent filed a Petition for
counted from June 23, 1999 when it was authorized by the Review before the CTA.
BSP to operate as a thrift bank. Consequently, it should
only pay its minimum corporate income tax after four (4) Ruling of the CTA Second Division
years from 1999.
The CTA Second Division made the following factual and
NOTE: legal findings, to wit:
MCIT 4-year grace period
(The MCIT of 2% of the GI (a) Sec. 13 of PD 1590 acquiring and limiting the extent of
shall not be imposed) the tax liability of respondent under its franchise is
Firms registered with BIR Beginning January 1, 1998 coached in a clear, plain and unambiguous manner, and
in 1994 and earlier years to January 1, 2001 needs no further interpretation or construction;
Firms registered with BIR Beginning on the fourth (b) Sec. 13 clearly provides that respondent is liable only
in 1995 and onwards taxable year immediately for either the basic corporate income tax based on its
following the year in which annual net taxable income, or the 2% franchise tax based
such corporation on gross revenue, whichever is lower;
commenced its business (c) Respondent-grantee must only choose between the
operations, when the two alternatives mentioned in Sec. 13 in the payment of its
minimum income tax is tax liability to the government, and its choice must be that
greater than the tax which will result in a lower tax liability;
computed under Subsection
(A) of this Section for the (d) Since the income tax return of respondent reflected a
taxable year. zero taxable income for the fiscal year ending 31 March
2000,obviously being lower than the 2% franchise tax, its
10. COMMISSIONER OF INTERNAL REVENUE vs. choice of the former is definitely a better alternative as
PHILIPPINE AIRLINES, INC. (PAL),G.R. No. 179259, basis for its tax liability to the government;
September 25, 2013
(e) The basic corporate income tax mentioned in Section
FACTS: 13 of PD1590 does not refer to the MCIT under Sec. 27(E)
Petitioner CIR has the power to assess and collect national of the NIRC of 1997, as amended, but particularly to the
internal revenue taxes, fees, and charges, including the 2% applicable rate of 32% income tax under Sec. 27(A) of the
per centum MCIT imposed under Sec. 27(E) of the NIRC, as same Code, on the taxable income of domestic
amended; while PAL is a domestic corporation duly corporations;
organized and existing under and by virtue of the laws of
the Philippines. (f) The MCIT is regarded to belong to "other taxes" as it
was not included in the choices provided by the franchise.
For the fiscal year that ended 31 March 2000, PAL filed its To hold otherwise would be to give another option to
Tentative Corporate Income Tax Return, reflecting a respondent which is evidently not within the ambit of PD
creditable tax withheld for the fourth quarter amounting 1590;
to ₱524,957.00, and a zero taxable income for said year.
Hence, it filed a written claim for refund before the CIR. (g) The "in lieu of all other taxes" clause under Sec. 13 of
respondent’s legislative franchise exempts it from all taxes
As a consequence, PAL received a Letter of Authority from necessary in the conduct of its business covered by the
the BIR, authorizing the revenue officers to examine franchise, except the tax on its real property for which
respondent’s books of accounts and other accounting respondent is expressly made payable; and
records to evaluate respondent’s "Claim for Refund on

(h) The rationale or purpose for the exemption from all rule in determining the income tax due from a domestic
other taxes except the income tax and real property tax corporation under the provisions of the NIRC of 1997, as
granted to respondent upon the payment of the basic amended, such rule can only be applied to respondent
corporate income tax or the 2% franchise tax is that such only as to the extent allowed by the provisions of its
tax exemption is part of inducement for the acceptance of franchise.
the franchise and the rendition of public service by the
grantee. PD 1590, the franchise of respondent, contains the
following pertinent provisions governing its taxation:
Simply put, it pronounced that the only qualification
provided for in the law is the option given to respondent Section 13. In consideration of the franchise and rights
to choose between the taxes which will yield the lesser hereby granted, the grantee shall pay to the Philippine
liability. Thus, if as a result of the exercise of the option, Government during the life of this franchise whichever of
the respondent ends up without any tax liability, it should subsections (a) and (b) hereunder will result in a lower tax:
not be held liable for any other tax, such as the MCIT,
except for real property tax. a) The basic corporate income tax [rate of 30%]
based on the grantee’s annual net taxable
ISSUE: WON PAL is liable for Minimum Corporate Income income computed in accordance with the
Tax. provisions of the National Internal Revenue
Code; or
HELD: -NO b) A franchise tax of two per cent (2%) of the gross
revenues derived by the grantee from all
Section 27 of the NIRC of 1997, as amended, provides: sources, without distinction as to transport or
Rates of Income Tax on Domestic Corporations – non-transport operations; provided, that with
(A) In General. — Except as otherwise provided in this respect to INTERNATIONAL AIR-TRANSPORT
Code, an income tax of thirty-five percent (35%) [now SERVICE, only the gross passenger, mail, and
30%] is hereby imposed upon the taxable income derived freight revenues from its outgoing flights shall be
during each taxable year from all sources within and subject to this tax.
without the Philippines by every corporation, as defined in
Sec. 22(B) of this Code and taxable under this Title as a The tax paid by the grantee under either of the above
corporation, organized in, or existing under the law of the alternatives shall be in lieu of all other taxes, duties,
Philippines: Provided, That effective January 1, 1998, the royalties, registration, license, and other fees and charges
rate of income tax shall be thirty-four percent (34%); of any kind, nature, or description, imposed, levied,
effective January 1, 1999, the rate shall be thirty-three established, assessed, or collected by any municipal, city,
percent (33%); and effective January 1, 2000 and provincial, or national authority or government agency,
thereafter, the rate shall be thirty-two percent (32%). now or in the future, including but not limited to the
following:
xxxx
xxxx
(E) Minimum Corporate Income Tax on Domestic
Corporations.— The grantee, shall, however, pay the tax on its real
(1) Imposition of Tax — A minimum corporate income property in conformity with existing law.
tax of two percent (2%) of the gross income as of the
end of the taxable year, as defined herein, is hereby For purposes of computing the basic corporate income tax
imposed on a corporation taxable under this Title, as provided herein, the grantee is authorized:
beginning on the fourth taxable year immediately a) To depreciate its assets to the extent of not
following the year in which such corporation more than twice as fast the normal rate of
commenced its business operations, when the depreciation; and
minimum income tax is greater than the tax computed b) To carry over as a deduction from taxable
under Subsection (A) of this Section for the taxable income any net loss incurred in any year up to
year. (Emphasis supplied) five years following the year of such loss.
A domestic corporation must pay whichever is the higher DURING THE LIFETIME OF THE FRANCHISE OF
of: 1) the income tax under Sec. 27(A) of the NIRC of 1997, RESPONDENT, its taxation shall be strictly governed by two
as amended, computed by applying the tax rate therein to fundamental rules, to wit: 1) respondent shall pay the
the taxable income of the corporation; or 2) the MCIT Government either the basic corporate income tax or
under Sec. 27(E), also of the same Code, equivalent to 2% franchise tax, whichever is lower; and 2) the tax paid by
of the gross income of the corporation. The Court would respondent, under either of these alternatives, shall be in
like to underscore that although this may be the general lieu of all other taxes, duties, royalties, registration,

license, and other fees and charges, except only real In comparison, the 2% MCIT under Sec. 27 (E) of the NIRC
property tax. of 1997 shall be based on the gross income of the
domestic corporation.
The basic corporate income tax of respondent shall be
based on its annual net taxable income, computed in There is a distinction between taxable income, which is the
accordance with the NIRC of 1997, as amended. PD 1590 basis for basic corporate income tax under Sec. 27(A); and
also explicitly authorizes respondent, in the computation gross income, which is the basis for the MCIT under Sec.
of its basic corporate income tax, to: 1) depreciate its 27(E).The same reasons prevent this Court from declaring
assets twice as fast the normal rate of depreciation; and 2) that the basic corporate income tax, for which PAL is liable
carry over deduction from taxable income any net loss under Sec. 13(a) of [PD] 1590, also covers MCIT under Sec.
incurred in any year up to five years following the year of 27(E) of the NIRC of 1997, since the basis for the first is the
such loss. annual net taxable income, while the basis for the second
is gross income.
The franchise tax shall be 2% of the gross revenues derived
by respondent from all sources, whether transport or non- Third, even if the basic corporate income tax and the MCIT
transport operations. However, WITH RESPECT TO are both income taxes under Sec. 27 of the NIRC of 1997,
INTERNATIONAL AIR-TRANSPORT SERVICE, the franchise and one is paid in place of the other, the two are distinct
tax shall only be imposed on the gross passenger, mail, and separate taxes.
and freight revenues of respondent from its outgoing
flights. Sec. 13 of [PD] 1590 gives PAL the option to pay basic
corporate income tax or franchise tax, whichever is lower;
First, Sec. 13(a) of [PD] 1590 refers to "basic corporate and the tax so paid shall be in lieu of all other taxes, except
income tax." In Commissioner of Internal Revenue v. real property tax. The income tax on the passive income of
Philippine Airlines, Inc., the Court already settled that the PAL falls within the category of "allot her taxes" from
"basic corporate income tax, "under Sec. 13(a) of [PD] which PAL is exempted, and which, if already collected,
1590, relates to the general rate of 35% (reduced to 32% should be refunded to PAL.
by the year 2000) as stipulated in Sec. 27(A) of the NIRC of
1997. [now 30%] The MCIT is different from the basic corporate income tax,
not just in the rates, but also in the bases for their
Sec. 13(a) of [PD] 1590 requires that the basic corporate computation. Not being covered by Sec. 13(a) of [PD]
income tax be computed in accordance with the NIRC. This 1590,which makes PAL liable only for basic corporate
means that PAL shall compute its basic corporate income income tax, then MCIT is included in "all other taxes" from
tax using the rate and basis prescribed by the NIRC of 1997 which PAL is exempted.
for the said tax. There is nothing in Sec. 13(a) of [PD] 1590
to support the contention of the CIR that PAL is subject to With this, the MCIT is paid in place of the basic corporate
the entire Title II of the NIRC of 1997, entitled "Tax on income tax, when the former is higher than the latter,
Income." does not mean that these two income taxes are one and
the same. The said taxes are merely paid in the alternative,
Second, Sec. 13(a) of PD No. 1590 further provides that giving the Government the opportunity to collect the
the basic corporate income tax of PAL shall be based on its higher amount between the two. The situation is not much
annual net taxable income. This is consistent with Sec. different from Sec. 13 of [PD] 1590, which reversely allows
27(A) of the NIRC of 1997, which provides that the rate of PAL to pay, whichever is lower of the basic corporate
basic corporate income tax, which is 32% beginning 1 income tax or the franchise tax. It does not make the basic
January 2000, [now 30%] shall be imposed on the taxable corporate income tax in distinguishable from the franchise
income of the domestic corporation. tax.
Pursuant to the NIRC of 1997, the taxable income of a Fourth, the intent of Sec. 13 of [PD] 1590 is to extend to
domestic corporation may be arrived at by subtracting PAL tax concessions not ordinarily available to other
from gross income deductions authorized, not just by the domestic corporations. Sec. 13 of [PD] 1590 permits PAL to
NIRC of 1997, but also by special laws. [PD] 1590 may be pay whichever is lower of the basic corporate income tax
considered as one of such special laws authorizing PAL, in or the franchise tax; and the tax so paid shall be in lieu of
computing its annual net taxable income, on which its all other taxes, except only real property tax. Hence, under
basic corporate income tax shall be based, to deduct from its franchise, PAL is to pay the least amount of tax possible.
its gross income the following: 1) depreciation of assets at
twice the normal rate; and 2) net loss carry-over up to five The imposition of MCIT on PAL, as the CIR insists, would
years following the year of such loss. result in a situation that contravenes the objective of Sec.
13 of [PD] 1590. In effect, PAL would not just have two,
but three tax alternatives, namely, the basic corporate

income tax, MCIT, or franchise tax. More troublesome is assessed deficiency MCIT of ₱326,778,723.35 for fiscal
the fact that, as between the basic corporate income tax year ending 31 March 2000.
and the MCIT, PAL shall be made to pay whichever is
higher, irrefragably, in violation of the avowed intention of CIR contention that PAL needs to actually pay a certain
Sec. 13 of [PD] 1590 to make PAL pay for the lower amount as basic corporate income tax or franchise tax
amount of tax. before it can enjoy the tax exemption granted to it since it
should retain the responsibility of paying its share of the
Fifth, the CIR posits that PAL may not invoke in the instant tax burden, this Court has categorically ruled in the above-
case the "in lieu of all other taxes" clause in Sec. 13 of [PD] cited cases that it is not the fact of tax payment that
No. 1590, if it did not pay anything at all as basic corporate exempts it, but the exercise of its option.
income tax or franchise tax. As a result, PAL should be
made liable for "other taxes" such as MCIT. This line of By way of reiteration, although it appears that respondent
reasoning has been dubbed as the Substitution Theory is not completely exempt from all forms of taxes under PD
wherein the Court found the Substitution Theory 1590 considering that Sec. 13 thereof requires it to pay,
unacceptable in the present Petition. either the lower amount of the basic corporate income tax
or franchise tax (which are both direct taxes), at its option,
And sixth, [PD] 1590 explicitly allows PAL, in computing its mere exercise of such option already relieves respondent
basic corporate income tax, to carry over as deduction any of liability for all other taxes and/or duties, whether direct
net loss incurred in any year, up to five years following the or indirect taxes. This is an expression of the same thought
year of such loss. Therefore, [PD] 1590 does not only in the ruling that, to repeat, it is not the fact of tax
consider the possibility that, at the end of a taxable period, payment that exempts it, but the exercise of its option.
PAL shall end up with zero annual net taxable income
(when its deductions exactly equal its gross income), as 11. RIZAL COMMERCIAL BANKING CORPORATION (RCBC)
what happened in the case at bar, but also the likelihood vs. CIR, G.R. No. 170257, September 7, 2011
that PAL shall incur net loss (when its deductions exceed
its gross income). If PAL is subjected to MCIT, the provision FACTS:
in [PD] 1590 on net loss carry-over will be rendered Petitioner RCBC is a corporation engaged in general
nugatory. banking operations. It seasonably filed its Corporation
Annual Income Tax Returns for Foreign Currency Deposit
Between [PD] 1590 which is a special law specifically Unit for the calendar years 1994 and 1995.
governing the franchise of PAL, issued on 11 June 1978;
and the NIRC of 1997 which is a general law on national It received Letter of Authority issued by then
internal revenue taxes, that took effect on 1 January 1998, Commissioner of Internal Revenue (CIR) Liwayway
the former prevails. The rule is that on a specific matter, Vinzons-Chato, authorizing a special audit team to
the special law shall prevail over the general law, which examine the books of accounts and other accounting
shall be resorted to only to supply deficiencies in the records for all internal revenue taxes from January 1, 1994
former. to December 31, 1995. RCBC executed two Waivers of the
Defense of Prescription under the Statute of Limitations of
The MCIT was a new tax introduced by Republic Act No. the NIRC covering the internal revenue taxes due for the
8424. Under the doctrine of strict interpretation, the years 1994 and 1995.
burden is upon the CIR to primarily prove that the new
MCIT provisions of the NIRC of 1997, clearly, expressly, RCBC argued that waivers of the Statute of Limitations
and unambiguously extend and apply to PAL, despite the were not valid because these were not signed or
latter’s existing tax exemption. To do this, the CIR must conformed to by the CIR as required under Sec. 222(b) of
convince the Court that the MCIT is a basic corporate the Tax Code. As regards the deficiency FCDU (foreign
income tax, and is not covered by the "in lieu of all other currency deposit unit) onshore tax, RCBC contended that
taxes" clause of [PD] 1590. Since the CIR failed in this because the onshore tax was collected in the form of a
regard, the Court is left with no choice but to consider the final withholding tax, it was the borrower, constituted by
MCIT as one of "all other taxes," from which PAL is exempt law as the withholding agent, that was primarily liable for
under the explicit provisions of its charter. (Emphasis the remittance of the said tax.
supplied)
The CTA-First Division promulgated its Decision which
Thus, it is clear that PAL is exempt from the MCIT imposed partially granted the petition for review. It considered as
under Sec. 27(E) of the NIRC of 1997, as amended (Reason: closed and terminated the assessments for deficiency
Since the CIR failed in this regard, the Court is left with no income tax, deficiency gross receipts tax, deficiency final
choice but to consider the MCIT as one of "all other taxes," withholding tax, deficiency expanded withholding tax, and
from which PAL is exempt under the explicit provisions of deficiency documentary stamp tax (not an industry issue)
its charter). Thus, PAL cannot be held liable for the for 1994 and 1995. It, however, upheld the assessment for

deficiency final tax on FCDU onshore income and
deficiency documentary stamp tax for 1994 and 1995 and The Tax Code only makes the agent personally liable for
ordered RCBC to pay certain amounts plus 20% the tax arising from the breach of its legal duty to withhold
delinquency tax. as distinguished from its duty to pay tax since:
"The government’s cause of action against the
The CTA-En Banc, in its assailed Decision, denied the withholding agent is not for the collection of income
petition for lack of merit. It ruled that by receiving, tax, but for the enforcement of the withholding
accepting and paying portions of the reduced assessment, provision of Sec. 53 of the Tax Code, compliance with
RCBC bound itself to the new assessment, implying that it which is imposed on the withholding agent and not
recognized the validity of the waivers. RCBC could not upon the taxpayer." (Emphases supplied)
assail the validity of the waivers after it had received and
accepted certain benefits as a result of the execution of The liability of the withholding agent is independent from
the said waivers. As to the deficiency onshore tax, it held that of the taxpayer. The former cannot be made liable for
that because the payor-borrower was merely designated the tax due because it is the latter who earned the income
by law to withhold and remit the said tax, it would then subject to withholding tax. The withholding agent is liable
follow that the tax should be imposed on RCBC as the only insofar as he failed to perform his duty to withhold
payee-bank. Finally, in relation to the assessment of the the tax and remit the same to the government. The liability
deficiency documentary stamp tax on petitioner’s special for the tax, however, remains with the taxpayer because
savings account, it held that petitioner’s special savings the gain was realized and received by him.
account was a certificate of deposit and, as such, was
subject to documentary stamp tax. While the payor-borrower can be held accountable for its
negligence in performing its duty to withhold the amount
ISSUE: WON petitioner, as payee-bank, can be held liable of tax due on the transaction, RCBC, as the taxpayer and
for deficiency onshore tax, which is mandated by law to be the one which earned income on the transaction, remains
collected at source in the form of a final withholding tax. liable for the payment of tax as the taxpayer shares the
responsibility of making certain that the tax is properly
HELD: Petition is denied. withheld by the withholding agent, so as to avoid any
penalty from the non-payment of the withholding tax due.
In Chamber of Real Estate and Builders’ Associations, Inc.
v. The Executive Secretary, the Court has explained that RCBC cannot evade its liability for FCDU Onshore Tax by
the purpose of the withholding tax system is three-fold: shifting the blame on the payor-borrower as the
1) to provide the taxpayer with a convenient way of paying withholding agent. As such, it is liable for payment of
his tax liability; 2) to ensure the collection of tax, and deficiency onshore tax on interest income derived from
3) to improve the government’s cashflow. foreign currency loans, pursuant to Sec. 24(e)(3) of the
National Internal Revenue Code of 1993 which provides:
Under the withholding tax system, the payor is the
taxpayer upon whom the tax is imposed, while the Sec. 24. Rates of tax on domestic corporations.
withholding agent simply acts as an agent or a collector of xxxx
the government to ensure the collection of taxes.
It is, therefore, indisputable that the withholding agent is (e) Tax on certain incomes derived by domestic
merely a tax collector and not a taxpayer, as elucidated by corporations
this Court in the case of Commissioner of Internal Revenue xxxx
v. Court of Appeals, to wit:
(3) Tax on income derived under the Expanded
In the operation of the withholding tax system, the Foreign Currency Deposit System. – Income
withholding agent is the payor, a separate entity acting derived by a depository bank under the
no more than an agent of the government for the expanded foreign currency deposit system from
collection of the tax in order to ensure its payments; foreign currency transactions with
the payer is the taxpayer – he is the person subject to nonresidents, offshore banking units in the
tax imposed by law; and the payee is the taxing Philippines, local commercial banks including
authority. In other words, the withholding agent is branches of foreign banks that may be
merely a tax collector, not a taxpayer. Under the authorized by the Central Bank to transact
withholding system, however, the agent-payor business with foreign currency depository
becomes a payee by fiction of law. His (agent) liability system units and other depository banks under
is direct and independent from the taxpayer, because the expanded foreign currency deposit system
the income tax is still imposed on and due from the shall be exempt from all taxes, except taxable
latter. The agent is not liable for the tax as no wealth income from such transactions as may be
flowed into him – he earned no income. specified by the Secretary of Finance, upon

recommendation of the Monetary Board to be
subject to the usual income tax payable by Respondent Court of Tax Appeals rendered a Decision
banks: Provided, That interest income from which granted the refund and/or tax credit to petitioner
foreign currency loans granted by such representing overpaid withholding tax on dividends
depository banks under said expanded system remitted by it to the Glaro S.A. Ltd. of Switzerland during
to residents (other than offshore banking units the second quarter of the years 1975 and 1976. Thus,
in the Philippines or other depository banks petitioner filed a Motion for Reconsideration but the same
under the expanded system) shall be subject to was denied in a Resolution.
a 10% tax. (Emphasis supplied)
ISSUE: WON Wander Phils. is entitled to the preferential
Thus, the Court has consistently held that findings and rate of 15% withholding tax on dividends declared and
conclusions of the CTA shall be accorded the highest remitted to its parent corporation, Glaro.
respect and shall be presumed valid, in the absence of any
clear and convincing proof to the contrary. HELD: -Yes.
The CTA, as a specialized court dedicated exclusively to the According to Sec. 24 (b) (1) of the Tax Code, as amended
study and resolution of tax problems, has developed an by P.D. 369 and 778, the law involved in this case, reads:
expertise on the subject of taxation. As such, its decisions
shall not be lightly set aside on appeal, unless this Court Sec. 1. The first paragraph of subsection (b) of Section 24
finds that the questioned decision is not supported by of the National Internal Revenue Code, as amended, is
substantial evidence or there is a showing of abuse or hereby further amended to read as follows:
improvident exercise of authority on the part of the Tax
Court. (b) Tax on foreign corporations. — 1) Non-resident
corporation. A foreign corporation not engaged in
trade or business in the Philippines, including a foreign
12. COMMISSIONER OF INTERNAL REVENUE vs. WANDER life insurance company not engaged in the life
PHILIPPINES, INC. AND THE COURT OF TAX APPEALS, G.R. insurance business in the Philippines, shall pay a tax
No. L-68375, April 15, 1988 equal to 35% of the gross income received during its
taxable year from all sources within the Philippines, as
FACTS: interest (except interest on foreign loans which shall
Wander Philippines, Inc. (Wander), a domestic corporation be subject to 15% tax), dividends, premiums, annuities,
organized under Philippine laws, is wholly-owned compensations, remuneration for technical services or
subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss otherwise, emoluments or other fixed or
corporation not engaged in trade or business in the determinable, annual, periodical or casual gains,
Philippines. profits, and income, and capital gains:
xxx
On July 18, 1975, Wander filed its withholding tax return
for the second quarter ending June 30, 1975 and remitted Provided, still further That on dividends received from
to its parent company, Glaro dividends in the amount of a domestic corporation liable to tax under this
P222,000.00, on which 35% withholding tax thereof Chapter, the tax shall be 15% of the dividends
(i.e.P77,700.00) was withheld and paid to the BIR. received, which shall be collected and paid as provided
in Section 53 (d) of this Code, subject to the condition
On July 14, 1976, Wander filed a withholding tax return for that the country in which the non-resident foreign
the second quarter ending June 30, 1976 on the dividends corporation is domiciled shall allow a credit against the
it remitted to Glaro amounting to P355,200.00, on which tax due from the non-resident foreign corporation
35% tax (i.e.P124,320.00) was withheld and paid to the taxes deemed to have been paid in the Philippines
BIR. equivalent to 20% which represents the difference
between the regular tax (35%) on corporations and the
On July 5, 1977, Wander filed with the Appellate Division tax (15%) dividends as provided in this section: xxx
of the Internal Revenue a claim for refund and/or tax
credit in the amount of P115, 400.00, contending that it is From the above provision, the dividends received from a
liable only to 15% withholding tax in accordance with domestic corporation liable to tax, the tax shall be 15% of
Section 24 (b)(1) of the Tax Code, as amended by PD Nos. the dividends received, subject to the condition that the
369 and 778, and not on the basis of 35% which was country in which the non-resident foreign corporation is
withheld and paid to and collected by the government. domiciled shall allow a credit against the tax due from the
Petitioner herein, having failed to act on the above-said non-resident foreign corporation taxes deemed to have
claim for refund, on July 15, 1977, Wander filed a petition been paid in the Philippines equivalent to 20% which
with respondent Court of Tax Appeals.

represents the difference between the regular tax (35%) rights for traffic purposes in the Philippines, and was not
on corporations and the tax (15%) dividends. granted a Certificate of public convenience and necessity
to operate in the Philippines by the Civil Aeronautics Board
Switzerland did not impose any tax on the dividends (CAB), except for a nine-month period, partly in 1961 and
received by Glaro. Accordingly, Wander claims that full partly in 1962, when it was granted a temporary landing
credit is granted and not merely credit equivalent to 20%. permit by the CAB.
On the other hand, petitioner avers the tax sparing credit
is applicable only if the country of the parent corporation 3. Consequently, it did not carry passengers and/or cargo
allows a foreign tax credit not only for the 15 percentage- to or from the Philippines, although during the period
point portion actually paid but also for the equivalent covered by the assessments, it maintained a general sales
twenty percentage point portion spared, waived or agent in the Philippines — Wamer Barnes and Company,
otherwise deemed as if paid in the Philippines; that private Ltd., and later Qantas Airways — which was responsible
respondent does not cite anywhere a Swiss law to the
for selling BOAC tickets covering passengers and cargoes.
effect that in case where a foreign tax, such as the
Philippine 35% dividend tax, is spared waived or otherwise 4. On 7 May 1968, petitioner Commissioner of Internal
considered as if paid in whole or in part by the foreign Revenue (CIR, for brevity) assessed BOAC the aggregate
country, a Swiss foreign-tax credit would be allowed for amount of P2,498,358.56 for deficiency income taxes
the whole or for the part, as the case may be, of the covering the years 1959 to 1963. This was protested by
foreign tax so spared or waived or considered as if paid by BOAC. Subsequent investigation resulted in the issuance of
the foreign country.
a new assessment, dated 16 January 1970 for the years
1959 to 1967 in the amount of P858,307.79. BOAC paid
While claims for refund are construed strictly against the
claimant, nevertheless, the fact that Switzerland did not this new assessment under protest.
impose any tax or the dividends received by Glaro from 5. On 17 November 1971, BOAC was assessed deficiency
the Philippines should be considered as a full satisfaction income taxes, interests, and penalty for the fiscal years
of the given condition. For, as aptly stated by respondent 1968-1969 to 1970-1971 in the aggregate amount of
Court, to deny private respondent the privilege to
P549,327.43, and the additional amounts of P1,000.00 and
withhold only 15% tax provided for under PD No. 369,
P1,800.00 as compromise penalties for violation of Section
amending Sec. 24 (b) (1) of the Tax Code, would run
counter to the very spirit and intent of said law and 46 (requiring the filing of corporation returns) penalized
definitely will adversely affect foreign corporations" under Section 74 of the National Internal Revenue Code
interest here and discourage them from investing capital in (NIRC).
our country. 6. On 25 November 1971, BOAC requested that the
assessment be countermanded and set aside. In a letter,
Moreover, the conclusion made by respondent Court is
dated 16 February 1972, however, the CIR not only denied
but a confirmation of the May 19, 1977 ruling of petitioner
that "since the Swiss Government does not impose any tax the BOAC request for refund in the First Case but also re-
on the dividends to be received by the said parent issued in the Second Case the deficiency income tax
corporation in the Philippines, the condition imposed assessment for P534,132.08 for the years 1969 to 1970-71
under the above-mentioned section is satisfied. plus P1,000.00 as compromise penalty under Section 74 of
Accordingly, the withholding tax rate of 15% is hereby the Tax Code. BOAC's request for reconsideration was
affirmed." denied by the CIR on 24 August 1973. This prompted BOAC
to file the Second Case before the Tax Court praying that it
be absolved of liability for deficiency income tax for the
13. CIR v Goodyear
years 1969 to 1971.
14. CIR vs British Overseas Airways Corp and CTA, G.R. 7. Tax Court – reversed the decision of CIR
No. L-65773-74 April 30, 1987
Issue:
Facts:
whether or not the revenue from sales of tickets by BOAC
1. BOAC is a 100% British Government-owned corporation in the Philippines constitutes income from Philippine
organized and existing under the laws of the United sources and, accordingly, taxable under our income tax
Kingdom It is engaged in the international airline business laws
and is a member-signatory of the Interline Air Transport
Association (IATA). Held:
2. During the periods covered by the disputed Yes. For the source of income to be considered
assessments, it is admitted that BOAC had no landing as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. In

BOAC's case, the sale of tickets in the Philippines is the and cargo from one place to another. It purports to tax the
activity that produces the income. The tickets exchanged business of transportation. 14 Being an excise tax, the
hands here and payments for fares were also made here in same can be levied by the State only when the acts,
Philippine currency. The site of the source of payments is privileges or businesses are done or performed within the
the Philippines. The flow of wealth proceeded from, and jurisdiction of the Philippines. The subject matter of the
occurred within, Philippine territory, enjoying the case under consideration is income tax, a direct tax on the
protection accorded by the Philippine government. In income of persons and other entities "of whatever kind
consideration of such protection, the flow of wealth and in whatever form derived from any source." Since the
should share the burden of supporting the government. two cases treat of a different subject matter, the decision
in one cannot be res judicata to the other.
True, Section 37(a) of the Tax Code, which
enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (21) dividends, (3) service,
15. Air Canada vs CIR, G.R. No. 169507, January 11, 2016
(4) rentals and royalties, (5) sale of real property, and (6)
sale of personal property, does not mention income from Facts:
the sale of tickets for international transportation.
1. Air Canada is a "foreign corporation organized and
However, that does not render it less an income from
existing under the laws of Canada[.]"5 On April 24, 2000, it
sources within the Philippines. Section 37, by its language,
was granted an authority to operate as an offline carrier by
does not intend the enumeration to be exclusive. It merely
the Civil Aeronautics Board, subject to certain conditions,
directs that the types of income listed therein be treated
which authority would expire on April 24, 2005.6 "As an
as income from sources within the Philippines. A cursory
off-line carrier, [Air Canada] does not have flights
reading of the section will show that it does not state that
originating from or coming to the Philippines [and does
it is an all-inclusive enumeration, and that no other kind of
not] operate any airplane [in] the Philippines[.]"
income may be so considered. "
2. On July 1, 1999, Air Canada engaged the services of
The absence of flight operations to and from the
Aerotel Ltd., Corp. (Aerotel) as its general sales agent in
Philippines is not determinative of the source of income or
the Philippines.
the site of income taxation. Admittedly, BOAC was an off-
line international airline at the time pertinent to this case. 3. On November 28, 2002, Air Canada filed a written claim
The test of taxability is the "source"; and the source of an for refund of alleged erroneously paid income taxes
income is that activity ... which produced the amounting to ₱5,185,676.77 before the Bureau of Internal
income. 11 Unquestionably, the passage documentations Revenue.
in these cases were sold in the Philippines and the revenue
SEC. 28. Rates of Income Tax on Foreign Corporations. -
therefrom was derived from a activity regularly pursued
within the Philippines. business a And even if the BOAC (A) Tax on Resident Foreign Corporations. -
tickets sold covered the "transport of passengers and
....
cargo to and from foreign cities", it cannot alter the fact
that income from the sale of tickets was derived from the (3) International Carrier. - An international
Philippines. The word "source" conveys one essential idea, carrier doing business in the Philippines shall pay
that of origin, and the origin of the income herein is the a tax of two and onehalf percent (2 1/2%) on its
‘Gross Philippine Billings’ as defined hereunder:
Philippines.
(a) International Air Carrier. - ‘Gross Philippine
Billings’ refers to the amount of gross revenue
Not related to the issue but presents an important point: derived from carriage of persons, excess
baggage, cargo and mail originating from the
Lastly, we find as untenable the BOAC argument Philippines in a continuous and uninterrupted
that the dismissal for lack of merit by this Court of the flight, irrespective of the place of sale or issue
appeal in JAL vs. Commissioner of Internal Revenue (G.R. and the place of payment of the ticket or
No. L-30041) on February 3, 1969, is res judicata to the passage document: Provided, That tickets
present case. The ruling by the Tax Court in that case was revalidated, exchanged and/or indorsed to
to the effect that the mere sale of tickets, unaccompanied another international airline form part of the
by the physical act of carriage of transportation, does not Gross Philippine Billings if the passenger boards
render the taxpayer therein subject to the common a plane in a port or point in the Philippines:
carrier's tax. As elucidated by the Tax Court, however, the Provided, further, That for a flight which
originates from the Philippines, but
common carrier's tax is an excise tax, being a tax on the
transshipment of passenger takes place at any
activity of transporting, conveying or removing passengers

port outside the Philippines on another airline, Code, thus, it may be subject to 32%53 tax on its taxable
only the aliquot portion of the cost of the ticket income:
corresponding to the leg flown from the
SEC. 28. Rates of Income Tax on Foreign Corporations. -
Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (Emphasis (A) Tax on Resident Foreign Corporations. -
supplied)
(1) In General. - Except as otherwise provided in this
4. CTA – denied the petition Code, a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade
- it should be taxed as a resident foreign
or business within the Philippines, shall be subject to an
corporation at the regular rate of 32%. income tax equivalent to thirty-five percent (35%) of the
5. Court of Tax Appeals En Banc affirmed the findings of taxable income derived in the preceding taxable year
the First Division from all sources within the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1, 1999, the
rate shall be thirty-three percent (33%); and effective
Issues:
January 1, 2000 and thereafter, the rate shall be thirty-two
1. W/N petitioner Air Canada, as an offline international percent (32%54). (Emphasis supplied)
carrier selling passage documents through a general sales
There is no specific criterion as to what constitutes "doing"
agent in the Philippines, is a resident foreign corporation
or "engaging in" or "transacting" business. Each case must
within the meaning of Section 28(A)(1) of the 1997
National Internal Revenue Code; be judged in the light of its peculiar environmental
circumstances. The term implies a continuity of
2. W/N petitioner Air Canada is subject to the 2½% tax on commercial dealings and arrangements, and
Gross Philippine Billings pursuant to Section 28(A)(3). If contemplates, to that extent, the performance of acts or
not, whether an offline international carrier selling
works or the exercise of some of the functions normally
passage documents through a general sales agent can be
incident to, and in progressive prosecution of commercial
subject to the regular corporate income tax of 32%30 on
taxable income pursuant to Section 28(A)(1); gain or for the purpose and object of the business
organization. "In order that a foreign corporation may be
Third, whether the Republic of the Philippines-Canada Tax regarded as doing business within a State, there must be
Treaty applies, specifically: continuity of conduct and intention to establish a
a. Whether the Republic of the Philippines- continuous business, such as the appointment of a local
Canada Tax Treaty is enforceable; agent, and not one of a temporary character.
b. Whether the appointment of a local general Aerotel performs acts or works or exercises functions that
sales agent in the Philippines falls under the are incidental and beneficial to the purpose of petitioner’s
definition of "permanent establishment" under business. The activities of Aerotel bring direct receipts or
Article V(2)(i) of the Republic of the Philippines- profits to petitioner.66 There is nothing on record to show
Canada Tax Treaty; and that Aerotel solicited orders alone and for its own account
and without interference from, let alone direction of,
3. W/N petitioner Air Canada is entitled to the refund of
petitioner. On the contrary, Aerotel cannot "enter into any
₱5,185,676.77 pertaining allegedly to erroneously paid tax
contract on behalf of [petitioner Air Canada] without the
on Gross Philippine Billings from the third quarter of 2000
express written consent of [the latter,]"67 and it must
to the second quarter of 2002.
perform its functions according to the standards required
by petitioner.68 Through Aerotel, petitioner is able to
engage in an economic activity in the Philippines.
Held:
Further, petitioner was issued by the Civil Aeronautics
1. Under the foregoing provision, the tax attaches only Board an authority to operate as an offline carrier in the
when the carriage of persons, excess baggage, cargo, and Philippines for a period of five years, or from April 24, 2000
mail originated from the Philippines in a continuous and until April 24, 2005.69
uninterrupted flight, regardless of where the passage
documents were sold. Not having flights to and from the Petitioner is, therefore, a resident foreign corporation that
Philippines, petitioner is clearly not liable for the Gross is taxable on its income derived from sources within the
Philippine Billings tax. Philippines. Petitioner’s income from sale of airline tickets,
through Aerotel, is income realized from the pursuit of its
2. Petitioner, an offline carrier, is a resident foreign business activities in the Philippines.
corporation for income tax purposes. Petitioner falls within
the definition of resident foreign corporation under 3. Yes. A tax treaty is an agreement entered into between
Section 28(A)(1) of the 1997 National Internal Revenue sovereign states "for purposes of eliminating double

taxation on income and capital, preventing fiscal evasion, on the protest within the 180-day period under Section
promoting mutual trade and investment, and according 228 of the NIRC. Thus, St. Luke's appealed to the CTA.
fair and equitable tax treatment to foreign residents or
4. The BIR argued before the CTA that Section 27(B) of the
nationals."73 Commissioner of Internal Revenue v. S.C.
NIRC, which imposes a 10% preferential tax rate on the
Johnson and Son, Inc.74 explained the purpose of a tax
income of proprietary non-profit hospitals, should be
treaty:
applicable to St. Luke's. According to the BIR, Section
The purpose of these international agreements is to 27(B), introduced in 1997, "is a new provision intended to
reconcile the national fiscal legislations of the contracting amend the exemption on non-profit hospitals that were
parties in order to help the taxpayer avoid simultaneous previously categorized as non-stock, non-profit
taxation in two different jurisdictions. More precisely, the corporations under Section 26 of the 1997 Tax Code x x x."
tax conventions are drafted with a view towards the
5. The BIR claimed that St. Luke's was actually operating
elimination of international juridical double taxation,
for profit in 1998 because only 13% of its revenues came
which is defined as the imposition of comparable taxes in
from charitable purposes. Moreover, the hospital's board
two or more states on the same taxpayer in respect of the
of trustees, officers and employees directly benefit from
same subject matter and for identical periods.
its profits and assets.
Through the appointment of Aerotel as its local sales
6. St. Luke's maintained that it is a non-stock and non-
agent, petitioner is deemed to have created a "permanent
profit institution for charitable and social welfare purposes
establishment" in the Philippines as defined under the
under Section 30(E) and (G) of the NIRC.
Republic of the Philippines-Canada Tax Treaty.
7. The BIR prays that St. Luke's be ordered to pay
4. No. The petitioner's similar tax refund claim assumes
₱57,659,981.19 as deficiency income and expanded
that the tax return that it filed was correct. Given,
withholding tax for 1998 with surcharges and interest for
however, the finding of the CTA that petitioner, although late payment.
not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable
under Sec. 28(A)(l), the correctness of the return filed by 8. CTA En Banc Decision on 19 November 2010 affirmed in
petitioner is now put in doubt. toto the CTA First Division Decision.
In this case, the P5,185,676.77 Gross Philippine Billings tax

paid by petitioner was computed at the rate of 1 ½% of its Issue:
gross revenues amounting to P345,711,806.08149 from the
third quarter of 2000 to the second quarter of 2002. It is W/N St. Luke's is liable for deficiency income tax in 1998
quite apparent that the tax imposable under Section under Section 27(B) of the NIRC, which imposes a
28(A)(l) of the 1997 National Internal Revenue Code [32% preferential tax rate of 10% on the income of proprietary
of taxable income, that is, gross income less deductions] non-profit hospitals.
will exceed the maximum ceiling of 1 ½% of gross revenues
as decreed in Article VIII of the Republic of the Philippines-
Canada Tax Treaty. Hence, no refund is forthcoming. Held:
Yes. The Court does not see how the CTA
overlooked relevant facts. St. Luke's itself stated that the
16. CIR vs St. Luke’s Medical Center, Inc., G.R. No. 195909
CTA "disregarded the testimony of [its] witness, Romeo B.
September 26, 2012
Mary, being allegedly self-serving, to show the nature of
the 'Other Income-Net' x x x."
Facts: The deficiency tax on "Other Income-Net"
stands. Thus, St. Luke's is liable to pay the 25% surcharge
1. St. Luke's Medical Center, Inc. (St. Luke's) is a hospital under Section 248(A)(3) of the NIRC. There is "[f]ailure to
organized as a non-stock and non-profit corporation. pay the deficiency tax within the time prescribed for its
2. On 16 December 2002, the Bureau of Internal Revenue payment in the notice of assessment[.]" St. Luke's is also
(BIR) assessed St. Luke's deficiency taxes amounting to liable to pay 20% delinquency interest under Section
₱76,063,116.06 for 1998, comprised of deficiency income 249(C)(3) of the NIRC. As explained by the CTA En Banc,
tax, value-added tax, withholding tax on compensation the amount of ₱6,275,370.38 in the dispositive portion of
and expanded withholding tax. The BIR reduced the the CTA First Division Decision includes only deficiency
amount to ₱63,935,351.57 during trial in the First Division interest under Section 249(A) and (B) of the NIRC and not
of the CTA. delinquency interest.
3. St. Luke's filed an administrative protest with the BIR

against the deficiency tax assessments. The BIR did not act

taxable years 1999 and 2000, as well as the delinquency interest
of 20% per annum.
17. Dumaguete Cathedral Credit Corp vs CIR

Held:
Facts:
No. ART. 61. Tax and Other Exemptions.
1. Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is
Cooperatives transacting business with both members
a credit cooperative duly registered with and regulated by the
and non-members shall not be subjected to tax on
Cooperative Development Authority (CDA).
their transactions with members. In relation to this, the
2. On November 27, 2001, the Bureau of Internal Revenue (BIR) transactions of members with the cooperative shall
Operations Group Deputy Commissioner, Lilian B. Hefti, issued not be subject to any taxes and fees, including but not
Letters of Authority Nos. 63222 and 63223, authorizing BIR limited to final taxes on members deposits and
Officers Tomas Rambuyon and Tarcisio Cubillan of Revenue documentary tax. Notwithstanding the provisions of
Region No. 12, Bacolod City, to examine petitioners books of any law or regulation to the contrary, such
accounts and other accounting records for all internal revenue cooperatives dealing with nonmembers shall enjoy the
taxes for the taxable years 1999 and 2000. following tax exemptions: (Underscoring ours)
3. On June 26, 2002, petitioner received two Pre-Assessment Moreover, no less than our Constitution guarantees
Notices for deficiency withholding taxes for taxable years 1999 the protection of cooperatives. Section 15, Article XII of the
and 2000 which were protested by petitioner on July 23, 2002. Constitution considers cooperatives as instruments for social
Thereafter, on October 16, 2002, petitioner received two other justice and economic development. At the same time, Section 10
Pre-Assessment Notices for deficiency withholding taxes also for of Article II of the Constitution declares that it is a policy of the
taxable years 1999 and 2000. The deficiency withholding taxes State to promote social justice in all phases of national
cover the payments of the honorarium of the Board of Directors, development. In relation thereto, Section 2 of Article XIII of the
security and janitorial services, legal and professional fees, and Constitution states that the promotion of social justice shall
interest on savings and time deposits of its members. include the commitment to create economic opportunities based
on freedom of initiative and self-reliance. Bearing in mind the
4. On November 29, 2002, petitioner availed of the VAAP and
foregoing provisions, we find that an interpretation exempting
paid the amounts of P105,574.62 and P143,867.24 corresponding
the members of cooperatives from the imposition of the final tax
to the withholding taxes on the payments for the compensation,
under Section 24(B)(1) of the NIRC is more in keeping with the
honorarium of the Board of Directors, security and janitorial
letter and spirit of our Constitution.
services, and legal and professional services, for the years 1999
and 2000, respectively.
5. On April 24, 2003, petitioner received from the BIR Regional
Director, Sonia L. Flores, Letters of Demand Nos. 00027-2003 and
17. Dumaguete Cathedral v. CIR
00026-2003, with attached Transcripts of Assessment and Audit
Results/Assessment Notices, ordering petitioner to pay the G.R. No. 182722, January 22, 2010
deficiency withholding taxes, inclusive of penalties, for the years
1999 and 2000 in the amounts of P1,489,065.30 Facts:
and P1,462,644.90, respectively.
a) Petitioner Dumaguete Cathedral Credit Cooperative
6. Petitioner protested the Letters of Demand and Assessment (DCCCO) is a credit cooperative duly registered with and
Notices with the Commissioner of Internal Revenue regulated by the Cooperative Development Authority
(CIR).[15] However, the latter failed to act on the protest within the (CDA).
prescribed 180-day period.
b) Petitioner received Pre-Assessment Notices for
7. CTA – denied deficiency withholding taxes for taxable years 1999 and
8. CTA En Banc – denied 2000. The deficiency withholding taxes cover the
payments of the (1) honorarium of the Board of Directors
(BOD), (2) security and janitorial services, (3) legal and
Issue: professional fees, and (4) interest on savings and time
deposits of the members of DCCCO.
Whether or not it is liable to pay the deficiency withholding taxes
on interest from savings and time deposits of its members for the c) Petitioner informed the BIR Regional Director that it
would only pay the deficiency withholding taxes

corresponding to the (1) honorarium of the BOD, (2) interest from savings and time deposits of their members.
security and janitorial services, and (3) legal and The CTA First Division, however, disregarded the above
professional fees. quoted ruling. According to the CTA En Banc, the BIR
Ruling was based on the premise that the savings and time
d) Petitioner received from the BIR Regional Director deposits were placed by the members of the cooperative
Letters of Demand, with attached Assessment Notices, in the bank. However, there is nothing in the ruling to
ordering petitioner to pay the deficiency withholding suggest that it applies only when deposits are maintained
taxes, inclusive of penalties, for the years 1999 and 2000. in a bank. Rather, the ruling clearly states, without any
e) Petitioner protested the Letters of Demand and qualification, that since interest from any Philippine
Assessment Notices with the Commissioner of Internal currency bank deposit and yield or any other monetary
Revenue (CIR). However, the latter failed to act on the benefit from deposit substitutes are paid by banks,
protest within the prescribed 180-day period. Hence, cooperatives are not required to withhold the
petitioner filed a Petition for Review before the CTA. corresponding tax on the interest from savings and time
deposits of their members.
f) The First Division of the CTA ordered petitioner to pay
the respondent deficiency withholding taxes on interests In addition, members of cooperatives deserve a
from savings and time deposits of its members for the preferential tax treatment pursuant to RA 6938, as
taxable years 1999 and 2000. In addition, petitioner is amended by RA 9520. Given that petitioner is a credit
ordered to pay the 20% delinquency interest from May 26, cooperative duly registered with the Cooperative
2003 until the amount of deficiency withholding taxes are Development Authority (CDA), Section 24(B)(1) of the NIRC
fully paid pursuant to Section 249 (C) of the Tax Code. must be read together with RA 6938, as amended by RA
9520. Under Article 2 of RA 6938, as amended by RA 9520,
g) Petitioner filed a Petition for Review with the CTA En it is a declared policy of the State to foster the creation
Banc. Finding no reversible error in the Decision and the and growth of cooperatives as a practical vehicle for
Resolution of the CTA First Division, the CTA En Banc promoting self-reliance and harnessing people power
denied the Petition for Review. The CTA En Banc held that towards the attainment of economic development and
Section 57 of the National Internal Revenue Code (NIRC) social justice. The legislative intent to give cooperatives a
requires the withholding of tax at source. Pursuant preferential tax treatment is apparent in Articles 61 and 62
thereto, Revenue Regulations No. 2-98 was issued of RA 6938.
enumerating the income payments subject to final
withholding tax, among which is interest from any peso Cooperatives exist for the benefit of their members. In
bank deposit and yield, or any other monetary benefit fact, the primary objective of every cooperative is to
from deposit substitutes and from trust funds and similar provide goods and services to its members to enable them
arrangements. According to the CTA En Banc, petitioner’s to attain increased income, savings, investments, and
business falls under the phrase similar arrangements; as productivity. Therefore, limiting the application of the tax
such, it should have withheld the corresponding 20% final exemption to cooperatives would go against the very
tax on the interest from the deposits of its members. Thus, purpose of a credit cooperative. Extending the exemption
the CTA ordered petitioner to pay deficiency withholding to members of cooperatives, on the other hand, would be
taxes on interest from savings and time deposits of its consistent with the intent of the legislature. Thus,
members for taxable years 1999 and 2000, pursuant to although the tax exemption only mentions cooperatives,
Section 24(B)(1) of the NIRC of 1997, as well as the this should be construed to include the members.
delinquency interest of 20% per annum. Moreover, the Constitution guarantees the protection of
Issue: cooperatives. Section 15, Article XII of the Constitution
considers cooperatives as instruments for social justice
Whether petitioner is liable to pay the assessed deficiency and economic development. At the same time, Section 10
withholding taxes on interest from the savings and time of Article II of the Constitution declares that it is a policy of
deposits of its members, as well as the delinquency the State to promote social justice in all phases of national
interest of 20% per annum development. In relation thereto, Section 2 of Article XIII
of the Constitution states that the promotion of social
Ruling: justice shall include the commitment to create economic
No. opportunities based on freedom of initiative and self-
reliance. Thus, the Court found that an interpretation
The BIR declared in BIR Ruling No. 551-888 that exempting the members of cooperatives from the
cooperatives are not required to withhold taxes on imposition of the final tax under Section 24(B)(1) of the

NIRC is more in keeping with the letter and spirit of our a) Whether the purchase of the U.S.A. Treasury bonds by
Constitution. petitioner in 1951 can be construed as an investment to an
unrelated business and hence, such was availed of by
Therefore, petitioner is not liable to pay the assessed petitioner for the purpose of preventing the imposition of
deficiency withholding taxes on interest from the savings the surtax upon petitioner’s shareholders by permitting its
and time deposits of its members, as well as the earnings and profits to accumulate beyond the reasonable
delinquency interest of 20% per annum. needs of the business
In sum, cooperatives, including their members, deserve a b) Whether the penalty tax of twenty-five percent (25%)
preferential tax treatment because of the vital role they can be imposed on such improper accumulation in 1957
play in the attainment of economic development and despite the fact that the accumulation occurred in 1951
social justice. Thus, although taxes are the lifeblood of the
government, the States power to tax must give way to Ruling:
foster the creation and growth of cooperatives. To borrow
the words of Justice Isagani A. Cruz: The power of taxation, a) Yes.
while indispensable, is not absolute and may be Section 25 of the National Internal Revenue Code (NIRC)
subordinated to the demands of social justice. provides that a prerequisite to the imposition of the
18. The Manila Wine Merchants v. CIR additional tax on corporations improperly accumulating
profits or surplus has been that the corporation be formed
G.R. No. L-26145, February 20, 1984 or availed of for the purpose of avoiding the income tax (or
surtax) on its shareholders, or on the shareholders of any
Facts: other corporation by permitting the earnings and profits of
a) Petitioner Manila Wine Merchants, Inc, a domestic the corporation to accumulate instead of dividing them
corporation organized in 1937, is principally engaged in the among or distributing them to the shareholders. If the
importation and sale of whisky, wines, liquors and distilled earnings and profits were distributed, the shareholders
spirits. would be required to pay an income tax thereon whereas,
if the distribution were not made to them, they would
b) Respondent Commissioner of Internal Revenue (CIR) incur no tax in respect to the undistributed earnings and
found the petitioner of having unreasonably accumulated profits of the corporation. The touchstone of liability is the
surplus of P428,934.32 for the calendar year 1947 to 1957, purpose behind the accumulation of the income and not
in excess of the reasonable needs of the business, subject the consequences of the accumulation. Thus, if the failure
to the 25% surtax imposed by Section 25 of the Tax Code. to pay dividends is due to some other cause, such as the
use of undistributed earnings and profits for the
c) The CIR demanded upon the petitioner payment of reasonable needs of the business, such purpose does not
P126,536.12 as 25% surtax and interest on the latter’s fall within the interdiction of the statute. An accumulation
unreasonable accumulation of profits and surplus for the of earnings or profits (including undistributed earnings or
year 1957. profits of prior years) is unreasonable if it is not required
d) Respondent contends that petitioner has accumulated for the purpose of the business, considering all the
earnings beyond the reasonable needs of its business circumstances of the case.
because of its substantial investment of surplus or profits To avoid the twenty-five percent (25%) surtax, petitioner
in unrelated business, particularly, its investment in U.S.A. has to prove that the purchase of the U.S.A. Treasury
Treasury Bonds amounting to P347,217.50. Bonds in 1951 with a face value of $175,000.00 was an
e) In purchasing the U.S.A. Treasury Bonds, in 1951, investment within the reasonable needs of the
petitioner argues that these bonds were so purchased (1) Corporation. To determine the "reasonable needs" of the
in order to finance their importation; and that a dollar business in order to justify an accumulation of earnings,
reserve abroad would be useful to the Company in the Courts of the United States have invented the so-called
meeting urgent orders of its local customers and (2) to "Immediacy Test" which construed the words
take care of future expansion including the acquisition of a "reasonable needs of the business" to mean the
lot and the construction of their office building and immediate needs of the business, and it was generally
bottling plant. held that if the corporation did not prove an immediate
need for the accumulation of the earnings and profits,
Issues: the accumulation was not for the reasonable needs of the
business, and the penalty tax would apply. American
cases likewise hold that investment of the earnings and

profits of the corporation in stock or securities of an Definiteness of plan coupled with action taken towards its
unrelated business usually indicates an accumulation consummation are essential. The CTA correctly made the
beyond the reasonable needs of the business. following ruling:
The finding of the Court of Tax Appeals (CTA) that the "As to the statement of Mr. Hawkins in Exh. "B"
purchase of the U.S.A. Treasury bonds were in no way regarding the expansion program of the
related to petitioner’s business of importing and selling petitioner by purchasing a lot and building of its
wines whisky, liquors and distilled spirits, and thus own, we find no justifiable reason for the
construed as an investment beyond the reasonable needs retention in 1957 or thereafter of the US
of the business is binding on the Court, the same being Treasury Bonds which were purchased in 1951.
factual.
xxx
The records further reveal that from May 1951 when
petitioner purchased the U.S.A. Treasury shares, until 1962 "Moreover, if there was any thought for the
when it finally liquidated the same, petitioner never had purchase of a lot and building for the needs of
the occasion to use the said shares in aiding or financing its petitioner’s business, the corporation may not
importation. This militates against the purpose enunciated with impunity permit its earnings to pile up
earlier by petitioner that the shares were purchased to merely because at some future time certain
finance its importation business. To justify an outlays would have to be made. Profits may only
accumulation of earnings and profits for the reasonably be accumulated for the reasonable needs of the
anticipated future needs, such accumulation must be business, and implicit in this is further
used within a reasonable time after the close of the requirement of a reasonable time."
taxable year. Petitioner advanced the argument that the Viewed on the foregoing analysis and tested under the
U.S.A. Treasury shares were held for a few more years "immediacy doctrine," the CTA is correct in finding that the
from 1957, in view of a plan to buy a lot and construct a investment made by petitioner in the U.S.A. Treasury
building of their own; that at that time (1957), the shares in 1951 was an accumulation of profits in excess of
Company was not yet qualified to own real property in the the reasonable needs of petitioner’s business.
Philippines, hence it (petitioner) had to wait until sixty
percent (60%) of the stocks of the Company would be b) Yes.
owned by Filipino citizens before making definite plans.
These arguments of petitioner indicate that it considers Petitioner asserts that the surplus profits allegedly
the U.S.A. Treasury shares not only for the purpose of accumulated in the form of U.S.A. Treasury shares in 1951
aiding or financing its importation but likewise for the by it (petitioner) should not be subject to the surtax in
purpose of buying a lot and constructing a building 1957. In other words, petitioner claims that the surtax of
thereon in the near future, but conditioned upon the 25% should be based on the surplus accumulated in 1951
completion of the 60% citizenship requirement of stock and not in 1957.
ownership of the Company in order to qualify it to This is devoid of merit. The rule is now settled that
purchase and own a lot. The time when the company undistributed earnings or profits of prior years are taken
would be able to establish itself to meet the said into consideration in determining unreasonable
requirement and the decision to pursue the same are accumulation for purposes of the 25% surtax. Previous
dependent upon various future contingencies. Whether accumulations should be considered in determining
these contingencies would unfold favorably to the unreasonable accumulation for the year concerned. In
Company and if so, whether the Company would decide determining whether accumulations of earnings or profits
later to utilize the U.S.A. Treasury shares according to its in a particular year are within the reasonable needs of a
plan, remains to be seen. From these assertions of corporation, it is necessary to take into account prior
petitioner, there is nothing definite or certain that can be accumulations, since accumulations prior to the year
gathered. In order to determine whether profits are involved may have been sufficient to cover the business
accumulated for the reasonable needs of the business as needs and additional accumulations during the year
to avoid the surtax upon shareholders, the controlling involved would not reasonably be necessary.’"
intention of the taxpayer is that which is manifested at
the time of accumulation not subsequently declared
intentions which are merely the product of afterthought.
A speculative and indefinite purpose will not suffice. The
mere recognition of a future problem and the discussion of
possible and alternative solutions is not sufficient.

19. Cyanamid v. CA invented the so-called Immediacy Test which
construed the words reasonable needs of the
G.R. No. 108067, January 20, 2000 business to mean the immediate needs of the
Facts: business, and it was generally held that if the
corporation did not prove an immediate need for
a) Petitioner Cyanamid Philippines, Inc., a corporation the accumulation of the earnings and profits, the
organized under Philippine laws, is a wholly owned accumulation was not for the reasonable needs
subsidiary of American Cyanamid Co. based in Maine, USA. of the business, and the penalty tax would apply.
It is engaged in the manufacture of pharmaceutical (Mertens, Law of Federal Income Taxation, Vol.
products and chemicals, a wholesaler of imported finished 7, Chapter 39, p. 103).
goods, and an importer/indentor.
The burden of proof to establish that the profits
b) The CIR sent an assessment letter to petitioner and accumulated were not beyond the reasonable needs of
demanded the payment of deficiency income tax of the company, remained on the taxpayer. Unless rebutted,
P119,817.00 for taxable year 1981. all presumptions generally are indulged in favor of the
correctness of the CIR’s assessment against the taxpayer.
c) Petitioner, through its external accountant claimed, With petitioner’s failure to prove the CIR incorrect, clearly
among others, that the surtax for the undue accumulation and conclusively, the Court upheld the correctness of tax
of earnings was not proper because the said profits were court’s ruling as affirmed by the Court of Appeals.
retained to increase petitioners working capital and it
would be used for reasonable business needs of the Also, the amendatory provision of Section 25 of the 1977
company. Petitioner claimed that CIR’s assessment NIRC, which was PD 1739, enumerated the corporations
representing the 25% surtax on its accumulated earnings exempt from the imposition of improperly accumulated
for the year 1981 had no legal basis since petitioner tax: (a) banks; (b) non-bank financial intermediaries; (c)
accumulated its earnings and profits for reasonable insurance companies; and (d) corporations organized
business requirements to meet working capital needs and primarily and authorized by the Central Bank of the
retirement of indebtedness. Philippines to hold shares of stocks of banks. Petitioner
does not fall among those exempt classes. Besides, the
d) Petitioner also stresses that the accumulated earnings rule on enumeration is that the express mention of one
tax does not apply to Cyanamid, a wholly owned subsidiary person, thing, act, or consequence is construed to exclude
of a publicly owned company. all others. Laws granting exemption from tax are
Issue: construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule
Whether the petitioner is liable for the accumulated and exemption is the exception. The burden of proof rests
earnings tax for the year 1981 upon the party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed, a burden which
Ruling: petitioner here has failed to discharge.
Yes.
Section 25 of the old National Internal Revenue Code

(NIRC) of 1977 discouraged tax avoidance through
corporate surplus accumulation. When corporations do 20. Soriano v. Secretary of Finance
not declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The G.R. No. 184450, January 24, 2017
tax on improper accumulation of surplus is essentially a Facts:
penalty tax designed to compel corporations to distribute
earnings so that the said earnings by shareholders could, a) Revenue Regulation (RR) No. 10-2008 was issued by the
in turn, be taxed. Bureau of Internal Revenue (BIR) on September 24, 2008
to implement the provisions of Republic Act (R.A.) No.
In Manila Wine Merchants, Inc. vs. Commissioner of 9504. The law granted, among others, income tax
Internal Revenue, the Court ruled: exemption for minimum wage earners (MWEs), as well as
"To determine the reasonable needs of the an increase in personal and additional exemptions for
business in order to justify an accumulation of individual taxpayers.
earnings, the Courts of the United States have

b) Petitioners assail the subject RR as an unauthorized compensation earners, and an increase in their take-home
departure from the legislative intent of R.A. 9504. The pay.
regulation allegedly restricts the implementation of the
MWE’s income tax exemption only to the period starting The Court also considered the President's certification of
from July 6, 2008, instead of applying the exemption to the the necessity of the immediate enactment of Senate Bill
entire year 2008. They further challenge the BIR's adoption No. 2293. It evinced the intent of the President to afford
of the prorated application of the new set of personal and wage earners immediate tax relief from the impact of a
additional exemptions for taxable year 2008. They also worldwide increase in the prices of commodities.
contest the validity of the RR's alleged imposition of a Specifically, the certification stated that the purpose was
condition for the availment by MWEs of the exemption to "address the urgent need to cushion the adverse impact
provided by R.A. 9504. Supposedly, in the event they of the global escalation of commodity prices upon the
receive other benefits in excess of ₱30,000, they can no most vulnerable within the low income group by providing
longer avail themselves of that exemption. Petitioners expanded income tax relief."
contend that the law provides for the unconditional In sum, R.A. 9504, like R.A. 7167 in Umali v. Estanislao,
exemption of MWEs from income tax and, thus, pray that G.R. Nos. 104037 & 104069, May 29, 1992, was a piece of
the RR be nullified. social legislation clearly intended to afford immediate tax
Issues: relief to individual taxpayers, particularly low-income
compensation earners. Indeed, if R.A. 9504 was to take
a) Whether the increased personal and additional effect beginning taxable year 2009 or half of the year
exemptions provided by R.A. 9504 should be applied to 2008 only, then the intent of Congress to address the
the entire taxable year 2008 or prorated, considering that increase in the cost of living in 2008 would have been
R.A. 9504 took effect only on July 6, 2008 negated.
b) Whether an MWE is exempt for the entire taxable year Following Umali, the test is whether the new set of
2008 or from July 6, 2008 only personal and additional exemptions was available at the
time of the filing of the income tax return. In other words,
c) Whether one who ceases to be an MWE may still be while the status of the individual taxpayers is determined
entitled to the personal and additional exemptions at the close of the taxable year, their personal and
d) Whether Sections 1 and 3 of RR 10-2008 are consistent additional exemptions - and consequently the
with the law in providing that an MWE who receives other computation of their taxable income - are reckoned when
benefits in excess of the statutory limit of ₱30,000 is no the tax becomes due, and not while the income is being
longer entitled to the exemption provided by R.A. 9504 earned or received.
Ruling: The NIRC is clear on these matters. The taxable income of

an individual taxpayer shall be computed on the basis of
a) The personal and additional exemptions established by the calendar year. The taxpayer is required to file an
R.A. 9504 should be applied to the entire taxable year income tax return on the 15th of April of each year
2008. covering income of the preceding taxable year. The tax
due thereon shall be paid at the time the return is filed.
Senator Francis Escudero's sponsorship speech for Senate
Bill No. 2293 which was passed as R.A. 9504 reveals two The test provided by Umali is consistent with Ingalls v.
important points about R.A. 9504: (1) it is a piece of social Trinidad, 46 Phil. 807, 1923 in which the Court dealt with
legislation; and (2) its intent is to make the proposed law the matter of a married person's reduced exemption. As
immediately applicable, that is, to taxable year 2008. He early as 1923, the Court already provided the reference
said that Senate Bill No. 2293 seeks, among others, to point for determining the taxable income:
exempt minimum wage earners from the payment of
income and/or withholding tax. It is an attempt to help [T]hese statutes dealing with the manner of
people cope with the rising costs of commodities that collecting the income tax and with the
seem to be going up unhampered these past few months. deductions to be made in favor of the taxpayer
Clearly, Senator Escudero expressed a sense of urgency for have reference to the time when the return is
passing what would subsequently become R.A. 9504. filed and the tax assessed.
Because time was of the essence, he urged the Senate to There, the exemption was reduced, not increased, and the
pass the bill immediately. The idea was immediate tax Court effectively ruled that income tax due from the
relief to the individual taxpayers, particularly low- individual taxpayer is properly determined upon the filing

of the return. This is done after the end of the taxable exemptions for himself and his dependent(s) as
year, when all the incomes for the immediately preceding if he died at the close of such year.
taxable year and the corresponding personal exemptions
and/or deductions therefor have been considered. If the spouse or any of the dependents dies or if
any of such dependents marries, becomes
In the present case, the increased exemptions were twenty-one (21) years old or becomes gainfully
already available much earlier than the required time of employed during the taxable year, the taxpayer
filing of the return on April 15, 2009. R.A. 9504 came into may still claim the same exemptions as if the
law on July 6, 2008, more than nine months before the spouse or any of the dependents died, or as if
deadline for the filing of the income tax return for such dependents married, became twenty-one
taxable year 2008. Hence, individual taxpayers were (21) years old or became gainfully employed at
entitled to claim the increased amounts for the entire year the close of such year. (Emphases supplied)
2008. This was true despite the fact that incomes were
already earned or received prior to the law's effectivity on Note that paragraph C does not allow the prorating of the
July 6, 2008. personal and additional exemptions provided in
paragraphs A and B, even in case a status-changing event
Even more compelling is the fact that R.A. 9504 became occurs during the taxable year. Rather, it allows the
effective during the taxable year in question. In Umali, the fullest benefit to the individual taxpayer. This manner of
Court ruled that the application of the law was reckoning the taxpayer's status for purposes of the
prospective, even if the amending law took effect after the personal and additional exemptions clearly demonstrates
close of the taxable year in question, but before the the legislative intention; that is, for the state to give the
deadline for the filing of the return and payment of the taxpayer the maximum exemptions that can be availed,
taxes due for that year. Here, not only did R.A. 9504 take notwithstanding the fact that the latter's actual status
effect before the deadline for the filing of the return and would qualify only for a lower exemption if prorating
payment for the taxes due for taxable year 2008, it took were employed.
effect way before the close of that taxable year.
Therefore, the operation of the new set of personal and The Court therefore saw no reason why any distinction
additional exemption in the present case was all the between the income earned prior to the effectivity of the
more prospective. amendment (from January 1, 2008 to July 5, 2008) and
that earned thereafter (from July 6, 2008 to December 31,
Additionally, the policy of full taxable year treatment for 2008) should be made as none is indicated in the law. The
the availment of personal and additional exemptions was principle that the courts should not distinguish when the
established, not by the amendments introduced by R.A. law itself does not distinguish squarely applies to this case.
9504, but by the provisions of the 1997 Tax Code itself,
which adopted the policy from as early as 1969. The new b) The MWE is exempt for the entire taxable year 2008.
law merely introduced a change in the amounts of the As it stands, the calendar year 2008 remained as one
basic and additional personal exemptions. Hence, the fact taxable year for an individual taxpayer. Therefore, RR 10-
that R.A. 9504 took effect only on July 6, 2008 is irrelevant. 2008 cannot declare the income earned by a minimum
Moreover, the policy in this jurisdiction is full taxable wage earner from January 1, 2008 to July 5, 2008 to be
year treatment. There is nothing in R.A. 9504 that taxable and those earned by him for the rest of that year
expressly provides or even suggests a prorated application to be tax-exempt. To do so would be to contradict the
of the exemptions for taxable year 2008. On the other NIRC and jurisprudence, as taxable income would then
hand, the policy of full taxable year treatment, especially cease to be determined on a yearly basis.
of the personal and additional exemptions, is clear under Senator Escudero's assertion is that the legislative intent is
Section 35, particularly paragraph C of R.A. 8424 or the to make the MWE' s tax exemption and the increased basic
1997 Tax Code: personal and additional exemptions available for the
(C) Change of Status. - If the taxpayer marries or entire year 2008.
should have additional dependent(s) as defined Accordingly, the Court agreed with petitioners that RR 10-
above during the taxable year, the taxpayer may 2008, insofar as it allows the availment of the MWE's tax
claim the corresponding additional exemption, exemption and the increased personal and additional
as the case may be, in full for such year. If the exemptions beginning only on July 6, 2008, is in
taxpayer dies during the taxable year, his estate contravention of the law it purports to implement.
may still claim the personal and additional

A clarification is proper at this point. The ruling that the statutory amount of ₱30,000, the MWE immediately
MWE exemption is available for the entire taxable year becomes ineligible for tax exemption; and otherwise non-
2008 is premised on the fact of one's status as an MWE; taxable minimum wage, along with the other taxable
that is, whether the employee during the entire year of incomes of the MWE, becomes taxable again.
2008 was an MWE as defined by R.A. 9504. When the
wages received exceed the minimum wage anytime during Nowhere in the provisions of R.A. 9504 would one find the
the taxable year, the employee necessarily loses the MWE qualifications prescribed by the assailed provisions of RR
qualification. Therefore, wages become taxable as the 10-2008. The provisions of the law are clear and precise;
employee ceased to be an MWE. But the exemption of the they leave no room for interpretation - they do not
employee from tax on the income previously earned as an provide or require any other qualification as to who are
MWE remains. MWEs. To be exempt, one must be an MWE, a term that is
clearly defined. Section 22(HH) says he/she must be one
c) Yes. who is paid the statutory minimum wage if he/she works
in the private sector, or not more than the statutory
The MWE exemption is separate and distinct from the minimum wage in the non-agricultural sector where
personal and additional exemptions. One's status as an he/she is assigned, if he/she is a government employee.
MWE does not preclude enjoyment of the personal and Thus, one is either an MWE or he/she is not. Simply put,
additional exemptions. Thus, when one is an MWE during MWE is the status acquired upon passing the litmus test -
a part of the year and later earns higher than the minimum whether one receives wages not exceeding the prescribed
wage and becomes a non-MWE, only earnings for that minimum wage.
period when one is a non-MWE is subject to tax. It also
necessarily follows that such an employee is entitled to the The minimum wage exempted by R.A. 9504 is that which is
personal and additional exemptions that any individual referred to in the Labor Code. It is distinct and different
taxpayer with taxable gross income is entitled. from other payments including allowances, honoraria,
commissions, allowances or benefits that an employer may
A different interpretation will actually render the MWE pay or provide an employee.
exemption a totally oppressive legislation. It would be a
total absurdity to disqualify an MWE from enjoying as Likewise, the other compensation incomes an MWE
much as ₱150,00058 in personal and additional receives that are also exempted by R.A. 9504 are all
exemptions just because sometime in the year, he or she mandated by law and are based on this minimum wage.
ceases to be an MWE by earning a little more in wages. Additional compensation in the form of overtime pay is
Laws cannot be interpreted with such absurd and unjust mandated for work beyond the normal hours based on the
outcome. It is axiomatic that the legislature is assumed to employee's regular wage. Those working between ten
intend right and equity in the laws it passes. o'clock in the evening and six o'clock in the morning are
required to be paid a night shift differential based on their
Critical, therefore, is how an employee ceases to become regular wage. Holiday/premium pay is mandated whether
an MWE and thus ceases to be entitled to an MWE's one works on regular holidays or on one's scheduled rest
exemption. days and special holidays. In all of these cases, additional
d) No. compensation is mandated, and computed based on the
employee's regular wage.
Respondents committed grave abuse of discretion in
promulgating Sections 1 and 3 of RR 10-2008, insofar as R.A. 9504 is explicit as to the coverage of the exemption:
they provide for the disqualification of MWEs who earn the wages that are not in excess of the minimum wage as
purely compensation income, whether in the private or determined by the wage boards, including the
public sector, from the privilege of availing themselves of corresponding holiday, overtime, night differential and
the MWE exemption in case they receive compensation- hazard pays.
related benefits exceeding the statutory ceiling of ₱30,000. The exemption granted to MWEs by R.A. 9504 reads:
Sections 1 and 3 of RR 10-2008 added a requirement not Provided, That minimum wage earners as
found in the law by effectively declaring that an MWE who defined in Section 22(HH) of this Code shall be
receives other benefits in excess of the statutory limit of exempt from the payment of income tax on their
₱30,000 is no longer entitled to the exemption provided by taxable income: Provided, further, That the
R.A. 9504. RR 10-2008 declares that once an MWE receives holiday pay, overtime pay, night shift differential
other forms of taxable income like commissions, pay and hazard pay received by such minimum
honoraria, and fringe benefits in excess of the non-taxable

wage earners shall likewise be exempt from purchase of the properties of the Philippine Sugar Estate
income tax. Development Company.
In other words, the law exempts from income taxation the The petitioner claims that these payments are fictitious
most basic compensation an employee receives - the because most of the payees are members of the same
amount afforded to the lowest paid employees by the family in control of Algue. It is argued that no indication
mandate of law. In a way, the legislature grants to these was made as to how such payments were made, whether
lowest paid employees additional income by no longer by check or in cash, and there is not enough substantiation
demanding from them a contribution for the operations of of such payments. In short, the petitioner suggests a tax
government. This is the essence of R.A. 9504 as a social dodge, an attempt to evade a legitimate assessment by
legislation. The government, by way of the tax exemption, involving an imaginary deduction.
affords increased purchasing power to this sector of the
working class. Issues: (1) Whether or not the appeal was made on time
and in accordance with law. (2) Whether or not the CIR
In declaring that once an MWE receives other forms of correctly disallowed the deduction claimed by private
taxable income like commissions, honoraria, and fringe respondent
benefits in excess of the non-taxable statutory amount of
.30,000, RR 10-2008 declared that the MWE immediately Rulings: 1. The Court held that indeed, four days after the
becomes ineligible for tax exemption; and otherwise non- private respondent received the petitioner's notice of
taxable minimum wage, along with the other taxable assessment, it filed its letter of protest. This was
incomes of the MWE, becomes taxable again. apparently not taken into account before the warrant of
distraint and levy was issued. The protest, however could
What the legislature is exempting is the MWE's minimum not be located in the office of the petitioner. It was only
wage and other forms statutory compensation like holiday after Atty. Guevara gave the BIR a copy of the protest that
pay, overtime pay, night shift differential pay, and hazard it was, if at all, considered by the tax authorities. During
pay. These are not bonuses or other benefits; these are the intervening period, the warrant was premature and
wages. Respondents seek to frustrate this exemption could therefore not be served.
granted by the legislature.
2. The Court held that respondent was a family
An administrative agency may not enlarge, alter or restrict corporation where strict business procedures were not
a provision of law. It cannot add to the requirements applied and immediate issuance of receipts was not
provided by law. To do so constitutes lawmaking, which is required. Even so, at the end of the year, when the books
generally reserved for Congress. were to be closed, each payee made an accounting of all of
the fees received by him or her, to make up the total of
21. G.R. No. L-28896 February 17, 1988 P75,000.00. The amount of the promotional fees was also
COMMISSIONER OF INTERNAL REVENUE, vs. ALGUE, INC., not excessive. This finding of the respondent court is in
and THE COURT OF TAX APPEALS accord with the following provision of the Tax Code:
Facts: Private respondent is a domestic corporation SEC. 30. Deductions from gross income.--In
engaged in engineering, construction and other allied computing net income there shall be allowed as
activities, received BIR Assessment Notice with P83,183.85 deductions —
as delinquency income taxes for the years 1958 and 1959. (a) Expenses:
Algue flied a letter of protest or request for
reconsideration. Through its counsel, Atty. Alberto (1) In general.--All the ordinary and necessary
Guevara, Jr., refused to receive the warrant of distraint expenses paid or incurred during the taxable
and levy on the ground of the pending protest. A year in carrying on any trade or business,
subsequent search for the protest was fruitless, and the including a reasonable allowance for salaries or
counsel only relented when it was clear that the BIR was other compensation for personal services
not taking action on their protest. actually rendered; ...
The respondent claims that the P75,000.00 deductions had Revenue Regulations No. 2, Section 70 (1),
been legitimately paid for actual services in the form of reading as follows:
promotional fees. These were collected by the Payees for
their work in the creation of the Vegetable Oil Investment SEC. 70. Compensation for personal services.--
Corporation of the Philippines and its subsequent Among the ordinary and necessary expenses
paid or incurred in carrying on any trade or

business may be included a reasonable Court of Appeals: Reversing and setting aside the decision
allowance for salaries or other compensation for of the Court of Tax Appeals, on the grounds of
personal services actually rendered. insufficiency to establish that the item it claimed as a
deduction is excessive.
The test of deductibility in the case of compensation
payments is whether they are reasonable and are, in fact, Issue: Whether or not the subject media advertising
payments purely for service Any amount paid in the form expense for "Tang" incurred by respondent was an
of compensation, but not in fact as the purchase price of ordinary and necessary expense fully deductible under the
services, is not deductible. (a) An ostensible salary paid by National Internal Revenue Code (NIRC).
a corporation may be a distribution of a dividend on stock.
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.) Ruling: It is a governing principle in taxation that tax
exemptions must be construed in strictissimi juris against
The private respondent has proved that the payment of the taxpayer and liberally in favor of the taxing authority;5
the fees was necessary and reasonable in the light of the and he who claims an exemption must be able to justify his
efforts exerted by the payees in inducing investors and claim by the clearest grant of organic or statute law. An
prominent businessmen to venture in an experimental exemption from the common burden cannot be permitted
enterprise and involve themselves in a new business to exist upon vague implications.6
requiring millions of pesos. This was no mean feat and
should be, as it was, sufficiently recompensed. Deductions for income tax purposes partake of the nature
of tax exemptions; hence, if tax exemptions are strictly
It is said that taxes are what we pay for civilization society. construed, then deductions must also be strictly
Without taxes, the government would be paralyzed for construed.
lack of the motive power to activate and operate it. Hence,
despite the natural reluctance to surrender part of one's Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the
hard earned income to the taxing authorities, every person NIRC provides:
who is able to must contribute his share in the running of (A) Expenses.-
the government. The government for its part, is expected
to respond in the form of tangible and intangible benefits (1) Ordinary and necessary trade, business or
intended to improve the lives of the people and enhance professional expenses.-
their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel (a) In general.- There shall be allowed as
the erroneous notion that it is an arbitrary method of deduction from gross income all ordinary and
exaction by those in the seat of power. necessary expenses paid or incurred during the
taxable year in carrying on, or which are directly
22. G.R. No. 143672 April 24, 2003 attributable to, the development, management,
operation and/or conduct of the trade, business
COMMISSIONER OF INTERNAL REVENUE, vs. GENERAL or exercise of a profession.
FOODS (PHILS.), INC.
Simply put, to be deductible from gross income, the
Facts: Respondent corporation is engaged in the subject advertising expense must comply with the
manufacture of beverages such as "Tang," "Calumet" and following requisites: (a) the expense must be ordinary and
"Kool-Aid," filed its income tax return for the fiscal year necessary; (b) it must have been paid or incurred during
ending February 28, 1985. In said tax return, respondent the taxable year; (c) it must have been paid or incurred in
corporation claimed as deduction, among other business carrying on the trade or business of the taxpayer; and (d) it
expenses, the amount of P9,461,246 for media advertising must be supported by receipts, records or other pertinent
for "Tang." papers.
Commissioner disallowed 50% of the deduction which There is yet to be a clear-cut criteria or fixed test for
caused an assessed deficiency income taxes in the amount determining the reasonableness of an advertising expense.
of P2,635, 141.42. The latter filed a motion for The right to a deduction depends on a number of factors
reconsideration but the same was denied. such as but not limited to: the type and size of business in
Court of Tax Appeals: Dismissed, on the ground that the which the taxpayer is engaged; the volume and amount of
gargantuan expense for the advertisement of a singular its net earnings; the nature of the expenditure itself; the
product, which even excludes "other advertising and intention of the taxpayer and the general economic
promotions" expenses, we are not prepared to accept that conditions. It is the interplay of these, among other factors
such amount is reasonable and properly weighed, that will yield a proper evaluation.

The Court found the subject expense for the 23. G.R. No. 172231 February 12, 2007
advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered COMMISSIONER OF INTERNAL REVENUE, vs. ISABELA
an ordinary expense deductible under then Section 29 (a) CULTURAL CORPORATION
(1) (A) of the NIRC. Facts: ICC is a domestic corporation, received from the BIR
Advertising is generally of two kinds: (1) advertising to Assessment Notice for deficiency income tax in the
stimulate the current sale of merchandise or use of amount of P333,196.86, and for expanded withholding tax
services and (2) advertising designed to stimulate the in the amount of P4,897.79, both for the taxable year
future sale of merchandise or use of services. The second 1986.
type involves expenditures incurred, in whole or in part, to ICC sought a reconsideration of the subject assessments.
create or maintain some form of goodwill for the However, it received a final notice before seizure
taxpayer’s trade or business or for the industry or demanding payment of the amounts stated in the said
profession of which the taxpayer is a member. If the notices.
expenditures are for the advertising of the first kind, then,
except as to the question of the reasonableness of Court of Tax Appeals: CTA held that the petition is
amount, there is no doubt such expenditures are premature because the final notice of assessment cannot
deductible as business expenses. If, however, the be considered as a final decision appealable to the tax
expenditures are for advertising of the second kind, then court.
normally they should be spread out over a reasonable
period of time. Court of Appeals: Reversed the decision, holding that a
demand letter of the BIR reiterating the payment of
It is the taxpayer’s prerogative to determine the amount of deficiency tax, amounts to a final decision on the
advertising expenses it will incur and where to apply them. protested assessment and may therefore be questioned
Said prerogative, however, is subject to certain before the CTA.
considerations. The first relates to the extent to which the
expenditures are actually capital outlays; this necessitates Supreme Court: Sustained the decision of CA and the case
an inquiry into the nature or purpose of such was thus remanded to the CTA for further proceedings.
expenditures. The second, which must be applied in Court of Tax Appeals: rendered a decision canceling and
harmony with the first, relates to whether the setting aside the assessment notices issued against ICC.
expenditures are ordinary and necessary. Concomitantly,
for an expense to be considered ordinary, it must be Issue: Whether or not the deduction of the expenses for
reasonable in amount. professional and security services from ICC’s gross income
is valid.
Respondent corporation incurred the subject advertising
expense in order to protect its brand franchise. We Ruling: The requisites for the deductibility of ordinary and
consider this as a capital outlay since it created goodwill necessary trade, business, or professional expenses, like
for its business and/or product. The media advertising expenses paid for legal and auditing services, are: (a) the
expense for the promotion of a single product, almost one- expense must be ordinary and necessary; (b) it must have
half of petitioner corporation’s entire claim for marketing been paid or incurred during the taxable year; (c) it must
expenses for that year under review is doubtlessly have been paid or incurred in carrying on the trade or
unreasonable. business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.
It has been a long standing policy and practice of the Court
to respect the conclusions of quasi-judicial agencies such The requisite that it must have been paid or incurred
as the Court of Tax Appeals, a highly specialized body during the taxable year is further qualified by Section 45 of
specifically created for the purpose of reviewing tax cases. the National Internal Revenue Code (NIRC) which states
The CTA, by the nature of its functions, is dedicated that: "[t]he deduction provided for in this Title shall be
exclusively to the study and consideration of tax problems. taken for the taxable year in which ‘paid or accrued’ or
It has necessarily developed an expertise on the subject. ‘paid or incurred’, dependent upon the method of
We extend due consideration to its opinion unless there is accounting upon the basis of which the net income is
an abuse or improvident exercise of authority. Since there computed x x x".
is none in the case at bar, the Court adheres to the
findings of the CTA. Accounting methods for tax purposes comprise a set of
rules for determining when and how to report income and

deductions. In the instant case, the accounting method After its motion for reconsideration was denied. It filed a
used by ICC is the accrual method. petition for review in the CTA En Banc, arguing that the
First Division erred in disallowing its deductions on the
Revenue Audit Memorandum Order No. 1-2000, provides ground that it had not substantiated them by sufficient
that under the accrual method of accounting, expenses evidence.
not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as ISSUE : WON PETITIONER IS ENTITLED TO CLAIM A TAX
deduction from income for the succeeding year. Thus, a DEDUCTION.
taxpayer who is authorized to deduct certain expenses and
other allowable deductions for the current year but failed
to do so cannot deduct the same for the next year. RULING : The rule that tax deductions, being in the nature
The accrual of income and expense is permitted when the of tax exemptions, are to be construed strictissimi juris
all-events test has been met. This test requires: (1) fixing against the taxpayer is well settled. Corollary to this rule is
of a right to income or liability to pay; and (2) the the principle that when a taxpayer claims a deduction, he
availability of the reasonable accurate determination of must point to some specific provision of the statute in
such income or liability. which such deduction is authorized and must be able to
prove that he is entitled to the deduction which the law
The all-events test requires the right to income or liability allows. An item of expenditure, therefore, must fall
be fixed, and the amount of such income or liability be squarely within the language of the law in order to be
determined with reasonable accuracy. The amount of deductible. A mere averment that the taxpayer has
liability does not have to be determined exactly; it must be incurred a loss does not automatically warrant a deduction
determined with "reasonable accuracy." Accordingly, the of its gross income.
term "reasonable accuracy" implies something less than an
exact or completely accurate amount. Accrual method of The requisites for the deductibility of ordinary and
accounting presents largely a question of fact; such that necessary trade or business expenses, like those paid for
the taxpayer bears the burden of proof of establishing the security and janitorial services, management and
accrual of an item of income or deduction. professional fees, and rental expenses, are that: (a) the
expenses must be ordinary and necessary; (b) they must
In the instant case, the expenses for professional fees have been paid or incurred during the taxable year; (c)
consist of expenses for legal and auditing services. ICC they must have been paid or incurred or incurred in
failed to discharge the burden of proving that the claimed carrying on the trade or business of the taxpayer; and (d)
expense deductions for the professional services were they must be supported by receipts, records or other
allowable deductions for the taxable year 1986. Hence, per pertinent papers.
Revenue Audit Memorandum Order No. 1-2000, they
cannot be validly deducted from its gross income for the APPLICATION
said year and were therefore properly disallowed by the To reiterate, deductions for income tax purposes partake
BIR. of the nature of tax exemptions and are strictly construed
As to the expenses for security services, the records show against the taxpayer, who must prove by convincing
that these expenses were incurred by ICC in 1986 and evidence that he is entitled to the deduction claimed.
could therefore be properly claimed as deductions for the Tambunting did not discharge its burden of substantiating
said year. its claim for deductions due to the inadequacy of its
documentary support of its claim. Its reliance on
withholding tax returns, cash vouchers, lessor's
certifications, and the contracts of lease was futile because
24. TAMBUNTING PAWNSHOP v. CIR such documents had scant probative value. As the CTA En
GR No. 173373, Jul 29, 2013 Banc succinctly put it, the law required Tambunting to
support its claim for deductions with the corresponding
official receipts issued by the service providers concerned.
FACTS
Petitioner is a domestic corporation authorized to engage

in the pawnshop business. It instituted an administrative CONCLUSION To be entitled to claim a tax deduction, the
protest against the assessment notices and demand letters taxpayer must establish the factual and documentary basis
with the Commissioner of Internal Revenue of its claim.

testimony of its accountant Ms. Masagana in order to
25. PHILIPPINE REFINING COMPANY vs. COURT OF prove that these accounts were bad debts. This was
APPEALS, COURT OF TAX APPEALS, and THE considered by all 3 courts to be self-serving. The SC said
COMMISSIONER OF INTERNAL REVENUE, G.R. No. that PRC failed to exercise due diligence in order to
118794, May 8, 1996 ascertain that these debts were uncollectible. In fact, PRC
did not even show the demand letters they allegedly gave
to some of their debtors.
FACTS
Philippine Refining Csorp (PRC) was assessed 26. CHINA BANKING CORPORATION vs. COURT OF
APPEALS, G.R. No. 146749; June 10, 2003
deficiency tax payments for the year 1985 in the amount
of around 1.9M. This figure was computed based on the FACTS:
disallowance of the claim of bad debts by PRC. PRC duly Petitioner paid P12,354,933.00 as gross receipts tax on its
protested the assessment claiming that under the law, bad income from interests on loan investments, commissions,
services, collection charges, foreign exchange profits and
debts and interest expense are allowable deductions.
other operating earnings during the second quarter of
1994. Citing Asian Bank, Petitioner argued that it was not
When the BIR subsequently garnished some of
liable for the gross receipts tax - amounting
PRC’s properties, the latter considered the protest as being to P1,140,623.82 - on the sums withheld by the Bangko
denied and filed an appeal to the CTA which set aside the Sentral ng Pilipinas as final withholding tax on its passive
interest income in 1994.
disallowance of the interest expense and modified the
disallowance of the bad debts by allowing 3 accounts to be Disputing Petitioner’s claim, the Commissioner asserted
claimed as deductions. However, 13 supposed “bad debts” that Petitioner paid the gross receipts tax pursuant to
Section 119 (now Section 121) of the National Internal
were disallowed as the CTA claimed that these were not Revenue Code ("Tax Code") and pertinent Bureau of
substantiated and did not satisfy the jurisprudential Internal Revenue ("BIR") regulations. Further it argued
that the final withholding tax on a bank’s interest income
requirement of “worthlessness of a debt” The CA denied forms part of its gross receipts in computing the gross
the petition for review. receipts tax. Contending that the term "gross receipts"
means the entire income or receipt, without any
deduction.
ISSUE Whether or not all the bad debts should be treated
as deductions. The Court of Tax Appeals ruled in favor of Petitioner and
held that the 20% final withholding tax on interest income
RULING No.For debts to be considered as worthless, and does not form part of CBC’s taxable gross receipts.
thereby qualify as bad debts making them deductible, the
taxpayer should show that (1) there is a valid and ISSUE:
subsisting debt; (2) the debt must be actually ascertained
to be worthless and uncollectible during the taxable year; a. WON the 20% final withholding tax on interest income
(3) the debt must be charged off during the taxable year; should form part of CBC’s gross receipts in computing the
and (4) the debt must arise from the business or trade of gross receipts tax on banks.
the taxpayer. Additionally, before a debt can be
b. WON there is double taxation
considered worthless, the taxpayer must also show that it
is indeed uncollectible even in the future. Furthermore, HELD:
there are steps outlined to be undertaken by the taxpayer
to prove that he exerted diligent efforts to collect the a. Yes. The concept of a withholding tax on income
debts, viz: (1) sending of statement of accounts; (2) obviously and necessarily implies that the amount of the
sending of collection letters; (3) giving the account to a tax withheld comes from the income earned by the
lawyer for collection; and (4) filing a collection case in taxpayer. Since the amount of the tax withheld constitutes
court. income earned by the taxpayer, then that amount
manifestly forms part of the taxpayer’s gross receipts.
In the case at bar, PRC failed to establish the requirements Because the amount withheld belongs to the taxpayer, he
to make the subject debt a "bad debt". They only used the can transfer its ownership to the government in payment

of his tax liability. The amount withheld indubitably comes
from income of the taxpayer, and thus forms part of his
gross receipts.
Actual receipt of interest income is not limited to physical

receipt. Actual receipt may either be physical receipt or
constructive receipt. When the depository bank withholds
the final tax to pay the tax liability of the lending bank,
there is prior to the withholding a constructive receipt by
the lending bank of the amount withheld. From the
amount constructively received by the lending bank, the
depository bank deducts the final withholding tax and
remits it to the government for the account of the lending
bank. Thus, the interest income actually received by the
lending bank, both physically and constructively, is the net
interest plus the amount withheld as final tax.
b. No. There is no double taxation when Section 121 of

the Tax Code imposes a gross receipts tax on interest
income that is already subjected to the 20% final
withholding tax under Section 27 of the Tax Code. The
gross receipts tax is a business tax under Title V of the Tax
Code, while the final withholding tax is an income tax
under Title II of the Code. There is no double taxation if
the law imposes two different taxes on the same income,
business or property.

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Taxation Case Digests Part II

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TAXATION CASE DIGESTS – PART II

1. Whether the absence of Letter of Assessment is FACTS

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1. On the basis of the above language of the law, it

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Effect on unregistered partnership profits of individual ISSUE:

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Inherited land which is subdivided and sold on instalments

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Considering that herein petitioners-mortgagors exercised

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subject to the minimum corporate income tax, thus: xxx

9. THE MANILA BANKING CORPORATION vs. CIR

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HELD: -YES. The intent of Congress relative to the minimum corporate

Congress enacted R.A. No. 7906 or the "Thrift Banks Act of

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In this case, the P5,185,676.77 Gross Philippine Billings tax

3. St. Luke's filed an administrative protest with the BIR

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17. Dumaguete Cathedral Credit Corp vs CIR

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Section 25 of the old National Internal Revenue Code

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Ruling: The NIRC is clear on these matters. The taxable income of

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Petitioner is a domestic corporation authorized to engage

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Actual receipt of interest income is not limited to physical

b. No. There is no double taxation when Section 121 of

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