[G.R. No.

175097 : February 05, 2010]

ALLIED BANKING CORPORATION, PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT.

DECISION

DEL CASTILLO, J.:

The key to effective communication is clarity.

The Commissioner of Internal Revenue (CIR) as well as his duly authorized representative must indicate
clearly and unequivocally to the taxpayer whether an action constitutes a final determination on a
disputed assessment.[1] Words must be carefully chosen in order to avoid any confusion that could
adversely affect the rights and interest of the taxpayer.

Assailed in this Petition for Review on Certiorari[2] under Section 12 of Republic Act (RA) No. 9282,[3] in
relation to Rule 45 of the Rules of Court, are the August 23, 2006 Decision[4] of the Court of Tax Appeals
(CTA) and its October 17, 2006 Resolution[5] denying petitioner's Motion for Reconsideration.

Factual Antecedents

On April 30, 2004, the Bureau of Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) to
petitioner Allied Banking Corporation for deficiency Documentary Stamp Tax (DST) in the amount of
P12,050,595.60 and Gross Receipts Tax (GRT) in the amount of P38,995,296.76 on industry issue for the
taxable year 2001.[6] Petitioner received the PAN on May 18, 2004 and filed a protest against it on May
27, 2004.[7]

On July 16, 2004, the BIR wrote a Formal Letter of Demand with Assessment Notices to petitioner, which
partly reads as follows:[8]

It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of
penalties incident to delinquency. This is our final decision based on investigation. If you disagree, you
may appeal the final decision within thirty (30) days from receipt hereof, otherwise said deficiency tax
assessment shall become final, executory and demandable.

Petitioner received the Formal Letter of Demand with Assessment Notices on August 30, 2004.[9]

Proceedings before the CTA First Division

On September 29, 2004, petitioner filed a Petition for Review[10] with the CTA which was raffled to its
First Division and docketed as CTA Case No. 7062.[11]

On December 7, 2004, respondent CIR filed his Answer.[12] On July 28, 2005, he filed a Motion to
Dismiss[13] on the ground that petitioner failed to file an administrative protest on the Formal Letter of
Demand with Assessment Notices. Petitioner opposed the Motion to Dismiss on August 18, 2005.[14]

Page 1 of 79
On October 12, 2005, the First Division of the CTA rendered a Resolution[15] granting respondent's
Motion to Dismiss. It ruled:

Clearly, it is neither the assessment nor the formal demand letter itself that is appealable to this Court. It
is the decision of the Commissioner of Internal Revenue on the disputed assessment that can be
appealed to this Court (Commissioner of Internal Revenue vs. Villa, 22 SCRA 3). As correctly pointed out
by respondent, a disputed assessment is one wherein the taxpayer or his duly authorized representative
filed an administrative protest against the formal letter of demand and assessment notice within thirty
(30) days from date [of] receipt thereof. In this case, petitioner failed to file an administrative protest on
the formal letter of demand with the corresponding assessment notices. Hence, the assessments did not
become disputed assessments as subject to the Court's review under Republic Act No. 9282. (See also
Republic v. Liam Tian Teng Sons & Co., Inc., 16 SCRA 584.)

WHEREFORE, the Motion to Dismiss is GRANTED. The Petition for Review is hereby DISMISSED for lack
of jurisdiction.

SO ORDERED.[16]

Aggrieved, petitioner moved for reconsideration but the motion was denied by the First Division in its
Resolution dated February 1, 2006.[17]

Proceedings before the CTA En Banc

On February 22, 2006, petitioner appealed the dismissal to the CTA En Banc.[18] The case was docketed
as CTA EB No. 167.

Finding no reversible error in the Resolutions dated October 12, 2005 and February 1, 2006 of the CTA
First Division, the CTA En Banc denied the Petition for Review[19]as well as petitioner's Motion for
Reconsideration.[20]

The CTA En Banc declared that it is absolutely necessary for the taxpayer to file an administrative
protest in order for the CTA to acquire jurisdiction. It emphasized that an administrative protest is an
integral part of the remedies given to a taxpayer in challenging the legality or validity of an assessment.
According to the CTA En Banc, although there are exceptions to the doctrine of exhaustion of
administrative remedies, the instant case does not fall in any of the exceptions.

Issue

Hence, the present recourse, where petitioner raises the lone issue of whether the Formal Letter of
Demand dated July 16, 2004 can be construed as a final decision of the CIR appealable to the CTA under
RA 9282.

Our Ruling

The petition is meritorious.

Section 7 of RA 9282 expressly

provides that the CTA exercises

Page 2 of 79
exclusive appellate jurisdiction
to review by appeal decisions
of the CIR in cases involving
disputed assessments

The CTA, being a court of special jurisdiction, can take cognizance only of

matters that are clearly within its jurisdiction.[21] Section 7 of RA 9282 provides:

Sec. 7. Jurisdiction. -- The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal
Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising
under the National Internal Revenue Code or other laws administered by the Bureau of Internal
Revenue, where the National Internal Revenue Code provides a specific period of action, in which case
the inaction shall be deemed a denial; (Emphasis supplied)
xxxx

The word "decisions" in the above quoted provision of RA 9282 has been interpreted to mean the
decisions of the CIR on the protest of the taxpayer against the assessments.[22] Corollary thereto, Section
228 of the National Internal Revenue Code (NIRC) provides for the procedure for protesting an
assessment. It states:

SECTION 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided,
however, That a preassessment notice shall not be required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the
tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over and automatically applied the same amount
claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable
year; or

(d) When the excise tax due on excisable articles has not been paid; or

(e) When an article locally purchased or imported by an exempt person, such as, but not limited to,

Page 3 of 79
vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-
exempt persons.

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required
to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may
be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted; otherwise, the assessment shall become
final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days
from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal
to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of
the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and
demandable.

In the instant case, petitioner timely filed a protest after receiving the PAN. In response thereto, the BIR
issued a Formal Letter of Demand with Assessment Notices. Pursuant to Section 228 of the NIRC, the
proper recourse of petitioner was to dispute the assessments by filing an administrative protest within
30 days from receipt thereof. Petitioner, however, did not protest the final assessment notices. Instead,
it filed a Petition for Review with the CTA. Thus, if we strictly apply the rules, the dismissal of the
Petition for Review by the CTA was proper.

The case is an exception to the

rule on exhaustion of administrative remedies

However, a careful reading of the Formal Letter of Demand with Assessment Notices leads us to agree
with petitioner that the instant case is an exception to the rule on exhaustion of administrative
remedies, i.e., estoppel on the part of the administrative agency concerned.

In the case of Vda. De Tan v. Veterans Backpay Commission,[23] the respondent contended that before
filing a petition with the court, petitioner should have first exhausted all administrative remedies by
appealing to the Office of the President. However, we ruled that respondent was estopped from
invoking the rule on exhaustion of administrative remedies considering that in its Resolution, it said,
"The opinions promulgated by the Secretary of Justice are advisory in nature, which may either be
accepted or ignored by the office seeking the opinion, and any aggrieved party has the court for
recourse". The statement of the respondent in said case led the petitioner to conclude that only a final
judicial ruling in her favor would be accepted by the Commission.

Similarly, in this case, we find the CIR estopped from claiming that the filing of the Petition for Review
was premature because petitioner failed to exhaust all administrative remedies.

Page 4 of 79
The Formal Letter of Demand with Assessment Notices reads:

Based on your letter-protest dated May 26, 2004, you alleged the following:

1. That the said assessment has already prescribed in accordance with the provisions of Section
203 of the Tax Code.

2. That since the exemption of FCDUs from all taxes found in the Old Tax Code has been deleted,
the wording of Section 28(A)(7)(b) discloses that there are no other taxes imposable upon
FCDUs aside from the 10% Final Income Tax.

Contrary to your allegation, the assessments covering GRT and DST for taxable year 2001 has not
prescribed for [sic] simply because no returns were filed, thus, the three year prescriptive period has not
lapsed.

With the implementation of the CTRP, the phrase "exempt from all taxes" was deleted. Please refer to
Section 27(D)(3) and 28(A)(7) of the new Tax Code. Accordingly, you were assessed for deficiency gross
receipts tax on onshore income from foreign currency transactions in accordance with the rates
provided under Section 121 of the said Tax Code. Likewise, deficiency documentary stamp taxes was
[sic] also assessed on Loan Agreements, Bills Purchased, Certificate of Deposits and related transactions
pursuant to Sections 180 and 181 of NIRC, as amended.

The 25% surcharge and 20% interest have been imposed pursuant to the provision of Section 248(A) and
249(b), respectively, of the National Internal Revenue Code, as amended.

It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of
penalties incident to delinquency. This is our final decision based on investigation. If you disagree, you
may appeal this final decision within thirty (30) days from receipt hereof, otherwise said deficiency
tax assessment shall become final, executory and demandable.[24] (Emphasis supplied)

It appears from the foregoing demand letter that the CIR has already made a final decision on the
matter and that the remedy of petitioner is to appeal the final decision within 30 days.

In Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue,[25] we considered the language
used and the tenor of the letter sent to the taxpayer as the final decision of the CIR.

In this case, records show that petitioner disputed the PAN but not the Formal Letter of Demand with
Assessment Notices. Nevertheless, we cannot blame petitioner for not filing a protest against the Formal
Letter of Demand with Assessment Notices since the language used and the tenor of the demand letter
indicate that it is the final decision of the respondent on the matter. We have time and again reminded
the CIR to indicate, in a clear and unequivocal language, whether his action on a disputed assessment
constitutes his final determination thereon in order for the taxpayer concerned to determine when his
or her right to appeal to the tax court accrues.[26] Viewed in the light of the foregoing, respondent is now
estopped from claiming that he did not intend the Formal Letter of Demand with Assessment Notices to
be a final decision.

Page 5 of 79
Moreover, we cannot ignore the fact that in the Formal Letter of Demand with Assessment Notices,
respondent used the word "appeal" instead of "protest", "reinvestigation", or "reconsideration".
Although there was no direct reference for petitioner to bring the matter directly to the CTA, it cannot
be denied that the word "appeal" under prevailing tax laws refers to the filing of a Petition for Review
with the CTA. As aptly pointed out by petitioner, under Section 228 of the NIRC, the terms "protest",
"reinvestigation" and "reconsideration" refer to the administrative remedies a taxpayer may take before
the CIR, while the term "appeal" refers to the remedy available to the taxpayer before the CTA. Section
9 of RA 9282, amending Section 11 of RA 1125,[27] likewise uses the term "appeal" when referring to the
action a taxpayer must take when adversely affected by a decision, ruling, or inaction of the CIR. As we
see it then, petitioner in appealing the Formal Letter of Demand with Assessment Notices to the CTA
merely took the cue from respondent. Besides, any doubt in the interpretation or use of the word
"appeal" in the Formal Letter of Demand with Assessment Notices should be resolved in favor of
petitioner, and not the respondent who caused the confusion.

To be clear, we are not disregarding the rules of procedure under Section 228 of the NIRC, as
implemented by Section 3 of BIR Revenue Regulations No. 12-99.[28] It is the Formal Letter of Demand
and Assessment Notice that must be administratively protested or disputed within 30 days, and not the
PAN. Neither are we deviating from our pronouncement in St. Stephen's Chinese Girl's School v. Collector
of Internal Revenue,[29] that the counting of the 30 days within which to institute an appeal in the CTA
commences from the date of receipt of the decision of the CIR on the disputed assessment, not from the
date the assessment was issued.

What we are saying in this particular case is that, the Formal Letter of Demand with Assessment Notices
which was not administratively protested by the petitioner can be considered a final decision of the CIR
appealable to the CTA because the words used, specifically the words "final decision" and "appeal",
taken together led petitioner to believe that the Formal Letter of Demand with Assessment Notices was
in fact the final decision of the CIR on the letter-protest it filed and that the available remedy was to
appeal the same to the CTA.

We note, however, that during the pendency of the instant case, petitioner availed of the provisions of
Revenue Regulations No. 30-2002 and its implementing Revenue Memorandum Order by submitting an
offer of compromise for the settlement of the GRT, DST and VAT for the period 1998-2003, as evidenced
by a Certificate of Availment dated November 21, 2007.[30] Accordingly, there is no reason to reinstate
the Petition for Review in CTA Case No. 7062.

WHEREFORE, the petition is hereby GRANTED. The assailed August 23, 2006 Decision and the October
17, 2006 Resolution of the Court of Tax Appeals are REVERSED and SET ASIDE. The Petition for Review in
CTA Case No. 7062 is hereby DISMISSED based solely on the Bureau of Internal Revenue's acceptance of
petitioner's offer of compromise for the settlement of the gross receipts tax, documentary stamp tax
and value added tax, for the years 1998-2003.

Page 6 of 79
G.R. No. 160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE
JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR., Respondents.

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and the
revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision
and those involving creditable withholding taxes.3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former
Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then
Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98.
Petitioner argues that the MCIT violates the due process clause because it levies income tax even if
there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection
of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these
revenue regulations are contrary to law for two reasons: first, they ignore the different treatment by RA
8424 of ordinary assets and capital assets and second, respondent Secretary of Finance has no authority
to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real
properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the
due process clause because, like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal protection clause as well because the
CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly
those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

Page 7 of 79
 (2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties classified as
ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of
2% of its gross income when such MCIT is greater than the normal corporate income tax imposed under
Section 27(A).4 If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT.
Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal
income tax for the three immediately succeeding taxable years. Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. – A [MCIT] of two 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,
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal income
tax as computed under Subsection (A) of this Section shall be carried forward and credited
against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulations that shall define the terms and conditions
under which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection (E)
hereof, the term ‘gross income’ shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse.

Page 8 of 79
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales
returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and specialists directly rendering the service
and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, that in the case of banks, "cost of services"
shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The
pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations. –

(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby
imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following
the taxable year in which such corporation commenced its business operations. The MCIT shall be
imposed whenever such corporation has zero or negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal income tax due from such corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and
thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as computed
under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal
income tax for the three (3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR,
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of taxes.6
Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of real
property, other than capital assets, by persons residing in the Philippines and habitually engaged in the
real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of. – Real property, other than capital assets, sold by an individual,
corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in
the real estate business in accordance with the following schedule –

Page 9 of 79
 Those which are exempt from a Exempt
withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

With a selling price of five hundred 1.5%

thousand pesos (₱500,000.00) or less.

With a selling price of more than five 3.0%

hundred thousand pesos
(₱500,000.00) but not more than two
million pesos (₱2,000,000.00).

With selling price of more than two 5.0%

million pesos (₱2,000,000.00)

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange, as determined in the Income Tax
Regulations shall be used.

Where the consideration or part thereof is payable on installment, no withholding tax is required to be
made on the periodic installment payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on
the last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall
be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross
selling price/total amount of consideration or the fair market value determined in accordance with
Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange
of real property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in
accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.

Page 10 of 79
 Upon the following values of real property, where the
seller/transferor is habitually engaged in the real estate
business.
With a selling price of Five Hundred Thousand Pesos 1.5%
(₱500,000.00) or less.
With a selling price of more than Five Hundred Thousand 3.0%
Pesos (₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange shall be considered as the
consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules
shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every
installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the
installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall
withhold the tax based on the gross selling price or fair market value of the property, whichever is
higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT]
due on the sale, transfer or exchange of real property other than capital asset has been fully paid.
(Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified
that such transfers and conveyances have been reported and the taxes thereof have been duly paid:7

Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfers and conveyances have been reported and the
expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid
xxxx.

Page 11 of 79
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining
whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to
the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or
current fair market value as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations. –

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are located
in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec.
27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question
before the court must be ripe for adjudication; (3) the person challenging the validity of the act must
have standing to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to them, there is no
actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because

Page 12 of 79
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed
by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege
that its members have shut down their businesses as a result of the payment of the MCIT or CWT.
Petitioner has raised concerns in mere abstract and hypothetical form without any actual, specific and
concrete instances cited that the assailed law and revenue regulations have actually and adversely
affected it. Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that
does not really settle legal issues.10

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims
which is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or
dispute.11 On the other hand, a question is considered ripe for adjudication when the act being
challenged has a direct adverse effect on the individual challenging it.12

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut down
their operations as a result of the MCIT or CWT. The assailed provisions are already being implemented.
As we stated in Didipio Earth-Savers’ Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said
to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial duty.14

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle
such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines.
Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material
interest or any wrong that it may suffer from the enforcement of [the assailed provisions].15

Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged.16 In Holy
Spirit Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing
because its members stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that
the individual members of petitioner association are residents of the NGC. As such they are covered and
stand to be either benefited or injured by the enforcement of the IRR, particularly as regards the
selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner
association may assail those provisions in the IRR which it believes to be unfavorable to the rights of its
members. xxx Certainly, petitioner and its members have sustained direct injury arising from the
enforcement of the IRR in that they have been disqualified and eliminated from the selection process.18

Page 13 of 79
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is involved.19
The questioned MCIT and CWT affect not only petitioners but practically all domestic corporate
taxpayers in our country. The transcendental importance of the issues raised and their overreaching
significance to society make it proper for us to take cognizance of this petition.20

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing
the true income of corporations.21 It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control and enforce. It is a
means to ensure that everyone will make some minimum contribution to the support of the public
sector. The congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first time a new concept called the
[MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for
administrative convenience. … This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement.22

Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial market and
to ensure a favorable business climate. It is therefore fair for the government to require them to make a
reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or zero income taxes year in and year out,
through under-declaration of income or over-deduction of expenses otherwise called tax shelters.23

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the
[MCIT]. Because from experience too, you have corporations which have been losing year in and year
out and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that
corporation has no business to be in business. It is dead. Why continue if you are losing year in and year
out? So, we have this provision to avoid this type of tax shelters, Your Honor.24

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are
allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income,
it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was
lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated
into the law:

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First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately
following the year in which the corporation commenced its operations.25 This grace period allows a new
business to stabilize first and make its ventures viable before it is subjected to the MCIT.26

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years.27

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several other
countries already had their own system of minimum corporate income taxation. Our lawmakers noted
that most developing countries, particularly Latin American and Asian countries, have the same form of
safeguards as we do. As pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent (0.5%)
of gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of
course the different countries have different basis for that minimum income tax.

The other thing you’ll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries.29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their
own versions of the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of
law. It explains that gross income as defined under said provision only considers the cost of goods sold
and other direct expenses; other major expenditures, such as administrative and interest expenses
which are equally necessary to produce gross income, were not taken into account.31 Thus, pegging the
tax base of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because
gross income, unlike net income, is not "realized gain."32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure.
The exercise of taxing power derives its source from the very existence of the State whose social
contract with its citizens obliges it to promote public interest and the common good.33

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Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this
means that in the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation.36 It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it
should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature
no limits, so that the principal check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay it.37 Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life,
liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due
process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure39 when it
amounts to a confiscation of property.40 But in the same case, we also explained that we will not strike
down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.41 There must be a factual foundation to such an
unconstitutional taint.42 This merely adheres to the authoritative doctrine that, where the due process
clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for
proof of such persuasive character.43

Petitioner is correct in saying that income is distinct from capital.44 Income means all the wealth which
flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one
distinct point in time while income denotes a flow of wealth during a definite period of time.45 Income is
gain derived and severed from capital.46 For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In
other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on
capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation
in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the
capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income
tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of
net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the
base the corporation’s gross income.

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Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible
items and at the same time reducing the applicable tax rate.49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in
many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity
of taxation.50

The United States has a similar alternative minimum tax (AMT) system which is generally characterized
by a lower tax rate but a broader tax base.51 Since our income tax laws are of American origin,
interpretations by American courts of our parallel tax laws have persuasive effect on the interpretation
of these laws.52 Although our MCIT is not exactly the same as the AMT, the policy behind them and the
procedure of their implementation are comparable. On the question of the AMT’s constitutionality, the
United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional.54

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a legitimate governmental end to which the AMT bore a
reasonable relation.55

American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax.56 This is because
deductions are a matter of legislative grace.57

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base
of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT resulted in
the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary
and confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes.58
Taxation is necessarily burdensome because, by its nature, it adversely affects property rights.59 The
party alleging the law’s unconstitutionality has the burden to demonstrate the supposed violations in
understandable terms.60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

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Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT
is being imposed and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due
from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation
incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still
subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on
gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to
be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT
would be less than the net income of the corporation which posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are collected.61
Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three
categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source
and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and maintains
that the revenue regulations on the collection of CWT on sale of real estate categorized as ordinary
assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were
promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"62 because they ignore such distinctions. Petitioner’s conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV)
of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary
assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents
cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and
payment of taxes on income from the sale of capital and ordinary assets.

Petitioner’s arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property
Considered as Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such

Page 18 of 79
authority is subject to the limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement.64 It is well-settled that an
administrative agency cannot amend an act of Congress.65

We have long recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws.66 The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the government’s cash
flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means
and remedies.68

Respondent Secretary has the authority to require the withholding of a tax on items of income payable
to any person, national or juridical, residing in the Philippines. Such authority is derived from Section
57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source. –

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B)
to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax
is imposed on the income payable and the tax is creditable against the income tax liability of the
taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real
Estate Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business’
income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. 69 They are installments on the annual tax which may be due at the end of the
taxable year.70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
remains to be the entity’s net income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions.

Page 19 of 79
The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable
year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real
property classified as ordinary assets remains to be the net taxable income:

Section 4. – Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to
the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current
[FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as
the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are located
in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec.
27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the
taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the
tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed
on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the
tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the
end of the taxable year. Instead, said withholding agent’s knowledge and privity are limited only to the
particular transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as these
are the only factors reasonably known or knowable by him in connection with the performance of his
duties as a withholding agent.

Page 20 of 79
No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized
as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6%
on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final
tax is also withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary
assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are
distinguished as follows:

FWT CWT

a) The amount of income tax withheld by a) Taxes withheld on certain income

the withholding agent is constituted as a payments are intended to equal or at least
full and final payment of the income tax approximate the tax due of the payee on
due from the payee on the said income. said income.

b)The liability for payment of the tax rests
primarily on the payor as a withholding
agent.
b) Payee of income is required to report
the income and/or pay the difference
between the tax withheld and the tax due
on the income. The payee also has the right
to ask for a refund if the tax withheld is
more than the tax due.

c) The payee is not required to file an c) The income recipient is still required to
income tax return for the particular file an income tax return, as prescribed in
income.73 Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed
on the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove
petitioner’s contention that ordinary assets are being lumped together with, and treated similarly as,
capital assets in contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to
the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of
income tax involving ordinary assets.75

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the
same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the
CWT. The withholding agent/buyer’s act of collecting the tax at the time of the transaction by

Page 21 of 79
withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It
follows that Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1),
27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on
specified items of income shall be withheld by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the recommendation
of the [CIR], require the withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by
law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of the taxpayer for the taxable
year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates
these as passive income. The BIR defines passive income by stating what it is not:

…if the income is generated in the active pursuit and performance of the corporation’s primary
purposes, the same is not passive income…76

It is income generated by the taxpayer’s assets. These assets can be in the form of real properties that
return rental income, shares of stock in a corporation that earn dividends or interest income received
from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to
natural or juridical persons, residing in the Philippines." There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily said so.

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Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to
CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses
any income other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard
57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has
been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its functions.77
Similarly, considering that the law uses the general term "income," the Secretary and CIR may specify
the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules
and regulations ordinarily deserve to be given weight and respect by the courts78 in view of the rule-
making authority given to those who formulate them and their specific expertise in their respective
fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax
from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the
end of the taxable year. The seller will be able to claim a tax refund if its net income is less than the
taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the due process requirement applies to the
power to tax.79 The CWT does not impose new taxes nor does it increase taxes.80 It relates entirely to the
method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers
have to wait years and may even resort to litigation before they are granted a refund.81 This argument is
misleading. The practical problems encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting the tax.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to
pay labor wages, materials, cost of money and other expenses which can then save the entity from
having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and
pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings;
long gestation period; sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least 20
government agencies.82

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s
complaints are essentially matters of policy best addressed to the executive and legislative branches of
the government. Besides, the CWT is applied only on the amounts actually received or receivable by the
real estate entity. Sales on installment are taxed on a per-installment basis.83 Petitioner’s desire to
utilize for its operational and capital expenses money earmarked for the payment of taxes may be a

Page 23 of 79
practical business option but it is not a fundamental right which can be demanded from the court or
from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the
CWT is being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not
much different from that of a real estate enterprise. Like a manufacturing concern, a real estate
business is involved in a continuous process of production and it incurs costs and expenditures on a
regular basis. The only difference is that "goods" produced by the real estate business are house and lot
units.84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."85 Stated differently, all persons belonging to the same class shall be
taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation
based on a reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions;
(2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply
equally to all members of the same class.86

The taxing power has the authority to make reasonable classifications for purposes of taxation.87
Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe
no constitutional limitation.88 The real estate industry is, by itself, a class and can be validly treated
differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to
realize that what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. The income from the sale of a real property is bigger and
its frequency of transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable
system of taxation and may well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold infrequently,
e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly
subjected to the CWT.89 As already discussed, the Secretary may adopt any reasonable method to carry
out its functions.90 Under Section 57(B), it may choose what to subject to CWT.

Page 24 of 79
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate. The
sales of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are
also subject to CWT for their transactions with said 5,000 corporations.91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not
effect the regisration of any document transferring real property unless a certification is issued by the
CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule
except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not.
Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is
unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source. –

(E) Registration with Register of Deeds. - No registration of any document transferring real property
shall be effected by the Register of Deeds unless the [CIR] or his duly authorized representative has
certified that such transfer has been reported, and the capital gains or [CWT], if any, has been paid:
xxxx any violation of this provision by the Register of Deeds shall be subject to the penalties imposed
under Section 269 of this Code. (Emphasis supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to
understand is the income tax."92 When a party questions the constitutionality of an income tax measure,
it has to contend not only with Einstein’s observation but also with the vast and well-established
jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has miserably
failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is
unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

Page 25 of 79
G.R. No. 188550 August 19, 2013

DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

SERENO, CJ.:

This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under Rule 45 of the
1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc) Decision2 dated
29 May 2009 and Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.

THE FACTS

In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of 1997, petitioner
withheld and remitted to respondent on 21 October 2003 the amount of PHP 67,688,553.51, which
represented the fifteen percent (15%) branch profit remittance tax (BPRT) on its regular banking unit
(RBU) net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years.5

Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers
Assessment and Investigation Division on 4 October 2005 an administrative claim for refund or issuance
of its tax credit certificate in the total amount of PHP 22,562,851.17. On the same date, petitioner
requested from the International Tax Affairs Division (ITAD) a confirmation of its entitlement to the
preferential tax rate of 10% under the RP-Germany Tax Treaty.6

Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review7 with
the CTA on 18 October 2005. Petitioner reiterated its claim for the refund or issuance of its tax credit
certificate for the amount of PHP 22,562,851.17 representing the alleged excess BPRT paid on branch
profits remittance to DB Germany.

THE CTA SECOND DIVISION RULING8

After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount of
PHP 67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP 451,257,023.29 for
2002 and prior taxable years. Records also disclose that for the year 2003, petitioner remitted to DB
Germany the amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP
63.804:1 EURO), which is net of the 15% BPRT.

However, the claim of petitioner for a refund was denied on the ground that the application for a tax
treaty relief was not filed with ITAD prior to the payment by the former of its BPRT and actual
remittance of its branch profits to DB Germany, or prior to its availment of the preferential rate of ten
percent (10%) under the RP-Germany Tax Treaty provision. The court a quo held that petitioner violated
the fifteen (15) day period mandated under Section III paragraph (2) of Revenue Memorandum Order
(RMO) No. 1-2000.

Page 26 of 79
Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation (formerly
Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue9 (Mirant)
where the CTA En Banc ruled that before the benefits of the tax treaty may be extended to a foreign
corporation wishing to avail itself thereof, the latter should first invoke the provisions of the tax treaty
and prove that they indeed apply to the corporation.

THE CTA EN BANC RULING10

The CTA En Banc affirmed the CTA Second Division’s Decision dated 29 August 2008 and Resolution
dated 14 January 2009. Citing Mirant, the CTA En Banc held that a ruling from the ITAD of the BIR must
be secured prior to the availment of a preferential tax rate under a tax treaty. Applying the principle of
stare decisis et non quieta movere, the CTA En Banc took into consideration that this Court had denied
the Petition in G.R. No. 168531 filed by Mirant for failure to sufficiently show any reversible error in the
assailed judgment.11 The CTA En Banc ruled that once a case has been decided in one way, any other
case involving exactly the same point at issue should be decided in the same manner.

The court likewise ruled that the 15-day rule for tax treaty relief application under RMO No. 1-2000
cannot be relaxed for petitioner, unlike in CBK Power Company Limited v. Commissioner of Internal
Revenue.12 In that case, the rule was relaxed and the claim for refund of excess final withholding taxes
was partially granted. While it issued a ruling to CBK Power Company Limited after the payment of
withholding taxes, the ITAD did not issue any ruling to petitioner even if it filed a request for
confirmation on 4 October 2005 that the remittance of branch profits to DB Germany is subject to a
preferential tax rate of 10% pursuant to Article 10 of the RP-Germany Tax Treaty.

ISSUE

This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-
2000 will deprive persons or corporations of the benefit of a tax treaty.

THE COURT’S RULING

The Petition is meritorious.

Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of 15%
based on the total profits applied for or earmarked for remittance without any deduction of the tax
component. However, petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty, which
provides that where a resident of the Federal Republic of Germany has a branch in the Republic of the
Philippines, this branch may be subjected to the branch profits remittance tax withheld at source in
accordance with Philippine law but shall not exceed 10% of the gross amount of the profits remitted by
that branch to the head office.

By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines,
remitting to its head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT.

On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the tax treaty
relief must be preceded by an application with ITAD at least 15 days before the transaction. The Order
was issued to streamline the processing of the application of tax treaty relief in order to improve

Page 27 of 79
efficiency and service to the taxpayers. Further, it also aims to prevent the consequences of an
erroneous interpretation and/or application of the treaty provisions (i.e., filing a claim for a tax
refund/credit for the overpayment of taxes or for deficiency tax liabilities for underpayment).13

The crux of the controversy lies in the implementation of RMO No. 1-2000.

Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-Germany
Tax Treaty, the CTA erred in denying its claim solely on the basis of RMO No. 1-2000. The filing of a tax
treaty relief application is not a condition precedent to the availment of a preferential tax rate. Further,
petitioner posits that, contrary to the ruling of the CTA, Mirant is not a binding judicial precedent to
deny a claim for refund solely on the basis of noncompliance with RMO No. 1-2000.

Respondent counters that the requirement of prior application under RMO No. 1-2000 is mandatory in
character. RMO No. 1-2000 was issued pursuant to the unquestioned authority of the Secretary of
Finance to promulgate rules and regulations for the effective implementation of the NIRC. Thus, courts
cannot ignore administrative issuances which partakes the nature of a statute and have in their favor a
presumption of legality.

The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this
prerequisite is fatal to the taxpayer’s availment of the preferential tax rate.

We disagree.

A minute resolution is not a binding precedent

At the outset, this Court’s minute resolution on Mirant is not a binding precedent. The Court has
clarified this matter in Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue14 as
follows:

It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition
of the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being
questioned. As a result, our ruling in that case has already become final. When a minute resolution
denies or dismisses a petition for failure to comply with formal and substantive requirements, the
challenged decision, together with its findings of fact and legal conclusions, are deemed sustained. But
what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it constitutes
res judicata. However, if other parties or another subject matter (even with the same parties and issues)
is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted
that a previous case, CIR v. Baier-Nickel involving the same parties and the same issues, was previously
disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the
CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the latter case because
the two cases involved different subject matters as they were concerned with the taxable income of
different taxable years.

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the

Page 28 of 79
Constitution that the facts and the law on which the judgment is based must be expressed clearly and
distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only by the
clerk of court by authority of the justices, unlike a decision. It does not require the certification of the
Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports.
Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. Indeed, as a rule, this Court lays
down doctrines or principles of law which constitute binding precedent in a decision duly signed by the
members of the Court and certified by the Chief Justice. (Emphasis supplied)

Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot bind this Court
in cases of a similar nature. There are differences in parties, taxes, taxable periods, and treaties
involved; more importantly, the disposition of that case was made only through a minute resolution.

Tax Treaty vs. RMO No. 1-2000

Our Constitution provides for adherence to the general principles of international law as part of the law
of the land.15 The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the agreement.
Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by
them in good faith.16 More importantly, treaties have the force and effect of law in this jurisdiction.17

Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and,
in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions."18 CIR v. S.C.
Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection against double taxation
is crucial in creating such a climate."19

Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax treaty or double tax
agreements.

"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken."20 Thus,
laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional requirements that would negate the availment of
the reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty
does not provide for any pre-requisite for the availment of the benefits under said agreement.

Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a
deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period. We
recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial
of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the

Page 29 of 79
objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by
duly entitled persons or corporations.

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

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000.1âwphi1 Logically, noncompliance with tax treaties has negative implications on international
relations, and unduly discourages foreign investors. While the consequences sought to be prevented by
RMO No. 1-2000 involve an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.

Prior Application vs. Claim for Refund

Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or application of
the treaty provisions. The objective of the BIR is to forestall assessments against corporations who
erroneously availed themselves of the benefits of the tax treaty but are not legally entitled thereto, as
well as to save such investors from the tedious process of claims for a refund due to an inaccurate
application of the tax treaty provisions. However, as earlier discussed, noncompliance with the 15-day
period for prior application should not operate to automatically divest entitlement to the tax treaty
relief especially in claims for refund.

The underlying principle of prior application with the BIR becomes moot in refund cases, such as the
present case, where the very basis of the claim is erroneous or there is excessive payment arising from
non-availment of a tax treaty relief at the first instance. In this case, petitioner should not be faulted for
not complying with RMO No. 1-2000 prior to the transaction. It could not have applied for a tax treaty
relief within the period prescribed, or 15 days prior to the payment of its BPRT, precisely because it
erroneously paid the BPRT not on the basis of the preferential tax rate under

the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior
application requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions of
the RP-Germany Tax Treaty when it requested for a confirmation from the ITAD before filing an
administrative claim for a refund should be deemed substantial compliance with RMO No. 1-2000.

Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery when there
has been an erroneous payment of tax.1âwphi1 The outright denial of petitioner’s claim for a refund, on
the sole ground of failure to apply for a tax treaty relief prior to the payment of the BPRT, would defeat
the purpose of Section 229.

Petitioner is entitled to a refund

Page 30 of 79
It is significant to emphasize that petitioner applied – though belatedly – for a tax treaty relief, in
substantial compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed whether
petitioner was entitled to the lower rate of 10% BPRT pursuant to the RP-Germany Tax Treaty.

Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:

Based on the evidence presented, both documentary and testimonial, petitioner was able to establish
the following facts:

a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a corporation
organized and existing under the laws of the Federal Republic of Germany;

b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income Taxes
Withheld under BIR Form No. 1601-F and remitted the amount of ₱67,688,553.51 as branch
profits remittance tax with the BIR; and

c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a clearance,
petitioner remitted to Frankfurt Head Office the amount of EUR5,174,847.38 (or
₱330,175,961.88 at 63.804 Peso/Euro) representing its 2002 profits remittance.22

The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU net income,
due for remittance to DB Germany amounting to PHP 451,257,023.29 for 2002 and prior taxable years.23

Likewise, both the administrative and the judicial actions were filed within the two-year prescriptive
period pursuant to Section 229 of the NIRC.24

Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10% BPRT in
accordance with the RP-Germany Tax Treaty.

Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income amounting to
PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT. Thus, it is proper to grant
petitioner a refund ofthe difference between the PHP 67,688,553.51 (15% BPRT) and PHP 45,125,702.34
(10% BPRT) or a total of PHP 22,562,851.17.

WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of Tax
Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1 July 2009 are REVERSED and SET
ASIDE. A new one is hereby entered ordering respondent Commissioner of Internal Revenue to refund
or issue a tax credit certificate in favor of petitioner Deutsche Bank AG Manila Branch the amount of
TWENTY TWO MILLION FIVE HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND
SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine currency, representing the erroneously paid
BPRT for 2002 and prior taxable years.

SO ORDERED.

Page 31 of 79
G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

x-----------------------x

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing
the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1
March 2011 in CTA Case No. 6746. This Court resolves this case on a pure question of law, which
involves the interpretation of Section 27(B) vis-à-vis Section 30(E) and (G) of the National Internal
Revenue Code of the Philippines (NIRC), on the income tax treatment of proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to the
sick, diseased and disabled persons; provided that purely medical and surgical services shall be
performed by duly licensed physicians and surgeons who may be freely and individually
contracted by patients;

(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as well
as provide facilities for scientific and medical researches which, in the opinion of the Board of
Trustees, may be justified by the facilities, personnel, funds, or other requirements that are
available;

Page 32 of 79
 (d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to ₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to
₱63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate
on the income of proprietary non-profit hospitals, should be applicable to St. Luke's. According to the
BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on non-
profit hospitals that were previously categorized as non-stock, non-profit corporations under Section 26
of the 1997 Tax Code x x x." 5 It is a specific provision which prevails over the general exemption on
income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable institutions and civic
organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of ₱1,730,367,965 or
approximately ₱1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating
expenses) of ₱334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of any
individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that
Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment of Section
27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section 30 of the
NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR prays that St.
Luke's be ordered to pay ₱57,659,981.19 as deficiency income and expanded withholding tax for 1998
with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of
a part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no ground
for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of Court, 11
this Court's review power is generally limited to "cases in which only an error or question of law is

Page 33 of 79
involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized
exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated
23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the amount
of ₱110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY
deficiency income tax and deficiency expanded withholding tax for the taxable year 1998 in the
respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of ₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total
amount of ₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came
from charitable activities. The CTA cancelled the remainder of the ₱63,113,952.79 deficiency assessed
by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was
not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E)
and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services to its
patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical
Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes of St. Luke's
under its articles of incorporation and various documents 17 identifying St. Luke's as a charitable
institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a
charitable institution does not lose its charitable character and its consequent exemption from taxation
merely because recipients of its benefits who are able to pay are required to do so, where funds derived
in this manner are devoted to the charitable purposes of the institution x x x." 19 The generation of
income from paying patients does not per se destroy the charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled
that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those
corporations or associations which, otherwise, would be subject thereto, because of the existence of x x
x net income." 22 The NIRC of 1997 substantially reproduces the provision on charitable institutions of
the old NIRC. Thus, in rejecting the argument that tax exemption is lost whenever there is net income,
the Court in Jesus Sacred Heart College declared: "[E]very responsible organization must be run to at

Page 34 of 79
least insure its existence, by operating within the limits of its own resources, especially its regular
income. In other words, it should always strive, whenever possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained
that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit." On the other
hand, Congress specifically used the word "non-stock" to qualify a charitable "corporation or
association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the present tax code,
indicating an intent to exempt this type of charitable organization from income tax. Section 27(B) does
not require that the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit
hospitals operated exclusively for charitable purpose are exempt from income tax on income received
by them as such, applying the provision of Section 30(E) of the NIRC of 1997, as amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise
only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26
which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly overlooked
certain relevant facts not disputed by the parties and which, if properly considered, would justify a
different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider
relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving. The
CTA declared that it has "gone through the records of this case and found no other evidence aside from
the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge
under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time
prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20%
delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the
amount of ₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B)
in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable and social
welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary

Page 35 of 79
educational institutions and proprietary non-profit hospitals. The BIR argues that Congress intended to
remove the exemption that non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of
1977, which is now substantially reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the
present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except those
covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or
other activity exceeds fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on
the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other
activity' means any trade, business or other activity, the conduct of which is not substantially related to
the exercise or performance by such educational institution or hospital of its primary purpose or
function. A 'proprietary educational institution' is any private school maintained and administered by
private individuals or groups with an issued permit to operate from the Department of Education,
Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education
and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and
regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable
institution and an organization promoting social welfare. The arguments of St. Luke's focus on the
wording of Section 30(E) exempting from income tax non-stock, non-profit charitable institutions. 34 St.
Luke's asserts that the legislative intent of introducing Section 27(B) was only to remove the exemption
for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30 state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under
this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their properties, real or personal, or from any of their

Page 36 of 79
activities conducted for profit regardless of the disposition made of such income, shall be subject to tax
imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of
the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section
30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed
together without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to
subject the taxable income of two specific institutions, namely, proprietary non-profit educational
institutions 36 and proprietary non-profit hospitals, among the institutions covered by Section 30, to the
10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any private school maintained and administered
by private individuals or groups" with a government permit. "Non-profit" means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc.
de Cebu, 37 this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees and
dues. If it had profits, they were used for overhead expenses and improving its golf course. 38 The club
was non-profit because of its purpose and there was no evidence that it was engaged in a profit-making
enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently
with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and
hearts under the influence of education or religion, by assisting them to establish themselves in life or
[by] otherwise lessening the burden of government." 41 A non-profit club for the benefit of its members
fails this test. An organization may be considered as non-profit if it does not distribute any part of its
income to stockholders or members. However, despite its being a tax exempt institution, any income
such institution earns from activities conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite
number of persons which lessens the burden of government. In other words, charitable institutions
provide for free goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which should have been
spent to address public needs, because certain private entities already assume a part of the burden. This
is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is
compensated by its relief from doing public works which would have been funded by appropriations
from the Treasury. 42

Page 37 of 79
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it. The power of Congress to tax implies the power to
exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o
law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly construed against the
taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the
government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for
the purpose of exemption from real property taxes. This ruling uses the same premise as Hospital de San
Juan 45 and Jesus Sacred Heart College 46 which says that receiving income from paying patients does
not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. 47

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions, churches
and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation." 48 The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The test requires that the institution
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center
of the Philippines did not lose its charitable character when it used a portion of its lot for commercial
purposes. The effect of failing to meet the use requirement is simply to remove from the tax exemption
that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of
the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the
NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable institution, but requires that the
institution "actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Page 38 of 79
Thus, both the organization and operations of the charitable institution must be devoted "exclusively"
for charitable purposes. The organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members,
trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized." 50 However, under Lung Center, any profit by a charitable institution must not only be
plowed back "whenever necessary or proper," but must be "devoted or used altogether to the
charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that "no
part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer, officer
or any specific person." The use of lands, buildings and improvements of the institution is but a part of
its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso
facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property "actually, directly and exclusively" for charitable
purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be "organized and operated exclusively" for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for
social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their properties, real or personal, or from any of their
activities conducted for profit regardless of the disposition made of such income, shall be subject to tax
imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or
association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x." It
likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind
and character" of a charitable institution "from any of its activities conducted for profit, regardless of
the disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(B),

Page 39 of 79
the tax rate on such income from for-profit activities was the ordinary corporate rate under Section
27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately ₱1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived
profits from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

OPERATING EXPENSES

Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation
or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively."
x x x The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitution and the law. Solely is synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC.
Services to paying patients are activities conducted for profit. They cannot be considered any other way.
There is a "purpose to make profit over and above the cost" of services. 55 The ₱1.73 billion total
revenues from paying patients is not even incidental to St. Luke's charity expenditure of ₱218,187,498
for non-paying patients.

Page 40 of 79
St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in 1998.
However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said that
the income is "devoted or used altogether to the charitable object which it is intended to achieve." 56
The income is plowed back to the corporation not entirely for charitable purposes, but for profit as well.
In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities
for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any
activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who
was a member of the Committee of Conference for the Senate, which introduced the phrase "or from
any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es una
actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero considerando
que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posición
social económica, lo que se paga por estos enfermos debe estar sujeto a 'income tax', y es una de las
razones que hemos tenido para insertar las palabras o frase 'or from any activity conducted for profit.'
57

The question was whether having a hospital is essential to an educational institution like the College of
Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms
generally occupied by people of good economic standing, then it should be subject to income tax. He
said that this was one of the reasons Congress inserted the phrase "or any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on the
activities of charitable institutions. Activities for profit should not escape the reach of taxation. Being a
non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution
from tax. An institution cannot use its corporate form to prevent its profitable activities from being
taxed.

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

Page 41 of 79
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax
exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of
the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However,
St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St.
Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus exempt from
income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said that
"good faith and honest belief that one is not subject to tax on the basis of previous interpretation of
government agencies tasked to implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution
dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO
PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate under Section
27(B) of the National Internal Revenue Code. However, it is not liable for surcharges and interest on
such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code. All other
parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule
45 of the Rules of Court.

SO ORDERED.

Page 42 of 79
 G.R. No. 196596, November 09, 2016

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY, INC., Respondent.

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,Respondent.

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari:1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the
December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals (CTA) in
En Banc Case No. 622;2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision
and October 4, 2011 resolution in CTA En Banc Case No. 671;3 and

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4,
2011 resolution in CTA En Banc Case No. 671.4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA Division) Case
No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case No. 622 filed by the Commissioner to
challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both stemmed from CTA En Banc Case No.
671 filed by DLSU to also challenge CTA Case No. 7303.chanroblesvirtuallawlibrary

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No.
2794 authorizing its revenue officers to examine the latter's books of accounts and other accounting
records for all internal revenue taxes for the period Fiscal Year Ending 2003 and Unverified Prior Years.5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the
following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and bookstores
operating within the campus; (2) value-added tax (VAT) on business income; and (3) documentary stamp
tax (DST) on loans and lease contracts. The BIR demanded the payment of P17,303,001.12, inclusive of
surcharge, interest and penalty for taxable years 2001, 2002 and 2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on

Page 43 of 79
August 3, 2005 a petition for review with the CTA Division.8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV,
Section 4 (3) of the Constitution, which reads:
chanRoblesvirtualLawlibrary
(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive portion
of the decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan
transactions of [DLSU] in the amount of P1,1681,774.00 is hereby CANCELLED. However, [DLSU] is
ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts, plus 25% surcharge for the
fiscal years 2001, 2002 and 2003 in the total amount of P18,421,363.53...xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due
computed from September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the
[National Internal Revenue Code]. Further, the compromise penalties imposed by [the Commissioner]
were excluded, there. being no compromise agreement between the parties.

SO ORDERED.9ChanRoblesVirtualawlibrary
Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010 decision.10 On
April 6, 2010, the CTA Division denied the Commissioner's motion for reconsideration while it held in
abeyance the resolution on DLSU's motion for reconsideration.11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622) arguing
that DLSU's use of its revenues and assets for non-educational or commercial purposes removed these
items from the exemption coverage under the Constitution.12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary
evidence to prove that its rental income was used actually, directly and exclusively for educational
purposes.13The Commissioner did not promptly object to the formal offer of supplemental evidence
despite notice.14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the
amount of DLSU's tax deficiencies. The dispositive portion of the amended decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED. [DLSU] is
hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25% surcharge for the fiscal years
2001, 2002 and 2003 in the total adjusted amount of P5,506,456.71...xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the...basic
deficiency taxes...until full payment thereof pursuant to Section 249(B) of the [National Internal
Revenue Code]...xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency taxes,

Page 44 of 79
surcharge and deficiency interest which have accrued...from September 30, 2004 until fully
paid.15ChanRoblesVirtualawlibrary
Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the
CTA Division erred in admitting DLSU's additional evidence.16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with
the CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the entire assessment should
have been cancelled because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA
Division should still have cancelled the entire assessment because DLSU submitted evidence similar to
those submitted by Ateneo De Manila University (Ateneo) in a separate case where the CTA cancelled
Ateneo's tax assessment;17 and (3) the CTA Division erred in finding that a portion of DLSU's rental
income was not proved to have been used actually, directly and exclusively for educational
purposes.18chanroblesvirtuallawlibrary

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the CTA
Division.19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant

(Independent CPA), the CTA En Banc found that DLSU was able to prove that a portion of the assessed
rental income was used actually, directly and exclusively for educational purposes; hence, exempt from
tax.20 The CTA En Banc was satisfied with DLSU's supporting evidence confirming that part of its rental
income had indeed been used to pay the loan it obtained to build the university's Physical Education -
Sports Complex.21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not
shown by supporting documents to have been actually, directly and exclusively used for educational
purposes, must be subjected to income tax and VAT.22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU proved its remittance of the DST due on its loan and
mortgage documents.23 The CTA En Banc found that DLSU's DST payments had been remitted to the BIR,
evidenced by the stamp on the documents made by a DST imprinting machine, which is allowed under
Section 200 (D) of the National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue
Regulations (RR) No. 15-2001.25cralawred

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even if
DLSU formally offered them only when it moved for reconsideration of the CTA Division's original
decision. Notably, the law creating the CTA provides that proceedings before it shall not be governed
strictly by the technical rules of evidence.26

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The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10,
2010 decision.27 Thus, she came to this court for relief through a petition for review on certiorari (G.R.
No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities to
P2,554,825.47 inclusive of surcharge.28

On the validity of the Letter of Authority

The issue of the LOA's validity was raised during trial;29 hence, the issue was deemed properly submitted
for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and that the
practice of issuing a LOA covering audit of unverified prior years is prohibited.30 The prohibition is
consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides that if the audit
includes more than one taxable period, the other periods or years shall be specifically indicated in the
LOA.31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years.
Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001 and 2002 are
void, but the assessment for taxable year 2003 is valid.32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different parties,
factual settings, bases of assessments, sets of evidence, and defenses.33

On the CTA Division's appreciation of the evidence

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

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

The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed of.35
DLSU's operations of canteens and bookstores within its campus even though exclusively serving the

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university community do not negate income tax liability.36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized with
Section 30 (H) of the Tax Code, which states among others, that the income of whatever kind and
character of [a non-stock and non-profit educational institution] from any of [its] properties, real or
personal, or from any of (its] activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed by this Code.37

The Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner of
Internal Revenue v. YMCA38 to support its conclusion that revenues however generated are covered by
the constitutional exemption, provided that, the revenues will be used for educational purposes or will
be held in reserve for such purposes.39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only from
property tax but not from income tax on the rentals earned from property.40 Thus, DLSU's income from
the leases of its real properties is not exempt from taxation even if the income would be used for
educational purposes.41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment42 and that it is not
qualified to use the On-Line Electronic DST Imprinting Machine, which is available only to certain classes
of taxpayers under RR No. 9-2000.43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The
belated submission of supplemental evidence reopened the case for trial, and worse, DLSU offered the
supplemental evidence only after it received the unfavorable CTA Division's original decision.44 In any
case, DLSU's submission of supplemental documentary evidence was unnecessary since its rental
income was taxable regardless of its disposition.45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior years.
A LOA issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on such defective
LOA must also be void.46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior Years.
On the basis of this defective LOA, the Commissioner assessed DLSU for deficiency income tax, VAT and
DST for taxable years 2001, 2002 and 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA
is valid for taxable year 2003. According to DLSU, when RMO No. 43-90 provides that:
chanRoblesvirtualLawlibrary
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
prohibited.ChanRoblesVirtualawlibrary
it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA issued to
DLSU follows this format, then any assessment arising from it must be entirely voided.48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly situated
parties, the same set of evidence should be appreciated and weighed in the same manner.49 The CTA En

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Banc erred when it did not similarly appreciate DLSU's evidence as it did to the pieces of evidence
submitted by Ateneo, also a non-stock, non-profit educational institution.50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the same
as those she raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment on DLSU's petition
docketed as G.R. No. 198841.51chanroblesvirtuallawlibrary

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition.52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and
revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and duties.53

On this point, DLSU explains that: (1) the tax exemption of nonstock, non-profit educational institutions
is novel to the 1987 Constitution and that Section 30 (H) of the 1997 Tax Code cannot amend the 1987
Constitution;54 (2) Section 30 of the 1997 Tax Code is almost an exact replica of Section 26 of the 1977
Tax Code - with the addition of non-stock, non-profit educational institutions to the list of tax-exempt
entities; and (3) that the 1977 Tax Code was promulgated when the 1973 Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under the 1973
Constitution was only for real property tax. Back then, the special tax treatment on income of private
educational institutions only emanates from statute, i.e., the 1977 Tax Code. Only under the 1987
Constitution that exemption from tax of all the assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes, was expressly and
categorically enshrined.55

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

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for an
exemption to be granted under Article XIV, Section 4 (3) of the Constitution, the taxpayer must prove
that: (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income
it seeks to be exempted from taxation is used actually, directly and exclusively for educational
purposes.58 Unlike YMCA, which is not an educational institution, DLSU is undisputedly a non-stock, non-
profit educational institution. It had also submitted evidence to prove that it actually, directly and
exclusively used its income for educational purposes.59

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DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that the
tax exemption was granted "to incentivize private educational institutions to share with the State the
responsibility of educating the youth."60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled DLSU's
loan and mortgage transactions had remitted to the BIR the DST through an imprinting machine, a
method allowed under RR No. 15-2001.61 In any case, DLSU argues that it cannot be held liable for DST
owmg to the exemption granted under the Constitution.62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of
supplemental evidence. Because of the Commissioner's failure to timely object, she became bound by
the results of the submission of such supplemental evidence.63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it failed to
raise this issue in both the administrative and judicial proceedings.64 That it was asked on cross-
examination during the trial does not make it an issue that the CTA could resolve.65 The Commissioner
also maintains that DLSU's rental income is not tax-exempt because an educational institution is only
exempt from property tax but not from tax on the income earned from the property.66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.67

In addition, DLSU prays that the Court award attorney's fees in its favor because it was constrained to
unnecessarily retain the services of counsel in this separate petition.68chanroblesvirtuallawlibrary

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which we
summarize as follows:

I. Whether DLSU's income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes;chanrobleslaw

II. Whether the entire assessment should be voided because of the defective LOA;chanrobleslaw

III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and

IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may be disturbed by the
Court.

Our Ruling

As we explain in full below, we rule that:

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 I. The income, revenues and assets of non-stock, non-profit educational institutions proved to
have been used actually, directly and exclusively for educational purposes are exempt from
duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered,
would justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant
facts. We thus sustain the CTA En Banc's findings that:
a. DLSU proved that a portion of its rental income was used actually, directly and
exclusively for educational purposes; and

b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock, non-profit educational institutions proved to have been used
actually, directly, and exclusively for educational purposes are exempt from duties and taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
chanRoblesvirtualLawlibrary
(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties. Upon the
dissolution or cessation of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law. Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such exemptions subject to the limitations
provided by law including restrictions on dividends and provisions for reinvestment [underscoring
and emphasis supplied]
Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-
profit educational institutions and (2) proprietary educational institutions.69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a non-
stock, non-profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the
Constitution, in the same provision, also imposes certain conditions to avail of the exemption. We
discuss below the import of the constitutional text vis-a-vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of nonstock, non-profit educational
institutions and proprietary educational institutions. The tax exemption granted to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and exclusive use of their revenues and
assets for educational purposes. While tax exemptions may also be granted to proprietary educational

Page 50 of 79
institutions, these exemptions may be subject to limitations imposed by Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary
educational institution is crucial in determining the nature and extent of the tax exemption granted to
non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the Tax
Code. The relevant text reads:
chanRoblesvirtualLawlibrary
The following organizations shall not be taxed under this Title [Tax on Income] in respect to income
received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income shall be subject
to tax imposed under this Code. [underscoring and emphasis supplied]ChanRoblesVirtualawlibrary
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock, non-
profit educational institutions such that the revenues and income they derived from their assets, or
from any of their activities conducted for profit, are taxable even if these revenues and income are used
for educational purposes.

Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-stock, non-profit
educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,71 the Court in the YMCA case had in
fact already analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution. The
Court in that case made doctrinal pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the YMCA,
established as a "welfare, educational and charitable non-profit corporation," was subject to income tax
under the Tax Code and the Constitution.72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling under
Article VI, Section 28 (3) of the Constitution,73 the YMCA is not tax-exempt per se; "what is exempted is
not the institution itself...those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes."74

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last paragraph of
then Section 27 (now Section 30) of the Tax Code, which mandates that the income of exempt
organizations from any of their properties, real or personal, are subject to the same tax imposed by the

Page 51 of 79
Tax Code, regardless of how that income is used. The Court ruled that the last paragraph of Section 27
unequivocally subjects to tax the rent income of the YMCA from its property.75

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax privilege
granted under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution holding
that the term educational institution, when used in laws granting tax exemptions, refers to the school
system (synonymous with formal education); it includes a college or an educational establishment; it
refers to the hierarchically structured and chronologically graded learnings organized and provided by
the formal school system.76

The Court then significantly laid down the requisites for availing the tax exemption under Article XIV,
Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and
exclusively for educational purposes.77

We now adopt YMCA as precedent and hold that:

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

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

not subject to limitations imposed by law.

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions is
conditioned only on the actual, direct and exclusive use of their assets, revenues and income78for
educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions,
churches, parsonages or convents, mosques, and non-profit cemeteries), which exempts from tax only
the assets, i.e., "all lands, buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes...," Article XIV, Section 4 (3) categorically states that "[a]ll
revenues and assets... used actually, directly, and exclusively for educational purposes shall be exempt
from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not
without significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of
the 1986 Constitutional Commission79 to provide broader tax privilege to non-stock, non-profit
educational institutions as recognition of their role in assisting the State provide a public good. The tax
exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition fees
if not for the tax exemption extended to all revenues and assets of non-stock, non-profit educational

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institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require
that the revenues and income must have also been sourced from educational activities or activities
related to the purposes of an educational institution. The phrase all revenues is unqualified by any
reference to the source of revenues. Thus, so long as the revenues and income are used actually,
directly and exclusively for educational purposes, then said revenues and income shall be exempt from
taxes and duties.81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations.82 It may refer to the sale of goods, rendition of services, or the return of an investment.
Revenue is a component of the tax base in income tax,83 VAT,84 and local business tax (LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.86 It
may refer to real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory of
goods, or any property from which the person or entity may derive income or use to generate the same.
In Philippine taxation, the fair market value of real property is a component of the tax base in real
property tax (RPT).87 Also, the landed cost of imported goods is a component of the tax base in VAT on
importation88 and tariff duties.89

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

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax
from which the entity shall be exempted from shall depend on whether the item is an item of revenue
or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased
portion is not actually, directly and exclusively used for educational purposes, even if the bookstore or
canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley College,
Inc. v. Aquino.90 We ruled in that case that the test of exemption from taxation is the use of the property
for purposes mentioned in the Constitution. We also held that the exemption extends to facilities which
are incidental to and reasonably necessary for the accomplishment of the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes such
asset from the property tax exemption granted under the Constitution.91 There is no exemption because
the asset is not used actually, directly and exclusively for educational purposes. The commercial use of
the property is also not incidental to and reasonably necessary for the accomplishment of the main
purpose of a university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational purposes the revenues
earned from the lease of its school building, such revenues shall be exempt from taxes and duties. The

Page 53 of 79
tax exemption no longer hinges on the use of the asset from which the revenues were earned, but on
the actual, direct and exclusive use of the revenues for educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually,
directly and exclusively for educational purposes are not exempt from duties and taxes. To avail of the
exemption, the taxpayer must factually prove that it used actually, directly and exclusively for
educational purposes the revenues or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two
things that must be viewed and treated separately. But so long as the assets or revenues are used
actually, directly and exclusively for educational purposes, they are exempt from duties and taxes.

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions,
unlike the exemption that may be availed of by proprietary educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary
educational institutions cannot be doubted. As discussed, the privilege granted to the former is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational
purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations imposed
by law.

We spell out below the difference in treatment if only to highlight the privileged status of non-stock,
non-profit educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section 30
(Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is covered
by Section 27 (Rates of Income Tax on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational
institutions shall not be taxed on income received by them as such.

Section 27 (B), on the other hand, states that [p]roprietary educational institutions...which are nonprofit
shall pay a tax of ten percent (10%) on their taxable income...Provided, that if the gross income from
unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived
by such educational institutions...[the regular corporate income tax of 30%] shall be imposed on the
entire taxable income...92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced rate of
10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary educational
institution is non profit and (2) its gross income from unrelated trade, business or activity does not
exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-stock,
non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-

Page 54 of 79
profit educational institutions used actually, directly and exclusively for educational purpose. We make
this declaration in the exercise of and consistent with our duty93 to uphold the primacy of the
Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions
and does not cover the other exempt organizations under Section 30 of the Tax Code.

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

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003 and insists that
the entire LOA should be voided for being contrary to RMO No. 43-90, which provides that if tax audit
includes more than one taxable period, the other periods or years shall be specifically indicated in the
LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and
other accounting records of the taxpayer in order to determine the taxpayer's correct internal revenue
liabilities95 and for the purpose of collecting the correct amount oftax,96 in accordance with Section 5 of
the Tax Code, which gives the CIR the power to obtain information, to summon/examine, and take
testimony of persons. The LOA commences the audit process97 and informs the taxpayer that it is under
audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and
consequently, disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:
chanRoblesvirtualLawlibrary

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The
practice of issuing [LOAs] covering audit of unverified prior years is hereby prohibited. If the
audit of a taxpayer shall include more than one taxable period, the other periods or years shall
be specifically indicated in the [LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior
years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It merely
prescribes that if the audit includes more than one taxable period, the other periods or years must be
specified. The provision read as a whole requires that if a taxpayer is audited for more than one taxable
year, the BIR must specify each taxable year or taxable period on separate LOAs.

Read in this light, the requirement to specify the taxable period covered by the LOA is simply to inform
the taxpayer of the extent of the audit and the scope of the revenue officer's authority. Without this
rule, a revenue officer can unduly burden the taxpayer by demanding random accounting records from
random unverified years, which may include documents from as far back as ten years in cases of fraud
audit.99

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

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

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's validity at the CTA
Division, and thus, should not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the trial.100
DLSU then raised the issue in its memorandum and motion for partial reconsideration with the CTA
Division. DLSU raised it again on appeal to the CTA En Banc. Thus, the CTA En Banc could, as it did, pass
upon the validity of the LOA.101 Besides, the Commissioner had the opportunity to argue for the validity
of the LOA at the CTA En Banc but she chose not to file her comment and memorandum despite
notice.102

III. The CTA correctly admitted the supplemental evidence formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of
documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration
with the CTA Division.103 The CTA Division admitted the supplemental evidence, which proved that a
portion of DLSU's rental income was used actually, directly and exclusively for educational purposes.
Consequently, the CTA Division reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually
reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the formal offer of
supplemental evidence; and (2) the CTA is not governed strictly by the technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its
own, disregard such evidence.104

The Court has held that if a party desires the court to reject the evidence offered, it must so state in the
form of a timely objection and it cannot raise the objection to the evidence for the first time on
appeal.105

Because of a party's failure to timely object, the evidence offered becomes part of the evidence in the
case. As a consequence, all the parties are considered bound by any outcome arising from the offer of
evidence properly presented.106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence
despite notice.107 The Commissioner objected to the admission of the supplemental evidence only when
the case was on appeal to the CTA En Banc. By the time the Commissioner raised her objection, it was

Page 56 of 79
too late; the formal offer, admission and evaluation of the supplemental evidence were all fait
accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality or
sufficiency of the supplemental evidence admitted, she was bound by the outcome of the CTA Division's
assessment of the evidence.108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's admission
of the formal offer of supplemental evidence, without prompt objection from the Commissioner, was
thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' motion
for reconsideration.

In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant attached to its
motion for reconsideration with the CTA its Final Adjustment Return. The Commissioner, as in the
present case, did not oppose the taxpayer's motion for reconsideration and the admission of the Final
Adjustment Return.110 We thus admitted and gave weight to the Final Adjustment Return although it was
only submitted upon motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of
documents after the trial, the law creating the CTA specifically provides that proceedings before it shall
not be governed strictly by the technical rules of evidence111 and that the paramount consideration
remains the ascertainment of truth. We ruled that procedural rules should not bar courts from
considering undisputed facts to arrive at a just determination of a controversy.112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v.
Commissioner of Internal Revenue113 and Commissioner of Internal Revenue v. PERF Realty
Corporation,114 where the taxpayers also submitted the supplemental supporting document only upon
filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application of
the technical rules of evidence in the present tax assessment case. If anything, the liberal application of
the rules assumes greater force and significance in the case of a taxpayer who claims a constitutionally
granted tax exemption. While the taxpayers in the cited cases claimed refund of excess tax payments
based on the Tax Code,115 DLSU is claiming tax exemption based on the Constitution. If liberality is
afforded to taxpayers who paid more than they should have under a statute, then with more reason
that we should allow a taxpayer to prove its exemption from tax based on the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because the
Commissioner failed to promptly object, but more so because the strict application of the technical tules
of evidence may defeat the intent of the Constitution.

IV. The CTA's appreciation of evidence is generally binding on the Court unless compelling reasons
justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by the
very nature of its function of being dedicated exclusively to the resolution of tax problems, has

Page 57 of 79
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority.116 We thus accord the findings of fact by the CTA with the highest respect. These findings of
facts can only be disturbed on appeal if they are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the CTA. In the absence of any clear and convincing proof
to the contrary, this Court must presume that the CTA rendered a decision which is valid in every
respect.117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used actually,
directly and exclusively for educational purposes a portion of its assessed income and that it had
remitted the DST payments though an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed
income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it
deduced that DLSU successfully proved that it used actually, directly and exclusively for educational
purposes a portion of its rental income.

The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the submission of the
supplemental evidence, which consisted of statement of receipts, statement of disbursement and fund
balance and statement of fund changes.118

These documents showed that DLSU borrowed P93.86 Million,119 which was used to build the
university's Sports Complex. Based on these pieces of evidence, the CTA found that DLSU's rental
income from its concessionaires were indeed transmitted and used for the payment of this loan. The
CTA held that the degree of preponderance of evidence was sufficiently met to prove actual, direct and
exclusive use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were allegedly
deposited to a fund (CF-CPA Account),120 intended for the university's capital projects, was not proved to
have been used actually, directly and exclusively for educational purposes. The CTA observed that
"[DLSU]...failed to fully account for and substantiate all the disbursements from the [fund]." Thus, the
CTA "cannot ascertain whether rental income from the [other] concessionaires was indeed used for
educational purposes."121

To stress, the CTA's factual findings were based on and supported by the report of the Independent CPA
who reviewed, audited and examined the voluminous documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and verification
of receipts, invoices, vouchers and other long accounts; (b) reproduction of, and comparison of such
reproduction with, and certification that the same are faithful copies of original documents, and pre-
marking of documentary exhibits consisting of voluminous documents; (c) preparation of schedules or
summaries containing a chronological listing of the numbers, dates and amounts covered by receipts or
invoices or other relevant documents and the amount(s) of taxes paid; (d) making findings as to
compliance with substantiation requirements under pertinent tax laws, regulations and
jurisprudence; (e) submission of a formal report with certification of authenticity and veracity of

Page 58 of 79
findings and conclusions in the performance of the audit; (f) testifying on such formal report; and (g)
performing such other functions as the CTA may direct.122

Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held that
only the portion of the rental income pertaining to the substantiated disbursements (i.e., proved by
receipts, vouchers, etc.) from the CF-CPA Account was considered as used actually, directly and
exclusively for educational purposes. Consequently, the unaccounted and unsubstantiated
disbursements must be subjected to income tax and VAT.123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years 2001
and 2002 due to the defective LOA.124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its ruling
on the evidence on record, which we reiterate, were examined and verified by the Independent CPA.
Thus, we see no persuasive reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean that we are
bound by its conclusions. In the present case, we do not agree with the method used by the CTA to
arrive at DLSU's unsubstantiated rental income (i.e., income not proved to have been actually, directly
and exclusively used for educational purposes).

To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in taxable year 2003.125
DLSU earned this income from leasing a portion of its premises to: 1) MTO-Sports Complex, 2) La Casita,
3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO Bookstore.126

To prove that its rental income was used for educational purposes, DLSU identified the transactions
where the rental income was expended, viz.: 1) P4,007,724.00127 used to pay the loan obtained by DLSU
to build the Sports Complex; and 2) P6,602,655.00 transferred to the CF-CPA Account.128

DLSU also submitted documents to the Independent CPA to prove that the P6,602,655.00 transferred to
the CF-CPA Account was used actually, directly and exclusively for educational purposes. According to
the Independent CPA' findings, DLSU was able to substantiate disbursements from the CF-CPA Account
amounting to P6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of the P10,610,379.00
rental income, P4,841,066.65 was unsubstantiated, and thus, subject to income tax and VAT.129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements from
the CF-CPA Account for taxable year 2003 is only 26.68%.130 The CTA held as follows:
chanRoblesvirtualLawlibrary
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri International
and MTO Bookstore, which were transmitted to the CF-CPA Account, petitioner again failed to fully
account for and substantiate all the disbursements from the CF-CPA Account; thus failing to prove that
the rental income derived therein were actually, directly and exclusively used for educational purposes.
Likewise, the findings of the Court-Commissioned Independent CPA show that the disbursements from
the CF-CPA Account for fiscal year 2003 amounts to P-6,259,078.30 only. Hence, this portion of the
rental income, being the substantiated disbursements of the CF-CPA Account, was considered by the
Special First Division as used actually, directly and exclusively for educational purposes. Since for fiscal

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year 2003, the total disbursements per voucher is P6,259,078.3 (Exhibit "LL-25-C"), and the total
disbursements per subsidiary ledger amounts to P23,463,543.02 (Exhibit "LL-29-C"), the ratio of
substantiated disbursements for fiscal year 2003 is 26.68% (P6,259,078.30/P23,463,543.02). Thus, the
substantiated portion of CF-CPA Disbursements for fiscal year 2003, arrived at by multiplying the ratio of
26.68% with the total rent income added to and used in the CF-CPA Account in the amount of
P6,602,655.00 ts P1,761,588.35.131 (emphasis supplied)ChanRoblesVirtualawlibrary
For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex
(P4,007,724.00) from the rental income (P10,610,379.00) earned from the abovementioned
concessionaries. The difference (P6,602,655.00) was the portion claimed to have been
deposited to the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements
(P1,761,308.37) from the P6,602,655.00 to arrive at the supposed unsubstantiated portion of
the rental income (P4,841,066.65).132

3. The substantiated portion of CF-CPA disbursements (P1,761,308.37)133 was derived by

multiplying the rental income claimed to have been added to the CF-CPA Account
(P6,602,655.00) by 26.68% or the ratio of substantiated disbursements to total disbursements
(P23,463,543.02).

4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from the CF-CPA
Account as found by the Independent CPA (P6,259,078.30) by the total disbursements
(P23,463,543.02) from the same account.

We find that this system of calculation is incorrect and does not truly give effect to the constitutional
grant of tax exemption to non-stock, nonprofit educational institutions. The CTA's reasoning is flawed
because it required DLSU to substantiate an amount that is greater than the rental income deposited in
the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental
income (which amounted to a total of P10.61 million)135 were used for educational purposes. This
amount was divided into two parts: (a) the P4.01 million, which was used to pay the loan obtained for
the construction of the Sports Complex; and (b) the P6.60 million,136 which was transferred to the CF-
CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to P23.46 million.137 These
figures, read in light of the constitutional exemption, raises the question: does DLSU claim that the
whole total CF-CPA disbursement of P23.46 million is tax-exempt so that it is required to prove that all
these disbursements had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of P23.46 million had
been for educational purposes and should thus be tax-exempt; DLSU only claimed P10.61 million for tax-
exemption and should thus be required to prove that this amount had been used as claimed.

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Of this amount, P4.01 had been proven to have been used for educational purposes, as confirmed by
the Independent CPA. The amount in issue is therefore the balance of P6.60 million which was
transferred to the CF-CPA which in turn made disbursements of P23.46 million for various general
purposes, among them the P6.60 million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational
purposes in year 2003 in the amount P6.26 million. Based on these given figures, the CTA concluded that
the expenses for educational purposes that had been coursed through the CF-CPA should be prorated so
that only the portion that P6.26 million bears to the total CF-CPA disbursements should be credited to
DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues actually and
directly used for educational purposes should be tax-exempt. As already mentioned above, DLSU is not
claiming that the whole P23.46 million CF-CPA disbursement had been used for educational purposes; it
only claims that P6.60 million transferred to CF-CPA had been used for educational purposes. This was
what DLSU needed to prove to have actually and directly used for educational purposes.

That this fund had been first deposited into a separate fund (the CF-CPA established to fund capital
projects) lends peculiarity to the facts of this case, but does not detract from the fact that the deposited
funds were DLSU revenue funds that had been confirmed and proven to have been actually and directly
used for educational purposes via the CF-CPA. That the CF-CPA might have had other sources of funding
is irrelevant because the assessment in the present case pertains only to the rental income which DLSU
indisputably earned as revenue in 2003. That the proven CF-CPA funds used for educational purposes
should not be prorated as part of its total CF-CPA disbursements for purposes of crediting to DLSU is also
logical because no claim whatsoever had been made that the totality of the CF-CPA disbursements had
been for educational purposes. No prorating is necessary; to state the obvious, exemption is based on
actual and direct use and this DLSU has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the difference between what it
claimed and what it has proven. In more concrete terms, DLSU only had to prove that its rental income
for taxable year 2003 (P10,610,379.00) was used for educational purposes. Hence, while the total
disbursements from the CF-CPA Account amounted to P23,463,543.02, DLSU only had to substantiate its
P10.6 million rental income, part of which was the P6,602,655.00 transferred to the CF-CPA account. Of
this latter amount, P6.259 million was substantiated to have been used for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003 as
follows:
chanRoblesvirtualLawlibrary
CTA Decision138 Revised

Rental income 10,610,379.00 10,610,379.00

Less: Rent income used in construction of the

4,007,724.00 4,007,724.00
Sports Complex

Page 61 of 79
Rental income deposited to the CF-CPA Account 6,602,655.00 6,602.655.00

Less: Substantiated portion of CF-CPA

1,761,588.35 6,259,078.30
disbursements

Tax base for deficiency income tax and VAT 4,841,066.65 343,576.70
On DLSU's argument that the CTA should have appreciated its evidence in the same way as it did with
the evidence submitted by Ateneo in another separate case, the CTA explained that the issue in the
Ateneo case was not the same as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes and
VAT under certain BIR and Department of Finance issuances139 that required the educational institution
to own and operate the canteens, or other commercial enterprises within its campus, as condition for
tax exemption. The CTA held that the Constitution does not require the educational institution to own
or operate these commercial establishments to avail of the exemption.140

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the
separate sets of evidence differently. The CTA likewise stressed that DLSU and Ateneo gave distinct
defenses and that its wisdom "cannot be equated on its decision on two different cases with two
different issues."141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it
submitted similar, if not stronger sets of evidence, as Ateneo. We reject DLSU's argument for being non
sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and materiality of
the evidence supporting their respective claims for tax exemption would necessarily differ because their
attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable years
they were assessed varied. The amount of tax assessment also varied. The amount of income proven to
have been used for educational purposes also varied because the amount substantiated varied.142 Thus,
the amount of tax assessment cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for taxable years 2001,
2002 and 2003. On the other hand, the BIR assessed Ateneo a total deficiency tax of P8,864,042.35 for
the same period. Notably, DLSU was assessed deficiency DST, while Ateneo was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly and
exclusively for educational purposes by submitting similar evidence, e.g., the testimony of their
employees on the use of university revenues, the report of the Independent CPA, their income
summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to prove that a
portion of its income and revenues had indeed been used for educational purposes.

Page 62 of 79
The CTA significantly found that some documents that could have fully supported DLSU's claim were not
produced in court. Indeed, the Independent CPA testified that some disbursements had not been proven
to have been used actually, directly and exclusively for educational purposes.144

The final nail on the question of evidence is DLSU's own admission that the original of these documents
had not in fact been produced before the CTA although it claimed that there was no bad faith on its
part.145 To our mind, this admission is a good indicator of how the Ateneo and the DLSU cases varied,
resulting in DLSU's failure to substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence, that the contents of
the missing supporting documents were proven by its recital in some other authentic documents on
record,146 can no longer be entertained at this late stage of the proceeding. The CTA did not rule on this
particular claim. The CTA also made no finding on DLSU's assertion of lack of bad faith. Besides, it is not
our duty to go over these documents to test the truthfulness of their contents, this Court not being a
trier of facts.

Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and uniformity of taxation
means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.147 A
tax is uniform when it operates with the same force and effect in every place where the subject of it is
found.148 The concept requires that all subjects of taxation similarly situated should be treated alike and
placed in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because their
income proved to have been used actually, directly and exclusively for educational purposes were
exempted from taxes. The CTA equally applied the requirements in the YMCA case to test if they indeed
used their revenues for educational purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show that, despite proving
that it used actually, directly and exclusively for educational purposes its income and revenues, the CTA
still affirmed the imposition of taxes. That the DLSU secured a different result happened because it
failed to fully prove that it used actually, directly and exclusively for educational purposes its revenues
and income.

On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of
taxation similarly situated are treated in literally the same way in all and every occasion. The fact that
the Ateneo and DLSU are both non-stock, non-profit educational institutions, does not mean that the
CTA or this Court would similarly decide every case for (or against) both universities. Success in tax
litigation, like in any other litigation, depends to a large extent on the sufficiency of evidence. DLSU's
evidence was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid and
remitted through its bank's On-Line Electronic DST Imprinting Machine. The Commissioner argues that
DLSU is not allowed to use this method of payment because an educational institution is excluded from
the class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.

Page 63 of 79
We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code and
the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the person
making, signing, issuing, accepting, or transferring the same.150 The Tax Code provides that whenever
one party to the document enjoys exemption from DST, the other party not exempt from DST shall be
directly liable for the tax. Thus, it is clear that DST shall be payable by any party to the document, such
that the payment and compliance by one shall mean the full settlement of the DST due on the
document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These agreements
are subject to DST.151 For the purpose of showing that the DST on the loan agreement has been paid,
DLSU presented its agreements bearing the imprint showing that DST on the document has been paid by
the bank, its counterparty. The imprint should be sufficient proof that DST has been paid. Thus, DLSU
cannot be further assessed for deficiency DST on the said documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay and
remit DST through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As correctly held
by the CTA, this is irrelevant because it was not DLSU who used the On-Line Electronic DST Imprinting
Machine but the bank that handled its mortgage and loan transactions. RR No. 9-2000 expressly includes
banks in the class of taxpayers that can use the On-Line Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the payment of the assessed DST
deficiency, except for the unpaid balance of P13,265.48.152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal Revenue in
G.R. No. 196596 and AFFIRM the December 10, 2010 decision and March 29, 2011 resolution of the
Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for the total amount of deficiency tax
liabilities of De La Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of the
Commissioner of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011 decision and
October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 671, with the
MODIFICATION that the base for the deficiency income tax and VAT for taxable year 2003 is
P343,576.70.

SO ORDERED.cralawlawlibrary

Page 64 of 79
G.R. No. 172087 March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO BUÑAG, in his
official capacity as COMMISSIONER OF INTERNAL REVENUE, Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the authority of Respondent.
Public and Private Respondents.

DECISION

PERALTA, J.:

For resolution of this Court is the Petition for Certiorari and Prohibition1 with prayer for the issuance of a
Temporary Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner
Philippine Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section 1
of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code
of 1997, by excluding petitioner from exemption from corporate income tax for being repugnant to
Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the
implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being
contrary to law.

The undisputed facts follow.

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued exempting
PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%) of the gross
revenue.4 Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption.5

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 18696 was issued.
Section 13 thereof reads as follows:

Sec. 13. Exemptions. — x x x

(1) Customs Duties, taxes and other imposts on importations. - All importations of equipment,
vehicles, automobiles, boats, ships, barges, aircraft and such other gambling paraphernalia,
including accessories or related facilities, for the sole and exclusive use of the casinos, the
proper and efficient management and administration thereof and such other clubs, recreation
or amusement places to be established under and by virtue of this Franchise shall be exempt
from the payment of duties, taxes and other imposts, including all kinds of fees, levies, or
charges of any kind or nature.

Vessels and/or accessory ferry boats imported or to be imported by any corporation having
existing contractual arrangements with the Corporation, for the sole and exclusive use of the
casino or to be used to service the operations and requirements of the casino, shall likewise be

Page 65 of 79
 totally exempt from the payment of all customs duties, taxes and other imposts, including all
kinds of fees, levies, assessments or charges of any kind or nature, whether National or Local.

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges, or levies of whatever nature, whether National or Local, shall
be assessed and collected under this Franchise from the Corporation; nor shall any form of tax
or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five
percent (5%)of the gross revenue or earnings derived by the Corporation from its operation
under this Franchise. Such tax shall be due and payable quarterly to the National Government
and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established, or collected by any municipal, provincial or national government
authority.

(b) Others: The exemption herein granted for earnings derived from the operations
conducted under the franchise, specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and
extend to corporation(s), association(s), agency(ies), or individual(s) with whom the
Corporation or operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this Franchise and to
those receiving compensation or other remuneration from the Corporation as a result of
essential facilities furnished and/or technical services rendered to the Corporation or
operator.

The fee or remuneration of foreign entertainers contracted by the Corporation or operator in

pursuance of this provision shall be free of any tax.

(3) Dividend Income. − Notwithstanding any provision of law to the contrary, in the event the
Corporation should declare a cash dividend income corresponding to the participation of the
private sector shall, as an incentive to the beneficiaries, be subject only to a final flat income
rate of ten percent (10%) of the regular income tax rates. The dividend income shall not in such
case be considered as part of the beneficiaries' taxable income; provided, however, that such
dividend income shall be totally exempted from income or other form of taxes if invested within
six (6) months from the date the dividend income is received in the following:

(a) operation of the casino(s) or investments in any affiliate activity that will ultimately
redound to the benefit of the Corporation; or any other corporation with whom the
Corporation has any existing arrangements in connection with or related to the
operations of the casino(s);

(b) Government bonds, securities, treasury notes, or government debentures; or

(c) BOI-registered or export-oriented corporation(s).7

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by
Letter of Instruction No. 1430, which was issued in September 1984.

Page 66 of 79
On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of 1997,
took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled
corporations (GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government
Service and Insurance Corporation, the Social Security System, the Philippine Health Insurance
Corporation, and the Philippine Charity Sweepstakes Office, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of

existing special general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement
and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed
by this Section upon corporations or associations engaged in similar business, industry, or activity.9

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is Section 1
of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by
excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income
tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of

existing special general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax
upon their taxable income as are imposed by this Section upon corporations or associations engaged in
similar business, industry, or activity.

Different groups came to this Court via petitions for certiorari and prohibition11 assailing the validity and
constitutionality of R.A. No. 9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties;
Section 5, which imposes a 10% VAT on importation of goods; and Section 6, which imposes a
10% VAT on sale of services and use or lease of properties, all contain a uniform proviso
authorizing the President, upon the recommendation of the Secretary of Finance, to raise the
VAT rate to 12%. The said provisions were alleged to be violative of Section 28 (2), Article VI of
the Constitution, which section vests in Congress the exclusive authority to fix the rate of taxes,
and of Section 1, Article III of the Constitution on due process, as well as of Section 26 (2), Article
VI of the Constitution, which section provides for the "no amendment rule" upon the last
reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or
the guarantee of equal protection of the laws, and Section 28 (1), Article VI of the Constitution;
and

3) other technical aspects of the passage of the law, questioning the manner it was passed.

Page 67 of 79
On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No.
9337.12

On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13 specifically
identifying PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the
National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The said revenue regulation, in
part, reads:

Sec. 4. 108-3. Definitions and Specific Rules on Selected Services. —

xxxx

(h) x x x

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless
of how their franchisees may have been granted, shall be subject to the 10% VAT imposed under
Sec.108 of the Tax Code. This includes, among others, the Philippine Amusement and Gaming
Corporation (PAGCOR), and its licensees or franchisees.

Hence, the present petition for certiorari.

PAGCOR raises the following issues:

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE
EQUAL PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.

II

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE
NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.

III

WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR
BEING BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID
REGULATION IMPOSED VAT ON THE SERVICES OF THE PETITIONER AS WELL AS PETITIONER’S LICENSEES
OR FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT
IMPOSE VAT ON PETITIONER OR ON PETITIONER’S LICENSEES OR FRANCHISEES.14

The BIR, in its Comment15 dated December 29, 2006, counters:

Page 68 of 79
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND CONSTITUTIONAL
PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE EFFECT
TO ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.

II

SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III OF THE 1987
CONSTITUTION.

III

BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL STRICKEN DOWN BY
LAWFUL AUTHORITIES.

The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,16 concurred with
the arguments of the petitioner. It added that although the State is free to select the subjects of
taxation and that the inequity resulting from singling out a particular class for taxation or exemption is
not an infringement of the constitutional limitation, a tax law must operate with the same force and
effect to all persons, firms and corporations placed in a similar situation. Furthermore, according to the
OSG, public respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005, because
the latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.

The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the
enactment of R.A. No. 9337.

After a careful study of the positions presented by the parties, this Court finds the petition partly
meritorious.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of
1977, petitioner is no longer exempt from corporate income tax as it has been effectively omitted from
the list of GOCCs that are exempt from it. Petitioner argues that such omission is unconstitutional, as it
is violative of its right to equal protection of the laws under Section 1, Article III of the Constitution:

Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any
person be denied the equal protection of the laws.

In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal protection, thus:

Equal protection requires that all persons or things similarly situated should be treated alike, both as to
rights conferred and responsibilities imposed. Similar subjects, in other words, should not be treated
differently, so as to give undue favor to some and unjustly discriminate against others. The guarantee
means that no person or class of persons shall be denied the same protection of laws which is enjoyed
by other persons or other classes in like circumstances. The "equal protection of the laws is a pledge of
the protection of equal laws." It limits governmental discrimination. The equal protection clause extends
to artificial persons but only insofar as their property is concerned.

xxxx

Page 69 of 79
Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable, the
law may operate only on some and not all of the people without violating the equal protection clause.
The classification must, as an indispensable requisite, not be arbitrary. To be valid, it must conform to
the following requirements:

1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.

3) It must not be limited to existing conditions only.

4) It must apply equally to all members of the class.18

It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs
exempted from payment of corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which,
reads:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of

existing special or general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement
and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed
by this Section upon corporations or associations engaged in similar business, industry, or activity.19

A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on
Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of
corporate income tax was due to the acquiescence of the Committee on Ways on Means to the request
of PAGCOR that it be exempt from such tax.20 The records of the Bicameral Conference Meeting reveal:

HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.

CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.

HON. R. DIAZ. Tinanggal na ba natin yon?

CHAIRMAN ENRILE. Oo.

HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal basis,
we included a tax on cockfighting winnings.

CHAIRMAN ENRILE. No, we removed the ---

HON. R. DIAZ. I . . . (inaudible) natin yong lotto?

CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.

Page 70 of 79
CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.

CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will
accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.

HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would
reflect the VAT and other sales taxes---

CHAIRMAN ENRILE. No, we’re talking of this measure only. We will not --- (discontinued)

HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we release
the money into the hands of the public, they will not use that to --- for wallpaper. They will spend that
eh, Mr. Chairman. So when they spend that---

CHAIRMAN ENRILE. There’s a VAT.

HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification? Is
there an approximation?

CHAIRMAN JAVIER. Not anything.

HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in the
economy which is unrealistic.

CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody receives
it in the form of wages and supplies and other services and other goods. They are not being taken from
the public and stored in a vault.

CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the taxpayers.

HON. ROXAS. Precisely, so they will be spending it.21

The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying
corporate income tax was not based on a classification showing substantial distinctions which make for
real differences, but to reiterate, the exemption was granted upon the request of PAGCOR that it be
exempt from the payment of corporate income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded
from the enumeration of GOCCs that are exempt from paying corporate income tax. The records of the
Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of
Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be
subject to the payment of corporate income tax, thus:

THE CHAIRMAN (SEN. RECTO). Yes, Osmeña, the proponent of the amendment.

Page 71 of 79
SEN. OSMEÑA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we
want to show the world who our creditors, that we are increasing official revenues that go to the
national budget. Unfortunately today, Pagcor is unofficial.

Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some
small taxes that they are subjected to. Of the 9.7 billion, they claim they remitted to national
government seven billion. Pagkatapos, there are other specific remittances like to the Philippine Sports
Commission, etc., as mandated by various laws, and then about 400 million to the President's Social
Fund. But all in all, their net profit today should be about 12 billion. That's why I am questioning this two
billion. Because while essentially they claim that the money goes to government, and I will accept that
just for the sake of argument. It does not pass through the appropriation process. And I think that at
least if we can capture 35 percent or 32 percent through the budgetary process, first, it is reflected in
our official income of government which is applied to the national budget, and secondly, it goes
through what is constitutionally mandated as Congress appropriating and defining where the money
is spent and not through a board of directors that has absolutely no accountability.

REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.

There is wisdom in the comments of my good friend from Cebu, Senator Osmeña.

SEN. OSMEÑA. And Negros.

REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my friends
from the Department of Finance in a difficult position, but may we know your comments on this
knowing that as Senator Osmeña just mentioned, he said, "I accept that that a lot of it is going to
spending for basic services," you know, going to most, I think, supposedly a lot or most of it should go to
government spending, social services and the like. What is your comment on this? This is going to affect
a lot of services on the government side.

THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.

SEN. OSMEÑA. It goes from pocket to the other, Monico.

REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have your
own pre-judgment on this and I don't blame you. I don't blame you. And I know you have your own
research. But will this not affect a lot, the disbursements on social services and other?

REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier for
you to explain to, say, foreign creditors, how do you explain to them that if there is a fiscal gap some of
our richest corporations has [been] spared [from] taxation by the government which is one rich source
of revenues. Now, why do you save, why do you spare certain government corporations on that, like
Pagcor? So, would it be easier for you to make an argument if everything was exposed to taxation?

REP. TEVES. Mr. Chair, please.

THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call Congressman
Teves?

Page 72 of 79
MR. PURISIMA. Thank you, Mr. Chair.

Yes, from definitely improving the collection, it will help us because it will then enter as an official
revenue although when dividends declare it also goes in as other income. (sic)

xxxx

REP. TEVES. Mr. Chairman.

xxxx

THE CHAIRMAN (REP. LAPUS). Congressman Teves.

REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are talking
here on value-added tax. Do you mean to say we are going to amend it from income tax to value-
added tax, as far as Pagcor is concerned?

THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the exemption
from income tax of Pagcor.

xxxx

REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.

THE CHAIRMAN (REP. LAPUS). Congressman Nograles.

REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that are
VATable? What will we VAT in Pagcor?

THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.

REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?

xxxx

REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .

REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract, which
basis?

THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss a VAT on
Pagcor but it just takes away their exemption from non-payment of income tax.22

Taxation is the rule and exemption is the exception.23 The burden of proof rests upon the party claiming
exemption to prove that it is, in fact, covered by the exemption so claimed.24 As a rule, tax exemptions
are construed strongly against the claimant.25 Exemptions must be shown to exist clearly and
categorically, and supported by clear legal provision.26

Page 73 of 79
In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax,
considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue
Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as shown by the
discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax;
hence, the omission or removal of PAGCOR from exemption from the payment of corporate income tax.
It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.27 Thus, the express mention of the GOCCs exempted from payment of corporate income tax
excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming within the
purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim:
exceptio firmat regulam in casibus non exceptis.28

PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records
of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means,
show that PAGCOR’s exemption from payment of corporate income tax, as provided in Section 27 (c) of
R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid
classification based on substantial distinctions and the other requirements of a reasonable classification
by legislative bodies, so that the law may operate only on some, and not all, without violating the equal
protection clause. The legislative records show that the basis of the grant of exemption to PAGCOR from
corporate income tax was PAGCOR’s own request to be exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the
non-impairment clause of the Constitution. Petitioner avers that laws form part of, and is read into, the
contract even without the parties expressly saying so. Petitioner states that the private parties/investors
transacting with it considered the tax exemptions, which inure to their benefit, as the main
consideration and inducement for their decision to transact/invest with it. Petitioner argues that the
withdrawal of its exemption from corporate income tax by R.A. No. 9337 has the effect of changing the
main consideration and inducement for the transactions of private parties with it; thus, the amendatory
provision is violative of the non-impairment clause of the Constitution.

Petitioner’s contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that
no law impairing the obligation of contracts shall be passed. The non-impairment clause is limited in
application to laws that derogate from prior acts or contracts by enlarging, abridging or in any manner
changing the intention of the parties.29 There is impairment if a subsequent law changes the terms of a
contract between the parties, imposes new conditions, dispenses with those agreed upon or withdraws
remedies for the enforcement of the rights of the parties.30

As regards franchises, Section 11, Article XII of the Constitution31 provides that no franchise or right shall
be granted except under the condition that it shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires.32

In Manila Electric Company v. Province of Laguna,33 the Court held that a franchise partakes the nature
of a grant, which is beyond the purview of the non-impairment clause of the Constitution.34 The
pertinent portion of the case states:

Page 74 of 79
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as
being in the nature of contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions,
in the real sense of the term and where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such as those contained in government
bonds or debentures, lawfully entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly,
tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These
contractual tax exemptions, however, are not to be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its
precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such privilege shall be
subject to amendment, alteration or repeal by Congress as and when the common good so requires.35

In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other
recreation or amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether
on land or sea, within the territorial jurisdiction of the Republic of the Philippines.36 Under Section 11,
Article XII of the Constitution, PAGCOR’s franchise is subject to amendment, alteration or repeal by
Congress such as the amendment under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of
R.A. No. 9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from
corporate income tax, which may affect any benefits to PAGCOR’s transactions with private parties, is
not violative of the non-impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT
is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can
be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the
payment of corporate income tax, which was already addressed above by this Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k)
thereof, which reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:

Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:

xxxx

(k) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except Presidential Decree No. 529.37

Petitioner is exempt from the payment of VAT, because PAGCOR’s charter, P.D. No. 1869, is a special
law that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424, thus:

Page 75 of 79
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further
amended to read as follows:

SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties: x x x

xxxx

(B) Transactions Subject to Zero Percent (0%) Rate. — The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate;

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
percent (0%) rate;

x x x x38

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No.
8424 by imposing VAT on other services not previously covered, it did not amend the portion of Section
108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons to persons
or entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and
extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation.39
Acesite was the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leased a portion of the
hotel’s premises to PAGCOR. It incurred VAT amounting to ₱30,152,892.02 from its rental income and
sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite tried to shift the said
taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR. However, PAGCOR refused to
pay the taxes because of its tax-exempt status. PAGCOR paid only the amount due to Acesite minus VAT
in the sum of ₱30,152,892.02. Acesite paid VAT in the amount of ₱30,152,892.02 to the Commissioner
of Internal Revenue, fearing the legal consequences of its non-payment. In May 1998, Acesite sought the
refund of the amount it paid as VAT on the ground that its transaction with PAGCOR was subject to zero
rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR and Acesite were both
exempt from paying VAT, thus:

xxxx

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the
payment of taxes. Section 13 of P.D. 1869 pertinently provides:

Page 76 of 79
Sec. 13. Exemptions. —

xxxx

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as
well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any
way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue
or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due
and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any municipal,
provincial, or national government authority.

(b) Others: The exemptions herein granted for earnings derived from the operations conducted under
the franchise specifically from the payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to be conducted under this Franchise and to
those receiving compensation or other remuneration from the Corporation or operator as a result of
essential facilities furnished and/or technical services rendered to the Corporation or operator.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to
indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is
also exempt from indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to
PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect taxes,
PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or
entities contracting with PAGCOR in casino operations. Although, differently worded, the provision
clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt
status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that
PAGCOR is not liable for the P30, 152,892.02 VAT and neither is Acesite as the latter is effectively subject
to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in
the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or
services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax.

Page 77 of 79
It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or
leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the value.
Verily, the seller or lessor has the option to follow either way in charging its clients and customer. In the
instant case, Acesite followed the latter method, that is, charging an additional 10% of the gross sales
and rentals. Be that as it may, the use of either method, and in particular, the first method, does not
denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable
for the payment of it as it is exempt in this particular transaction by operation of law to pay the indirect
tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now
Sec. 108 [b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x x x; Provided, that the following services performed in the Philippines
by VAT registered persons shall be subject to 0%.

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
(0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such
exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from
the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax
exemption of the World Health Organization (WHO) upon an international agreement was upheld. We
held in said case that the exemption of contractee WHO should be implemented to mean that the entity
or person exempt is the contractor itself who constructed the building owned by contractee WHO, and
such does not violate the rule that tax exemptions are personal because the manifest intention of the
agreement is to exempt the contractor so that no contractor's tax may be shifted to the contractee
WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with
PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to
PAGCOR.40

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner
of Internal Revenue v. Acesite (Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax Code,
as amended, which section was retained as Section 108 (B) (3) in R.A. No. 8424,41 it is still applicable to
this case, since the provision relied upon has been retained in R.A. No. 9337.421avvphi1

It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the
terms and provisions of the basic law.43 RR No. 16-2005, therefore, cannot go beyond the provisions of
R.A. No. 9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its authority in

Page 78 of 79
subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory provision is hereby
nullified.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27
(c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and
Gaming Corporation from the enumeration of government-owned and controlled corporations
exempted from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-
2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to the National
Internal Revenue Code of 1997, as amended by Republic Act No. 9337.

No costs.

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