subordinates?
GUIDE NOTES AND CASES ON THE ORGANIZATION OF
THE BUREAU OF INTERNAL REVENUE AND POWERS OF
THE SECRETARY OF FINANCE AND THE COMMISISONER
OF INTERNAL REVENUE INCLUDING VARIOUS
ADMINISTRATIVE ISSUANCES OF THE BUREAU OF
INTERNAL REVENUE
TITLE I ORGANIZATION AND FUNCTION OF THE BUREAU OF
INTERNAL REVENUE
Sec. 1, Title of the Code. - This Code shall be known as the
National Internal Revenue Code of 1997.
Sec. 2, Powers and Duties of the Bureau of Internal
Revenue. - The Bureau of Internal Revenue shall be under the
supervision and control of the Department of Finance and its
powers and duties shall comprehend the assessment and
collection of all national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and
fines connected therewith, including the execution of judgments
in all cases decided in its favor by the Court of Tax Appeals and
the ordinary courts. The Bureau shall give effect to and
administer the supervisory and police powers conferred to it by
this Code or other laws.
Q: Enumerate the CIR’s powers and duties.
* Pursuant to Sections 2 to 8 of the 1997 Tax Code, the CIR has the
following powers and duties:
(1) To interpret tax laws and to decide tax cases;
(2) To obtain information and to summon/examine and take
testimony of persons;
(3) To make assessment and prescribe additional requirements for
tax administration and enforcement;
(4) To delegate power; and
(5) To ensure the provision and distribution of forms, receipts,
certificates, and appliances, and acknowledgment of payment of
taxes.
Q: Which powers of the CIR may not be delegated to his/her
* Section 7 of the 1997 Tax Code enumerates the CIR powers which
may not be delegated, to wit:
(1) To recommend the promulgation of rules and regulations by the
DOF Secretary;
(2) To issue rulings of first impression, or to reverse, revoke, or
modify any existing ruling of the CIR;
(3) To compromise or abate tax liability, subject to certain exceptions;
and
(4) To assign or reassign internal revenue officers to establishments
where articles subject to excise tax are produced or kept.
Q: Distinguish between ministerial and discretionary duty.
* In Meralco Securities Corporation v. Savellano, upon receipt of
confidential information, the CIR caused the investigation of Meralco
Securities Corporation for tax evasion. The CIR found and held that
no deficiency corporate income tax was due from the corporation on
dividends it received from another corporation. Subsequently, the
informant filed with the CFI a petition for mandamus. The CFI issued
a writ of mandamus ordering the corporation to pay, and the CIR to
collect, alleged deficiency corporate income tax, plus interests and
surcharges due thereon, as well as informer’s reward. At the outset,
the Supreme Court noted that “mandamus only lies to enforce the
performance of a ministerial act or duty and not to control the
performance of a discretionary power.” Discretion “when applied to
public functionaries, means a power or right conferred upon them by
law of acting officially, under certain circumstances, according to the
dictates of their own judgments and consciences, uncontrolled by the
judgments or consciences of others. A purely ministerial act or duty,
in contradistinction to a discretional act, is one which an officer or
tribunal performs in a given state of facts, in a prescribed manner, in
obedience to the mandate of a legal authority, without regard to or
the exercise of his own judgment upon the propriety or impropriety of
the act done. If the law imposes a duty upon a public officer, and
1
gives him the right to decide how or when the duty shall be
performed, such duty is discretionary and not ministerial. The duty is
ministerial only when the discharge of the same requires neither the
exercise of official discretion nor judgment.”
In this case, the Supreme Court held that the CIR is charged with the
administration of revenue laws, which is the primary responsibility of
the executive branch of the government. “Thus, after the [CIR] who is
specifically charged by law with the task of enforcing and
implementing the tax laws and the collection of taxes had after a
mature and thorough study rendered his decision or ruling that no tax
is due or collectible, and his decision is sustained by the [Secretary
of Finance], such decision or ruling is a valid exercise of discretion in
the performance of official duty and cannot be controlled much less
reversed by mandamus.” In other words, mandamus may not lie to
compel the CIR to impose a tax assessment not found by him to be
proper.
[Meralco Securities Corporation v. Savellano, GR Nos. L-36181 and
L-36748, 23 October 1982.]
Q: When may the CIR exercise police power?
* At issue in Vera v. Cuevas were several provisions in the old Tax
Code pertaining to skimmed milk (as opposed to filled milk). Section
141 imposed a specific tax on skimmed milk; Section 169 required
that the packaging of skimmed milk contain a declaration to the effect
that skimmed milk was not suitable for nourishment for infants less
than one year of age; lastly, Section 177 penalized the sale of
skimmed milk without payment of the specific tax and without the
legend required by Section 169. Sections 141 and 177 were
expressly repealed by various laws. The Supreme Court held that by
the express repeals of Sections 141 and 177 of the old Tax Code,
Section 169 became a merely declaratory provision, without a tax
purpose or a penal sanction. The CIR contended that he still had
jurisdiction to enforce Section 169 by virtue of Section 3 (now
Section 2 of the 1997 Tax Code) which provides that the BIR “shall
give effect to and administer the supervisory and police power
conferred to it by this Code or other laws.” The Supreme Court ruled
that the BIR “may claim police power only when necessary in the
enforcement of its principal powers and duties consisting of the
‘collection of all national internal revenue taxes, fees and charges,
and the enforcement of all forfeitures, penalties and fines connected
therewith.’ The enforcement of Section 169 entails the promotion of
the health of the nation and is thus unconnected with any tax
purpose.” Neither the CIR nor the Fair Trade Board had jurisdiction
to investigate and prosecute alleged misbranding, mislabeling and/or
misleading advertisements of filled milk. The jurisdiction was properly
vested upon the Board of Food and Drug Inspection and the Food
and Drug Administrator, with the Secretary of Health and the
Secretary of Justice also intervening in such event that criminal
prosecution would have to be instituted.
[Vera v. Cuevas, GR Nos. L-33693-94, 31 May 1979.]
Sec. 3, Chief Officials of the Bureau of Internal
Revenue. - The Bureau of Internal Revenue shall have a chief
to be known as Commissioner of Internal Revenue, hereinafter
referred to as the Commissioner and four (4) assistant chiefs to
be known as Deputy Commissioners.
Sec. 4, Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases. - The power to interpret
the provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal
Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals.
Q: Explain the nature of the CIR’s power to interpret tax laws and to
decide tax cases.
* In Asia International Auctioneers, Inc. v. Parayno, Asia International
Auctioneers, Inc. and Subic Bay Motors Corporation were engaged
2
in the importation of mainly secondhand or used motor vehicles and
heavy transportation or construction equipment which they sold to
the public through auction. Petitioners filed a complaint praying for
the nullification of RMC No. 31-2003 dated 3 June 2003 setting the
“Uniform Guidelines on the Taxation of Imported Motor Vehicles
through the Subic Free Port Zone and Other Freeport Zones that are
Sold at Public Auction.” The complaint was thereafter amended
seeking the nullification of several other RMC and RRs on the tax
incentives enjoyed by businesses or enterprises within special
economic zones. The Supreme Court held that revenue issuances
are administrative rulings which are issued from time to time by the
CIR. “In the case at bar, the assailed revenue regulations and
revenue memorandum circulars are actually rulings or opinions of
the CIR on the tax treatment of motor vehicles sold at public auction
within the SSEZ to implement Section 12 of R.A. No. 7227 which
provides that ‘exportation or removal of goods from the territory of
the [SSEZ] to other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and
other relevant laws of the Philippines.” Such RRs and RMCs were
validly issued pursuant to the power of the CIR to interpret tax laws
and to decide tax cases based on Section 4 of the 1997 Tax Code.
[Asia International Auctioneers, Inc. v. Parayno, GR No. 163445, 18
December 2007.]
The power to interpret the National Internal Revenue Code and other
tax laws is under the exclusive and original jurisdiction of the CIR,
subject to review by the Secretary of Finance ( Section 4, NIRC).
Under RMC No. 37-07, the authority of the CIR to sign rulings
granting and/or confirming tax incentives, and tax treaty relief
through the ruling process is now delegated tpt the Deputy
Commissioner of the Legal and Inspection Group and to the
Assistant Commissioner of the Legal Service Group. The CIR is
empowered, motu propio to reverse , modify or alter any such ruling
issued by the Dep Commissioner or the Asst Commissioner
Sec. 5, Power of the Commissioner to Obtain
Information, and to Summon, Examine, and Take
Testimony of Persons. - In ascertaining the correctness of
any return, or in making a return when none has been made, or
in determining the liability of any person for any internal revenue
tax, or in collecting any such liability, or in evaluating tax
compliance, the Commissioner is authorized:
(A) To examine any book, paper, record, or other data which may
be relevant or material to such inquiry;
(B) To obtain on a regular basis from any person other than the
person whose internal revenue tax liability is subject to audit or
investigation, or from any office or officer of the national and
local governments, government agencies and instrumentalities,
including the Bangko Sentral ng Pilipinas and government-
owned or -controlled corporations, any information such as, but
not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names, addresses, and
financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters of
multinational companies, joint accounts, associations, joint
ventures of consortia and registered partnerships, and their
members;
(C) To summon the person liable for tax or required to file a
return, or any officer or employee of such person, or any person
having possession, custody, or care of the books of accounts
and other accounting records containing entries relating to the
business of the person liable for tax, or any other person, to
appear before the Commissioner or his duly authorized
representative at a time and place specified in the summons and
to produce such books, papers, records, or other data, and to
give testimony;
(D) To take such testimony of the person concerned, under oath,
as may be relevant or material to such inquiry; and
(E) To cause revenue officers and employees to make a canvass
from time to time of any revenue district or region and inquire
after and concerning all persons therein who may be liable to
pay any internal revenue tax, and all persons owning or having
the care, management or possession of any object with respect
to which a tax is imposed. The provisions of the foregoing
paragraphs notwithstanding, nothing in this Section shall be
construed as granting the Commissioner the authority to inquire
into bank deposits other than as provided for in Section 6(F) of
this Code.
Read also Section 71 in relation to Section 270 of the 1997
Tax Code which provide:
3
 Sec. 71, Disposition of Income Tax Returns, Publication of Lists
of Taxpayers and Filers. - After the assessment shall have been
made, as provided in this Title, the returns, together with any
corrections thereof which may have been made by the
Commissioner, shall be filed in the Office of the Commissioner
and shall constitute public records and be open to inspection as
such upon the order of the President of the Philippines, under
rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
The Commissioner may, in each year, cause to be prepared and
published in any newspaper the lists containing the names and
addresses of persons who have filed income tax returns.
xxx
Sec. 270, Unlawful Divulgence of Trade Secrets. – Except as
provided in Section 71 of this Code and [the Omnibus Election
Code of the Philippines], any officer or employee of the Bureau of
Internal Revenue who divulges to any person or makes known in
any other manner than may be provided by law information
regarding the business, income, or estate of any taxpayer, the
secrets, operation, style or work, or apparatus of any
manufacturer or producer, or confidential information regarding
the business of any taxpayer, knowledge of which was acquired
by him in the discharge of his official duties, shall, upon
conviction for each act or omission, be punished by a fine of not
less than Fifty thousand pesos (P50,000) but not more than One
hundred thousand pesos (P100,000), or suffer imprisonment of
not less than two (2) years but not more than five (5) years, or
both.
Q: The law mandates confidentially of all returns filed and
whatever information contained therein. Is there any exception
to the rule?
* In Vera v. Cusi, Chu Tiong was the defendant in a civil case
heard before the CFI of Davao entitled Sarmiento Enterprises,
Inc. v. Chu Tiong. The decision in said case was adverse to
the defendant. The execution of the judgment having been
returned unsatisfied, Chu Tiong was examined concerning his
income and properties. In the course thereof, Chu Tiong
manifested before Judge Cusi his willingness to produce
copies of his income tax returns for the years 1964 until 1968.
He subsequently wrote a letter request to the local BIR
authorities for production of copies of the returns. The local
BIR authorities refused to heed the request. The Supreme
Court said: “It is true that, as a rule, the Bureau of Internal
Revenue cannot divulge the income of a taxpayer because of
its confidential nature. However, the BIR itself has regulations
issued pursuant to the Tax Code indicating the instances when
the income of a taxpayer may be made public. One such
instance is provided in Sec. 4(b) of the Regulations, supra,
whereby the return of an individual shall be open to inspection
‘by the person who made the return or by his duly constituted
attorney in fact.”
[Vera v. Cusi, GR No. L-33115, 29 June 1979.]
Sec. 6, Power of the Commissioner to Make
Assessments and Prescribe Additional
Requirements for Tax Administration and
Enforcement. -
(A) Examination of Returns and Determination of Tax Due. - After
a return has been filed as required under the provisions of this
Code, the Commissioner or his duly authorized representative
may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however;
That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer.
The tax or any deficiency tax so assessed shall be paid upon
notice and demand from the Commissioner or from his duly
authorized representative.
Any return, statement of declaration filed in any office authorized
to receive the same shall not be withdrawn: Provided, That within
three (3) years from the date of such filing, the same may be
modified, changed, or amended: Provided, further, That no notice
for audit or investigation of such return, statement or declaration
has in the meantime been actually served upon the taxpayer.
(B) Failure to Submit Required Returns, Statements, Reports and
other Documents. - When a report required by law as a basis for
the assessment of any national internal revenue tax shall not be
forthcoming within the time fixed by laws or rules and
4
regulations or when there is reason to believe that any such
report is false, incomplete or erroneous, the Commissioner shall
assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document
at the time prescribed by law, or willfully or otherwise files a false
or fraudulent return or other document, the Commissioner shall
make or amend the return from his own knowledge and from
such information as he can obtain through testimony or
otherwise, which shall be prima facie correct and sufficient for all
legal purposes.
(C) Authority to Conduct Inventory-Taking, Surveillance and to
Prescribe Presumptive Gross Sales and Receipts. - The
Commissioner may, at any time during the taxable year, order
inventory-taking of goods of any taxpayer as a basis for
determining his internal revenue tax liabilities, or may place the
business operations of any person, natural or juridical, under
observation or surveillance if there is reason to believe that such
person is not declaring his correct income, sales or receipts for
internal revenue tax purposes. The findings may be used as the
basis for assessing the taxes for the other months or quarters of
the same or different taxable years and such assessment shall
be deemed prima facie correct.
When it is found that a person has failed to issue receipts and
invoices in violation of the requirements of Sections 113 and 237
of this Code, or when there is reason to believe that the books of
accounts or other records do not correctly reflect the
declarations made or to be made in a return required to be filed
under the provisions of this Code, the Commissioner, after
taking into account the sales, receipts, income or other taxable
base of other persons engaged in similar businesses under
similar situations or circumstances or after considering other
relevant information may prescribe a minimum amount of such
gross receipts, sales and taxable base, and such amount so
prescribed shall be prima facie correct for purposes of
determining the internal revenue tax liabilities of such person.
(D) Authority to Terminate Taxable Period. _ When it shall come
to the knowledge of the Commissioner that a taxpayer is retiring
from business subject to tax, or is intending to leave the
Philippines or to remove his property therefrom or to hide or
conceal his property, or is performing any act tending to obstruct
the proceedings for the collection of the tax for the past or
current quarter or year or to render the same totally or partly
ineffective unless such proceedings are begun immediately, the
Commissioner shall declare the tax period of such taxpayer
terminated at any time and shall send the taxpayer a notice of
such decision, together with a request for the immediate
payment of the tax for the period so declared terminated and the
tax for the preceding year or quarter, or such portion thereof as
may be unpaid, and said taxes shall be due and payable
immediately and shall be subject to all the penalties hereafter
prescribed, unless paid within the time fixed in the demand made
by the Commissioner.
(E) Authority of the Commissioner to Prescribe Real Property
Values. - The Commissioner is hereby authorized to divide the
Philippines into different zones or areas and shall, upon
consultation with competent appraisers both from the private
and public sectors, determine the fair market value of real
properties located in each zone or area. For purposes of
computing any internal revenue tax, the value of the property
shall be, whichever is the higher of;
(1) the fair market value as determined by the Commissioner, or
(2) the fair market value as shown in the schedule of values of
the Provincial and City Assessors.
(F) Authority of the Commissioner to inquire into Bank Deposit
Accounts and Other Related Information Held by Financial
Institutions. - Notwithstanding any contrary provision of
Republic Act No. 1405, Republic Act No. 6426, otherwise known
as the Foreign Currency Deposit Act of the Philippines, and other
general or special laws, the Commissioner is hereby authorized
to inquire into the bank deposits and other related information
held by financial institutions of:
(1) A decedent to determine his gross estate.
(2) Any taxpayer who has filed an application for compromise of
his tax liability under Sec. 204(A)(2) of this Code by reason of
financial incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the
payment of his tax liabilities on his claim that his financial
position demonstrates a clear inability to pay the tax assessed,
his application shall not be considered unless and until he
waives in writing his privilege under Republic Act No. 1405,
Republic Act No. 6426, otherwise known as the Foreign Currency
Deposit Act of the Philippines, or under other general or special
laws, and such waiver shall constitute the authority of the
Commissioner to inquire into the bank deposits of the taxpayer.
(3) A specific taxpayer or taxpayers subject of a request for the
supply of tax information from a foreign tax authority pursuant to
an international convention or agreement on tax matters to
which the Philippines is a signatory or a party of: Provided, That
5
the information obtained from the banks and other financial
institutions may be used by the Bureau of Internal Revenue for
tax assessment, verification, audit and enforcement purposes.
In case of a request from a foreign tax authority for tax
information held by banks and financial institutions, the
exchange of information shall be done in a secure manner to
ensure confidentiality thereof under such rules and regulations
as may be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
The Commissioner shall provide the tax information obtained
from banks and financial institutions pursuant to a convention or
agreement upon request of the foreign authority when such
requesting foreign tax authority has provided the following
information to demonstrate the foreseeable relevance of the
information to the request:
(a) The identity of the person under examination or
investigation;
(b) A statement of the information being sought including its
nature and the form in which the said foreign tax authority
prefers to receive the information from the Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held
in the Philippines or is in the possession or control of a
person within the jurisdiction of the Philippines;
(e) To the extent known, the name and address of any person
believed to be in possession of the requested information;
(f) A statement that the request is in conformity with the law
and administrative practices of the said foreign tax
authority, such that if the requested information was within
the jurisdiction of the said foreign tax authority then it would
be able to obtain the information under its laws or in the
normal course of administrative practice and that it is in the
conformity with a convention or international agreement;
and
(g) A statement that the requesting foreign tax authority has
exhausted all means available in its own territory to obtain
the information, except those that would give rise to
disproportionate difficulties.
The Commissioner shall forward the information as promptly as
possible to the requesting foreign tax authority. To ensure a
prompt response, the Commissioner shall confirm receipt of a
request in writing to the requesting tax authority and shall notify
the latter of deficiencies in the request, if any, within sixty (60)
days from receipt of the request.
If the Commissioner is unable to obtain and provide the
information within ninety (90) days from receipt of the request,
due to obstacles encountered in furnishing the information or
when the bank or financial institution refuses or furnish the
information, he shall immediately inform the requesting tax
authority of the same, explaining the nature of the obstacles
encountered or the reasons for refusal.
The term ‘foreign tax authority,’ as used herein, shall refer to the
tax authority or tax administration of the requesting State under
the tax treaty or convention to which the Philippines is a
signatory or a party of. (As amended by RA No. 10021.)
(G) Authority to Accredit and Register Tax Agents. - The
Commissioner shall accredit and register, based on their
professional competence, integrity and moral fitness, individuals
and general professional partnerships and their representatives
who prepare and file tax returns, statements, reports, protests,
and other papers with or who appear before, the Bureau for
taxpayers. Within one hundred twenty (120) days from January 1,
1998, the Commissioner shall create national and regional
accreditation boards, the members of which shall serve for three
(3) years, and shall designate from among the senior officials of
the Bureau, one (1) chairman and two (2) members for each
board, subject to such rules and regulations as the Secretary of
Finance shall promulgate upon the recommendation of the
Commissioner.
Individuals and general professional partnerships and their
representatives who are denied accreditation by the
Commissioner and/or the national and regional accreditation
boards may appeal such denial to the Secretary of Finance, who
shall rule on the appeal within sixty (60) days from receipt of
such appeal. Failure of the Secretary of Finance to rule on the
Appeal within the prescribed period shall be deemed as approval
of the application for accreditation of the appellant.
(H) Authority of the Commissioner to Prescribe Additional
Procedural or Documentary Requirements. - The Commissioner
may prescribe the manner of compliance with any documentary
or procedural requirement in connection with the submission or
preparation of financial statements accompanying the tax
returns.
Read also Section 56 of the 1997 Tax Code which provides:
Sec. 56, Payment and Assessment of Income Tax for
Individuals and Corporation. -
(A) Payment of Tax. -
6
(1) In General. - The total amount of tax imposed by this Title shall
be paid by the person subject thereto at the time the return is
filed. In the case of tramp vessels, the shipping agents and/or the
husbanding agents, and in their absence, the captains thereof are
required to file the return herein provided and pay the tax due
thereon before their departure. Upon failure of the said agents or
captains to file the return and pay the tax, the Bureau of Customs
is hereby authorized to hold the vessel and prevent its departure
until proof of payment of the tax is presented or a sufficient bond
is filed to answer for the tax due.
(2) Installment of Payment. - When the tax due is in excess of Two
thousand pesos (P2,000), the taxpayer other than a corporation
may elect to pay the tax in two (2) equal installments in which
case, the first installment shall be paid at the time the return is
filed and the second installment, on or before July 15 following
the close of the calendar year. If any installment is not paid on or
before the date fixed for its payment, the whole amount of the tax
unpaid becomes due and payable, together with the delinquency
penalties.
(3) Payment of Capital Gains Tax. - The total amount of tax
imposed and prescribed under Section 24 (c), 24(D), 27(E)(2),
28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return
prescribed therefor is filed by the person liable thereto: Provided,
That if the seller submits proof of his intention to avail himself of
the benefit of exemption of capital gains under existing special
laws, no such payments shall be required : Provided, further, That
in case of failure to qualify for exemption under such special laws
and implementing rules and regulations, the tax due on the gains
realized from the original transaction shall immediately become
due and payable, subject to the penalties prescribed under
applicable provisions of this Code: Provided, finally, That if the
seller, having paid the tax, submits such proof of intent within six
(6) months from the registration of the document transferring the
real property, he shall be entitled to a refund of such tax upon
verification of his compliance with the requirements for such
exemption.
In case the taxpayer elects and is qualified to report the gain by
installments under Section 49 of this Code, the tax due from each
installment payment shall be paid within (30) days from the
receipt of such payments.
No registration of any document transferring real property shall
be effected by the Register of Deeds unless the Commissioner or
his duly authorized representative has certified that such transfer
has been reported, and the tax herein imposed, if any, has been
paid.
(B) Assessment and Payment of Deficiency Tax. - After the return
is filed, the Commissioner shall examine it and assess the correct
amount of the tax. The tax or deficiency income tax so discovered
shall be paid upon notice and demand from the Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title,
the term 'deficiency' means:
(1) The amount by which the tax imposed by this Title exceeds
the amount shown as the tax by the taxpayer upon his return; but
the amount so shown on the return shall be increased by the
amounts previously assessed (or collected without assessment)
as a deficiency, and decreased by the amount previously abated,
credited, returned or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon this
return, or if no return is made by the taxpayer, then the amount by
which the tax exceeds the amounts previously assessed (or
collected without assessment) as a deficiency; but such amounts
previously assessed or collected without assessment shall first
be decreased by the amounts previously abated, credited
returned or otherwise repaid in respect of such tax.
Q: Explain the nature of the CIR’s power to make assessments.
* In Medina v. CIR, Antonio Medina acquired forest concessions in
certain municipalities in Isabela and sold the logs removed therefrom
to various persons, including his wife, Antonia Medina. On the thesis
that the sales made by Mr. Medina to his wife were null and void
pursuant to Article 1490 of the Civil Code, the CIR considered the
sales made by Mrs. Medina to third persons as Mr. Medina’s original
sales taxable and hence, assessed Mr. Medina of deficiency sales
tax and surcharges. Mr. Medina contended, among others, that he
and his wife executed a premarital agreement of absolute separation
of properties, and that the CIR could not assail the questioned sales,
the latter being a stranger to said transactions. On the first point, the
Supreme Court found that Mr. Medina did not sufficiently prove the
existence of such premarital agreement. The sales made by Mr.
Medina to his wife were void. Being void, such sales were correctly
disregarded by the CIR. On the second point, the High Court noted
that the government, through the CIR, is “always an interested party
to all matters involving taxable transactions and, needless to say,
qualified to question their validity or legitimacy whenever necessary
to block tax evasion.”
7
[Medina v. CIR, GR No. L-15113, 28 January 1961.]
Q: What is the rule on the “best evidence obtainable.”
* In Sy Po v. Court of Tax Appeals, petitioner was the widow of the
late Po Bien Sing who in his lifetime was the sole proprietor of Silver
Cup Wine Factory. Upon receipt of confidential information that Silver
Cup was allegedly involved in tax evasion, an investigation was
conducted by the Finance-BIR-NBI team. Po did not heed the team’s
request for production of books of accounts. The team, consequently,
entered the factory bodega of Silver Cup and seized different brands
of alcohol products. On the basis of the team’s report of
investigation, the CIR assessed Po of deficiency income tax for 1966
to 1970 and specific tax for 1964 and 1972. Did the assessments
have valid and legal bases? The Supreme Court answered
affirmatively, stating that the rule on the “best evidence obtainable”
applies “when a tax report required by law for the purpose of
assessment is not available or when the tax report is incomplete or
fraudulent.” The persistent failure of Po to present the books of
account for examination for the taxable years involved left the CIR no
other legal option except to resort to the power conferred upon him
under Section 16 (now Section 6 of the 1997 Tax Code).
Additionally: “Tax assessments by tax examiners are presumed
correct and made in good faith. The taxpayer has the duty to prove
otherwise. In the absence of proof of any irregularities in the
performance of duties, an assessment duly made by a Bureau of
Internal Revenue examiner and approved by his superior officers will
not be disturbed. All presumptions are in favor of the correctness of
tax assessments.”
[Sy Po v. Court of Tax Appeals, GR No. L-81446, 18 August 1988.]
** Section 203 of the 1997 Tax Code provides that the government
has the right to assess internal revenue taxes within 3 years from the
last day prescribed by law for the filing of the tax return or the actual
date of filing of such return, whichever comes later. In CIR v. Kudos
Metal Corporation, respondent filed its annual income tax return on
15 April 1999 for the taxable year 1998. Thereafter, respondent
executed two waivers of defense of prescription. In 2003, respondent
received assessment notices for the subject period. Had the
government’s right to assess respondent prescribed? The Supreme
Court held in the affirmative. The two waivers executed by
respondent suffered from legal infirmities for failure to comply with
the requisites enumerated in RMO No. 20-90 and RDAO No. 05-01.
Due to the defects in the waivers, the period to assess or collect
taxes was not extended. Furthermore: “As to the alleged delay of the
respondent to furnish the BIR of the required documents, this cannot
be taken against respondent. Neither can the BIR use this as an
excuse for issuing the assessments beyond the three-year period
because with or without the required documents, the CIR has the
power to make assessments based on the best evidence
obtainable.”
[CIR v. Kudos Metal Corporation, GR No. 178087, 5 May 2010.]
Q: What is the nature of the CIR’s authority to prescribe real property
values?
* The case of Capitol Steel Corporation v. Phividec Industrial
Authority dealt with the expropriation proceedings initiated by
Phividec, a government owned and controlled corporation vested
with the power of eminent domain for the purpose of acquiring rights
of way or any property for the establishment of the Phividec
Industrial Areas. One of the issues tackled in the case was the
correct amount to be deposited representing the zonal value of the
properties. Phividec deposited an amount based on the schedule of
zonal valuation for real properties under Department Order No. 40-
97 (i.e., Php 300 and Php 500 per square meter). Capitol Steel
opposed the application of DO No. 40-97, claiming instead that
under the Technical Committee on Real Property Valuation
Resolution, the subject properties were revalued at Php 700 per
square meter. The Supreme Court upheld Phividec’s position on this
point. “Clearly, while the law grants to the Commissioner of Internal
Revenue the power to determine zonal values, including the
authority to delegate to the Assistant Commissioner of the
Assessment Service the authority to approve and sign TCRPV
8
resolutions involving requests for revaluation of established zonal
values of real properties, the same is for the purpose of computing
internal revenue taxes [and not necessarily for purposes of
expropriation proceedings].”
[Capitol Steel Corporation v. Phividec Industrial Authority, GR No.
169453, 6 December 2006.]
Q: What act of the CIR constitutes usurpation of the legislative
prerogative?
* RA No. 8240 took effect on 1 January 1997. Under said law,
specific tax on cigars and cigarettes was covered by Section 142.
Subsequently, RA No. 8424 was passed recodifying the code to what
is now known as the 1997 Tax Code. Section 142 was renumbered
as Section 145. Prior to the effectivity of RA No. 8240, a survey of
the net retail prices per pack of cigarettes as of 1 October 1996 was
conducted. The results thereof were embodied as Annex “D” of the
Tax Code and classified existing brands as those registered and
existing prior to 1 January 1997 which classification could not be
revised except by an act of Congress. To implement RA No. 8240,
RR No. 1-97 was issued which provided that new brands, or those
registered after 1 January 1997, should be initially assessed at their
suggested retail prices. 3 months after the new brand was launched
in the market, a survey would be conducted to determine its actual
net retail price which would be the basis in determining its specific
tax classification.
In February 1999, La Suerte introduced into the market Astro and
Memphis cigarettes. In February 2003, RR No. 9-2003 was issued
which provided for a periodic review every 2 years or earlier of the
current net retail prices of new brands and their variants to establish
and update their tax classification. Subsequently, in August 2003, RR
No. 22-2003 was issued to implement the revised tax classification of
certain new brands introduced in the market after 1 January 1997. As
a consequence, the average net retail prices of Astro and Memphis
cigarettes increased, thus also increasing the applicable excise tax
from Php 1.12 per pack to Php 5.60 per pack. La Suerte filed suit
contending in the main that the CIR did not have the power to
reclassify cigarettes introduced in the market after 1 January 1997.
Hence, the classification thereof by the CIR constituted usurpation of
legislative powers.
The Supreme Court held that RR Nos. 9-2003 and 22-2003 were
void insofar as they empowered the CIR to periodically review or re-
determine the current net retail prices of cigarettes for purposes of
updating their tax classification 2 years or earlier. Said revenue
issuances ran counter to the wording of now Section 145 of the 1997
Tax Code. Moreover, unless expressly granted to the CIR, the power
to reclassify cigarette brands remains a prerogative of the legislature
which cannot be usurped by the former. Consequently, the upward
classification of Astro and Memphis cigarettes was invalid.
[Secretary of Finance v. La Suerte Cigar and Cigarette Factory, GR
No. 166498, 11 June 2009.]
Sec. 7, Authority of the Commissioner to Delegate
Power. - The Commissioner may delegate the powers vested in
him under the pertinent provisions of this Code to any or such
subordinate officials with the rank equivalent to a division chief
or higher, subject to such limitations and restrictions as may be
imposed under rules and regulations to be promulgated by the
Secretary of finance, upon recommendation of the
Commissioner: Provided, However, That the following powers of
the Commissioner shall not be delegated:
(a) The power to recommend the promulgation of rules and
regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse,
revoke or modify any existing ruling of the Bureau;
(c) The power to compromise or abate, under Sec. 204 (A) and
(B) of this Code, any tax liability: Provided, however, That
assessments issued by the regional offices involving basic
deficiency taxes of Five hundred thousand pesos (P500,000) or
less, and minor criminal violations, as may be determined by
rules and regulations to be promulgated by the Secretary of
finance, upon recommendation of the Commissioner, discovered
by regional and district officials, may be compromised by a
regional evaluation board which shall be composed of the
Regional Director as Chairman, the Assistant Regional Director,
the heads of the Legal, Assessment and Collection Divisions and
the Revenue District Officer having jurisdiction over the taxpayer,
as members; and
(d) The power to assign or reassign internal revenue officers to
9
 establishments where articles subject to excise tax are produced
or kept.
Q: May the CIR’s power to approve the filing of tax collection cases
delegated?
* In Arches v. Bellosillo, an assessment for deficiency income and tax
residence taxes was issued against petitioner for the taxable year
1953. Thereafter, the CIR filed suit in the municipal court of Roxas
City to recover said deficiency taxes. Petitioner sought the dismissal
of the complaint on the ground that it did not expressly show the
approval of the CIR as required by Section 308 of the old Tax Code.
The Supreme Court held that the express approval of the CIR was
not necessary, relying on Memorandum Order No. V-634, approved
by the Secretary of Finance, wherein the CIR’s functions regarding
the administration and enforcement of revenue laws and regulations
– powers broad enough to cover the approval of court actions as
required in Section 308 of the old Tax Code – were expressly
delegated to the Regional Directors. The High Court stated that
Memorandum Order No. V-634, as a regulation whose issuance was
authorized by statute, had the force and effect of law.
[Arches v. Bellosillo, GR No. L-23534, 16 May 1967.]
** In Republic of the Philippines v. Hizon, an assessment was issued
against respondent for deficiency income tax covering the fiscal year
1981-1982. Years later, the CIR filed a case to collect the tax
deficiency. The complaint was signed by the Chief of the Legal
Division (BIR Region 4), and verified by the Regional Director
(Pampanga). Respondent argued that the complaint was filed
without the authority of the CIR. On this point, the Supreme Court
held that by virtue of Section 7 of the 1997 Tax Code, the CIR has
the authority to delegate its powers, subject to certain exceptions.
“None of the exceptions relates to the Commissioner’s power to
approve the filing of tax collection taxes.”
[Republic of the Philippines v. Hizon, GR No. 130430, 13 December
1999.]
Q: How is compromise different from abatement?
* In People v. Sandiganbayan, the Supreme Court explained
abatement or cancellation of a tax. It defined abatement as the
“diminution or decrease in the amount of tax imposed,” such that to
abate is “to nullify or reduce in value or amount.” The Supreme Court
went on to say that: “The BIR may therefore abate or cancel the
whole or any unpaid portion of a tax liability, inclusive of increments,
if its assessment is excessive or erroneous; or if the administration
costs involved do not justify the collection of the amount due. No
mutual concessions need be made, because an excessive or
erroneous tax is not compromised; it is abated or canceled. Only
correct taxes should be paid.”
Here, the Supreme Court found that although referred to in the
pleadings as a compromise, the agreement between the parties was
actually an abatement or a cancellation of an unjust, excessively
assessed, and unreasonable tax. Compromise is marked by mutual
concessions, whereas in abatement or cancellation, no mutual
concessions between the taxpayer and the CIR are made.
[People v. Sandiganbayan, GR No. 152532, 16 August 2005.]
Sec. 8, Duty of the Commissioner to Ensure the
Provision and Distribution of Forms, Receipts,
Certificates, and Appliances, and the
Acknowledgment of Payment of Taxes. -
(A) Provision and Distribution to Proper Officials. - It shall be the
duty of the Commissioner, among other things, to prescribe,
provide, and distribute to the proper officials the requisite
licenses internal revenue stamps, labels all other forms,
certificates, bonds, records, invoices, books, receipts,
instruments, appliances and apparatus used in administering the
laws falling within the jurisdiction of the Bureau. For this
purpose, internal revenue stamps, strip stamps and labels shall
be caused by the Commissioner to be printed with adequate
security features.
Internal revenue stamps, whether of a bar code or fuson design,
shall be firmly and conspicuously affixed on each pack of cigars
and cigarettes subject to excise tax in the manner and form as
prescribed by the Commissioner, upon approval of the Secretary
of Finance.
(B) Receipts for Payment Made. - It shall be the duty of the
Commissioner or his duly authorized representative or an
10
authorized agent bank to whom any payment of any tax is made
under the provision of this Code to acknowledge the payment of
such tax, expressing the amount paid and the particular account
for which such payment was made in a form and manner
prescribed therefor by the Commissioner.
Sec. 9, Internal Revenue Districts. - With the approval of
the Secretary of Finance, the Commissioner shall divide the
Philippines into such number of revenue districts as may form
time to time be required for administrative purposes. Each of
these districts shall be under the supervision of a Revenue
District Officer.
Sec. 10, Revenue Regional Director. - Under rules and
regulations, policies and standards formulated by the
Commissioner, with the approval of the Secretary of Finance, the
Revenue Regional director shall, within the region and district
offices under his jurisdiction, among others:
(a) Implement laws, policies, plans, programs, rules and
regulations of the department or agencies in the regional area;
(b) Administer and enforce internal revenue laws, and rules and
regulations, including the assessment and collection of all
internal revenue taxes, charges and fees.
(c) Issue Letters of authority for the examination of taxpayers
within the region;
(d) Provide economical, efficient and effective service to the
people in the area;
(e) Coordinate with regional offices or other departments,
bureaus and agencies in the area;
(f) Coordinate with local government units in the area;
(g) Exercise control and supervision over the officers and
employees within the region; and
(h) Perform such other functions as may be provided by law and
as may be delegated by the Commissioner.
Sec. 11, Duties of Revenue District Officers and
Other Internal Revenue Officers. - It shall be the duty of
every Revenue District Officer or other internal revenue officers
and employees to ensure that all laws, and rules and regulations
affecting national internal revenue are faithfully executed and
complied with, and to aid in the prevention, detection and
punishment of frauds of delinquencies in connection therewith.
It shall be the duty of every Revenue District Officer to examine
the efficiency of all officers and employees of the Bureau of
Internal Revenue under his supervision, and to report in writing
to the Commissioner, through the Regional Director, any neglect
of duty, incompetency, delinquency, or malfeasance in office of
any internal revenue officer of which he may obtain knowledge,
with a statement of all the facts and any evidence sustaining
each case.
Sec. 12, Agents and Deputies for Collection of
National Internal Revenue Taxes. - The following are
hereby constituted agents of the Commissioner:
(a) The Commissioner of Customs and his subordinates with
respect to the collection of national internal revenue taxes on
imported goods;
(b) The head of the appropriate government office and his
subordinates with respect to the collection of energy tax; and
(c) Banks duly accredited by the Commissioner with respect to
receipt of payments internal revenue taxes authorized to be
made thru bank.
Any officer or employee of an authorized agent bank assigned to
receive internal revenue tax payments and transmit tax returns
or documents to the Bureau of Internal Revenue shall be subject
to the same sanctions and penalties prescribed in Sections 269
and 270 of this Code.
Sec. 13, Authority of a Revenue Officer. - Subject to the
rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, a Revenue
Officer assigned to perform assessment functions in any district
may, pursuant to a Letter of Authority issued by the Revenue
Regional Director, examine taxpayers within the jurisdiction of
the district in order to collect the correct amount of tax, or to
recommend the assessment of any deficiency tax due in the
same manner that the said acts could have been performed by
the Revenue Regional Director himself.
Q: What is a Letter of Authority?
* Section 13 of the 1997 Tax Code provides that: “Subject to the rules
and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, a Revenue Officer assigned
to perform assessment functions in any district may, pursuant to a
Letter of Authority issued by the Revenue Regional Director, examine
taxpayers within the jurisdiction of the district in order to collect the
11
correct amount of tax, or to recommend the assessment of any
deficiency tax due in the same manner that the said acts could have
been performed by the Revenue Regional Director himself.” In other
words, the Letter of Authority (LA/LOA) is the authority given to the
revenue officer to perform assessment functions.
** A Letter of Authority should cover a taxable period not exceeding
one taxable year. The practice of issuing LAs covering audit of
“unverified prior years” is prohibited. If the audit of a taxpayer shall
include more than one taxable period, the other periods shall be
specifically indicated in the LA.
[Revenue Memorandum Order No. 43-90, 20 September 1990.]
*** In CIR v. Sony Philippines, Inc., the relevant Letter of Authority
covered “the period 1997 and unverified prior years.” However, the
deficiency VAT assessment the CIR arrived at was based on records
from January to March 1998. It was the CIR’s contention that the LA,
although it stated “the period 1997 and unverified prior years,” should
be understood to mean the fiscal year ended 31 March 1998. The
Supreme Court disagreed and held that clearly, the CIR, acting
through the revenue officers, went beyond the scope of their
authority as indicated in the LA. “[T]he CIR knew which period should
be covered by the investigation. Thus, if the CIR wanted or intended
the investigation to include the year 1998, it should have done so by
including it in the LOA or issuing another LOA.” Hence, the
deficiency VAT assessment made on the basis of the subject LA was
disallowed.
[CIR v. Sony Philippines, Inc., GR No. 178697, 17 November 2010.]
**** Effective 1 July 2010, the manual issuance of LAs has been
discontinued. In place thereof, electronic LAs shall be issued through
the Letter of Authority Monitoring System (LAMS).
Q: What is a Letter Notice? Is it equivalent to a Letter of Authority?
* A Letter Notice is a discrepancy notice issued by the CIR after
conducting data matching processes, informing the taxpayer of
findings of discrepancy, e.g., under-declared sales and over-claimed
purchases. An LN shall cover only the tax indicated therein on a
given particular period or quarter, e.g., VAT liabilities for 2002 3 rd
quarter. Compared with a Letter of Authority, the coverage of an LA is
more comprehensive than that of an LN.
[Revenue Memorandum Order No. 42-2003, 23 October 2003.]
** RMO No. 55-10 provides that a Letter Notice shall be treated as a
“notice of audit or investigation in the absence of evident error or
clear abuse of discretion.” In order to expedite the processing of LN
cases, the issuance of Notices of Informal Conference may
immediately commence, even without the prior issuance of Letters of
Authority. On the basis of RMO No. 55-10, it appears that an LN is
effectively equated to an LA. [NOTE: Relate this revenue issuance to
Section 13 of the 1997 Tax Code which essentially states that a
revenue officer shall be authorized to perform assessment functions
on the strength of an LA, and not merely an LN.]
[Revenue Memorandum Order No. 55-10, 11 June 2010.]
Sec. 14, Authority of Officers to Administer Oaths
and Take Testimony. - The Commissioner, Deputy
Commissioners, Service Chiefs, Assistant Service Chiefs,
Revenue Regional Directors, Assistant Revenue Regional
Directors, Chiefs and Assistant Chiefs of Divisions, Revenue
District Officers, special deputies of the Commissioner, internal
revenue officers and any other employee of the Bureau thereunto
especially deputized by the Commissioner shall have the power
to administer oaths and to take testimony in any official matter or
investigation conducted by them regarding matters within the
jurisdiction of the Bureau.
Sec. 15, Authority of Internal Revenue Officers to
Make Arrests and Seizures. - The Commissioner, the
Deputy Commissioners, the Revenue Regional Directors, the
Revenue District Officers and other internal revenue officers
shall have authority to make arrests and seizures for the
violation of any penal law, rule or regulation administered by the
Bureau of Internal Revenue. Any person so arrested shall be
forthwith brought before a court, there to be dealt with according
to law.
12

Q: What are the general requirements for a warrant?
* In dispute in Stonehill v. Diokno were search warrants issued by
respondent-prosecutors and respondent-judges on different dates
against petitioners and the corporations of which they were officers.
The search warrants authorized the search of the persons of the
petitioners or the premises of their offices, warehouses and/or
residences, and the seizure of such personal property constituting
the subject of the offense, stolen or embezzled and proceeds or fruits
of the offense, or used or intended to be used as the means of
committing the offense, such offense being the “violation of Central
Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and
the Revised Penal Code.” The Supreme Court held that the search
warrants were general warrants. “In other words, no specific offense
had been alleged in said applications. The averments thereof with
respect to the offense committed were abstract. As a consequence, it
was impossible for the judges who issued the warrants to have found
the existence of probable cause, for the same presupposes the
introduction of competent proof that the party against whom it is
sought has performed particular acts, or committed specific
omissions, violating a given provision of our criminal laws.” General
search warrants are outlawed because they place the sanctity of the
domicile and the privacy of communication and correspondence at
the mercy of the whims, caprice or passion of peace officers.
[Stonehill v. Diokno, GR No. L-19550, 19 June 1967.]
Sec. 16, Assignment of Internal Revenue Officers
Involved in Excise Tax Functions to Establishments
Where Articles Subject to Excise Tax are Produced
or Kept. - The Commissioner shall employ, assign, or reassign
internal revenue officers involved in excise tax functions, as
often as the exigencies of the revenue service may require, to
establishments or places where articles subject to excise tax are
produced or kept: Provided, That an internal revenue officer
assigned to any such establishment shall in no case stay in his
assignment for more than two (2) years, subject to rules and
regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
Sec. 17, Assignment of Internal Revenue Officers
and Other Employees to Other Duties. - The
Commissioner may, subject to the provisions of Section 16 and
the laws on civil service, as well as the rules and regulations to
be prescribed by the Secretary of Finance upon the
recommendation of the Commissioner, assign or reassign
internal revenue officers and employees of the Bureau of Internal
Revenue, without change in their official rank and salary, to other
or special duties connected with the enforcement or
administration of the revenue laws as the exigencies of the
service may require: Provided, That internal revenue officers
assigned to perform assessment or collection function shall not
remain in the same assignment for more than three (3) years;
Provided, further, That assignment of internal revenue officers
and employees of the Bureau to special duties shall not exceed
one (1) year.
Sec. 18, Reports of Violation of Laws. - When an
internal revenue officer discovers evidence of a violation of this
Code or of any law, rule or regulations administered by the
Bureau of Internal Revenue of such character as to warrant the
institution of criminal proceedings, he shall immediately report
the facts to the Commissioner through his immediate superior,
giving the name and address of the offender and the names of
the witnesses if possible: Provided, That in urgent cases, the
Revenue Regional director or Revenue District Officer, as the
case may be, may send the report to the corresponding
prosecuting officer in the latter case, a copy of his report shall be
sent to the Commissioner.
Sec. 19, Contents of Commissioner's Annual
Report. - The annual Report of the Commissioner shall contain
detailed statements of the collections of the Bureau with
specifications of the sources of revenue by type of tax, by
manner of payment, by revenue region and by industry group
and its disbursements by classes of expenditures.
In case the actual collection exceeds or falls short of target as
set in the annual national budget by fifteen percent (15%) or
more, the Commissioner shall explain the reason for such
excess or shortfall.
13

Sec. 20, Submission of Report and Pertinent
Information by the Commissioner. -
(A) Submission of Pertinent Information to Congress. - The
provision of Section 270 of this Code to the contrary
notwithstanding, the Commissioner shall, upon request of
Congress and in aid of legislation, furnish its appropriate
Committee pertinent information including but not limited to:
industry audits, collection performance data, status reports in
criminal actions initiated against persons and taxpayer's returns:
Provided, however, That any return or return information which
can be associated with, or otherwise identify, directly or
indirectly, a particular taxpayer shall be furnished the
appropriate Committee of Congress only when sitting in
Executive Session Unless such taxpayer otherwise consents in
writing to such disclosure.
(B) Report to Oversight Committee. - The Commissioner shall,
with reference to Section 204 of this Code, submit to the
Oversight Committee referred to in Section 290 hereof, through
the Chairmen of the Committee on Ways and Means of the
Senate and House of Representatives, a report on the exercise of
his powers pursuant to the said section, every six (6) months of
each calendar year.
Sec. 21, Sources of Revenue. - The following taxes, fees
and charges are deemed to be national internal revenue taxes:
(a) Income tax;
(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and
collected by the Bureau of Internal Revenue.
Income tax – tax imposed on the net or gross income realized in a
taxable year. (CIR v Solidbank 416 SCRA 436, 2003)
Estate tax – tax that is levied, assessed, collected and paid upon the
transfer of the estate of a decedent to his heirs.
Donors Tax – tax imposed on the gratuitous transfer of property
between two or more persons who are living at the time of the
transfer.
Percentage tax – tax measured by a certain percentage of the gross
selling price or gross value in money of goods sold, bartered or
imported, or of the gross receipts or earnings derived by any person
engaged in the sale of services (CIR v Solidbank 416 SCRA 436,
2003)
Value added Tax – is a uniform 12% tax levied on every rendition of
services in the course of business or trade, on every sale or barter,
exchange or lease of goods or properties in course of business as
they pass along the production and distribution chain, on every
importation of goods, whether or not in the course of business or not;
its an indirect tax that may be shifted or passed on to the buyer,
transferee, or lessee of the goods, properties or services . (CIR v
Seagate Technology , 415 SCRA 132, 2005)
Excise tax – tax applicable to certain specified or selected goods or
articles manufactured or produced in the Philippines for domestic
sale or consumption or for any other disposition and to things
imported into the Philippines
Documentary stamp tax – tax levied on the exercise by persons of
certain privileges conferred by law for the creation, revision, or
termination of specific legal relationships through execution of
specific instruments ( Phil Home Assurance Corp. vs CA GR. No.
119446, 1999)
======
Sec. 246, Non-Retroactivity of Rulings. – Any
revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding
Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the
taxpayers, except in the following cases:
14
 (a) Where the taxpayer deliberately misstates or omits material
facts from his return or any document required of him by the
Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which
the ruling is based; or
(c) Where the taxpayer acted in bad faith.
Q: What are the kinds of administrative issuances?
* There are two kinds of administrative issuances: (1) legislative
rules, and (2) interpretative rules. “[A] legislative rule is in the nature
of subordinate legislation, designed to implement a primary
legislation by providing the details thereof. In the same way that laws
must have the benefit of public hearing, it is generally required that
before a legislative rule is adopted there must be hearing.” On the
other hand, “interpretative rules are designed to provide guidelines to
the law which the administrative agency is in charge of enforcing.”
In CIR v. Court of Appeals, Fortune Tobacco Corporation was
engaged in the manufacture of different brands of cigarettes, e.g.,
Champion, Hope and More cigarettes. On 3 July 1993, RA No. 7654
took effect. The law amended Section 142(c)(1) of the old Tax Code
dealing with excise tax on cigar and cigarettes. About a month after
the enactment of RA No. 7654 and 2 days before the effectivity of the
same, RMC No. 37-93 was issued. By virtue of RMC No. 37-93,
Champion, Hope and More cigarettes were considered locally
manufactured cigarettes bearing a foreign brand subject to the 55%
ad valorem tax on cigarettes. Prior to the issuance of RMC No. 37-
93, the 3 brands were in the category of locally manufactured
cigarettes not bearing a foreign brand subject to the 45% ad valorem
tax. Without RMC No. 37-93, the enactment of RA No. 7654 would
have had no new tax rate consequence on the 3 brands. The
Supreme Court stated that evidently, in order to place Champion,
Hope and More cigarettes within the scope of RA No. 7654 and
subject them to an increased tax rate, RMC No. 37-93 was issued.
“In so doing, the BIR not simply interpreted the law; verily, it
legislated under its quasi-legislative authority. The due observance of
the requirements of notice, of hearing, and of publication should not
have been ignored.” The Supreme Court eventually found that the
hastily promulgated RMC No. 37-93 fell short of a valid and effective
administrative issuance. “Let it be made clear that such authority of
the Commissioner is not here doubted. Like any other government
agency, however, the CIR may not disregard legal requirements or
applicable principles in the exercise of quasi-legislative powers.”
[CIR v. Court of Appeals, GR No. 119761, 29 August 1996.]
** Section 116 of the 1977 Tax Code, as amended, provides:
“SEC. 116. Percentage tax on dealers in securities; lending
investors. – Dealers in securities and lending investors shall pay a
tax equivalent to six (6) per centum of their gross income. Lending
investors shall pay a tax equivalent to five percent (5%) of their gross
income.”
The issue in CIR v. Michel J. Lhuillier Pawnshop, Inc. was whether
pawnshops were considered lending investors for the purpose of
imposing percentage tax. Pursuant to RMO No. 15-91 dated 11
March 1991 and RMC No. 43-91 dated 27 May 1991, the CIR issued
an assessment against Lhuillier for deficiency percentage tax.
Lhuillier protested the assessment on grounds that: “(1) neither the
Tax Code nor the VAT Law expressly imposes 5% percentage tax on
the gross income of pawnshops; (2) pawnshops are different from
lending investors, which are subject to the 5% percentage tax under
the specific provision of the Tax Code; (3) RMO No. 15-91 is not
implementing any provision of the Internal Revenue laws but is a
new and additional tax measure on pawnshops, which only
Congress could enact; (4) RMO No. 15-91 impliedly amends the Tax
Code and is therefore taxation by implication, which is proscribed by
law; and (5) RMO No. 15-91 is a ‘class legislation’ because it singles
out pawnshops among other lending and financial operations.” The
Supreme Court essentially upheld Lhuillier’s contentions and held
that RMO No. 15-91 and RMC No. 43-91 were administrative
issuances which were not merely interpretative rules, but were
legislative rules. Hence, the requirements of notice, hearing and
publication should have been observed. In any event: “Since Section
116 of the NIRC of 1977, which breathed life on the questioned
administrative issuances, had already been repealed, RMO 15-91
15
and RMC 43-91, which depended upon it, are deemed automatically
repealed.”
[CIR v. Michel J. Lhuillier Pawnshop, Inc., GR No. 150947, 15 July
2003.]
Q: What are revenue issuances?
* Revenue issuances are those issuances officially released by the
CIR, thus:1
(1) Revenue Regulations (RRs) are issuances signed by the
Secretary of Finance, upon recommendation of the CIR, that specify,
prescribe or define rules and regulations for the effective
enforcement of the provisions of the 1997 Tax Code and related
statutes.
(2) Revenue Memorandum Orders (RMOs) are issuances that
provide directives or instructions, prescribe guidelines, and outline
processes, operations, activities, workflows, methods and
procedures necessary in the implementation of stated policies, goals,
objectives, plans and programs of the BIR in all areas of operations,
except auditing.
(3) Revenue Memorandum Rulings (RMRs) are rulings, opinions
and interpretations of the CIR with respect to the provisions of the
1997 Tax Code and other tax laws, as applied to a specific set of
facts, with or without established precedents, and which the CIR may
issue from time to time for the purpose of providing taxpayers
guidance on the tax consequences in specific situations. BIR
Rulings, therefore, cannot contravene duly issued RMRs. Otherwise,
such BIR Rulings are null and void ab initio.
(4) Revenue Memorandum Circular (RMCs) are issuances that
publish pertinent and applicable portions, as well as amplifications, of
laws, rules, regulations and precedents issued by the BIR and other
agencies/offices.
(5) Revenue Bulletins (RBs) refer to periodic issuances, notices
and official announcements of the CIR that consolidate the BIR’s
position on certain specific issues of law or administration in relation
1
Definitions of the various revenue issuances were lifted from the official website of
the BIR.
to the provisions of the 1997 Tax Code, relevant tax laws and other
issuances for the guidance of the public.
(6) BIR Rulings are the official position of the BIR to queries raised
by taxpayers and other stakeholders relative to clarification and
interpretation of tax laws.
Kinds of Rulings ( RAO No. 01-03)
1. Rulings of first impression – rulings, opinions, and
interpretations of the CIR with respect to the
NIRC and other tax laws without extablished
precedent, and which are issued in response to a
specific request for ruling filed by a taxpayer with the
BIR; includes the reversal, modification or revocation
of any existing ruling. The power to issue Ruling of
first impression can not be delegated.
2. Rulings with established precedents – reiteration of previous
rulings, opinions and interpretations of the CIR as delegated
under RMC NO. 37-07
Rule making authority of the Secretary of Finance
1. The Secretary of Finance has the power to reverse , revise
or modify rulings that are adverse to the Taxpayer
2. The Secretary of Finance upon recommendation of the CIR
shall promulgate all needful rules and regulations
Q: Discuss the rule on non-retroactivity of revenue issuances or
rulings.
* In ABS-CBN Broadcasting Corporation v. Court of Tax Appeals,
petitioner was engaged in the business of telecasting local and
foreign films acquired from foreign corporations not engaged in trade
or business within the Philippines, for which petitioner paid film
rentals after withholding income tax. Pursuant to General Circular
16
No. V-334, petitioner withheld the amount of 30% of one half of film
rentals paid by it to the foreign corporations. The last year that
petitioner withheld taxes pursuant to the foregoing circular was in
1968. In 1971, RMC No. 4-71 was issued revoking General Circular
No. V-334 and now holding that the tax should be based on gross
income without deduction whatever. Later, the CIR issued an
assessment against petitioner for deficiency withholding income tax
on the remitted film rentals for the years 1965 through 1968. The
Supreme Court ruled in this sense: “The prejudice to petitioner of the
retroactive application of [RMC No. 4-71] is beyond question. It was
issued only in 1971, or three years after 1968, the last year that
petitioner had withheld taxes under General Circular No. V-334. xxx
Petitioner was no longer in a position to withhold taxes due from
foreign corporations because it had already remitted all film rentals
and no longer had any control over them when the new Circular was
issued.” Hence, RMC No. 4-71 was not given retroactive application.
[ABS-CBN Broadcasting Corporation v. Court of Tax Appeals, GR
No. L-52306, 12 October 1981.]
** In CIR v. Burroughs Limited, on 14 March 1979, respondent paid
the 15% branch profit remittance tax based on the amount of its
profits before tax. Subsequently and relying on the BIR Ruling dated
21 January 1980, respondent filed a claim for tax refund or credit of
allegedly overpaid branch profit remittance tax. Pursuant to the 1980
BIR Ruling, branch profit remittance tax shall be based on the profit
actually remitted abroad and not on the total branch profits out of
which the remittance is to be made. The CIR argued that respondent
was no longer entitled to a refund because RMC No. 8-82 dated 17
March 1982 had revoked and/or repealed the 1980 BIR Ruling, to
wit: “Considering that the 15% branch profit remittance tax is
imposed and collected at source, necessarily the tax base should be
the amount actually applied for by the branch with the Central Bank
of the Philippines as profit to be remitted abroad.” The Supreme
Court cited Section 327 (now Section 246 of the 1997 Tax Code) in
holding that RMC No. 8-82 could not be given retroactive effect. “The
prejudice that would result to [respondent] by a retroactive
application of [RMC No. 8-82] is beyond question for it would be
deprived of the substantial amount of P172,058.90.”
[CIR v. Burroughs Limited, GR No. L-66653, 19 June 1986.]
*** In CIR v. Court of Appeals, Alhambra Industries, Inc. was
engaged in the manufacture and sale of cigar and cigarette products.
The present dispute arose from the discrepancy in the taxable base
on which the excise tax payable on Alhambra’s products was to
apply, on account of two incongruous BIR Rulings: (1) BIR Ruling
No. 473-88 dated 4 October 1988 which excluded the VAT from the
tax base in computing the 15% excise tax due, and (2) BIR Ruling
No. 017-91 dated 11 February 1991 which included back the VAT in
computing the tax base for purposes of the 15% ad valorem tax. The
Supreme Court said that Alhambra would be prejudiced by the
retroactive application of the revocation, i.e., BIR Ruling No. 017-91,
as Alhambra would be assessed deficiency excise tax. “[R]ulings and
circulars, rules and regulations promulgated by the Commissioner of
Internal Revenue would have no retroactive application if to so apply
them would be prejudicial to the taxpayers.”
[CIR v. Court of Appeals, GR No.117982, 6 February 1997.]
**** In CIR v. Benguet Corporation, respondent sold gold to the
Central Bank during the period covering 1 January 1988 to 31 July
1989. Respondent relied on VAT Ruling No. 378-88 dated 28 August
1988 and VAT Ruling RMC No. 59-88 dated 14 December 1988 that
such sales were zero-rated. Later, VAT Ruling No. 008-92 dated 23
January 1992 was issued, revoking the grant of zero-rating status to
the sales of gold to the Central Bank and applying a new and
contrary position that such sales were now subject to 10%. The
Supreme Court held that to apply VAT Ruling No. 008-92
retroactively was clearly inconsistent with justice and the elementary
requirements of fair play. “[R]ulings and circulars, rules and
regulations promulgated by the Commissioner of Internal Revenue
would have no retroactive application if to so apply them would be
prejudicial to the taxpayers.”
[CIR v. Benguet Corporation, GR No. 145559, 14 July 2006.]
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***** In CIR v. Philippine Health Care Providers, Inc., VAT Ruling No.
231-88 dated 8 June 1988 was issued to respondent stating that as
a provider of medical services, it was exempt from the VAT coverage.
The 1997 Tax Code became effective on 1 January 1998, which
exempted from VAT only medical, dental, hospital and veterinary
services (as opposed to services of arranging for the same). Hence,
the 1997 Tax Code effectively imposed VAT on the services provided
by respondent. Later, respondent received an assessment for
deficiency VAT and documentary stamp tax for taxable years 1996
and 1997. The Supreme Court confirmed that respondent believed in
good faith that it was VAT exempt for the subject taxable years on
the basis of VAT Ruling No. 231-88. The CIR was precluded from
adopting a position contrary to one previously taken where injustice
would result to the taxpayer.
[CIR v. Philippine Health Care Providers, Inc., GR No. 168129, 24
April 2007.]
Q: Are there exceptions to the rule on non-retroactivity of revenue
issuances or rulings?
* In CIR v. Court of Appeals, Alhambra Industries, Inc. was engaged
in the manufacture and sale of cigar and cigarette products. The
present dispute arose from the discrepancy in the taxable base on
which the excise tax payable on Alhambra’s products was to apply,
on account of two incongruous BIR Rulings: (1) BIR Ruling No. 473-
88 dated 4 October 1988 which excluded the VAT from the tax base
in computing the 15% excise tax due, and (2) BIR Ruling No. 017-91
dated 11 February 1991 which included back the VAT in computing
the tax base for purposes of the 15% ad valorem tax. The Supreme
Court said that Alhambra would be prejudiced by the retroactive
application of the revocation, i.e., BIR Ruling No. 017-91, as
Alhambra would be assessed deficiency excise tax. “[R]ulings and
circulars, rules and regulations promulgated by the Commissioner of
Internal Revenue would have no retroactive application if to so apply
them would be prejudicial to the taxpayers.”
Additionally, the CIR imputed bad faith on the part of Alhambra. It
was the CIR’s position that the rule on non-retroactivity of rulings
would not apply where the taxpayer acted in bad faith. On this point,
the Supreme Court held that it found no convincing evidence to show
that Alhambra’s implementation of the first ruling was attended with
bad faith. To the contrary, the Supreme Court said, as a sign of good
faith, Alhambra immediately reverted to the computation mandated
by the new ruling upon knowledge of its issuance. “Bad faith imports
a dishonest purpose or some moral obliquity and conscious doing of
wrong. It partakes of the nature of fraud; a breach of a known duty
through some motive of interest or ill will.”
[CIR v. Court of Appeals, GR No.117982, 6 February 1997.]
** In CIR v. Philippine Health Care Providers, Inc., VAT Ruling No.
231-88 dated 8 June 1988 was issued to respondent stating that as
a provider of medical services, it was exempt from the VAT coverage.
The 1997 Tax Code became effective on 1 January 1998, which
exempted from VAT only medical, dental, hospital and veterinary
services (as opposed to services of arranging for the same). Hence,
the 1997 Tax Code effectively imposed VAT on the services provided
by respondent. Later, respondent received an assessment for
deficiency VAT and documentary stamp tax for taxable years 1996
and 1997. The Supreme Court confirmed that respondent believed in
good faith that it was VAT exempt for the subject taxable years on
the basis of VAT Ruling No. 231-88. The CIR was precluded from
adopting a position contrary to one previously taken where injustice
would result to the taxpayer.
Additionally, the CIR imputed bad faith on the part of respondent. It
was the CIR’s position that the rule on non-retroactivity of rulings
would not apply where the taxpayer deliberately misstated or omitted
material facts from his return or any document required of him by the
CIR. On this point, the Supreme Court found that in securing VAT
Ruling No. 231-88, the failure of respondent to refer to itself as a
health maintenance organization was not an indication of bad faith or
a deliberate attempt to make false representations. The High Court
recognized that when VAT Ruling No. 231-88 was issued in
respondent’s favor, the term “health maintenance organization” was
18
yet unknown or had no significance for taxation purposes. (The term
was first introduced upon the passage of RA No. 7875, otherwise
known as The National Health Insurance Act of 1995.) Respondent,
therefore, believed in good faith that it was VAT exempt for the
taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88.
[CIR v. Philippine Health Care Providers, Inc., GR No. 168129, 24
April 2007.]
*** In Philippine Bank of Communications v. CIR, petitioner relied on
RMC No. 7-85 which stated that overpaid income taxes were not
covered by the two-year prescriptive period under the 1977 Tax Code
and that taxpayers could file a claim for tax refund or credit for the
excess quarterly income tax with the BIR within 10 years under
Article 1144 of the Civil Code. The CIR contended that petitioner’s
right to file its claim had already prescribed. On the other hand,
petitioner argued that the CIR was barred from asserting a position
contrary to RMC No. 7-85 if it would result to injustice to taxpayers,
citing the rule on non-retroactivity of rulings. At the outset, the
Supreme Court held that RMC No. 7-85 erroneously interpreted
Section 230 of the 1977 Tax Code. “Article 8 of the Civil Code
recognizes judicial decisions applying or interpreting statutes as part
of the legal system of the country. But administrative decisions do not
enjoy that level of recognition. xxx For there are no vested rights to
speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place
the Government in estoppel to correct or overrule the same.
Moreover, the non-retroactivity of rulings by the Commissioner of
Internal Revenue is not applicable in this case because the nullity of
RMC No. 7-85 was declared by respondent courts and not by the
Commissioner of Internal Revenue.”
[Philippine Bank of Communications v. CIR, GR No. 112024, 28
January 1999.]
Q: May revenue issuances change or modify the laws they
implement?
* On 22 August 1986, EO No. 41 was promulgated declaring a one-
time tax amnesty on unpaid income taxes, later amended to include
estate and donor’s taxes and business taxes, for the taxable years
1981 to 1985. ROH Auto Products Philippines, Inc. filed its tax
amnesty returns and paid the corresponding amnesty taxes due. In
view of this, ROH sought the cancellation of the assessments that
the CIR previously issued against it. The request was denied by the
CIR on the ground that RMO No. 4-87 dated 9 February 1987,
implementing EO No. 41, had construed the amnesty coverage to
include only assessments issued by the CIR after the promulgation
of the law on 22 August 1986 and not to assessments theretofore
made. Did the CIR’s position coincide with the meaning and intent of
EO No. 41? The Supreme Court answered in the negative. “If, as the
Commissioner argues, Executive Order No. 41 had not been
intended to include 1981-1985 tax liabilities already assessed
(administratively) prior to 22 August 1986, the law could have simply
so provided in its exclusionary clauses. It did not. The conclusion is
unavoidable, and it is that the executive order has been designed to
be in the nature of a general grant of tax amnesty subject only to the
cases specifically excepted by it.”
It must be remembered that: “The authority of the [Secretary of
Finance], in conjunction with the Commissioner of Internal Revenue,
to promulgate all needful rules and regulations for the effective
enforcement of internal revenue laws cannot be controverted.
Neither can it be disputed that such rules and regulations, as well as
administrative opinions and rulings, ordinarily should deserve weight
and respect by the courts. Much more fundamental than either of the
above, however, is that all such issuances must not override, but
must remain consistent and in harmony with, the law they seek to
apply and implement. Administrative rules and regulations are
intended to carry out, neither to supplant nor to modify, the law.”
[CIR v. Court of Appeals, GR No. 108358, 20 January 1995.]
** In Philippine Bank of Communications v. CIR, petitioner relied on
RMC No. 7-85 which stated that overpaid income taxes were not
covered by the two-year prescriptive period under the 1977 Tax Code
and that taxpayers could file a claim for tax refund or credit for the
19
excess quarterly income tax with the BIR within 10 years under
Article 1144 of the Civil Code. On the validity of RMC No. 7-85, the
Supreme Court held that when RMC No. 7-85 changed the
prescriptive period of 2 years to 10 years on claims for tax refund or
credit of excess quarterly income taxes, such circular created a clear
inconsistency with Section 230 of the 1977 Tax Code. “In so doing,
the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.” Moreover, “courts will
not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply
and implement.”
[Philippine Bank of Communications v. CIR, GR No. 112024, 28
January 1999.]
Q: What is the significance of revenue issuances?
* The case of Alexander Howden & Co., Ltd. v. CIR was decided in
1965 and dealt with the taxability of reinsurance premiums.
Commonwealth Insurance Co., a domestic corporation, entered into
reinsurance contracts with 32 British insurance companies not
engaged in trade or business in the Philippines, whereby the former
agreed to cede to them a portion of the premiums on insurances on
fire, marine and other risks it had underwritten in the Philippines.
(Alexander Howden & Co., Ltd. represented the aforesaid British
insurance companies.) Pursuant to the contracts, Commonwealth
Insurance remitted to Alexander Howden a certain sum of money as
reinsurance premiums. On behalf of Alexander Howden,
Commonwealth Insurance filed an income tax return for the calendar
year 1951. Later, Alexander Howden filed a claim for tax refund or
credit, invoking a BIR Ruling dated 8 December 1953. Said ruling
stated that it exempted from withholding tax reinsurance premiums
received from domestic insurance companies by foreign insurance
companies not authorized to do business in the Philippines.
(Alexander Howden’s brief cited other rulings of the same official
thereby attempting to show that the prevailing administrative
interpretation was that reinsurance premiums ceded to nonresident
foreign insurance premiums were exempted from withholding tax.)
The Supreme Court first tackled the taxability of the reinsurance
premiums. It ruled that the reinsurance premiums were considered
derived from sources within the Philippines and hence taxable. On
the evidentiary weight of the BIR rulings cited by Alexander Howden
in support of its claim for tax refund or credit, the Supreme Court had
the following to say: “Secondly, the administrative rulings of the
Commissioner of Internal Revenue relied upon by the taxpayers
were only contained in letters to taxpayers and never published, so
that the Legislature is not presumed to know said rulings. Thirdly, in
the case on which [Alexander Howden relies], Interprovincial
Autobus Co., Inc. vs. Collector of Internal Revenue, L-4671, January
31, 1956, what was declared to have acquired the force or effect of
law was a regulation promulgated to implement a law; whereas, in
this case, what [Alexander Howden] would seek to have the force of
law are opinions on queries submitted.”
[Alexander Howden & Co., Ltd. v. CIR, GR No. L-19392, 14 April
1965.]
** In Arches v. Bellosillo, an assessment for deficiency income and
tax residence taxes was issued against petitioner for the taxable year
1953. Thereafter, the CIR filed suit in the municipal court of Roxas
City to recover said deficiency taxes. Petitioner sought the dismissal
of the complaint on the ground that it did not expressly show the
approval of the CIR as required by Section 308 of the old Tax Code.
The Supreme Court held that the express approval of the CIR was
not necessary, relying on Memorandum Order No. V-634, approved
by the Secretary of Finance, wherein the CIR’s functions regarding
the administration and enforcement of revenue laws and regulations
– powers broad enough to cover the approval of court actions as
required in Section 308 of the old Tax Code – were expressly
delegated to the Regional Directors. The High Court stated that
Memorandum Order No. V-634, as a regulation whose issuance was
authorized by statute, had the force and effect of law.
[Arches v. Bellosillo, GR No. L-23534, 16 May 1967.]
CIR v. Solidbank Corporation, GR No. 148191, 25 November 2003.
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Q: What are tax treaties and international agreements?
* The main issue in CIR v. John Gotamco & Sons, Inc. was whether
respondent was liable to pay 3% contractor’s tax on the gross
receipts it realized from the construction of the World Health
Organization office building in Manila. The WHO, as an international
organization, enjoyed privileges and immunities defined more
specifically in the Host Agreement between the Republic of the
Philippines and the WHO. Section 11 of the Agreement provided:
“the Organization, its assets, income and other properties shall be:
(a) exempt from all direct and indirect taxes. It is understood,
however, that the Organization will not claim exemption from taxes
which are, in fact, no more than charges for public utility services.”
The CIR questioned the entitlement of the WHO to tax exemption.
He contended, among others, that the Host Agreement was null and
void, not having been ratified by the Philippine Senate as required by
the Constitution. On this point, the Supreme Court held that the Host
Agreement was a valid and enforceable international agreement (as
opposed to a treaty). “While treaties are required to be ratified by the
Senate under the Constitution, less formal types of international
agreements may be entered into by the Chief Executive and become
binding without the concurrence of the legislative body. The Host
Agreement comes within the latter category; it is a valid and binding
international agreement even without the concurrence of the
Philippine Senate.” Moreover: “The privileges and immunities
granted to the WHO under the Host Agreement have been
recognized by this Court as legally binding on Philippine authorities.”
[CIR v. John Gotamco & Sons, Inc., GR No. L-31092, 27 February
1987.]
** In CIR v. S.C. Johnson and Son, Inc., SC Johnson Phils. entered
into a license agreement with SC Johnson US pursuant to which SC
Johnson Phils. was granted the right to use the trademark, patents
and technology owned by SC Johnson US. For the use of the
trademark or technology, SC Johnson Phils. was obliged to pay SC
Johnson US royalties based on a percentage of net sales and
subjected the same to 25% withholding tax on royalty payments.
Later, SC Johnson Phils. filed with the BIR International Affairs
Division a claim for refund of overpaid withholding tax on royalties.
SC Johnson Phils. invoked the application of the most favored nation
clause of the RP-US Tax Treaty in relation to the RP-West Germany
Tax Treaty. Hence, according to SC Johnson Phils., the royalty
payments should have been subjected to a reduced/preferential
withholding tax rate of 10%.
“The purpose of a most favored nation clause is to grant to the
contracting party treatment less favorable than that which has been
or may be granted to the ‘most favored’ among other countries. The
most favored nation clause is intended to establish the principle of
equality of international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges accorded
by either party to those of the most favored nation. The essence of
the principle is to allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in
the tax treaty under which the taxpayer is liable.”
Here, the Supreme Court found that based on the RP-US and RP-
West Germany Tax Treaties, there was no payment of taxes on
royalties under similar circumstances that would warrant the
application of the most favored nation clause. The RP-US Tax Treaty
did not give a matching tax credit of 20% for taxes paid to the
Philippines on royalties as allowed under the RP-West Germany Tax
Treaty. Hence, SC Johnson Phils. could not be deemed entitled to
the preferential tax rate of 10% granted under the RP-West Germany
Tax Treaty.
The High Court likewise had occasion to explain the nature of tax
treaties and international agreements. The Philippines is party to a
number of bilateral treaties entered into for the avoidance of double
taxation. “The purpose of these international agreements is to
reconcile the national fiscal legislations of the contracting parties in
order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax conventions are drafted
21
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.”
[CIR v. S.C. Johnson and Son, Inc., GR No. 127105, 25 June 1999.]

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