personal and additional exemptions for individual
XXII. SOURCES OF TAX LAWS
PART 2
INCOME TAXATION
I. KINDS OF TAXABLE INCOME OR GAIN
II. GROSS INCOME
III. SITUS OF INCOME (Section 42)
IV. EXCLUSIONS FORM GROSS INCOME
V. ALLOWABLE DEDUCTIONS
1. Deduction vs Exemption
2. Deduction vs Exclusion
VI. BASIC PRINCIPLES GOVERNING
DEDUCTIONS
VII. KINDS OF ALLOWABLE DEDUCTIONS
1. Itemized deductions (Sec. 34A-K and
34M)
2. Optional Standard Deduction of forty
(40%) of the Gross Income.
VIII. NON-DEDUCTIBLE ITEMS (Sec. 36A and
36B)
Jurisprudence:
Soriano v Secretary of Finance, GR No.
184450. January 24, 2017 (En Banc)
NATURE OF THE CASE:
Before us are consolidated Petitions for
Certiorari, Prohibition and Mandamus, under
Rule 65 of the 1997 Revised Rules of Court.
These Petitions seek to nullify certain provisions
of Revenue Regulation No. (RR) 10-2008. The
RR was issued by the Bureau of Internal
Revenue (BIR) on 24 September 2008 to
implement the provisions of Republic Act No.
(R.A.) 9504. The law granted, among others,
income tax exemption for minimum wage
earners (MWEs), as well as an increase in
taxpayers.
Petitioners assail the subject RR as an
unauthorized departure from the legislative
intent of R.A. 9504. The regulation allegedly
restricts the implementation of the MWEs'
income tax exemption only to the period starting
from 6 July 2008, instead of applying the
exemption to the entire year 2008.
FACTS:
On 17 June 2008, R.A. 9504 entitled "An Act
Amending Sections 22, 24, 34, 35, 51, and 79 of
Republic Act No. 8424, as Amended, Otherwise
Known as the National Internal Revenue Code
of 1997," was approved and signed into law by
President Arroyo. The following are the salient
features of the new law:
 It increased the basic personal
exemption from P20,000 for a single
individual, P25,000 for the head of the
family, and P32,000 for a married
individual to P50,000 for each individual.
It increased the additional exemption for
each dependent not exceeding four from
P8,000 to P25,000.
 It raised the Optional Standard
Deduction (OSD) for individual
taxpayers from 10% of gross income to
40% of the gross receipts or gross
sales.
 It introduced the OSD to corporate
taxpayers at no more than 40% of their
gross income.
 It granted MWEs exemption from
payment of income tax on their minimum
wage, holiday pay, overtime pay, night
shift differential pay and hazard pay.
On 24 September 2008, the BIR issued RR 10-
2008, dated 08 July 2008, implementing the
provisions of R.A. 9504. The relevant portions of
the said RR read as follows:
For the year 2008, however, being the initial
year of implementation of R.A. 9504, there shall
be a transitory withholding tax table for the
period from July 6 to December 31, 2008 (Annex
"D") determined by prorating the annual
personal and additional exemptions under R.A.
9504 over a period of six months. Thus, for
individuals, regardless of personal status, the
prorated personal exemption is P25,000 and for
each qualified dependent child (QDC),
P12,500.
1

Then Senator Manuel Roxas, as principal author
of R.A. 9504, also argues for a full taxable year
treatment of the income tax benefits of the new
law. He relies on what he says is clear legislative
intent in his "Explanatory Note of Senate Bill No.
103," he stresses "the very spirit of enacting the
subject tax exemption law" as follows:
With the poor, every little bit
counts, and by lifting their
burden of paying income tax, we
give them opportunities to put
their money to daily essentials
as well as savings. Minimum
wage earners can no longer
afford to be taxed and to be
placed in the cumbersome
income tax process in the same
manner as higher-earning
employees. It is our obligation to
ease their burdens in any way
we can. (Emphasis Supplied)
Apart from raising the issue of legislative intent,
Senator Roxas brings up the following legal
points to support his case for the full-year
application of R.A. 9504's income tax benefits.
He says that the pro rata application of the
assailed RR deprives MWEs of the financial
relief extended to them by the law; that Umali v.
Estanislao serves as jurisprudential basis for his
position that R.A. 9504 should be applied on a
full-year basis to taxable year 2008; and that the
social justice provisions of the 1987 Constitution,
particularly Articles II and XIII, mandate a full
application of the law according to the spirit of
R.A. 9504.
The Office of the Solicitor General (OSG) filed a
Consolidated Comment and took the position
that the application of R.A. 9504 was intended to
be prospective, and not retroactive. This was
supposedly the general rule under the rules of
statutory construction: law will only be applied
retroactively if it clearly provides for retroactivity,
which is not provided in this instance.
The OSG contends that Umali v. Estanislao is
not applicable to the present case. It explains
that R.A. 7167, the subject of that case, was
intended to adjust the personal exemption levels
to the poverty threshold prevailing in 1991.
Hence, the Court in that case held that R.A.
7167 had been given a retroactive effect.
The OSG further argues that the legislative
intent of non-retroactivity was effectively
confirmed by the "Conforme" of Senator
Escudero, Chairperson of the Senate Committee
on Ways and Means, on the draft revenue
regulation that became RR 10-2008.
ISSUE:
Whether or not the increased personal and
additional exemptions provided by R.A. 9504
should be applied to the entire taxable year 2008
or prorated, considering that R.A. 9504 took
effect only on 6 July 2008.
RULING:
1. The personal and additional exemptions
established by R.A. 9504 should be applied to
the entire taxable year 2008. Umali is applicable.
Umali v. Estanislao supports this Court's stance
that R.A. 9504 should be applied on a full-year
basis for the entire taxable year 2008. Moreover,
the Court can not lose sight of the fact that these
personal and additional exemptions are fixed
amounts to which an individual taxpayer is
entitled, as a means to cushion the devastating
effects of high prices and a depreciated
purchasing power of the currency. In the end, it
is the lower-income and the middle-income
groups of taxpayers (not the high-income
taxpayers) who stand to benefit most from the
increase of personal and additional exemptions
provided for by Rep. Act 7167. To that extent,
the act is a social legislation intended to alleviate
in part the present economic plight of the lower
income taxpayers. It is intended to remedy the
inadequacy of the heretofore existing personal
and additional exemptions for individual
taxpayers.
Madrigal v. Raffety, GR No. 12287, August 7,
1918, 38 Phil. 415
FACTS:
Vicente Madrigal filed his total net income for the
year 1914, the sum of 296,302.73. He
subsequently filed a claim that the net income he
declared is the income of the conjugal property
and it should be divided by two in computing and
assessing the additional income tax.
2
The Attorney-general ruled in favor of Madrigal,
but the US CIR reversed the opinion of the
Attorney-general and decided against Madrigal.
Payment under protest was made by
Madrigal and subsequently filed an action
against the CIR and deputy collector of IR
for the recovery of 3,786.08 alleged to
have been wrongfully and illegally
assessed and collected by said
defendants. Madrigal contented that the
computation and assessment should have
been 2,921.09, which taken together
amounts to a total of 5,842.18 instead of
the 9,668.21 wrongfully and illegally
assessed by the CIR.
ISSUE:
Whether or not the additional income tax should
be divided by two because of the conjugal
partnership between the spouses.
RULING: NO.
The Income Tax Law as the name implies, taxes
upon income and not upon capital and property.
The essential difference between capital and
income is that capital is a fund, income is a flow.
A tax on income is not a tax on property.
"Income" can be defined as profits or gains.
Spanish Authorities have been cited by the SC
which states that prior to liquidation of the
conjugal partnership, the interest of the wife is
an interest inchoate, a mere expectancy, which
constitutes neither legal nor an equitable estate
and does not ripen into title until there appears
that there are assets in the community as a
result of liquidation and settlement.
In the case at bar, Susana Paterno has an
inchoate right in the property of her husband
during the life of the conjugal partnership. She
has an interest in the ultimate property
rights and ultimate ownership acquired as
income after such income has become capital.
Susana Paterno has no absolute right to one-
half the income of the conjugal partnership and
cannot make a separate return in order to
receive the benefit of the exemption which would
arise by reason of the additional tax as she has
no estate and income, actually and legally
vested in her and entirely distinct from her
husband's property, the income cannot be
properly be considered the separate income of
the wife for the purposes of the additional tax.
Moreover, the Income Tax Law does not look on
the spouses as individual partners in an ordinary
partnership.
Judgment affirmed.
Commissioner of Internal revenue vs.
Filinvest Development Corporation, GR No.
167689, July 19, 2011
FACTS:
Respondent Filinvest Development Corporation
(FDC) owns 80% of the outstanding shares of
respondent Filinvest Alabang Inc. as well as
67.42% of the outstanding shares of Filinvest
Land, Inc. (FLI). On Nov 1996, FDC and FAI
entered into a deed of exchange with FLI
whereby the former both transferred in favor of
the latter parcels of land appraised at 4.3 Billion
Pesos. In exchange of said parcels intended to
facilitate development of medium-rise residential
and commercial buildings, 463M shares of stock
of FLI were issued to FDC and FAI. As a result
of the exchange, FLI’s ownership structure was
changed wherein FDC received 61.03% of the
shares after the exchange, FAI owns 9.96% and
others receiving 29.01%.
On Jan 1997, FLI requested a ruling from the
BIR to the effect that no gain or loss should be
recognized in the aforesaid transfer of real
properties. Action on the request, BIR issued its
ruling dated Feb 1997 finding that the exchange
is among those contemplated under Sec.
34(c)(2) of the National Internal Revenue Code
(NIRC) which provides that “no gain or loss shall
be recognized if property is transferred to a
corporation by a person in exchange for stock in
such corporation of which as a result of such
exchange said person, alone or together with
others, not exceeding four (4) persons, gains
control of said corporation.” With this ruling, FLI,
FDC and FAI complied with all the requirements
imposed in the ruling.
On various dates during the years 1996 and
1997, in the meantime, FDC also extended
advances in favor of its affiliates namely FAI,
FLI, Davao Sugar Central Corporation and
Filinvest Capital Inc (FCI). The advances
amounted to 2.5B in 1996 and 3.3B in 1997.
FDC also entered into a shareholders’
agreement w/ RHPL on a joint venture for the
creation of Filinvest Asia Corporation.
3

On Jan 2000, FDC received from the BIR a
formal notice of demand to pay deficiency
income taxes and DST plus interests and
penalties based on several assessment notices.
These were assessed on the taxable gain
supposedly realized from the deed of exchange,
shareholder’s agreement executed with RHPL
as well as the imposable taxes on the advance
FDC extended to its affiliates.
FDC and FAI filed their respective requests for
reconsideration/protest before the BIR on the
ground that the deficiency income and DST
assessed by the BIR were bereft of legal basis
and contrary to the BIR ruling which held that no
taxable gain should have been assessed from
the subject Deed of Exchange since FDC and
FAI collectively gained further control of FLI as a
consequence of the exchange. CIR failed to
resolve this hence the petition for review before
the CTA.
The CTA rendered its decision cancelling the
deficiency income tax and documentary stamp
taxes assessed against FDC and FAI for the
years 1996 and 1997 on the ground that the
equity participation of FDC and FAI in FLI
rendered the gain derived from the exchange
tax-free. However, it maintained the validity of
the CIR’s collection of taxes on the cash
advances of FDC to its affiliates pursuant to the
Commissioner’s authority under Sec. 43 of the
NIRC in order to forestall tax evasion.
CIR elevated the case to the CA where it upheld
the decision of the CTA. Hence, the present
petition.
ISSUE:
1. Whether the CA erred in holding that the
advances extended by respondent to its
affiliates are not subject to income tax
2. Whether the CA committed grave abuse
of discretion in holding that the
exchange of shares of stock among
FDC, FAI and FLI met all the
requirements for the “non-recognition of
taxable gain” under section 34(c)(2) of
the old NIRC now Sec. 40(c)(2) of the
new NIRC.
3. Whether the CA erred in holding that the
letters of instruction or cash vouchers
extended by FDC to its affiliates are not
deemed loan agreements subject to
DST under Sec. 180 of the NIRC
4. Whether the CA erred in holding that
gain on dilution as a result of the
increase in the value of FDC’s
shareholdings in FAC is not taxable
RULING:
1. No, the CA was correct in holding that
the advances are not subject to income
tax.
CIR argues that theoretical interests can be
imputed on the advances FDC extended to its
affiliates as it is covered under its powers of
distribution, apportionment and allocation of
gross income and deductions under Sec. 43 of
the 1993 NIRC and Sec. 179(b) of Revenue
Regulation No. 2. However, SC found that
subject provisions does not include the power to
impute “theoretical interests” to the controlled
taxpayer’s transactions. There must be proof of
the actual or, at the very least, probable receipt
by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or
allocated by the CIR.
Art. 1956 of the NCC provides that no interest
shall be due unless it has been expressly
stipulated in writing . Considering that taxes,
being burdens, are not to be presumed beyond
what the applicable statute expressly and clearly
declares, the rule is likewise settled that tax
statutes must be construed strictly against the
government and liberally in favor of the taxpayer.
Accordingly, the general rule of requiring
adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and
the provisions of a taxing act are not to be
extended by implication. While it is true that
taxes are the lifeblood of the government, it has
been held that their assessment and collection
should be in accordance with law as any
arbitrariness will negate the very reason for
government itself.
2. No, CA was correct in upholding the BIR
Ruling reiterating the compliance of FDC, FAI
and FLI of the requirements for “non-recognition
of taxable gain.” under Sec. 34(c)(2) of NIRC.
The requisites for the non-recognition of gain or
loss under the foregoing provision are as
follows: (a) the transferee is a corporation; (b)
4
the transferee exchanges its shares of stock for
property/ies of the transferor; (c) the transfer is
made by a person, acting alone or together with
others, not exceeding four persons; and, (d) as a
result of the exchange the transferor, alone or
together with others, not exceeding four, gains
control of the transferee.
Acting on the 13 January 1997 request filed by
FLI, the BIR had, in fact, acknowledged the
concurrence of the foregoing requisites in the
Deed of Exchange the former executed with
FDC and FAI by issuing the BIR Ruling. With the
BIR's reiteration of said ruling upon the request
for clarification filed by FLI, there is also no
dispute that said transferee and transferors
subsequently complied with the requirements
provided for the non-recognition of gain or loss
from the exchange of property for tax, as
provided under Section 34 (c) (2) of the 1993
NIRC.
3. Yes, the LOIs and cash vouchers are
deemed as loan agreements subject to DST
under Sec. 180 of the NIRC.
Section 180 of the 1993 NIRC read in
conjunction with Section 173 applies to "all loan
agreements, whether made or signed in the
Philippines, or abroad when the obligation or
right arises from Philippine sources or the
property or object of the contract is located or
used in the Philippines.” The terms 'Loan
Agreement" under Section 180 and "Mortgage'
under Section 195, both of the Tax Code, as
amended, generally refer to distinct and
separate instruments. A loan agreement shall be
taxed under Section 180, while a deed of
mortgage shall be taxed under Section 195."
Also, in cases where no formal agreements or
promissory notes have been executed to cover
credit facilities, the documentary stamp tax shall
be based on the amount of drawings or
availment of the facilities, which may be
evidenced by credit/debit memo, advice or
drawings by any form of check or withdrawal
slip, under Section 180 of the Tax Code.
Applying the aforesaid provisions to the case at
bench, the instructional letters as well as the
journal and cash vouchers evidencing the
advances FDC extended to its affiliates in 1996
and 1997 qualified as loan agreements upon
which documentary stamp taxes may be
imposed. In keeping with the caveat attendant to
every BIR Ruling to the effect that it is valid only
if the facts claimed by the taxpayer are correct,
the SC found that CA erred in utilizing a prior
ruling which could be invoked only by the
taxpayer who sought the same.
4. No, CA was correct in holding that gain
on dilution as a result of the increase in the
value of FDC’s shareholdings in FAC is not
taxable
Alongside the principle that tax revenues are not
intended to be liberally construed, the rule is
settled that the findings and conclusions of the
CTA are accorded great respect and are
generally upheld by the SC, unless there is a
clear showing of reversible error.
Absent showing of such error here, we find no
strong and cogent reasons to depart from said
rule with respect to the CTA's finding that no
deficiency income tax can be assessed on the
gain on the supposed dilution and/or increase in
the value of FDC's shareholdings in FAC which
the CIR, at any rate, failed to establish. Bearing
in mind the meaning of "gross income" as above
discussed, it cannot be gainsaid, even then, that
a mere increase or appreciation in the value of
said shares cannot be considered income for
taxation purposes.
CIR’s petition is partially granted.
Baier-Nickel v CIR, GR No. 156305, February
17, 2003
FACTS:
Baier-Nickel, a non-resident German citizen, is
the President of Jubanitex, Inc., a domestic
corporation engaged in manufacturing,
marketing, acquiring, importing and exporting
and selling embroidered textile products.
Through its General Manager, the corporation
engaged the services of Baier-Nickel as
commission agent, who will receive 10% sales
commission on all sales abroad actually
concluded and collected through her efforts. In
1995, Baier-Nickel received commission income,
from which Jubanitex withheld 10% and remitted
to the BIR. Baier-Nickel filed her income tax
return on October 17, 1997. On April 14, 1998,
she filed a claim for refund, contending that her
commission income is not taxable in the
Philippines because it was compensation for her
marketing services rendered in Germany and
not compensation income as President of
5
Jubanitex. After all, she came to and stayed in
the Philippines only for short periods.
ISSUE:
Whether or not Non-resident aliens engaged in
trade or business, are subject to Philippine
income tax on their income received from all
sources within the Philippines.
RULING:
The underlying theory is that the consideration
for taxation is protection of life and property and
that the income rightly to be levied upon to
defray the burdens of the Government is that
income which is created by activities and
property protected by the Government or
obtained by persons enjoying that protection.
The important factor, therefore, which
determines the source of income of personal
services is not the residence of the payor, or the
place where the contract for service is entered
into, or the place of payment, but the place
where the services were actually rendered.
There are only two ways by which the President
and other members of the Board can be granted
compensation apart from reasonable per diems:
(1) when there is a provision in the by-laws fixing
their compensation; and
(2) when the stockholders agree to give it to
them. If none of these conditions are present,
commission income cannot be automatically
attributed to petitioner’s position in the company.
CIR v Baier-Nickel, GR No. 153793, August
29, 2006
FACTS:
Juliane Baier-Nickel, a non-resident German
citizen, is the President of JUBANITEX, Inc., a
domestic corporation engaged in
"manufacturing, marketing on wholesale only,
buying or otherwise acquiring, holding, importing
and exporting, selling and disposing
embroidered textile products." Through
JUBANITEX’s General Manager, Marina Q.
Guzman, the corporation appointed and
engaged the services of respondent as
commission agent. It was agreed that
respondent will receive 10% sales commission
on all sales actually concluded and collected
through her efforts
On October 17, 1997, respondent filed her 1995
income tax return reporting a taxable income of
P1,707,772.64 and a tax due of P170,777.26.6.
On April 14, 1998, respondent filed a claim to
refund the amount of P170,777.26 and alleged
that it was mistakenly withheld and remitted by
JUBANITEX to the BIR. Respondent contended
that her sales commission income is not taxable
in the Philippines because the same was a
compensation for her services rendered in
Germany and therefore considered as income
from sources outside the Philippines.
She filed a petition for review with the CTA
contending that no action was taken by the BIR
on her claim for refund. CTA rendered a decision
denying her claim. It held that the commissions
received by respondent were actually her
remuneration in the performance of her duties as
President of JUBANITEX and not as a mere
sales agent thereof.
On petition with the Court of Appeals, the latter
reversed the Decision of the CTA, holding that
respondent received the commissions as sales
agent of JUBANITEX and not as President
thereof. And since the "source" of income means
the activity or service that produced the income,
the sales commission received by respondent is
not taxable in the Philippines because it arose
from the marketing activities performed by
respondent in Germany.
ISSUE: Whether or not respondent’s sales
commission income is taxable in the Philippines.
RULING: Yes, the income is taxable and the
petition is granted.
Pursuant to Section 25 of the NIRC, non-
resident aliens, whether or not engaged in trade
or business, are subject to Philippine income
taxation on their income received from all
sources within the Philippines. Thus, the
keyword in determining the taxability of non-
resident aliens is the income’s "source."
The following discussions on sourcing of income
under the Internal Revenue Code of the U.S.,
are instructive:
The Supreme Court has said, in
a definition much quoted but
often debated, that income may
be derived from three possible
sources only: (1) capital and/or
(2) labor; and/or (3) the sale of
6
 capital assets. Much confusion
will be avoided by regarding the
term "source" in this
fundamental light. It is not a
place, it is an activity or
property. As such, it has a situs
or location, and if that situs or
location is within the United
States the resulting income lvais
taxable to nonresident aliens
and foreign corporations.
The important factor therefore which determines
the source of income of personal services is not
the residence of the payor, or the place where
the contract for service is entered into, or the
place of payment, but the place where the
services were actually rendered.
Both the petitioner and respondent cited the
case of Commissioner of Internal Revenue v.
British Overseas Airways Corporation in support
of their arguments, but the correct interpretation
of the said case favors the theory of respondent
that it is the situs of the activity that determines
whether such income is taxable in the
Philippines. The source of an income is the
property, activity or service that produced the
income. For the source of income to be
considered as coming from the Philippines, it is
sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale
of tickets in the Philippines is the activity that
produces the income. The situs of the source of
payments is the Philippines.
In the instant case, the appointment letter of
respondent as agent of JUBANITEX stipulated
that the activity or the service which would entitle
her to 10% commission income, are "sales
actually concluded and collected through [her]
efforts." What she presented as evidence to
prove that she performed income producing
activities abroad, were copies of documents she
allegedly faxed to JUBANITEX. However, these
documents do not show whether the instructions
or orders faxed ripened into concluded or
collected sales in Germany. At the very least,
these pieces of evidence show that while
respondent was in Germany, she sent
instructions/orders to JUBANITEX.
The Court finds that the faxed documents
presented by respondent did not constitute
substantial evidence, or that relevant evidence
that a reasonable mind might accept as
adequate to support the conclusion that it was in
Germany where she performed the income
producing service which gave rise to the
reported monthly sales in the months of March
and May to September of 1995. She thus failed
to discharge the burden of proving that her
income was from sources outside the Philippines
and exempt from the application of our income
tax law. Hence, the claim for tax refund should
be denied
CIR v Marubeni Corporation, GR No. 137377,
December 18, 2001
FACTS:
CIR examined the books of accounts of
Marubeni Corporation, a Japanese corporation
engaged in general import and export trading,
financing and construction business in the
Philippines for the fiscal year ending March
1985. In the course of the examination,
Marubeni has two undeclared income contracts,
one is the NDC in connection with the
construction and installation of a wharf/port
complex and the other is PHILPOS for the
construction of an ammonia storage complex.
The gross income for the two projects amounted
to 967.269811.14, an income from Philippine
sources subject to internal revenue taxes.
CIR revenue examiners recommended an
assessment for deficiency income, branch profit
remittance, contractor's and commercial broker's
taxes.
On August 2, 1986, E.O. No. 41 was issued
declaring a one time tax amnesty covering
unpaid income taxes for the years 1981 to 1985.
E.O. No. 64 expanded E.O. No. 64 to include
estate and donor's taxes and business tax.
Marubeni filed its tax amnesty return of its net
worth increase between 1981 to 1986.
CTA rendered a decision that Marubeni had
properly availed of the tax amnesty under EO
No. 41 and 64 and declared the deficiency taxes
deemed cancelled and withdrawn. The CA
affirmed its decision.
ISSUE:
1. Whether or not Marubeni properly availed of
the tax amnesty program
2. Whether or not Marubeni is liable for
deficiency contractor's tax whose income from
7
the 2 projects came from the Offshore Portion of
the contracts.
RULING:
1. Yes. Marubeni timely filed its tax amnesty
return. The point of reference is the date of
effectivity of EO No. 41. CIR filed its income tax
cases in court against Marubeni only after EO
No. 41 took effect which did not disqualify the
latter from the exemption under Section 4(b).
However, E.O. No. 64 which amended EO no.
41 disqualified Marubeni from availing of the
business tax amnesty granted therein because
Marubeni already fell under the exception in sec
4(b) who prior to the date of its effectivity, has
income tax cases lodged in court. The general
rule is that an amended act operates
prospectively.
2. No. Marubeni is not liable for deficiency
contractor's tax in the offshore portion of the
contracts. A contractor's tax is a tax imposed
upon the privilege of engaging business, being
an excise tax, it can be levied by the taxing
authority only when the acts, privileges or
business are done or performed within the
jurisdiction of said authority. In the case at bar,
the two projects involved two taxing jurisdictions.
These two acts occurred in Japan and the
Philippines. While construction and installation
work were completed within the Philippines, the
evidence is clear that some pieces of equipment
and supplies were completely designed and
engineered in Japan. All services for the design,
fabrication, engineering and manufacture of the
materials and equipment were made and
completed in Japan. These services were
rendered outside the taxing jurisdiction of the
Philippines, thus not subject to contractor's tax.
Petition denied.
Tuazon v Lingad, 58 SCRA 170.
FACTS:
In 1948, petitioner Antonio Tuason inherited
from his mother several tracts of land, among
which were 2 contiguous parcels situated on
Pureza and Sta. Mesa streets in Manila. When
his mother was still alive she had them
subdivided into 29 lots. 28 were allocated to their
then occupants who had lease contracts with the
petitioner’s predecessor at various times from
1900 to 1903 which contracts expired on Dec
1953. The 29th lot with an area of 48k sqm was
not leased to anyone - it needed filling because
of its very low elevation and was planted to
kangkong and other crops.
After he took possession of the parcels, he
instructed his attorney-in-fact Antonio Araneta to
sell them. The 28 were easily sold to their
respective occupants on a 10-year installment
basis meanwhile lot 29 could not however be
immediately sold due to low elevation.
Sometime in 1952, Araneta had lot 29 filled, then
subdivided into small lots and paved with
macadam roads. The small lots were then sold
over the years on a uniform 10-year annual
amortization basis. Araneta did not employ any
broker nor put up advertisements in its sale.
In 1953 and 1954, Tuason reported his income
from the sale of the small lots as long-term
capital gains. This treatment of the sale as
capital gains was upheld by the Commissioner
of Internal Revenue in 1957.
In his 1957 tax return, petitioner treated like
before his income from the sale of the small lots
as capital gains and included only ½ thereof as
taxable income. His payment of dealer’s tax was
on account of rentals received from the 28 lots
and other properties of the petitioner. On the
basis of the 1957 opinion of the CIR, the
revenue examiner approved petitioner’s
treatment of his income from the sale. This was
likewise approved in a memorandum issued by
the chief of the BIR assessment department
concurred by the CIR.
However, in 1963, the commissioner reversed
himself and considered the profits as ordinary
gains thus a formal letter was sent by the BIR to
petitioner to pay for deficiency income tax for
1957. Petitioner filed a motion for
reconsideration but was denied. When elevated,
the CTA likewise affirmed the treatment as
capital gains by the CIR.
Hence, the present petition.
ISSUE:
Whether the properties sold in small lots be
regarded as capital assets
RULING:
8
Yes, the properties in question are regarded as petitioner's sales of the several lots forming part
capital assets and are rightly subjected to the of his rental business cannot be characterized
foregoing deficiency assessments. as other than sales of non-capital assets.

Under the NIRC, the term "capital assets" Judgment of the CTA is affirmed, except the
includes all the properties of a taxpayer whether portion thereof that imposes 5% surcharge and
or not connected with his trade or business, 1% monthly interest, which is hereby set aside.
except: (1) stock in trade or other property No costs.
included in the taxpayer's inventory; (2) property
primarily for sale to customers in the ordinary Republic v. De la Rama, GR No. L-21108, 18
course of his trade or business; (3) property SCRA 861
used in the trade or business of the taxpayer
and subject to depreciation allowance; and (4)
FACTS:
real property used in trade or business.If the
The estate of the late Esteban de la Rama was
taxpayer sells or exchanges any of the
the subject of Special Proceedings No. 401 of
properties above-enumerated, any gain or loss
the Court of First Instance of Iloilo. The
relative thereto is an ordinary gain or an ordinary
executor-administrator, Eliseo Hervas, filed
loss; the gain or loss from the sale or exchange
income tax returns of the estate corresponding
of all other properties of the taxpayer is a capital
to the taxable year 1950. The Bureau of Internal
gain or a capital loss.
Revenue later claimed that it had found out that
there had been received by the estate in 1950
In addition, under section 34(b) (2) of the Tax
from the De la Rama Steamship Company, Inc.
Code, if a gain is realized by a taxpayer (other
cash dividends amounting to P86,800.00, which
than a corporation) from the sale or exchange of
amount was not declared in the income tax
capital assets held for more than twelve months,
return of the estate for the year 1950. The
only 50% of the net capital gain shall be taken
Bureau of Internal Revenue then made an
into account in computing the net income.
assessment as deficiency income tax against
However, this provision constitutes a statute of
the estate.
partial exemption. In view of the familiar and
settled rule that tax exemptions are construed in
The Collector of Internal Revenue wrote a letter
strictissimi juris against the taxpayer and liberally
to Mrs. Lourdes de la Rama-Osmeña informing
in favor of the taxing authority, the field of
her of the deficiency income tax and asking for
application of the term it "capital assets" is
payment. Counsel for Lourdes wrote to the
necessarily narrow, while its exclusions must be
Collector acknowledging receipt of the
interpreted broadly. Consequently, it is the
assessment but contended that Lourdes had no
taxpayer's burden to bring himself clearly and
authority to represent the estate, and that the
squarely within the terms of a tax-exempting
assessment should be sent to Leonor de la
statutory provision, otherwise, all fair doubts will
Rama who was pointed to by said counsel as
be resolved against him. It bears emphasis
the administratrix. The Deputy Collector of
nonetheless that in the determination of whether
Internal Revenue then sent a letter to Leonor de
a piece of property is a capital asset or an
la Rama as administratrix of the estate, asking
ordinary asset, a careful examination and
payment. The tax, as assessed, not having been
weighing of all circumstances revealed in each
paid, the Deputy Commissioner of Internal
case must be made.
Revenue, on September 7, 1959, wrote another
letter to Lourdes demanding the payment of the
Records show in the present case that the
deficiency income tax within the period of thirty
petitioner owned other real properties which he
days from receipt thereof. The counsel of
was putting out for rent, from which he
Lourdes insisted that the letter should be sent to
periodically derived a substantial income, and for
Leonor de la Rama. The Deputy Commissioner
which he had to pay the real estate dealer's tax
of Internal Revenue wrote to Leonor de la Rama
(which he used to deduct from his gross
another letter, demanding the payment within
income).8 In fact, as far back as 1957 the
thirty days from receipt thereof.
petitioner was receiving rental payments from
The deficiency income tax not having been paid,
the mentioned 28 small lots, even if the leases
the Republic of the Philippines filed a complaint
executed by his deceased mother thereon
against the heirs of Esteban de la Rama. The
expired in 1953. Under the circumstances, the

9
Trial court, however, dismissed the complaint on not fall within the exclusive jurisdiction of the
the ground that [relevant to the subject Court of Tax Appeals.
heading]it was Eliseo Hervas, and neither
Leonor nor Lourdes, who was the proper CIR v Pilipinas Shell Petroleum Corporation,
administrator at the time, and to whom the GR No. 188497, April 25, 2012
assessment should have been sent.
The appellant contended that the assessment
FACTS:
had become final, because the decision of the
Respondent argues that Section 135 of the
Collector of Internal Revenue was sent in a letter
NIRC reveals petroleum products sold to
dated February 11, 1960 and addressed to the
international carriers are exempt from excise.
heirs of the late Esteban de la Rama, through
Furthermore, that excise tax, being an indirect
Leonor de la Rama as administratrix of the
tax, should refer to Section 135 in relation to
estate, and was not disputed or contested by
Section 148 and that it should be interpreted to a
way of appeal within thirty days from receipt
tax exemption from the point of production and
thereof to the Court of Tax Appeals.
removal from the place of production considering
that it is only at that point that an excise tax is
ISSUE:
imposed. The situation is unlike the value-added
Whether or not there was a proper notice of tax
tax (VAT) which is imposed at every point of
assessment
turnover – from production to wholesale, to retail
and to end-consumer. Respondent thus
RULING: Petition is DISMISSED, the decision
concludes that exemption could only refer to the
appealed from is AFFIRMED.
imposition of the tax on the statutory seller, in
The SC sustained the finding of the lower court
this case the respondent. This is because when
that neither Leonor nor Lourdes was the
a tax paid by the statutory seller is passed on to
administratrix of the estate of Esteban de la
the buyer it is no longer in the nature of a tax but
Rama. The Court noted that at the time the tax
an added cost to the purchase price of the
assessment was sent, Special Proceedings No.
product sold.
401 were still open with respect to the
controverted matter regarding the cash
Respondent also contends that the ruling that
dividends upon which the deficiency assessment
Section 135 only prohibits local petroleum
was levied. It is clear that at the time these
manufacturers like respondent from shifting the
special proceedings were taking place, Eliseo
burden of excise tax to international carriers has
Hervas was the duly appointed administrator of
adverse economic impact as it severely curtails
the estate.
the domestic oil industry. Requiring local
petroleum manufacturers to absorb the tax
Plaintiff-appellant also contends that the lower
burden in the sale of its products to international
court could not take cognizance of the defense
carriers is contrary to the State’s policy of
that the assessment was erroneous, this being a
"protecting gasoline dealers and distributors
matter that is within the exclusive jurisdiction of
from unfair and onerous trade conditions," and
the Court of Tax Appeals. This contention has
places them at a competitive disadvantage since
no merit. According to Republic Act 1125, the
foreign oil producers, particularly those whose
Court of Tax Appeals has exclusive jurisdiction
governments with which we have entered into
to review by appeal decisions of the Collector of
bilateral service agreements, are not subject to
Internal Revenue in cases involving disputed
excise tax for the same transaction. Under this
assessments, and the disputed assessment
scenario, participation of Filipino capital,
must be appealed by the person adversely
management and labor in the domestic oil
affected by the decision within thirty days after
industry is effectively diminished.
the receipt of the decision. In the instant case,
the person adversely affected should have been
Lastly, respondent asserts that the imposition by
the administrator of the estate, and the notice of
the Philippine Government of excise tax on
the assessment should have been sent to him.
petroleum products sold to international carriers
The administrator had not received the notice of
is in violation of the Chicago Convention on
assessment, and he could not appeal the
International Aviation ("Chicago Convention") to
assessment to the Court of Tax Appeals within
which it is a signatory, as well as other
30 days from notice. Hence the assessment did
international agreements (the Republic of the

10
Philippines’ air transport agreements with the
United States of America, Netherlands, Belgium
and Japan).
Solicitor General highlights the statutory basis of
the Court’s ruling that the exemption under
Section 135 does not attach to the products.
Citing Exxonmobil Petroleum & Chemical
Holdings, Inc.-Philippine Branch v.
Commissioner of Internal Revenue, which held
that the excise tax, when passed on to the
purchaser, becomes part of the purchase price,
the Solicitor General claims this refutes
respondent’s theory that the exemption attaches
to the petroleum product itself and not to the
purchaser for it would have been erroneous for
the seller to pay the excise tax and inequitable to
pass it on to the purchaser if the excise tax
exemption attaches to the product.
ISSUE: Whether or not Section 135 intended the
tax exemption to apply to petroleum products at
the point of production.
RULING: The Court affirmed the decision of the
CTA En Banc.
Under Section 129 of the NIRC, excise taxes are
those applied to goods manufactured or
produced in the Philippines for domestic sale or
consumption or for any other disposition and to
things imported. Excise taxes as used in our Tax
Code fall under two types – (1) specific tax
which is based on weight or volume capacity
and other physical unit of measurement, and (2)
ad valorem tax which is based on selling price or
other specified value of the goods. Aviation fuel
is subject to specific tax under Section 148 (g)
which attaches to said product "as soon as they
are in existence as such."
Section 135(a) of the NIRC and earlier
amendments to the Tax Code represent our
Governments’ compliance with the Chicago
Convention, its subsequent resolutions/annexes,
and the air transport agreements entered into by
the Philippine Government with various
countries. On March 7, 2013, President Benigno
Aquino III has signed into law Republic Act
(R.A.) No. 1037814 granting tax incentives to
foreign carriers which include exemption from
the 12% value-added tax (VAT) and 2.5% gross
Philippine billings tax (GPBT).The exemption
from excise tax of aviation fuel purchased by
international carriers for consumption outside the
Philippines fulfills a treaty obligation pursuant to
which our Government supports the promotion
and expansion of international travel through
avoidance of multiple taxation and ensuring the
viability and safety of international air travel.
Under the basic international law principle of
pacta sunt servanda, we have the duty to fulfill
our treaty obligations in good faith. This entails
harmonization of national legislation with treaty
provisions. In this case, Sec. 135(a) of the NIRC
embodies our compliance with our undertakings
under the Chicago Convention and various
bilateral air service agreements not to impose
excise tax on aviation fuel purchased by
international carriers from domestic
manufacturers or suppliers.
The court held that respondent, as the statutory
taxpayer who is directly liable to pay the excise
tax on its petroleum products, is entitled to a
refund or credit of the excise taxes it paid for
petroleum products sold to international carriers,
the latter having been granted exemption from
the payment of said excise tax under Sec. 135
(a) of the NIRC.
Renato Diaz and Aurora Ma. F. Timbol v. the
Secretary of Finance and the CIR, GR No.
193007, July 19, 2011
FACTS:
BIR revived the idea of imposing VAT on the
collections of tollway operators. Renato Diaz and
Aurora Timbol filed a declaratory relief assailing
the validity of the impending imposition claiming
that VAT would result in increased toll fees.
They hold the view that Congress, when
enacting the NIRC did not intend to include toll
fees within the meaning of 'sale of services' that
are subject to tax. To impose VAT on toll fees
would amount to a tax on public service, and
that, since VAT was never factored into the
formula for computing toll fees, its imposition
would violate the non-impairment clause of the
constitution.
OSG also filed it's comment and aver that NIRC
imposes VAT on all kinds of services of
franchise grantees, including tollway operations,
except where the law provides otherwise.
ISSUE:
1. Whether or not the government is
unlawfully expanding VAT coverage by
including tollway operators and tollway
operations in the terms "franchise
11
 grantees" and "sale of services" under
Section 108 of the Code; and
2. Whether or not the imposition of VAT on
tollway operators a) amounts to a tax on
tax and not a tax on services;
RULING:
1. No. Section 108 of the NIRC imposes
VAT on 'all kinds of services' for a fee
including those specified in the list. This
include tollway operators under the
broad term 'all kinds of services' as well
as fall under the specific class described
as 'all other franchise grantees' who are
subject to VAT. The word 'franchise'
broadly covers government grants of a
special right to do an act or series of
acts of public concern. It is also broadly
construed as referring not only to
authorizations that Congress directly
issues in the form of a special law, but
also to those granted by the
administrative agencies to which the
power to grant franchises has been
delegated by Congress. Thus, the
construction, operation, and
maintenance of toll facilities on public
improvements are activities of public
consequence that necessarily require a
special grant of authority from the state.
As to 'sale of services', section 108
opens other companies rendering
service for a fee to the imposition of
VAT. Business of a public nature such
as public utilities and the collection of
tolls or charges for its use or service is a
franchise.
1. No. Tollway fees are not taxes. They are
not assessed and collected by the BIR
and do not go to the general coffers of
the government.
They are collected by private tollway
operators from the public as
reimbursement for the costs and
expenses incurred in the
construction, maintenance and
operation of the tollways, as well as
to assure them a reasonable margin
of income. Taxes may be imposed
only by the government under it
sovereign authority, toll fees may be
demanded by either the government
or private individuals or entities, as
an attribute of ownership.
A. VAT on tollway operations is not a tax
on the tollway user, but on the tollway operator.
Under section 105 of the Code, VAT is imposed
on any person who in the course of trade or
business, sells or renders services for a fee, the
seller of services, who is the tollway operator is
the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway uses as
part of the toll fees. For this reasons, VAT on
tollway operations cannot be a tax on tax even if
toll fees were deemed as a 'user's tax'. VAT is
assessed against the tollway operator's gross
receipts and not necessarily on the toll fees.
Although the tollway operator may shift the VAT
burden simply becomes part of the toll fees that
one has to pay in order to use the tollways.
Philippine Amusement and Gaming
Corporation (PAGCOR) v. BIR, GR No.
172087, March 15, 2011
FACTS:
Petitioner Philippine Amusement and Gaming
Corporation (PAGCOR), sought the declaration
of nullity of Section 1 of Republic Act (R.A.) No.
9337 insofar as it amends Section 27 (c) of the
National Internal Revenue Code of 1997, by
excluding petitioner from exemption from
corporate income tax for being repugnant to
Sections 1 and 10 of Article III of the
Constitution. Petitioner further seeks to prohibit
the implementation of Bureau of Internal
Revenue (BIR) Revenue Regulations No. 16-
2005 for being contrary to law.
PAGCOR was created pursuant to Presidential
Decree (P.D.) No. 1067-A on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B[3]
(supplementing P.D. No. 1067-A) was issued
exempting PAGCOR from the payment of any
type of tax, except a franchise tax of five percent
(5%) of the gross revenue. Thereafter, on June
2, 1978, P.D. No. 1399 was issued expanding
the scope of PAGCOR's exemption.
To consolidate the laws pertaining to the
franchise and powers of PAGCOR, P.D. No.
1869 was issued. PAGCOR's tax exemption was
removed in June 1984 through P.D. No. 1931,
but it was later restored by Letter of Instruction
No. 1430, which was issued in September 1984.
On January 1, 1998, R.A. No. 8424, otherwise
known as the National Internal Revenue
Code of 1997, took effect. Section 27 (c) of
12
R.A. No. 8424 provides that government-
owned and controlled corporations (GOCCs)
shall pay corporate income tax, except
petitioner PAGCOR, the Government Service
and Insurance Corporation, the Social
Security System, the Philippine Health
Insurance Corporation, and the Philippine
Charity Sweepstakes Office.
With the enactment of R.A. No. 9337 on May
24, 2005, certain sections of the National
Internal Revenue Code of 1997 were
amended. Under Section 1 of R.A. No. 9337,
amending Section 27 (c) of the National
Internal Revenue Code of 1977, petitioner is
no longer exempt from corporate income tax
as it has been effectively omitted from the
list of GOCCs that are exempt from it.
Petitioner argues that such omission is
unconstitutional, as it is violative of its right
to equal protection of the laws under Section
1, Article III of the Constitution
Different groups came to this Court via petitions
for certiorari and prohibition assailing the validity
and constitutionality of R.A. No. 9337, in
particular:
1) Sec 4 which imposes 10% Value Added Tax
(VAT) on sale of goods and properties, 10%
VAT on importation of goods, 10% VAT on sale
of services and use or lease of properties... the
Court dismissed all the petitions and upheld the
constitutionality of R.A. No. 9337 - alleged to be
violative of Section 28 (2), Article VI of the
Constitution, which section vests in Congress
the exclusive authority to fix the rate of taxes,
and of Section 1, Article III of the Constitution on
due process, as well as of Section 26 (2), Article
VI of the Constitution, which section provides for
the "no amendment rule" upon the last reading
of a bill;
2) Sections 8 and 12 were alleged to be violative
of Section 1, Article III of the Constitution, or the
guarantee of equal protection of the laws, and
Section 28 (1), Article VI of the Constitution; and
3) other technical aspects of the passage of the
law, questioning the manner it was passed.
The Court dismissed all the petitions and
upheld the constitutionality of R.A. No. 9337.
On the same date, respondent BIR issued
Revenue Regulations (RR) No. 16--2005,
specifically identifying PAGCOR as one of
the franchisees subject to 10% VAT imposed
under Section 108 of the National Internal
Revenue Code of 1997, as amended by R.A.
No. 9337. Furthermore, according to the
OSG, public respondent BIR exceeded its
statutory authority when it enacted RR No.
16-2005, because the latter's provisions are
contrary to the mandates of P.D. No. 1869 in
relation to R.A. No. 9337.
ISSUE:
Whether or not PAGCOR is still exempt from
corporate income tax and VAT with the
enactment of R.A. No. 9337.
RULING:
INCOME TAX – NO, NOT Exempt (note: read
the 2014 decision)
Taxation is the rule and exemption is the
exception. The burden of proof rests upon the
party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed. As a
rule, tax exemptions are construed strongly
against the claimant. Exemptions must be
shown to exist clearly and categorically, and
supported by clear legal provision.
In this case, PAGCOR failed to prove that it is
still exempt from the payment of corporate
income tax, considering that Section 1 of R.A.
No. 9337 amended Section 27 (c) of the
National Internal Revenue Code of 1997 by
omitting PAGCOR from the exemption. The
legislative intent, as shown by the discussions in
the Bicameral Conference Meeting, is to require
PAGCOR to pay corporate income tax; hence,
the omission or removal of PAGCOR from
exemption from the payment of corporate
income tax. It is a basic precept of statutory
construction that the express mention of one
person, thing, act, or consequence excludes all
others as expressed in the familiar
maxim expressio unius est exclusio
alterius. Thus, the express mention of the
GOCCs exempted from payment of corporate
income tax excludes all others. Not being
excepted, petitioner PAGCOR must be regarded
as coming within the purview of the general rule
that GOCCs shall pay corporate income tax,
expressed in the maxim: exceptio firmat regulam
in casibus non exceptis.
13
As regards franchises, Section 11, Article XII of
the Constitution provides that no franchise or
right shall be granted except under the condition
that it shall be subject to amendment, alteration,
or repeal by the Congress when the common
good so requires.
In Manila Electric Company v. Province of
Laguna, the Court held that a franchise partakes
the nature of a grant, which is beyond the
purview of the non-impairment clause of the
Constitution. Thus, “…A franchise partakes the
nature of a grant which is beyond the purview of
the non-impairment clause of the Constitution.
Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the
1935 and the 1973 Constitutions, is explicit that
no franchise for the operation of a public utility
shall be granted except under the condition that
such privilege shall be subject to amendment,
alteration or repeal by Congress as and when
the common good so requires.”
In this case, PAGCOR was granted a
franchise to operate and maintain gambling
casinos, clubs and other recreation or
amusement places, sports, gaming pools,
i.e., basketball, football, lotteries, etc.,
whether on land or sea, within the territorial
jurisdiction of the Republic of the
Philippines. Under Section 11, Article XII of
the Constitution, PAGCOR's franchise is
subject to amendment, alteration or repeal by
Congress such as the amendment under
Section 1 of R.A. No. 9377. Hence, the
provision in Section 1 of R.A. No. 9337,
amending Section 27 (c) of R.A. No. 8424 by
withdrawing the exemption of PAGCOR from
corporate income tax, which may affect any
benefits to PAGCOR's transactions with
private parties, is not violative of the non-
impairment clause of the Constitution.
VAT – Yes, Exempt.
Anent the validity of RR No. 16-2005, the Court
holds that the provision subjecting PAGCOR to
10% VAT is invalid for being contrary to R.A. No.
9337. Nowhere in R.A. No. 9337 is it provided
that petitioner can be subjected to VAT. R.A.
No. 9337 is clear only as to... the removal of
petitioner's exemption from the payment of
corporate income tax, which was already
addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself
exempts petitioner from VAT pursuant to Section
7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code,
as amended, is hereby further amended
to read as follows:
Section 109. Exempt Transactions. - (1)
Subject to the provisions of Subsection
(2) hereof, the following transactions
shall be exempt from the value-added
tax:
xxxx
(k) Transactions which are
exempt under international agreements
to which the Philippines is a signatory
or under special laws, except
Presidential Decree No. 529
Petitioner is exempt from the payment of VAT,
because PAGCOR's charter, P.D. No. 1869, is a
special law that grants petitioner exemption from
taxes.
Moreover, the exemption of PAGCOR from VAT
is supported by Section 6 of R.A. No. 9337
The following services performed in the
Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate;
Services rendered to persons or entities
whose exemption under special laws...
subjects the supply of such services to
zero percent (0%) rate... although R.A.
No. 9337 introduced amendments to
Section 108 of R.A. No. 8424 by
imposing VAT on other services not
previously covered, it did not amend the
portion of Section 108 (B) (3) that
subjects to zero percent rate services
performed by VAT-registered persons to
persons or entities whose exemption
under special laws or international
agreements to which the Philippines is a
signatory effectively subjects the supply
of such services to 0% rate.
As pointed out by petitioner, although R.A. No.
9337 introduced amendments to Section 108 of
R.A. No. 8424 by imposing VAT on other
services not previously covered, it did not amend
the portion of Section 108 (B) (3) that subjects to
14
zero percent rate services performed by VAT-
registered persons to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a
signatory effectively subjects the supply of such
services to 0% rate.
The factual findings of the Court of Tax Appeals
(CTA), a special court exercising expertise on
the subject of tax, are generally regarded as
final, binding and conclusive upon the Supreme
Court, especially if these are substantially similar
to the findings of the Court of Appeals (CA)
which is normally the final arbiter of questions of
fact. Miguel G. Osorio Pension Foundation,
Incorporated vs Court of Appeals and
Commissioner of Internal Revenue, G.R. No.
162175, June 28, 2010.
United Airlines, Inc. v. CIR, GR No. 178788,
September 29, 2010
FACTS:
International airline, petitioner United Airlines,
filed a claim for income tax refund. Petitioner
sought to be refunded the erroneously collected
income tax in the amount of P5,028,813.23 on
passenger revenue from tickets sold in the
Philippines, uplifts of which did not originate in
the Philippines, arguing that it cannot be
considered as income from sources within the
Philippines. The airlines ceased operation
originating form the Philippines since February
21, 1998.
Court of tAx appeals ruled the petitioner is not
entitled to a refund because under the NIRC,
income tax on GPB also includes gross revenue
from carriage of cargoes from the Philippines.
And upon assessment by the CTA, it was found
out that petitioner deducted items from its cargo
revenues which should have entitled the
government to an amount of P 31.43 million,
which is obviously higher than the amount the
petitioner prayed to be refunded.
Petitioner argued that the petitioner’s supposed
underpayment cannot offset his claim to a refund
as established by well-settled jurisprudence.
ISSUE: WON UA is entitled to a refund of the
amount it paid as income tax on its passenger
revenues in 1999
RULING:
NO. Under Section 72 of the NIRC (Suit to
Recover Tax Based on False or Fraudulent
Returns), the CTA can make a valid finding that
UA made erroneous deductions on its gross
cargo revenue; that because of the erroneous
deductions, UA reported a lower cargo revenue
and paid a lower income tax thereon; and that
UA’s underpayment of the income tax on cargo
revenue is even higher than the income tax it
paid on passenger revenue subject of the claim
for refund, such that the refund cannot be
granted.
· The CTA explained that it merely
determined whether UA is entitled to a refund
based on the facts. On the assumption that UA
filed a correct return, it had the right to file a
claim for refund of GPB tax on passenger
revenues it paid in 1999 when it was not
operating passenger flights to and from the
Philippines. However, upon examination by the
CTA, UA’s return was found erroneous as it
understated its gross cargo revenue for the
same taxable year due to deductions of 2 items
consisting of commission and other incentives of
its agent. Having underpaid the GPB tax due on
its cargo revenues for 1999, UA is not entitled to
a refund of its GPB tax on its passenger
revenue. The CTA therefore correctly denied the
claim for tax refund after determining the proper
assessment and the tax due. The matter of
prescription raised by UA is a non-issue. The
prescriptive periods under Sections 203and
222of the NIRC find no application in this case.
Tax refunds, like tax exemptions, are
construed strictly against the taxpayer and
liberally in favor of the taxing authority.
CIR v Smart Communication, Inc., GR No.
179045-46, August 25, 2010
FACTS:
Respondent Smart Communications, Inc. is a
corporation organized and existing under
Philippine law. Respondent entered into three
Agreements for Programming and Consultancy
Services with Prism Transactive (M) Sdn. Bhd.
(Prism), a non-resident corporation duly
organized and existing under the laws of
Malaysia. Under the agreements, Prism was to
provide programming and consultancy services
for the installation of the Service Download
Manager (SDM) and the Channel Manager
(CM), and for the installation and implementation
of Smart Money and Mobile Banking Service
15
SIM Applications (SIM Applications) and Private
Text Platform (SIM Application).
Prism billed respondent in the amount of
US$547,822.45. Thinking that these payments
constitute royalties, respondent withheld the
amount of US$136,955.61 or ₱7,008,840.43,5
representing the 25% royalty tax under the RP-
Malaysia Tax Treaty. Respondent filed its
Monthly Remittance Return of Final Income
Taxes Withheld (BIR Form No. 1601-F) for the
month of August 2001.
On September 24, 2003, or within the two-year
period to claim a refund, respondent filed with
the Bureau of Internal Revenue (BIR), through
the International Tax Affairs Division (ITAD), an
administrative claim for refund8 of the amount of
₱7,008,840.43.
Petitioner Commissioner of Internal Revenue
(CIR) failed to act on the claim for refund so the
respondent filed a Petition for Review with the
CTA. In its Petition for Review, respondent
claimed that it is entitled to a refund because the
payments made to Prism are not royalties but
"business profits,” pursuant to the definition of
royalties under the RP-Malaysia Tax Treaty.
Respondent further averred that since under
Article 7 of the RP-Malaysia Tax Treaty,
"business profits" are taxable in the Philippines
"only if attributable to a permanent
establishment in the Philippines, the payments
made to Prism, a Malaysian company with no
permanent establishment in the Philippines,”
should not be taxed.
The Second Division of CTA found respondent
entitled only to a partial refund. Although it
agreed with respondent that the payments for
the CM and SIM Application Agreements are
"business profits," and therefore, not subject to
tax under the RP-Malaysia Tax Treaty, the
Second Division found the payment for the SDM
Agreement a royalty subject to withholding tax.
The CTA En Banc rendered a Decision affirming
the partial refund granted to respondent.
ISSUE:
Whether or not the payments made to Prism
constitute "business profits" or royalties.
RULING:
The payments for the CM and the SIM
Application Agreements constitute "business
profits."
Under the RP-Malaysia Tax Treaty, the term
royalties is defined as payments of any kind
received as consideration for: "(i) the use of, or
the right to use, any patent, trade mark, design
or model, plan, secret formula or process, any
copyright of literary, artistic or scientific work, or
for the use of, or the right to use, industrial,
commercial, or scientific equipment, or for
information concerning industrial, commercial or
scientific experience; (ii) the use of, or the right
to use, cinematograph films, or tapes for radio or
television broadcasting." These are taxed at the
rate of 25% of the gross amount.
Under the same Treaty, the "business profits" of
an enterprise of a Contracting State is taxable
only in that State, unless the enterprise carries
on business in the other Contracting State
through a permanent establishment. The term
"permanent establishment" is defined as a fixed
place of business where the enterprise is wholly
or partly carried on. However, even if there is no
fixed place of business, an enterprise of a
Contracting State is deemed to have a
permanent establishment in the other
Contracting State if it carries on supervisory
activities in that other State for more than six
months in connection with a construction,
installation or assembly project which is being
undertaken in that other State.
It was established during the trial that Prism
does not have a permanent establishment in the
Philippines. Hence, "business profits" derived
from Prism’s dealings with respondent are not
taxable. The question is whether the payments
made to Prism under the SDM, CM, and SIM
Application agreements are "business profits"
and not royalties.
The provisions in the agreements are clear.
Prism has intellectual property right over the
SDM program, but not over the CM and SIM
Application programs as the proprietary rights of
these programs belong to respondent. In other
words, out of the payments made to Prism, only
the payment for the SDM program is a royalty
subject to a 25% withholding tax. A refund of the
erroneously withheld royalty taxes for the
payments pertaining to the CM and SIM
Application Agreements is therefore in order.
16
The petition is DENIED and the decision of the Employees’ trust fund; no estoppel in favor of
Court of Tax Appeals En Banc is affirmed. The BIR. An employees’ trust fund is not estopped
Bureau of Internal Revenue ordered to issue a from proving its ownership over a lot held in trust
Tax Credit Certificate to Prism Transactive (M) by, and titled in the name of, another when the
Sdn. Bhd. purpose is not to contest the disposition or
encumbrance of the property in favor of an
innocent third-party purchaser for value. The
Miguel G. Osorio Pension Foundation, Inc. v. Bureau of Internal Revenue (BIR), not being a
CA and CIR, GR No. 162175, June 28, 2010 buyer or claimant to any interest in the lot, has
not relied on the fact of the title of the lot to
acquire any interest in it. Thus, there is no basis
DOCTRINES:
for the BIR to claim that the trustee of
Court of Tax Appeals; factual findings final,
employees’ trust fund is estopped from proving
binding and conclusive. The factual findings of
that it co-owns the lot. Miguel G. Osorio
the Court of Tax Appeals (CTA), a special court
Pension Foundation, Incorporated vs Court of
exercising expertise on the subject of tax, are
Appeals and Commissioner of Internal
generally regarded as final, binding and
Revenue, G.R. No. 162175, June 28, 2010.
conclusive upon the Supreme Court, especially if
these are substantially similar to the findings of
Employees’ trust fund; article 1452 of the Civil
the Court of Appeals (CA) which is normally the
Code; recognition of trust by the BIR. Article
final arbiter of questions of fact. Miguel G.
1452 of the Civil Code expressly allows a co-
Osorio Pension Foundation, Incorporated vs
owner, or first co-owner, of a parcel of land to
Court of Appeals and Commissioner of Internal
register his proportionate share in the name of
Revenue, G.R. No. 162175, June 28, 2010.
his co-owner, or second co-owner, in whose
name the entire land is registered. The second
Court of Tax Appeals; factual findings final,
co-owner serves as a legal trustee of the first co-
binding and conclusive; exceptions. Recognized
owner insofar as the proportionate share of the
exceptions to the rule that the factual findings
first co-owner is concerned. For said article to
are final, binding and conclusive are: (1) when
apply, all that a co-owner needs to show is that
the findings are grounded entirely on
there is “common consent” among the
speculation, surmises or conjectures; (2) when
purchasing co-owners to put the legal title to the
the inference made is manifestly mistaken,
purchased property in the name of one co-owner
absurd or impossible; (3) when there is grave
for the benefit of all. Once this “common
abuse of discretion; (4) when the judgment is
consent” is shown a trust is created by force of
based on misapprehension of facts; (5) when the
law. The BIR has no option but to recognize
findings of fact are conflicting; (6) when in
such legal trust as well as the beneficial
makings its findings the CA went beyond the
ownership of the real owners because the trust
issues of the case; or its findings are contrary to
is created by force of law. The fact that the title
the admissions of both the appellee and the
is registered solely in the name of one person is
appellant; (7) when the findings are contrary to
not conclusive that he alone owns the
the trial court; (8) when the findings are
property. Miguel G. Osorio Pension Foundation,
conclusions without citation of specific evidence
Incorporated vs Court of Appeals and
on which they are based; (9) when the facts set
Commissioner of Internal Revenue, G.R. No.
forth in the petition as well as in the petitioner’s
162175, June 28, 2010.
main and reply briefs are not disputed by the
respondent; (10) when the findings of fact are
Employees’ trust fund; income tax exemption;
premised on the supposed absence of evidence
rationale. Income of an employees’ trust fund is
and contradicted by the evidence on record; or
exempt otherwise taxation of those earnings
(11) when the CA manifestly overlooked certain
would result in a diminution of accumulated
relevant facts not disputed by the parties which,
income and reduce whatever the trust
if properly considered, would justify a different
beneficiaries would receive out of the trust
conclusion. Miguel G. Osorio Pension
fund. Miguel G. Osorio Pension Foundation,
Foundation, Incorporated vs Court of Appeals
Incorporated vs Court of Appeals and
and Commissioner of Internal Revenue, G.R.
Commissioner of Internal Revenue, G.R. No.
No. 162175, June 28, 2010.
162175, June 28, 2010.

17
Employees’ trust fund; refund; trustee proper
party in interest. Since the petitioner exists for
the purpose of holding title to, and administering,
the tax-exempt employees’ trust fund
established for the benefit of the employees, it
has personality to claim tax refunds due the
employees’ trust fund. Miguel G. Osorio Pension
Foundation, Incorporated vs Court of Appeals
and Commissioner of Internal Revenue, G.R.
No. 162175, June 28, 2010.
FACTS:
Petitioner is a non-stock and nonprofit
corporation – it was organized for the purpose of
holding title to and administering the employees
trust or retirement funds (Employees Trust Fund)
established for the benefit of the employees of
Victoria’s Milling Company Inc. (VMC). Petitioner
as trustee claims that the income earned by the
employees Trust Fund is tax exempt under Sec.
53(b) (now Sec. 60 (b) of the NIRC.
Petitioner as trustee of the employees fund
invested part of said fund to purchase a lot in
Madrigal Business Park (MBP) located in
Muntinlupa. Since petitioner needed funds to
pay the retirement and pension benefits of VMC
employees and to reimburse advances made by
VMC, petitioner’s board of trustees authorized
the sale of its share in the MBP lot.
VMC eventually sold the MBP lot to Metrobank
and as withholding agent; Metrobank paid the
amount of PHP 6, 125, 625.00 as withholding
tax on the sale of the real property.
Petitioner claims that it is a co-owner of the MBP
lot as trustee of the Employees Trust Fund.
Further, it contends that the Employees Trust
Fund is exempt from income tax. Since
petitioner as trustee purchased 49.59% of the
MBP lot using funds of the Trust Fund, it asserts
that their 49.59% share in the income tax
paid amounting to PHP 3, 037, 697.40 rounded
off to PHP 3, 037, 500 should be refunded. It
maintained that the tax exemption of the Trust
Fund rendered the payment of income tax as
illegal or erroneous – which resulted in filing a
claim for tax refund.
As action, the BIR stated that under Sec 26 of
the Tax Code, petitioner is not exempt from tax
on its income from the sale of real property. The
BIR asked petitioner to submit documents to
prove its co-ownership of the MBP lot and its
exemption from tax.
Petitioner in reply said that the applicable
provision granting its claim for tax exemption is
not Sec. 26 but Sec. 53 (b) of the Tax Code and
that its co-ownership of the MBP lot is evidenced
by Board Resolution #s 92-34 and 96-46 and the
MOA among petitioner, VMC and its
subsidiaries.
Since the BIR failed to act on petitioner’s claim,
it was elevated to CIR - again no action was
taken hence, a petition for tax refund before the
CTA was filed.
The CTA ruled that Sec. 53 (b) of the Tax Code
talks about exemption from income tax on the
income or earnings of the Employees trust Fund.
Also, that the petitioner is not the pension trust
itself but is a separate and distinct entity whose
function is to administer the pension plan for
some VMC employees.
As to the co-ownership of the lot, the CTA ruled
that the evidences are self-serving and cannot
themselves prove the co-ownership of the
petitioner of the MBP lot. Further, petitioner
failed to present any evidence to prove that the
money used to purchase the MBP lot came from
the Employees Trust Fund. Thus, petitioner is
estopped from claiming a tax exemption.
When the claim was filed before the CA, the CA
agreed that the pieces of documentary evidence
submitted are largely self-serving and can be
contrived easily and that the documents failed to
show that the funds used to purchase the MBP
lot came from the Employees Trust Fund. Hence
this petition.
ISSUE:
Whether or not the petitioner is entitled to claim
a refund for the income tax paid on the sale of its
co-owned MBP lot in its capacity as trustee of
the Employees Trust Fund. – YES (Income
from Employees’ Trust Fund is Exempt from
Income Tax)
RULING:
The Office of the Solicitor General argues that
the cardinal rule in taxation is that tax
exemptions are highly disfavored and whoever
claims a tax exemption must justify his right by
the clearest grant of law. Tax exemption cannot
arise by implication and any doubt whether the
exemption exists is strictly construed against the
taxpayer.41 Further, the findings of the CTA,
18
which were affirmed by the CA, should be given
respect and weight in the absence of abuse or
improvident exercise of authority.
The court ruled that, the tax-exempt character of
petitioner’s Employees Trust Fund is not an
issue in this case because the tax-exempt
character of the Employees Trust Fund has long
been settled. It is also settled that petitioner exist
for the purpose of holding title to and
administering the tax exempt Employees Trust
Fund which was established for the benefit of
VMC’s employees. As such, petitioner has the
personality to claim tax refunds due to the
Employees Trust Fund.
As to the proof of co-ownership of the MBP lot,
the law expressly allows a co-owner (1st co-
owner) of a parcel of land to register his
proportionate share in the name of his co-owner
(2nd co-owner) in whose name the entire land is
registered. The 2nd co-owner serves as a legal
trustee of the 1st co-owner insofar as the
proportionate share of the 1st co-owner is
concerned. The 1st co-owner remains the owner
of his proportionate share and not the 2 nd co-
owner in whose name the entire land is
registered, as provided in Art. 1452 of the NCC.
The income from the trust fund investments is
therefore exempt from the payment of income
tax and consequently from the payment of the
creditable withholding tax on the sale of their
real property.
Thus, the Employees Trust Fund owns 49.59%
of the MBP lot.
Since petitioner has proven that the income from
the sale of the MBP lot came from an investment
by the Employees Trust Fund, petitioner as
trustee is entitled to claim the tax refund of PHP
3, 037, 500.00 – which was erroneously paid in
the sale of the MBP lot.
INCOME TAXATION FOR INDIVIDUALS
I. TAXABLE INDIVIDUALS
a. Resident Citizen
b. Non-resident Citizen [Sec. 22(E),
NIRC]
c. Resident Alien
d. Non-resident alien
e. Special Employees
f. Estates and Trusts
II. INCOME TAX RATES - Options available
for self-employed individuals under TRAIN
Law
III. INCLUSIONS (Gross Income for
Individuals)
i. Compensation Income
1. Definition
First Lepanto Taisho Insurance Corporation
v. CIR, GR No. 197117, April 10, 2013
FACTS:
Petitioner First Lepanto Taisho is a non-life
insurance corporation and considered as a
“Large Taxpayer under Revenue Regulations
No. 6-85, as amended by Revenue Regulations
No. 12-94 effective 1994.” After submitting its
corporate income tax return for taxable year
ending Dec 31, 1997, petitioner received a Letter
of Authority, dated Oct 30, 1998, from
respondent Commissioner of Internal Revenue
(CIR) to allow it to examine their books of
account and other accounting records for 1997
and other unverified prior years. On Dec 29
1999, CIR issued internal revenue tax
assessments for deficiency income, withholding,
expanded withholding, final withholding, CAT,
and DSTs for taxable year 1997. On Feb 2000,
First Lepanto protested the said tax
assessments. During the pendency of the case
on 2008, petitioner filed its motion for partial
withdrawal of petition for review of assessment
notice in view of the tax amnesty program it had
availed. This was granted by CTA 2nd division.
Consequently, CTA 2nd division directed CIR to
pay a reduced tax liability of 1.9M Pesos. This
was affirmed by CTA En Banc.
Petitioner contended that it was not liable to pay
Withholding Tax on Compensation on the
P500,000.00 Director’s Bonus to their directors,
specifically, Rodolfo Bausa, Voltaire Gonzales,
Felipe Yap, and Catalino Macaraig, Jr., because
they were not employees and the amount was
already subjected to Expanded Withholding
Tax. The CTA En banc, however, ruled that
Section 5 of Revenue Regulation No. 12-86
expressly identified a director to be an
employee.
19

Hence, the present petition.
ISSUE:
Whether CTA En Banc erred in holding
petitioner First Lepanto liable for deficiency
withholding taxes on compensation on directors'
bonuses under Assessment No. ST-WC-97-
0021-99
RULING:
No, CTA En banc was correct in holding First
Lepanto Liable. The Court finds no merit in the
petition.
For taxation purposes, a director is considered
an employee under Section 5 of Revenue
Regulation No. 12-86, to wit:
“An individual, performing services for a
corporation, whether as an officer and director or
merely as a director whose duties are confined
to attendance at and participation in the
meetings of the Board of Directors, is an
employee.”
The non-inclusion of the names of some of
petitioner’s directors in the company’s Alpha List
does not ipso facto create a presumption that
they are not employees of the corporation,
because the imposition of withholding tax on
compensation hinges upon the nature of work
performed by such individuals in the company.
Moreover, contrary to petitioner’s attestations,
Revenue Regulation No. 2-98, specifically,
Section 2.57.2. A (9) thereof, cannot be applied
to this case as the latter is a later regulation
while the accounting books examined were for
taxable year 1997.
Petition is denied.
2. Kinds
3. Doctrine of Cash Equivalent
4. Mode of Compensation Income
Collection / Payment
5. Fringe Benefits
a. Definition
b. Kinds of Fringe Benefits
[HEVHEMEHEL]
c. Computation of Fringe Benefits Tax
i.Burden of FBT: Employer
ii.Grossed Up Monetary Value for:
1. Special
Employees
2. NRA-NETB
d. Exemption from Fringe Benefit Tax
.De Minimis Benefits
i.Contributions of the employer for the benefit
of the employee to retirement,
ii.Insurance and hospitalization benefits plan
iii.Employer’s convenenience rule
iv.FB which are authorized or exempted from
tax under special laws
ii. Business or Professional Income
iii. Passive Income
1. Taxation at Source
a. Final Withholding Tax
b. Creditable Withholding Tax
ING Bank N.V. vs Commissioner of Internal
Revenue, GR No. 167679, July 22, 2015
Qualified taxpayers with pending tax cases
may still avail themselves of the tax amnesty
program under Republic Act No.
9480,1 otherwise known as the 2007 Tax
Amnesty Act. Thus, the provision in BIR
Revenue Memorandum Circular No. 19-2008
excepting "[i]ssues and cases which were ruled
by any court (even without finality) in favor of the
BIR prior to amnesty availment of the taxpayer"
from the benefits of the law is illegal, invalid, and
null and void.2 The duty to withhold the tax on
compensation arises upon its accrual.
FACTS:
ING Bank, "the Philippine branch of
Internationale Nederlanden Bank N.V., a
foreign banking corporation incorporated in
the Netherlands[,] is duly authorized by the
Bangko Sentral ng Pilipinas to operate as a
branch with full banking authority in the
Philippines."
January ING Bank received a Final Assessment
3, 2000 Notice11 dated December 3, 1999.
It contained the Details of Assessment
and 13 Assessment Notices issued by
the BIR through its Assistant
Commissioner Salazar and covered the
deficiency tax assessments for taxable
years 1996 and 1997.
20
February
ING Bank "paid the deficiency
2, 2000 assessments for [the] 1996 compromise
penalty, 1997 deficiency documentary
stamp tax and 1997 deficiency final tax in
the respective amounts of ₱1,000.00,
₱1,000.00 and ₱75,013.25 [the original
amount of ₱73,752.47 plus additional
interest]."16 ING Bank, however,
"protested [on the same day] the
remaining ten (10) deficiency tax
assessments in the total amount of
₱672,576,939.18."17
October
ING Bank filed a Petition for Review
26, 2000 before CTA and sought the cancellation
and withdrawal of the deficiency tax
assessments for the years 1996 and
1997, including the alleged deficiency
documentary stamp tax on special
savings accounts, deficiency onshore
tax, and deficiency onshore tax, and
deficiency withholding tax on
compensation mentioned above.
CTA Decision:
CANCELLED AND WITHDRAWN
- assessment for 1996 and 1997
deficiency income tax
- 1996 and 1997 deficiency branch
profit remittance tax
- 1997 deficiency documentary stamp
tax on IBCLs exceeding five days
ORDERED TO PAY:
- P240,106,928.94 plus 20%
delinquency interest per annum from
February 3, 2000 until fully paid,
pursuant to Section 249 (C) of the
NIRC Code of 1997.
Novembe
CIR and ING Bank filed MR but DENIED
r 12, for lack of merit.
2004
Decembe
ING Bank filed its appeal before the CTA
r 8, 2004 but was DENIED
Decembe
ING Bank filed a Manifestation and
r 20, Motion informing this court that it had
2007 availed itself of the tax amnesty
authorized and granted under RA No.
9480 covering “all national internal
revenue taxes for the taxable year 2005
and prior years, with or without
assessments duly issued therefor, that
have remained unpaid as of December
31, 2005[.]"32 ING Bank stated that it
filed before the Bureau of Internal
Revenue its Notice of Availment of Tax
Amnesty Under Republic Act No.
948033 on December 14, 2007.
Documents are Statement of Assets,
Liabilities and Net Worth (SALN) as of
Dec. 31, 2005; and Tax Amnesty Return
for Taxable Year 2005 and Prior Years
and Tax Amnesty Payment Form for
Taxable Year 2005 and Prior Years
showing payment of the amnesty tax in
the amount of P500,000.00
ING Bank prayed that this court issue a resolution
taking note of its availment of the tax amnesty,
and confirming its entitlement to all the
immunities and privileges under Section 6 of
Republic Act No. 9480, particularly with respect to
the "payment of deficiency documentary stamp
taxes on its special savings accounts for the
taxable years 1996 and 1997 and deficiency tax on
onshore interest income derived under the foreign
currency deposit system for taxable year 1996[.]"
ISSUE:
(1) Whether or not ING Bank is entitled to
the immunities and privileges under RA No.
9480
(2) Whether or not the assessment for
defficiency withholding tax on compensation
is proper
RULING:
(1) YES. Taxpayers with pending tax cases
may avail themselves of the tax amnesty
program under Republic Act No. 9480.
In CS Garment, Inc. v. Commissioner of
Internal Revenue,68 this court has "definitively
declare[d] . . . the exception ‘[i]ssues and
cases which were ruled by any court (even
without finality) in favor of the BIR prior to
amnesty availment of the taxpayer’ under
BIR [Revenue Memorandum Circular No.] 19-
2008 [as] invalid, [for going] beyond the
scope of the provisions of the 2007 Tax
Amnesty Law." Thus:
[N]either the law nor the implementing
rules state that a court ruling that has not
attained finality would preclude the
availment of the benefits of the Tax
Amnesty Law. Both R.A. 9480 and DOF
Order No. 29-07 are quite precise in
declaring that "[t]ax cases subject of final
and executory judgment by the courts" are
the ones excepted from the benefits of the
21
 law. In fact, we have already pointed out the
erroneous interpretation of the law in
Philippine Banking Corporation (Now:
Global Business Bank, Inc.) v.
Commissioner of Internal Revenue, viz:
The BIR’s inclusion of "issues and
cases which were ruled by any court (even
without finality) in favor of the BIR prior to
amnesty availment of the taxpayer" as one
of the exceptions in RMC 19-2008 is
misplaced. RA 9480 is specifically clear that
the exceptions to the tax amnesty program
include "tax cases subject of final and
executory judgment by the courts." The
present case has not become final and
executory when Metrobank availed of the
tax amnesty program.70 (Emphasis in the
original, citation omitted)
Moreover, in the fairly recent case of LG
Electronics Philippines, Inc. v. Commissioner of
Internal Revenue, we confirmed that only cases
that involve final and executory judgments
are excluded from the tax amnesty program
as explicitly provided under Section 8 of
Republic Act No. 9480.
Thus, petitioner ING Bank is not
disqualified from availing itself of the tax
amnesty under the law during the pendency
of its appeal before this court.
Republic Act No. 9480 confers no
discretion on respondent Commissioner of
Internal Revenue. The provisions of the law
are plain and simple. Unlike the power to
compromise or abate a taxpayer’s liability
under Section 20473 of the 1997 National
Internal Revenue Code that is within the
discretion of respondent Commissioner of
Internal Revenue, its authority under
Republic Act No. 9480 is limited to
determining whether (a) the taxpayer is
qualified to avail oneself of the tax amnesty;
(b) all the requirements for availment under
the law were complied with; and (c) the
correct amount of amnesty tax was paid
within the period prescribed by law. There is
nothing in Republic Act No. 9480 which can be
construed as authority for respondent
Commissioner of Internal Revenue to introduce
exceptions and/or conditions to the coverage of
the law nor to disregard its provisions and
substitute his own personal judgment.
Republic Act No. 9480 provides a general
grant of tax amnesty subject only to the cases
specifically excepted by it. A tax amnesty
"partakes of an absolute. . . waiver by the
Government of its right to collect what otherwise
would be due it[.]"75 The effect of a qualified
taxpayer’s submission of the required
documents and the payment of the prescribed
amnesty tax was immunity from payment of all
national internal revenue taxes as well as all
administrative, civil, and criminal liabilities
founded upon or arising from non-payment of
national internal revenue taxes for taxable year
2005 and prior taxable years.76
Finally, the documentary stamp tax and onshore
income tax are covered by the tax amnesty
program under Republic Act No. 9480 and its
Implementing Rules and
Regulations.77 Moreover, as to the deficiency
tax on onshore interest income, it is worthy to
state that petitioner ING Bank was assessed by
respondent Commissioner of Internal Revenue,
not as a withholding agent, but as one that was
directly liable for the tax on onshore interest
income and failed to pay the same.
Considering petitioner ING Bank’s tax amnesty
availment, there is no more issue regarding its
liability for deficiency documentary stamp taxes
on its special savings accounts for 1996 and
1997 and deficiency tax on onshore interest
income for 1996, including surcharge and
interest.
(2) YES. Petitioner ING Bank is liable for the
withholding tax on the bonuses since it
claimed the same as expenses in the year
they were accrued.
Under the NIRC, every form of compensation for
personal services is subject to income tax and,
consequently, to withholding tax. Petitioner ING
Bank insists that the bonus accruals in 1996 and
1997 were not yet subject to withholding tax
because these bonuses were actually distributed
only in the succeeding years of their accrual
when the amounts were finally determined.
The tax on compensation income is withheld at
source under the creditable withholding tax
system wherein the tax withheld is intended to
equal or at least approximate the tax due of the
payee on the said income. It was designed to
enable (a) the individual taxpayer to meet his or
her income tax liability on compensation earned;
and (b) the government to collect at source the
22
appropriate taxes on compensation. Taxes
withheld are creditable in nature. Thus, the
employee is still required to file an income tax
return to report the income and/or pay the
difference between the tax withheld and the tax
due on the income. For over withholding, the
employee is refunded. Therefore, absolute or
exact accuracy in the determination of the
amount of the compensation income is not a
prerequisite for the employer’s withholding
obligation to arise. –end here- read nalang the
succeeding ruling
It is true that the law and implementing
regulations require the employer to deduct and
pay the income tax on compensation paid to its
employees, either actually or constructively.
Every person required to deduct and withhold
the tax from the compensation of an employee is
liable for the payment of such tax whether or not
collected from the employee. However, if the
employer in violation of the provisions of the Tax
Code fails to deduct and withhold and thereafter
the employee pays the tax, it shall no longer be
collected from the employer. Such payment
does not operate to relieve the employer from
liability for penalties or additions to the tax for
failure to deduct and withhold within the time
prescribed by law or regulations. The employer
will not be relieved of his liability for payment of
the tax required to be withheld unless he can
show that the tax has been paid by the
employee.
The amount of any tax withheld/collected by the
employer is a special fund in trust for the
Government of the Philippines.
When the employer or other person required to
deduct and withhold the tax under this Chapter
XI, Title II of the Tax Code has withheld and paid
such tax to the Commissioner of Internal
Revenue or to any authorized collecting officer,
then such employer or person shall be relieved
of any liability to any person. (Emphasis
supplied)
On the other hand, it is also true that under
Section 45 of the 1997 National Internal
Revenue Code (then Section 39 of the 1977
National Internal Revenue Code, as amended),
deductions from gross income are taken for the
taxable year in which "paid or accrued" or "paid
or incurred" is dependent upon the method of
accounting income and expenses adopted by
the taxpayer.
Petitioner ING Bank accrued or recorded the
bonuses as deductible expense in its books.
Therefore, its obligation to withhold the related
withholding tax due from the deductions for
accrued bonuses arose at the time of accrual
and not at the time of actual payment.
In Filipinas Synthetic Fiber Corporation v. Court
of Appeals, the issue was raised on "whether the
liability to withhold tax at source on income
payments to non-resident foreign corporations
arises upon remittance of the amounts due to
the foreign creditors or upon accrual thereof." In
resolving this issue, this court considered the
nature of the accounting method employed by
the withholding agent, which was the accrual
method, wherein it was the right to receive
income, and not the actual receipt, that
determined when to report the amount as part of
the taxpayer’s gross income. It upheld the lower
court’s finding that there was already a definite
liability on the part of petitioner at the maturity of
the loan contracts. Moreover, petitioner already
deducted as business expense the said amounts
as interests due to the foreign corporation.
Consequently, the taxpayer could not claim that
there was "no duty to withhold and remit income
taxes as yet because the loan contract was not
yet due and demandable."104 Petitioner,
"[h]aving ‘written-off’ the amounts as business
expense in its books, . . . had taken advantage
of the benefit provided in the law allowing for
deductions from gross income."105
Here, petitioner ING Bank already recognized a
definite liability on its part considering that it had
deducted as business expense from its gross
income the accrued bonuses due to its
employees. Underlying its accrual of the bonus
expense was a reasonable expectation or
probability that the bonus would be achieved. In
this sense, there was already a constructive
payment for income tax purposes as these
accrued bonuses were already allotted or made
available to its officers and employees.
We note petitioner ING Bank's earlier claim
before the Court of Tax Appeals that the bonus
accruals in 1996 and 1997 were disbursed in the
following year of accrual, as reimbursements of
representation, travel, and entertainment
expenses incurred by its employees.106 This
shows that the accrued bonuses in the amounts
of P400,075.0l (1996) and Pl,034,119.43 (1997)
on which deficiency withholding taxes of
Pl67,384.97 (1996) and P397,157.70 (1997)
23
were imposed, respectively, were already set
apart or made available to petitioner ING Bank's
officers and employees. To avoid any tax issue,
petitioner ING Bank should likewise have
recognized the withholding tax liabilities
associated with the bonuses at the time of
accrual.
2. Transactions subject to final
withholding
Banco De Oro, et. al. vs. Republic of the
Philippines, et. al, GR Nos. 198756, January
13, 2015
FACTS:
ISSUE:
RULING:
Iv. Capital Gains
a. Sale of Shares of Stocks NOT listed
and traded in the local exchange OR listed
but NOT traded in local stocks exchange
b. Sale of Real Property located in the
Philippines
c. Sale of other “capital assets”
d. Conditionally Exempt form Payment
of CGT
e. Exempt entities from CGT
Republic v. Spouses Salvador, GR No.
205428, June 7, 2017
DOCTRINE:
It is settled that the transfer of property
through expropriation proceedings is a sale
or· exchange within the meaning of Sections
24(D) and 56(A) (3) of the National Internal
Revenue Code, and profit from the
transaction constitutes capital gain. Since
capital gains tax is a tax on passive income,
it is the seller, or respondents in this case,
who are liable to shoulder the tax.
As far as the government is concerned, the
capital gains tax in expropriation
proceedings remains a liability of the seller,
as it is a tax on the seller's gain from the sale
of real property.
NATURE OF THE CASE:
Petition for Review on Certiorari under Rule 45
assailing the August 23, 2012 Decision and the
January 10, 2013 Order of the RTC of
Valenzuela City which directed petitioner
Republic of the Philippines (Republic) to pay
respondents spouses Senando F. Salvador and
Josefina R. Salvador consequential damages
equivalent to the value of the capital gains tax
and other taxes necessary for the transfer of the
expropriated property in the Republic's name.
PETITIONER:
The Republic, represented by the Department of
Public Works and Highways (DPWH).
RESPONDENT:
Respondents are the registered owners of a
parcel of land with a total land area of 229
square meters, located in Kaingin Street,
Barangay Parada, Valenzuela City, and covered
by Transfer Certificate of Title No.V-77660.
FACTS:
DPWH filed a verified Complaint before the RTC
for the expropriation of 83 square meters of said
parcel of land (subject property), as well as the
improvements thereon, for the construction of
the C-5 Northern Link Road Project Phase 2
(Segment 9) from the North Luzon Expressway
(NLEX) to McArthur Highway.
Respondents received two checks from the
DPWH representing 100% of the zonal value of
the subject property and the cost of the one-
storey semi-concrete residential house erected
on the property amounting to ₱l61, 850.00 and
₱523, 449.22, respectively. The RTC thereafter
issued the corresponding Writ of Possession in
favor of the Republic. Respondents signified in
open court that they recognized the purpose for
which their property is being expropriated and
interposed no objection. They also manifested
that they have already received the total sum of
₱685,349.22 from the DPWH and are therefore
no longer intending to claim any just
compensation.
Ruling of the RTC
In its Decision dated August 23, 2012, the RTC
rendered judgment in favor of the Republic
condemning subject property for the purpose of
implementing the construction of Segment 9,
24
pay respondents consequential damages
equivalent to the value of the capital gains
tax and other taxes necessary for the transfer
of the subject property in the Republic's name.
The Republic moved for partial reconsideration,
specifically on the payment of the capital gains
tax, but the RTC denied the motion in its Order
dated January 10, 2013 for having been
belatedly filed. The RTC also found no justifiable
basis to reconsider its award of Consequential
damages in favor of respondents, as the
payment of capital gains tax and other transfer
taxes is but a consequence of the
expropriation proceedings.
Republic filed the present Petition for Review on
Certiorari assailing the RTC's August 23, 2012
Decision and January 10, 2013 Order.
ISSUE/S:
1. Whether the RTC correctly denied the
Republic's Motion for Partial
Reconsideration for having been filed
out of time
2. Whether the capital gains tax on the
transfer of the expropriated property can
be considered as consequential
damages that may be awarded to
respondents.
RULING:
The Petition is impressed with merit.
1. "Section 3, Rule 13 of the Rules of Court
provides that if a pleading is filed by
registered mail, x x x the date of
mailing shall be considered as the
date of filing. It does not matter when
the court actually receives the mailed
pleading."
In this case, the records show that the
Republic filed its Motion for Partial
Reconsideration before the RTC via
registered mail on September 28, 2012.
Although the trial court received the
Republic's motion only on October 5,
2012, it should have considered the
pleading to have been filed on
September 28, 2012, the date of its
mailing, which is clearly within the
reglementary period of 15 days to file
said motion, counted from September
13, 2012, or the date of the Republic's
receipt of the assailed Decision.
Given these circumstances, we hold that
the RTC erred in denying the
Republic's Motion for Partial
Reconsideration for having been filed
out of time.
2. RTC committed a serious error when
it directed the Republic to pay
respondents consequential damages
equivalent to the value of the capital
gains tax and other taxes necessary
for the transfer of the subject
property.
"Just compensation [is defined as] the
full and fair equivalent of the property
sought to be expropriated.x x x The
measure is not the taker's gain but the
owner's loss. [The compensation, to be
just,] must be fair not only to the owner
but also to the taker."
In order to determine just compensation,
the trial court should first ascertain the
market value of the property by
considering the:
i. Cost of acquisition
ii. Current value of like properties
iii. Actual or potential uses; and
iv. In the particular case of lands,
their size, shape, location, and
the tax declarations.
If as a result of the expropriation, the
remaining lot suffers from
impairment or decrease in value,
consequential damages may be
awarded by the trial court, provided
that the consequential benefits which
may arise from the expropriation do not
exceed said damages suffered by the
owner of the property.
While it is true that "the determination of
the amount of just compensation is
within the court's discretion, it should not
25
be done arbitrarily or capriciously.
[Rather,] it must [always] be based on all
established rules, upon correct legal
principles and competent evidence."
The court cannot base its judgment on
mere speculations and surmises.
In the present case, the RTC deemed it
"fair and just that x x x whatever is the
value of the capital gains tax and all
other taxes necessary for the transfer of
the subject property to the [Republic] are
but consequential damages that should
be paid by the latter." This is clearly an
error. It is settled that the transfer of
property through expropriation
proceedings is a sale or· exchange
within the meaning of Sections 24(D)
and 56(A) (3) of the National Internal
Revenue Code, and profit from the
transaction constitutes capital gain.
Since capital gains tax is a tax on
passive income, it is the seller, or
respondents in this case, who are
liable to shoulder the tax.
In fact, the Bureau of Internal Revenue
(BIR), in BIR Ruling No. 476-2013
dated December 18, 2013, has
constituted the DPWH as a withholding
agent tasked to withhold the 6% final
withholding tax in the expropriation of
real property for infrastructure projects.
As far as the government is
concerned, the capital gains tax in
expropriation proceedings remains a
liability of the seller, as it is a tax on
the seller's gain from the sale of real
property.
Consequential damages are only
awarded if as a result of the
expropriation, the remaining property of
the owner suffers from impairment or
decrease in value. In this case, no
evidence was submitted to prove any
impairment or decrease in value of
the subject property as a result of the
expropriation. More significantly, given
that the payment of capital gains tax
on the transfer of the subject
property has no effect on the
increase or decrease in value of the
remaining property, it can hardly be
considered as consequential damages
that may be awarded to respondents.
DECISION:
WHEREFORE, we GRANT the Petition for
Review on Certiorari. The Decision dated August
23, 2012 and the Order dated January 10, 2013
of the Regional Trial Court, Branch 270,
Valenzuela City, in Civil Case No. 175-V-11, are
hereby MODIFIED, in that the award of
consequential damages is DELETED. In
addition, spouses Senando F. Salvador and
Josefina R. Salvador are hereby ORDERED
to pay for the capital gains tax due on the
transfer of the expropriated property.
v. Other Income
a. Rent Income other than royalties
b. Interest income other than interest
income on bank deposit
Banco de Oro, et al vs. Republic of the
Philippines et al. (En Banc), GR No. 198756,
August 16, 2016
FACTS:
ISSUE:
RULING:
c. Dividend income
d. Income from other sources and this
include:
i.Bad debts recovered
ii.Illegal gains derived from gambling
iii.Tax refunds
iv.Compensation for private property
expropriated by the government for public
v.Use
vi.Damages
vii.Cancellation of indebtedness
IV. INCOME TAX COMPUTATION
V. TAX on NRA-NETB
VI. EXCLUSIONS
Confederation for Unity, Recognition and
Advancement of Government Employees
26
 (COURAGE) et al v. CIR, GR Nos. 213446 & On August 6, 2014, petitioners Confederation for
213658, (En Banc) July 3, 2018 Unity, Recognition and Advancement of
Government Employees (COURAGE), et al.,
NATURE OF THE CASE: organizations/unions of government employees
G.R. Nos. 213446 and 213658 are petitions for from the SB, Senate of the Philippines, CA,
Certiorari, Prohibition and/or Mandamus under DAR, DSWD, DTI, MMDA, NHA and local
Rule 65 of with Application for Issuance of TRO government of Quezon City, filed a Petition for
and/or Writ of Preliminary Injunction, uniformly Prohibition and Mandamus, imputing grave
seeking to: abuse of discretion on the part of respondent
CIR in issuing RMO No. 23-2014.
(a) Issue a TRO to enjoin the
implementation of Revenue According to petitioners, RMO No. 23-2014
Memorandum Order (RMO) No. 23- classified as taxable compensation, the
2014 dated June 20, 2014 issued by the following allowances, bonuses,
CIR; and compensation for services granted to
(b) Declare null, void and unconstitutional government employees, which they alleged to
paragraphs A, B, C, and D of Section III, be considered by law as non-taxable fringe
and Sections IV, VI and VII of RMO No. and de minimis benefits, to wit:
23-2014.
I. Legislative Fringe Benefits
The petition in G.R. No. 213446 also prays for
the issuance of a Writ of Mandamus to compel Anniversary Cost of Living Inflationary
respondents to upgrade the P30,000.00 non- Bonus Assistance Assistance
taxable ceiling of the 13th month pay and other Allowance
benefits for the concerned officials and
employees of the government. Additional Efficiency Longevity
Food Subsidy Incentive Bonus Service Pay
FACTS:
On June 20, 2014, respondent CIR issued the 13th Month Financial Relief Medical
assailed RMO No. 23-2014, in furtherance of Pay Assistance Allowance
Revenue Memorandum Circular (RMC) No. 23-
Food Subsidy Grocery Mid-Year
2012 dated February 14, 2012 on the
Allowance Eco.
"Reiteration of the Responsibilities of the
Assistance
Officials and Employees of Government Offices
for the Withholding of Applicable Taxes on Cash Gift Hospitalization Productivity
Certain Income Payments and the Imposition of Incentive
Penalties for Non-Compliance Thereof," in order Benefit
to:
Transition Uniform
Clarify and consolidate the Allowance Allowance
responsibilities of the public sector to
withhold taxes on its transactions as a
customer (on its purchases of goods
II. Judiciary Benefits
and services); and as an employer (on
compensation paid to its officials and Additional Productivity Year-End
employees) under the NIRC of 1997, as Compensation Incentive Bonus (13th
amended, and other special laws. Income Benefit Month Pay)
The Petitions: Extraordinary & Grocery Cash Gift
G.R. No. 213446 Miscellaneous Allowance
Expenses

27
Monthly Special Clothing Loyalty On August 19, 2014, petitioners Armando A.
Allowance Allowance Cash Award Yanga, President of the RTC Judges
(Milestone Association of Manila, and Ma. Cristina Carmela
Bonus) I. Japzon, President of the Philippine Association
of Court Employees – Manila Chapter, filed a
Additional Cost Emergency Christmas Petition for Certiorari and Prohibition as duly
of Living Economic Allowance authorized representatives of said associations,
Allowance Assistance m. seeking to nullify RMO No. 23-2014 on the
(from Judiciary Anniversary following grounds:
Development Bonus
Fund) (1) CIR is bereft of any authority to issue
the assailed RMO. The NIRC of 1997,
as amended, expressly vests to the
Petitioners further assert that the imposition of
withholding tax on these allowances, Secretary of Finance the authority to
bonuses and benefits, allotted by the promulgate all needful rules and
Government to its employees free of tax for a regulations for the effective
long time: enforcement of tax provisions; and
(2) CIR committed grave abuse of
 Violates the prohibition on non- discretion amounting to lack or
diminution of benefits under Article 100 excess of jurisdiction when it
of the Labor Code subjected to withholding tax benefits
 Infringes upon the fiscal autonomy of the and allowances of court employees
Legislature, Judiciary, Constitutional
which are tax-exempt such as:
Commissions and Office of the
(a) Special Allowance for Judiciary
Ombudsman granted by the Constitution.
(SAJ) under RA No. 9227 and
 Constitutes a usurpation of legislative
additional cost of living allowance
power and diminishes the delegated
power of local government units (AdCOLA) granted under PD No.
inasmuch as it defines new offenses and 1949 which are considered as non-
prescribes penalty therefor, particularly taxable fringe benefits under
upon local government officials; and Section 33(A) of the NIRC.
 Violates the equal protection clause of (b) Cash gift, loyalty awards, uniform
the Constitution as it discriminates and clothing allowance and
against government officials and additional compensation (ADCOM)
employees by imposing fringe benefit tax granted to court employees which
upon their allowances and benefits, as are considered de minimis under
opposed to the allowances and benefits of Section 33(C)(4).
employees of the private sector, the fringe (c) Allowances and benefits granted by
benefit tax of which is borne and paid by the Judiciary which are not taxable
their employers. pursuant to Section 32(7)(E) of
the NIRC
Petition also prays for the issuance of a writ of (d) Expenses for the Judiciary provided
mandamus ordering respondent CIR to perform under COA Circular 2012-001.
its duty under Section 32(B)(7)(e)(iv) of the
NIRC of 1997, as amended, to upgrade the Petitioners further assert that RMO No. 23-2014
ceiling of the 13th month pay and other violates their right to due process of law
benefits for the concerned officials and because while it is ostensibly denominated
employees of the government, including as a mere revenue issuance, it is an illegal
petitioners. and unwarranted legislative action which
sharply increased the tax burden of officials
G.R. No. 213658

28
and employees of the Judiciary without the units. It merely reiterates the obligation
benefit of being heard. of the government as an employer to
withhold taxes, which has long been
The Court resolved to consolidate the foregoing
provided by the Tax Code.
cases.
o The allowances and benefits
Respondents, through the OSG filed their enumerated in Section III A, B, C, and
Consolidated Comment and argued that: D, are not fringe benefits which are
exempt from taxation under Section
o Petitions are barred by the doctrine of
33 of the Tax Code, nor de minimis
hierarchy of courts
benefits excluded from employees'
o Petitioners failed to present any special
taxable basic salary. The SAJ under
and important reasons or exceptional
and AdCOLA additional allowances
and compelling circumstance to justify
which form part of the employee's
direct recourse to this Court.
basic salary; thus, subject to
o RMO No. 23-2014 was validly issued in
withholding taxes.
accordance with the power of the CIR to
o RMO No. 23-2014 does not violate
make rulings and opinion in connection
petitioners' right to equal protection of
with the implementation of internal
laws as it covers all employees and
revenue laws.
officials of the government. It does not
o Unlike Revenue Regulations (RRs),
create a new category of taxable income
RMOs do not require the approval or
nor make taxable those which are not
signature of the Secretary of Finance, as
taxable but merely reflect those incomes
these merely provide directives or
which are deemed taxable under
instructions in the implementation of
existing laws.
stated policies, goals, objectives, plans
o Mandamus will not lie to compel
and programs of the Bureau.
respondents to increase the ceiling for
o RMO No. 23-2014 is in fact a mere
tax exemptions because the Tax Code
reiteration of the Tax Code and previous
does not impose a mandatory duty on
RMOs, and can be traced back to RR
the part of respondents to do the same.
No. 01-87 dated April 2, 1987
implementing E.O. No. 651 which was
promulgated by then Sec. of Finance The Petitions-in-Intervention
Jaime V. Ongpin upon recommendation
of then CIR Bienvenido A. Tan, Jr. Thus, On September 11, 2014, the National Federation
of Employees Associations of the Department of
the CIR never usurped the power and
Agriculture (NAFEDA) et al., duly registered
authority of the legislature in the
union/association of employees of the DA,
issuance of the assailed RMO.
National Agricultural and Fisheries Council,
o Due process requirements of hearing COMELEC, Mines and Geosciences Bureau,
and publication are not applicable to and Philippine Fisheries Development Authority,
RMO No. 23-2014. claiming similar interest as petitioners in
o Petitioners' claim that RMO No. 23-2014 G.R. No. 213446, filed a Petition-in-
is unconstitutional has no leg to stand Intervention seeking the nullification of items
on. The constitutional guarantee of fiscal III, VI and VII of RMO No. 23-2014 based on the
autonomy to Judiciary and Constitutional following grounds:
Commissions does not include
(1) CIR acted with grave abuse of discretion
exemption from payment of taxes, which
and usurped the power of the Legislature
is the lifeblood of the nation.
in issuing RMO No. 23-2014 which
o RMO No. 23-2014 never intended to
imposes additional taxes on government
diminish the powers of local government
employees and prescribes penalties for

29
 government official's failure to withhold and
remit the same;
(2) RMO No. 23-2014 violates the equal
protection clause because the
Commission on Human Rights (CHR)
was not included among the
constitutional commissions covered by
the issuance and the ADCOM of
employees of the Judiciary was
subjected to withholding tax but those
received by employees of the Legislative
and Executive branches are not; and
(3) CIR failed to upgrade the tax exemption
ceiling for benefits under Section
32(B)(7) of the NIRC of 1997, as amended.
In its Comment, respondents, through the OSG,
sought the denial of the Petition-in-Intervention
for:
o Failure of the intervenors to seek prior
leave of Court and to demonstrate that
the existing consolidated petitions are
not sufficient to protect their interest as
parties affected by the assailed RMO.
o Contrary to the intervenors' position, the
CHR is not exempt from the applicability
of RMO No. 23-2014.29 Thehe
enumeration of government offices and
constitutional bodies covered by RMO
No. 23-2014 is not exclusive; Section III
thereof in fact states that RMO No. 23-
2014 covers all employees of the public
sector.
o ADCOM referred to in Section III(B) of
the assailed RMO is unique to the
Judiciary; employees and officials in the
executive and legislative do not receive
this specific type of ADCOM enjoyed by
the employees and officials of the
Judicial branch.
On October 10, 2014, a Motion for Intervention
with attached Complaint in Intervention was
filed, in G.R. No. 213658, by the Members of the
Association of Regional Trial Court Judges in
Iloilo City. Claiming that they are similarly
situated with petitioners, said intervenors pray
that the:
(1) Court declare null and void RMO No.
23-2014 and direct the BIR to refund the
amount illegally exacted from the
salaries/compensations of the judges by
virtue of the implementation of RMO No.
23-2014.33
(2) The intervenors claim that RMO No. 23-
2014 violates their right to due process
as it takes away a portion of their
salaries and compensation without
giving them the opportunity to be heard.
(3) The implementation of RMO No. 23-
2014 resulted in the diminution of their
salaries/compensation in violation of
Sections 3 and 10, Article VIII of the
Constitution.
In their Comment to the Motion, respondents
adopted the arguments in their Consolidated
Comment and further stated that:
o RMO No. 23-2014 does not diminish the
salaries and compensation of members
of the judiciary as it has been judicially
settled that the imposition of taxes on
salaries and compensation of judges
and justices is not equivalent to
diminution of the same;
o Allowances and benefits enumerated
under Section III(B) of RMO No. 23-
2014 are not fringe benefits exempt
from taxation;
o AdCOLA and SAJ are not fringe
benefits as these are considered part of
the basic salary of government
employees subject to income tax;39 and
o There is no valid ground for the
refund of the taxes withheld pursuant
to RMO No. 23-2014.
Summary of Arguments
 Petitioners and intervenors (collectively
referred to as petitioners) argue that:
RMO No. 23-2014 is ultra vires insofar as:
o Sections III and IV of RMO No. 23-2014,
for subjecting to withholding taxes non-
taxable allowances, bonuses and benefits
received by government employees;
30
o Sections VI and VII, for defining new
offenses and prescribing penalties
therefor, particularly upon government
officials;
o RMO No. 23-2014 violates the equal
protection clause as it discriminates
against government employees;
o RMO No. 23-2014 violates fiscal
autonomy enjoyed by government
agencies;
o The implementation of RMO No. 23-2014
results in diminution of benefits of
government employees, a violation of
Article 100 of the Labor Code; and
o Respondents may be compelled through a
writ of mandamus to increase the tax-
exempt ceiling for 13th month pay and
other benefits.
 Respondents counter that:
o The instant consolidated petitions are
barred by the doctrine of hierarchy of
courts;
o The CIR did not abuse its discretion in the
issuance of RMO No. 23-2014 because:
It was issued pursuant to the CIR's power
to interpret the NIRC of 1997, and other
tax laws, under Section 4 of the NIRC of
1997;
o RMO No. 23-2014 does not discriminate
against government employees. It does
not create a new category of taxable
income nor make taxable those which are
exempt;
o RMO No. 23-2014 does not result in
diminution of benefits;
o The allowances, bonuses or benefits listed
under Section III of the assailed RMO are
not fringe benefits;
o The fiscal autonomy granted by the
Constitution does not include tax
exemption; and
o Mandamus does not lie against
respondents because the NIRC of 1997,
as amended, does not impose a
mandatory duty upon them to increase the
tax-exempt ceiling for 13th month pay and
other benefits.
Related Case: A.M. No. 16-12-04-SC
The Court, on July 11, 2017, issued a Resolution
directing the Fiscal Management and Budget
Office of the Court to maintain the status quo
by the non-withholding of taxes from the
benefits authorized to be granted to judiciary
officials and personnel, namely, the Mid-year
Economic Assistance, the Year-end Economic
Assistance, the Yuletide Assistance, the Special
Welfare Assistance (SWA) and the Additional
SWA, until such time that a decision is rendered
in the instant consolidated cases.
ISSUE:
Procedural
 WON there was a non-exhaustion of
administrative remedies
 WON petitions are barred by the
doctrine of hierarchy of courts
Substantive
 WON paragraphs A, B, C, and D of
Section III, and Sections IV, VI and VII
of RMO No. 23-2014
 WON respondents should be compelled
to upgrade the P30,000.00 non-taxable
ceiling of the 13th month pay and other
benefits for the concerned officials and
employees of the government.
RULING:
Procedural
I. On Non-exhaustion of administrative
remedies.
It is an unquestioned rule in this jurisdiction that
certiorari under Rule 65 will only lie if there is
no appeal, or any other plain, speedy and
adequate remedy in the ordinary course of
law against the assailed issuance of the CIR.
The plain, speedy and adequate remedy
expressly provided by law is an appeal of the
assailed RMO with the Sec. of Finance under
Sec. 4 of the NIRC of 1997, as amended, to wit:
SEC. 4. Power of the Commissioner
to Interpret Tax Laws and to Decide
31
 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 BIR
is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the CTA.
The CIR's exercise of its power to interpret tax
laws comes in the form of revenue issuances,
which include RMOs 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 Bureau in all areas of
operations, except auditing." These revenue
issuances are subject to the review of the
Secretary of Finance. In relation thereto,
Department of Finance Department Order No.
007-0244 issued by the Secretary of Finance
laid down the procedure and requirements for
filing an appeal from the adverse ruling of the
CIR to the said office. A taxpayer is granted a
period of thirty (30) days from receipt of the
adverse ruling of the CIR to file with the
Office of the Secretary of Finance a request
for review in writing and under oath.
In Asia International Auctioneers, Inc. v.
Parayno, Jr., the Court dismissed the petition
seeking the nullification of RMC No. 31-2003
for failing to exhaust administrative
remedies. The Court held:
x x x It is settled that the premature
invocation of the court's intervention
is fatal to one's cause of action. If a
remedy within the administrative
machinery can still be resorted to by
giving the administrative officer every
opportunity to decide on a matter that
comes within his jurisdiction, then such
remedy must first be exhausted before
the court's power of judicial review can
be sought. The party with an
administrative remedy must not only
initiate the prescribed administrative
procedure to obtain relief but also
pursue it to its appropriate
conclusion before seeking judicial
intervention in order to give the
administrative agency an opportunity
to decide the matter itself correctly
and prevent unnecessary and
premature resort to the court.
Courts of justice for reasons of comity and
convenience will shy away from a dispute until
the system of administrative redress has been
completed and complied with so as to give the
administrative agency concerned every
opportunity to correct its error and to dispose of
the case. While there are recognized exceptions
to this salutary rule, petitioners have failed to
prove the presence of any of those in the
instant case.
II. On Violation of the rule on hierarchy of courts.
Petitioners violated the rule on hierarchy of
courts as the petitions should have been
initially filed with the CTA, having the
exclusive appellate jurisdiction to determine
the constitutionality or validity of revenue
issuances.
In The Philippine American Life and General
Insurance Co. v. Secretary of Finance, the Court
held that rulings of the Secretary of Finance
in its exercise of its power of review under
Section 4 of the NIRC of 1997, as amended,
are appealable to the CTA. The Court
explained that while there is no law which
explicitly provides where rulings of the
Secretary of Finance under the adverted to
NIRC provision are appealable, Section
7(a)51 of RA No. 1125, the law creating the
CTA, is nonetheless sufficient, albeit
impliedly, to include appeals from the
Secretary's review under Section 4 of the
NIRC of 1997, as amended.
In City of Manila v. Grecia-Cuerdo, the CTA has
the power of certiorari within its appellate
jurisdiction, the Court declared that "it is now
within the power of the CTA, through its
power of certiorari, to rule on the validity of a
particular administrative rule or regulation so
32
long as it is within its appellate jurisdiction.
Hence, it can now rule not only on the
propriety of an assessment or tax treatment
of a certain transaction, but also on the
validity of the revenue regulation or revenue
memorandum circular on which the said
assessment is based."
In Banco de Oro v. Republic, the Court held that
the CTA has exclusive appellate jurisdiction
to review, on certiorari, the constitutionality
or validity of revenue issuances, even
without a prior issuance of an assessment...
Article VIII, Section 1 of the 1987 Constitution -
Based on this constitutional provision, this
Court recognized, for the first time, in The
City of Manila v. Hon. Grecia-Cuerdo, the Court
of Tax Appeals' jurisdiction over petitions for
certiorari assailing interlocutory orders issued
by the Regional Trial Court in a local tax case.
Thus:
[W]hile there is no express grant of
such power, with respect to the CTA,
Section 1, Article VIII of the 1987
Constitution provides, nonetheless, that
judicial power shall be vested in one
Supreme Court and in such lower courts
as may be established by law and that
judicial power includes the duty of the
courts of justice to settle actual
controversies involving rights which are
legally demandable and enforceable,
and to determine whether or not there
has been a grave abuse of discretion
amounting to lack or excess of
jurisdiction on the part of any branch or
instrumentality of the Government.
On the strength of the above
constitutional provisions, it can be
fairly interpreted that the power of the
CTA includes that of determining
whether or not there has been grave
abuse of discretion amounting to lack or
excess of jurisdiction on the part of the
RTC in issuing an interlocutory order in
cases falling within the exclusive
appellate jurisdiction of the tax court. It,
thus, follows that the CTA, by
constitutional mandate, is vested with
jurisdiction to issue writs of certiorari in
these cases. (Emphasis in the original)
This Court further explained that the CTA’s
authority to issue writs of certiorari is
inherent in the exercise of its appellate
jurisdiction which implies that:
o There is included in it the power necessary
to exercise it effectively, to make all orders
that will preserve the subject of the action,
and to give effect to the final determination
of the appeal.
o It carries with it the power to protect that
jurisdiction and to make the decisions of the
court thereunder effective.
o The court, in aid of its appellate jurisdiction,
has authority to control all auxiliary and
incidental matters necessary to the efficient
and proper exercise of that jurisdiction.
o For this purpose, it may, when necessary,
prohibit or restrain the performance of any
act which might interfere with the proper
exercise of its rightful jurisdiction in cases
pending before it.
o It would not be amiss to point out that a
court which is endowed with a particular
jurisdiction should have powers which are
necessary to enable it to act effectively
within such jurisdiction.
These should be regarded as powers which are
inherent in its jurisdiction and the court must
possess them in order to enforce its rules of
practice and to suppress any abuses of its
process and to defeat any attempted thwarting
of such process.
Section 1 of RA 9282 states that the CTA shall
be of the same level as the CA and shall
possess all the inherent powers of a court of
justice.
Judicial power likewise authorizes lower courts
to determine the constitutionality or validity
of a law or regulation in the first instance.
This is contemplated in the Constitution when it
speaks of appellate review of final judgments of
inferior courts in cases where such
constitutionality is in issue.
33
On June 16, 1954, Republic Act No. 1125
created the Court of Tax Appeals not as
another superior administrative agency as
was its predecessor — the former Board of
Tax Appeals — but as a part of the judicial
system with exclusive jurisdiction to act on
appeals from:
(1) Decisions of the CIR in cases involving
disputed assessments, refunds of
internal revenue taxes, fees or other
charges, penalties imposed in relation
thereto, or other matters arising under
the NIRC or other law or part of law
administered by the BIR;
(2) Decisions of the Commissioner of
Customs in cases involving liability for
customs duties, fees or other money
charges; seizure, detention or release of
property affected fines, forfeitures or
other penalties imposed in relation
thereto; or other matters arising under
the Customs Law or other law or part of
law administered by the BOC; and
(3) Decisions of provincial or city Boards of
Assessment Appeals in cases involving
the assessment and taxation of real
property or other matters arising under
the Assessment Law, including rules
and regulations relative thereto.
Republic Act No. 1125 transferred to the CTA
jurisdiction over all matters involving
assessments that were previously cognizable by
the RTC.
In 2004, Republic Act No. 9282 was enacted.
It expanded the jurisdiction of the CTA and
elevated its rank to the level of a collegiate court
with special jurisdiction.
o Section 1 specifically provides that the
CTA is of the same level as the CA
and possesses "all the inherent
powers of a Court of Justice."
o Section 7, as amended, grants the CTA
the :
 Exclusive jurisdiction to resolve all
tax-related issues
 Undoubted jurisdiction to pass upon
the constitutionality or validity of a
tax law or regulation when raised by
the taxpayer as a defense in
disputing or contesting an
assessment or claiming a refund.
 Take cognizance of cases directly
challenging the constitutionality or
validity of a tax law or regulation or
administrative issuance (revenue
orders, revenue memorandum
circulars, rulings).
 Except for local taxes, appeals from
the decisions of quasi-judicial
agencies (Commissioner of Internal
Revenue, Commissioner of
Customs, Secretary of Finance,
Central Board of Assessment
Appeals, Secretary of Trade and
Industry) on tax-related problems
must be brought exclusively to the
Court of Tax Appeals.
In other words, within the judicial system, the law
intends the Court of Tax Appeals to have
exclusive jurisdiction to resolve all tax problems.
Petitions for writs of certiorari against the
acts and omissions of the said quasi-judicial
agencies should, thus, be filed before the
Court of Tax Appeals.
Republic Act No. 9282, a special and later law
than Batas Pambansa Blg. 129 provides an
exception to the original jurisdiction of the RTC
over actions questioning the constitutionality or
validity of tax laws or regulations. Except for
local tax cases, actions directly challenging the
constitutionality or validity of a tax law or
regulation or administrative issuance may be
filed directly before the Court of Tax Appeals.
With respect to administrative issuances
(revenue orders, revenue memorandum
circulars, or rulings), these are issued by the
Commissioner under its power to make rulings
or opinions in connection with the
implementation of the provisions of internal
revenue laws. Tax rulings are official positions
of the Bureau on inquiries of taxpayers who
request clarification on certain provisions of the
NIRC, other tax laws, or their implementing
regulations. Hence, the determination of the
validity of these issuances clearly falls within
34
the exclusive appellate jurisdiction of the
CTA.
A direct invocation of this Court's jurisdiction
should only be allowed when there are special,
important and compelling reasons clearly and
specifically spelled out in the petition.
Despite the procedural infirmities of the petitions
that warrant their outright dismissal, the Court
deems it prudent, if not crucial, to take
cognizance of, and accordingly act on, the
petitions as they assail the validity of the
actions of the CIR that affect thousands of
employees in the different government
agencies and instrumentalities. The Court,
following recent jurisprudence, avails itself of its
judicial prerogative in order not to delay the
disposition of the case at hand and to promote
the vital interest of justice. As the Court held in
Bloomberry Resorts and Hotels, Inc. v. Bureau
of Internal Revenue:
From the foregoing jurisprudential
pronouncements, it would appear that in
questioning the validity of the subject
revenue memorandum circular,
petitioner should not have resorted
directly before this Court considering
that it appears to have failed to
comply with the doctrine of
exhaustion of administrative
remedies and the rule on hierarchy of
courts, a clear indication that the
case was not yet ripe for judicial
remedy. Notably, however, in addition
to the justifiable grounds relied upon by
petitioner for its immediate recourse
(i.e., pure question of law, patently
illegal act by the BIR, national interest,
and prevention of multiplicity of suits),
we intend to avail of our jurisdictional
prerogative in order not to further delay
the disposition of the issues at hand,
and also to promote the vital interest of
substantial justice. To add, in recent
years, this Court has consistently acted
on direct actions assailing the validity of
various revenue regulations, revenue
memorandum circulars, and the likes,
issued by the CIR. The position we now
take is more in accord with latest
jurisprudence. x x x
Substantive
I. On the issue that CIR's issuance of RMO No.
23-2014, particularly Sections III, IV, VI and VII
thereof, is tainted with grave abuse of discretion.
As earlier stated, Section 4 of the NIRC of 1997,
as amended, grants the CIR the power to issue
rulings or opinions interpreting the provisions of
the NIRC or other tax laws. However, the CIR
cannot, in the exercise of such power, issue
administrative rulings or circulars inconsistent
with the law sought to be applied.
Administrative issuances must not override,
supplant or modify the law, but must remain
consistent with the law they intend to carry
out. Conversely, if the assailed administrative
rule conforms with the law sought to be
implemented, the validity of said issuance
must be upheld.
In this case, the Court finds the petitions partly
meritorious only insofar as Section VI of the
assailed RMO is concerned. On the other
hand, the Court upholds the validity of
Sections III, IV and VII thereof as these are in
fealty to the provisions of the NIRC of 1997, as
amended, and its implementing rules.
 Sections III and IV of RMO No. 23-2014
are valid.
Compensation income is the income of the
individual taxpayer arising from services
rendered pursuant to an employer-employee
relationship.
 Under the NIRC, every form of
compensation for services, whether paid
in cash or in kind, is generally subject to
income tax and consequently to
withholding tax.
 The name designated to the
compensation income received by an
employee is immaterial. Thus, salaries,
wages, emoluments and honoraria,
allowances, commissions, fees, (including
director's fees, if the director is, at the same
time, an employee of the
employer/corporation), bonuses, fringe
benefits (except those subject to the fringe
benefits tax under Section 33 of the Tax
35
 Code), pensions, retirement pay, and other
income of a similar nature, constitute
compensation income that are taxable
and subject to withholding.
The withholding tax system was devised for
three primary reasons, namely:
(1) to provide the taxpayer a convenient manner
to meet his probable income tax liability;
(2) to ensure the collection of income tax which
can otherwise be lost or substantially
reduced through failure to file the
corresponding returns; and
(3) to improve the government's cash flow.
This results in administrative savings,
prompt and efficient collection of taxes,
prevention of delinquencies and reduction of
governmental effort to collect taxes through
more complicated means and remedies.
Section 79(A) of the NIRC of 1997, as
amended, states:
SEC. 79. Income Tax Collected at Source.
– and
(A) Requirement of Withholding - Except
in the case of a minimum wage earner as
defined in Section 22(HH) of this Code,
every employer making payment of
wages shall deduct and withhold upon
such wages a tax determined in
accordance with the rules and
regulations to be prescribed by the
Secretary of Finance, upon
recommendation of the Commissioner.
In relation to the foregoing, Section 2.78 of
RR No. 2-98,75 as amended, issued by the
Secretary of Finance to implement the
withholding tax system under the NIRC of
1997, as amended, provides:
SECTION 2.78. Withholding Tax on
Compensation. — The withholding of tax
on compensation income is a method of
collecting the income tax at source upon
receipt of the income. It applies to all
employed individuals whether citizens or
aliens, deriving income from
compensation for services rendered in
the Philippines. The employer is
constituted as the withholding agent.
Section 2.78.3 of RR No. 2-98 further
states that the term employee "covers all
employees, including officers and
employees, whether elected or
appointed, of the Government of the
Philippines, or any political subdivision
thereof or any agency or instrumentality";
while an employer, as Section 2.78.4 of the
same regulation provides, "embraces not
only an individual and an organization
engaged in trade or business, but also
includes an organization exempt from
income tax, such as charitable and
religious organizations, clubs, social
organizations and societies, as well as
the Government of the Philippines,
including its agencies, instrumentalities,
and political subdivisions."
The law is therefore clear that
withholding tax on compensation applies
to the Government of the Philippines,
including its agencies, instrumentalities,
political subdivisions. The
Government, as an employer, is constituted
as the withholding agent, mandated to
deduct, withhold and remit the
corresponding tax on compensation income
paid to all its employees.
However, not all income payments to
employees are subject to withholding
tax. The following allowances, bonuses or
benefits, excluded by the NIRC of 1997, as
amended, from the employee's
compensation income, are exempt from
withholding tax on compensation:
 Retirement benefits received under RA No.
7641 and those received by officials and
employees of private firms under a
reasonable private benefit plan maintained
by the employer;
 Any amount received by an official or
employee or by his heirs from the employer
due to death, sickness or other physical
disability or for any cause beyond the control
of the said official or employee, such as
retrenchment, redundancy, or cessation of
business;
36
 Social security benefits, retirement
gratuities, pensions and other similar
benefits received by residents or non-
resident citizens of the Philippines or aliens
who come to reside permanently in the
Philippines from foreign government
agencies and other institutions private or
public;
 Payments of benefits due or to become due
to any person residing in the Philippines
under the law of the United States
administered by the United States Veterans
Administration;
 Payments of benefits made under the Social
Security System Act of 1954 as amended;
 Benefits received from the GSIS Act of
1937, as amended, and the retirement
gratuity received by government officials and
employees;
 13th) month pay and other benefits received
by officials and employees of public and
private entities not exceeding P82,000.00;
 GSIS, SSS, Medicare and Pag-Ibig
contributions, and union dues of individual
employees;
 Remuneration paid for agricultural labor;
 Remuneration for domestic services;
 Remuneration for casual labor not in the
course of an employer's trade or business;
 Remuneration not more than the statutory
minimum wage and the holiday pay,
overtime pay, night shift differential pay and
hazard pay received by Minimum Wage
Earners;
 Compensation for services by a citizen or
resident of the Philippines for a foreign
government or an international organization;
 Actual, moral, exemplary and nominal
damages received by an employee or his
heirs pursuant to a final judgment or
compromise agreement arising out of or
related to an employer-employee
relationship;
 Proceeds of life insurance policies paid to
the heirs or beneficiaries upon the death of
the insured, whether in a single sum or
otherwise, provided however, that interest
payments agreed under the policy for the
amounts which are held by the insured
under such an agreement shall be included
in the gross income;
 The amount received by the insured, as a
return of premium or premiums paid by him
under life insurance, endowment, or annuity
contracts either during the term or at the
maturity of the term mentioned in the
contract or upon surrender of the contract;
 Amounts received through Accident or
Health Insurance or under Workmen's
Compensation Acts, as compensation for
personal injuries or sickness, plus the
amount of any damages received whether
by suit or agreement on account of such
injuries or sickness;
 Income of any kind to the extent required by
any treaty obligation binding upon the
Government of the Philippines;
 Fringe and De minimis Benefits. [Section
33(C) of the NIRC of 1997, as amended);
and
 Other income received by employees which
are exempt under special laws (RATA
granted to public officers and employees
under the General Appropriations Act and
Personnel Economic Relief Allowance
granted to government personnel).
A closer look at the assailed Sections III and
IV RMO No. 23-2014 reveals it did went
beyond the provisions of the NIRC of 1997.
For reference, the provisions read, as
follows:
III. OBLIGATION TO WITHHOLD ON
COMPENSATION PAID TO
GOVERNMENT OFFICIALS AND
EMPLOYEES
xxxxxxx
...Section 32(A) of the NIRC of 1997, as
amended, compensation for services, in
whatever form paid and no matter how
called, form part of gross income.
Compensation income includes, among
others, salaries, fees, wages, emoluments
and honoraria, allowances, commissions
(e.g. transportation, representation,
entertainment and the like); fees including
37
 director's fees, if the director is, at the same
time, an employee of the
employer/corporation; taxable bonuses and
fringe benefits except those which are
subject to the fringe benefits tax under
Section 33 of the NIRC; taxable pensions
and retirement pay; and other income of a
similar nature.
The foregoing also includes allowances,
bonuses, and other benefits of similar nature
received by officials and employees of the
Government of the Republic of the
Philippines or any of its branches, agencies
and instrumentalities, its political
subdivisions, including government-owned
and/or controlled corporations (herein
referred to as officials and employees in the
public sector) which are composed of (but
are not limited to) the following:
 Allowances, bonuses, honoraria or benefits
received by employees and officials in the
Legislative Branch, such as anniversary
bonus, Special Technical Assistance
Allowance, Efficiency Incentive Benefits,
Additional Food Subsidy, Eight[h] (8th)
Salary Range Level Allowance,
Hospitalization Benefits, Medical Allowance,
Clothing Allowance, Longevity Pay, Food
Subsidy, Transition Allowance, Cost of
Living Allowance, Inflationary Adjustment
Assistance, Mid-Year Economic Assistance,
Financial Relief Assistance, Grocery
Allowance, Thirteenth (13th Month Pay,
Cash Gift and Productivity Incentive Benefit
and other allowances, bonuses and benefits
given by the Philippine Senate and
House of Representatives to their
officials and employees, subject to the
exemptions enumerated herein.
 Allowances, bonuses, honoraria or benefits
received by employees and officials in the
Judicial Branch, such as the Additional
Compensation (ADCOM), Extraordinary and
Miscellaneous Expenses (EME), Monthly
Special Allowance from the Special
Allowance for the Judiciary, Additional Cost
of Living Allowance from the Judiciary
Development Fund, Productivity Incentive
Benefit, Grocery Allowance, Clothing
Allowance, Emergency Economic
Allowance, Year-End Bonus, Cash Gift,
Loyalty Cash Award (Milestone Bonus), SC
Christmas Allowance, anniversary bonuses
and other allowances, bonuses and benefits
given by the Supreme Court of the
Philippines and all other courts and
offices under the Judicial Branch to their
officials and employees, subject to the
exemptions enumerated herein.
 Compensation for services in whatever form
paid, including, but not limited to allowances,
bonuses, honoraria or benefits received by
employees and officials in the
Constitutional bodies (Commission on
Election, Commission on Audit, Civil
Service Commission) and the Office of
the Ombudsman, subject to the exemptions
enumerated herein.
 Allowances, bonuses, honoraria or benefits
received by employees and officials in the
Executive Branch, such as the Productivity
Enhancement Incentive (PEI), Performance-
Based Bonus, anniversary bonus and other
allowances, bonuses and benefits given by
the departments, agencies and other
offices under the Executive Branch to
their officials and employees, subject to
the exemptions enumerated herein.
 Any amount paid either as advances or
reimbursements for expenses incurred or
reasonably expected to be incurred by the
official and employee in the performance of
his/her duties are not compensation
subject to withholding, if the following
conditions are satisfied:
i. Employee was duly authorized to incur
such expenses on behalf of the
government; and
ii. Compliance with pertinent laws and
regulations on accounting and
liquidation of advances and
reimbursements, including, but not limited
to withholding tax rules.
The expenses should be duly receipted for
and in the name of the government office
concerned. Other than those pertaining to
38
 intelligence funds duly appropriated and
liquidated, any amount not in compliance
with the foregoing requirements shall be
considered as part of the gross taxable
compensation income of the taxpayer.
Intelligence funds not duly appropriated
and not properly liquidated shall form
part of the compensation of the
government officials/personnel
concerned, unless returned.
IV. NON-TAXABLE COMPENSATION
INCOME – Subject to existing laws and
issuances, the following income received
by the officials and employees in the
public sector are not subject to income
tax and withholding tax on
compensation:
 13th Month Pay and Other Benefits not
exceeding P30,000.00 paid/accrued during
the year. Any amount exceedingP30,000.00
are taxable compensation. This includes:
 Benefits received by officials and employees
of the national and local government
pursuant to Republic Act no. 6686 ("An Act
Authorizing Annual Christmas Bonus to
National and Local Government Officials
and Employees Starting CY 1998");
 Benefits received by employees pursuant to
Presidential Decree No. 851 ("Requiring All
Employers to Pay Their Employees a 13th
Month Pay"), as amended by Memorandum
Order No. 28, dated August 13, 1986;
 Benefits received by officials and employees
not covered by Presidential Decree No. 851,
as amended by Memorandum Order No. 28,
dated August 19, 1986;
 Other benefits such as Christmas bonus,
productivity incentive bonus, loyalty award,
gift in cash or in kind and other benefits of
similar nature actually received by officials
and employees of government offices,
including the additional compensation
allowance (ACA) granted and paid to all
officials and employees of the National
Government Agencies (NGAs) including
state universities and colleges (SUCs),
government-owned and/or controlled
corporations (GOCCs), government financial
institutions (GFIs) and Local Government
Units (LGUs).
 Facilities and privileges of relatively small
value or "De Minimis Benefits" as defined in
existing issuances and conforming to the
ceilings prescribed therein;
 Fringe benefits which are subject to the
fringe benefits tax under Section 33 of the
NIRC, as amended;
 Representation and Transportation
Allowance (RATA) granted to public officers
and employees under the General
Appropriations Act;
 Personnel Economic Relief Allowance
(PERA) granted to government personnel;
 The monetized value of leave credits paid to
government officials and employees;
 Mandatory/compulsory GSIS, Medicare and
Pag-Ibig Contributions, provided that,
voluntary contributions to these institutions
in excess of the amount considered
mandatory/compulsory are not excludible
from the gross income of the taxpayer and
hence, not exempt from Income Tax and
Withholding Tax;
 Union dues of individual employees;
 Compensation income of employees in the
public sector with compensation income of
not more than the Statutory Minimum Wage
(SMW) in the non-agricultural sector
applicable to the place where he/she is
assigned;
 Holiday pay, overtime pay, night shift
differential pay, and hazard pay received by
Minimum Wage Earners (MWEs);
 Benefits received from the GSIS Act of
1937, as amended, and the retirement
gratuity/benefits received by government
officials and employees under pertinent
retirement laws;
 All other benefits given which are not
included in the above enumeration but are
exempted from income tax as well as
withholding tax on compensation under
existing laws, as confirmed by BIR.77
Clearly, Sections III and IV of the assailed
RMO do not charge any new or additional
tax. On the contrary, they merely mirror the
39
relevant provisions of the NIRC of 1997, as
amended, and its implementing rules on the
withholding tax on compensation income as
discussed above. The assailed Sections
simply reinforce the rule that every form of
compensation for personal services received
by all employees arising from employer-
employee relationship is deemed subject to
income tax and, consequently, to
withholding tax, unless specifically exempted
or excluded by the Tax Code; and the duty of
the Government, as an employer, to withhold
and remit the correct amount of withholding
taxes due thereon.
While Section III enumerates certain allowances
which may be subject to withholding tax, it does
not exclude the possibility that these allowances
may fall under the exemptions identified under
Section IV – thus, the phrase, "subject to the
exemptions enumerated herein." In other words,
Sections III and IV articulate in a general and
broad language the provisions of the NIRC of
1997, as amended, on the forms of
compensation income deemed subject to
withholding tax and the allowances, bonuses
and benefits exempted therefrom. Thus,
Sections III and IV cannot be said to have
been issued by the CIR with grave abuse of
discretion as these are fully in accordance
with the provisions of the NIRC of 1997, as
amended, and its implementing rules.
II. On the issue that assailed provisions of RMO
No. 23-2014 contravene the equal protection
clause, fiscal autonomy, and the rule on non-
diminution of benefits.
The Court finds petitioners' contention
untenable. The constitutional guarantee of
equal protection is not violated by an
executive issuance which was issued to
simply reinforce existing taxes applicable to
both the private and public sector. As
discussed, the withholding tax system
embraces not only private individuals,
organizations and corporations, but also
covers organizations exempt from income
tax, including the Government of the
Philippines, its agencies, instrumentalities,
and political subdivisions. While the assailed
RMO is a directive to the Government, as a
reminder of its obligation as a withholding
agent, it did not, in any manner or form, alter
or amend the provisions of the Tax Code, for
or against the Government or its employees.
II. On the issue that it violates fiscal autonomy
enjoyed by government agencies
The fiscal autonomy enjoyed by the
Judiciary, Ombudsman, and Constitutional
Commissions, as envisioned in the
Constitution, does not grant immunity or
exemption from the common burden of
paying taxes imposed by law. To borrow
former Chief Justice Corona's words in his
Separate Opinion in Francisco, Jr. v. House of
Representatives, "fiscal autonomy entails
freedom from outside control and limitations,
other than those provided by law. It is the
freedom to allocate and utilize funds granted by
law, in accordance with law and pursuant to the
wisdom and dispatch its needs may require from
time to time."
It bears to emphasize the Court's ruling in
Nitafan v. Commissioner of Internal Revenue
that the imposition of taxes on salaries of
Judges does not result in diminution of
benefits. This applies to all government
employees because the intent of the framers
of the Organic Law and of the people
adopting it is "that all citizens should bear
their aliquot part of the cost of maintaining
the government and should share the burden
of general income taxation equitably."
III. On the Determination of existence of fringe
benefits is a question of fact.
Petitioner insist that the allowances, bonuses
and benefits enumerated in Section III of the
assailed RMO are, in fact, fringe and de minimis
benefits exempt from withholding tax on
compensation. The Court cannot, however,
rule on this issue as it is essentially a
question of fact that cannot be determined in
this petition questioning the constitutionality
of the RMO.
To be sure, settled is the rule that exemptions
from tax are construed strictissimi juris
against the taxpayer and liberally in favor of
40
the taxing authority. One who claims tax
exemption must point to a specific provision
of law conferring, in clear and plain terms,
exemption from the common burden84 and
prove, through substantial evidence, that it
is, in fact, covered by the exemption so
claimed. The determination, therefore, of the
merits of petitioners' claim for tax exemption
would necessarily require the resolution of both
legal and factual issues, which this Court, not
being a trier of facts, has no jurisdiction to do;
more so, in a petition filed at first instance.
Among the factual issues that need to be
resolved, at the first instance, is the nature of
the fringe benefits granted to employees. The
NIRC of 1997, as amended, does not impose
income tax, and consequently a withholding tax,
on payments to employees which are either (a)
required by the nature of, or necessary to, the
business of the employer; or (b) for the
convenience or advantage of the employer. This,
however, requires proper documentation.
Without any documentary proof that the
payment ultimately redounded to the benefit
of the employer, the same shall be
considered as a taxable benefit to the
employee, and hence subject to withholding
taxes.
Another factual issue that needs to be confirmed
is the recipient of the alleged fringe benefit.
Fringe benefits furnished or granted, in cash
or in kind, by an employer to its managerial
or supervisory employees, are not
considered part of compensation income;
thus, exempt from withholding tax on
compensation. Instead, these fringe benefits
are subject to a fringe benefit tax equivalent
to 32% of the grossed-up monetary value of
the benefit, which the employer is legally
required to pay. On the other hand, fringe
benefits given to rank and file employees,
while exempt from fringe benefit tax, form
part of compensation income taxable under
the regular income tax rates provided in
Section 24(A)(2) of the NIRC, of 1997, as
amended; and consequently, subject to
withholding tax on compensation.
Fringe benefits of relatively small value
furnished by the employer to his employees
(both managerial/supervisory and rank and
file) as a means of promoting health, goodwill,
contentment, or efficiency, otherwise known as
de minimis benefits, that are exempt from
both income tax on compensation and fringe
benefit tax; hence, not subject to withholding
tax, are limited and exclusive only to those
enumerated under RR No. 3-98, as amended.
All other benefits given by the employer
which are not included in the said list,
although of relatively small value, shall not
be considered as de minimis benefits; hence,
shall be subject to income tax as well as
withholding tax on compensation income, for
rank and file employees, or fringe benefits
tax for managerial and supervisory
employees, as the case may be.
It is clear that to completely determine the
merits of petitioners' claimed exemption
from withholding tax on compensation,
under Section 33 of the NIRC of 1997, there is
a need to confirm several factual issues. As
such, petitioners cannot but first resort to the
proper courts and administrative agencies
which are better equipped for said task.
All told, the Court finds Sections III and IV of
the assailed RMO valid. The NIRC of 1997, as
amended, is clear that all forms of
compensation income received by the
employee from his employer are presumed
taxable and subject to withholding taxes. The
Government of the Philippines, its agencies,
instrumentalities, and political subdivisions, as
an employer, is required by law to withhold and
remit to the BIR the appropriate taxes due
thereon. Any claims of exemption from
withholding taxes by an employee, as in the
case of petitioners, must be brought and
resolved in the appropriate administrative
and judicial proceeding, with the employee
having the burden to prove the factual and
legal bases thereof.
IV. On the issue that RMO No. 23-2014 is ultra
vires insofar as Sections VI and VII thereof
define new offenses and prescribe penalties
therefor, particularly upon government officials
Section VII of RMO No. 23-2014 is valid;
Section VI contravenes, in part, the provisions
41
of the NIRC of 1997, as amended, and its
implementing rules.
The NIRC of 1997, as amended, clearly
provides the offenses and penalties relevant to
the obligation of the withholding agent to deduct,
withhold and remit the correct amount of
withholding taxes on compensation income, to
wit:
TITLE X
Statutory Offenses and Penalties
CHAPTER I
Additions to the Tax
SEC. 247. General Provisions. – (a) The
additions to the tax or deficiency tax
prescribed in this Chapter shall apply to all
taxes, fees and charges imposed in this Code.
The amount so added to the tax shall be
collected at the same time, in the same manner
and as part of the tax.
(b) If the withholding agent is the Government
or any of its agencies, political subdivisions or
instrumentalities, or a government- owned or -
controlled corporation, the employee thereof
responsible for the withholding and
remittance of the tax shall be personally liable
for the additions to the tax prescribed herein.
(c) The term "person", as used in this Chapter,
includes an officer or employee of a corporation
who as such officer, employee or member is
under a duty to perform the act in respect of
which the violation occurs.
SEC. 248. Civil Penalties. — x x x
SEC. 249. Interest. – x x x
xxxx
SEC. 251. Failure of a Withholding Agent to
Collect and Remit Tax. – Any person required
to withhold, account for, and remit any tax
imposed by this Code or who willfully fails to
withhold such tax, or account for and remit such
tax, or aids or abets in any manner to evade any
such tax or the payment thereof, shall, in
addition to other penalties provided for under
this Chapter, be liable upon conviction to a
penalty equal to the total amount of the tax
not withheld, or not accounted for and
remitted.
SEC. 252. Failure of a Withholding Agent to
Refund Excess Withholding Tax. – Any
employer/withholding agent who fails or refuses
to refund excess withholding tax shall, in
addition to the penalties provided in this Title,
be liable to a penalty equal to the total
amount of refunds which was not refunded
to the employee resulting from any excess of
the amount withheld over the tax actually
due on their return.
CHAPTER II
Crimes, Other Offenses and Forfeitures
xxxx
SEC. 255. Failure to File Return, Supply
Correct and Accurate Information, Pay Tax,
Withhold and Remit Tax and Refund Excess
Taxes Withheld on Compensation. – Any
person required under this Code or by rules and
regulations promulgated thereunder to pay any
tax, make a return, keep any record, or supply
correct and accurate information, who willfully
fails to pay such tax, make such return, keep
such record, or supply such correct and accurate
information, or withhold or remit taxes withheld,
or refund excess taxes withheld on
compensation, at the time or times required by
law or rules and regulations shall, in addition to
other penalties provided by law, upon
conviction thereof, be punished by a fine of
not less than Ten thousand pesos (P10,000)
and suffer imprisonment of not less than one
(l) year but not more than ten (10) years.
CHAPTER III
Penalties Imposed on Public Officers
xxxx
SEC. 272. Violation of Withholding Tax
Provision. – Every officer or employee of the
Government of the Republic of the Philippines or
any of its agencies and instrumentalities, its
political subdivisions, as well as government-
owned or -controlled corporations, including the
42
BSP, who, under the provisions of this Code or
rules and regulations promulgated thereunder, is
charged with the duty to deduct and withhold
any internal revenue tax and to remit the same
in accordance with the provisions of this Code
and other laws is guilty of any offense herein
below specified shall, upon conviction for
each act or omission be punished by a fine of
not less than Five thousand pesos (P5,000)
but not more than Fifty thousand pesos
(P50,000) or suffer imprisonment of not less
than six (6) months and one day (1) but not
more than two (2) years, or both:
(a) Failing or causing the failure to deduct
and withhold any internal revenue tax
under any of the withholding tax laws
and implementing rules and regulations;
(b) Failing or causing the failure to remit
taxes deducted and withheld within the
time prescribed by law, and
implementing rules and regulations; and
(c) Failing or causing the failure to file
return or statement within the time
prescribed, o rendering or furnishing a
false or fraudulent return or statement
required under the withholding tax laws
and rules and regulations.
Based on the foregoing, and similar to Sections
III and IV of the assailed RMO, the Court finds
that Section VII thereof was issued in
accordance with the provisions of the NIRC of
1997, as amended, and RR No. 2-98. For easy
reference, Section VII of RMO No. 23-2014
states:
VII. PENALTY PROVISION
In case of non-compliance with their
obligation as withholding agents, the
abovementioned persons shall be liable for the
following sanctions:
 Failure to Collect and Remit Taxes (
Same with Section 251, NIRC)
 Failure to File Return, Supply Correct
and Accurate Information, Pay Tax
Withhold and Remit Tax and Refund
Excess Taxes Withheld on
Compensation (Same with Section
255, NIRC)
Additional: Any person who
attempts to make it appear for any
reason that he or another has in
fact filed a return or statement, or
actually files a return or statement and
subsequently withdraws the same
return or statement after securing the
official receiving seal or stamp of
receipt of internal revenue office
wherein the same was actually filed
shall, upon conviction therefor, be
punished by a fine of not less than
Ten thousand pesos (P10,000) but
not more than Twenty thousand
pesos (P20,000) and suffer
imprisonment of not less than one
(1) year but not more than three (3)
years."
 Violation of Withholding Tax Provision
(Same with Section Sec. 272, NIRC)
All revenue officials and employees concerned
shall take measures to ensure the full
enforcement of the provisions of this Order and
in case of any violation thereof, shall commence
the appropriate legal action against the erring
withholding agent.
Section VII of RMO No. 23-2014 does not
define a crime and prescribe a penalty
therefor. Section VII simply mirrors the relevant
provisions of the NIRC of 1997, as amended, on
the penalties for the failure of the withholding
agent to withhold and remit the correct amount
of taxes, as implemented by RR No. 2-98.
However, with respect to Section VI of the
assailed RMO, the Court finds that the CIR
overstepped the boundaries of its authority
to interpret existing provisions of the NIRC of
1997, as amended.
Section VI of RMO No. 23-2014 reads:
VI. PERSONS RESPONSIBLE FOR
WITHHOLDING
The following officials are duty bound to
deduct, withhold and remit taxes:
43

a) For Office of the Provincial
Government-province- the Chief
Accountant, Provincial Treasurer and
the Governor;
b) For Office of the City Government-
cities- the Chief Accountant, City
Treasurer and the City Mayor;
c) For Office of the Municipal
Government-municipalities- the Chief
Accountant, Municipal Treasurer and the
Mayor;
d) Office of the Barangay-Barangay
Treasurer and Barangay Captain
e) For NGAs, GOCCs and other
Government Offices, the Chief
Accountant and the Head of Office or
the Official holding the highest position
(such as the President, Chief Executive
Officer, Governor, General Manager).
To recall, the Government of the Philippines,
or any political subdivision or agency
thereof, or any GOCC, as an employer, is
constituted by law as the withholding agent,
mandated to deduct, withhold and remit the
correct amount of taxes on the
compensation income received by its
employees. In relation thereto, Section 82 of
the NIRC of 1997, as amended, states that the
return of the amount deducted and withheld
upon any wage paid to government
employees shall be made by the officer or
employee having control of the payments or
by any officer or employee duly designated
for such purpose. Consequently, RR No. 2-98
identifies the Provincial Treasurer in
provinces, the City Treasurer in cities, the
Municipal Treasurer in municipalities,
Barangay Treasurer in barangays, Treasurers
of government-owned or -controlled
corporations (GOCCs), and the Chief
Accountant or any person holding similar
position and performing similar function in
national government offices, as persons
required to deduct and withhold the
appropriate taxes on the income payments
made by the government.
However, nowhere in the NIRC of 1997, as
amended, or in RR No. 2-98, as amended,
would one find the Provincial Governor,
Mayor, Barangay Captain and the Head of
Government Office or the "Official holding
the highest position (such as the President,
Chief Executive Officer, Governor, General
Manager)" in an Agency or GOCC as one of
the officials required to deduct, withhold and
remit the correct amount of withholding
taxes. The CIR, in imposing upon these
officials the obligation not found in law nor in
the implementing rules, did not merely issue
an interpretative rule designed to provide
guidelines to the law which it is in charge of
enforcing; but instead, supplanted details
thereon — a power duly vested by law only
to respondent Secretary of Finance under
Section 244 of the NIRC of 1997, as amended.
Respondents' allusion to previous issuances
of the Secretary of Finance designating such
officials is bereft of legal basis. Since the 1977
NIRC and Executive Order No. 651, which
allegedly breathed life to these issuances,
have already been repealed with the
enactment of the NIRC of 1997, as amended,
and RR No. 2-98, these previous issuances of
the Secretary of Finance have ceased to have
the force and effect of law. The Court finds that
the CIR gravely abused its discretion in
issuing Section VI of RMO No. 23-2014
insofar as it includes the Governor, City
Mayor, Municipal Mayor, Barangay Captain,
and Heads of Office in agencies, GOCCs, and
other government offices, as persons
required to withhold and remit withholding
taxes, as they are not among those officials
designated by the 1997 NIRC, as amended,
and its implementing rules.
V. Petition for Mandamus is moot and academic.
As regards the prayer for the issuance of a writ
of mandamus to compel respondents to increase
the P30,000.00 non-taxable income ceiling, the
same has already been rendered moot and
academic due to the enactment of RA No.
10653 which was signed into law on February
12, 2015, which increased the income tax
exemption for 13th month pay and other
benefits, under Section 32(B)(7)(e) of the NIRC
of 1997, as amended, from P30,000.00 to
P82,000.00. Said law also states that every
three (3) years after the effectivity of said Act,
44
the President of the Philippines shall adjust the cannot rule on petitioners' claims
amount stated therein to its present value using of exemption from withholding
the Consumer Price Index, as published by the tax on compensation income
National Statistics Office. because these involve issues that
are essentially factual or evidentiary
Recently, RA No. 10963, otherwise known as in nature, which must be raised in
the "Tax Reform for Acceleration and Inclusion the appropriate administrative
(TRAIN)" Act, further increased the income
and/or judicial proceeding.
tax exemption for 13th month pay and other
 The Court's Decision upholding the
benefits to P90,000.00.
validity of Sections III and IV of the
As a final point, the Court cannot turn a blind eye assailed RMO is to be applied only
to the adverse effects of this Decision on prospectively.
ordinary government employees, including  Petition for Mandamus in G.R. No.
petitioners herein, who relied in good faith on the 213446 is hereby DENIED on the
belief that the appropriate taxes on all the ground of mootness.
income they receive from their respective
employers are withheld and paid. Nor does the
Court ignore the situation of the relevant officers VII. DEDUCTIONS
of the different departments of government that
had believed, in good faith, that there was no i. Pure Compensation Income Earner
need to withhold the taxes due on the ii. Earning Business or Professional
compensation received by said ordinary Income
government employees. Thus, as a measure of 1. Itemized Deduction or
equity and compassionate social justice, the Optional Standard
Court deems it proper to clarify and declare, pro Deduction
hac vice, that its ruling on the validity of
Sections III and IV of the assailed RMO is to
be given only prospective effect. VIII. INDIVIDUALS NOT REQUIRED TO FILE
INCOME TAX RETURN
DECISION:
o Petitions and Petitions-in- IX. PROCEDURE FOR FILING OF ITR
Interventions are PARTIALLY
GRANTED.
 Section VI of Revenue
Memorandum Order No. 23-2014 is
DECLARED null and void insofar as
it names the Governor, City Mayor,
Municipal Mayor, Barangay Captain,
and Heads of Office in government
agencies, government-owned or -
controlled corporations, and other
government offices, as persons
required to withhold and remit
withholding taxes.
 Sections III, IV and VII of RMO No.
23-2014 are DECLARED valid
inasmuch as they merely mirror the
provisions of the National Internal
Revenue Code of 1997, as
amended. However, the Court

45