Tax 1 Full Text C.A. To C.G

INCOME TAXATION: Definition, Nature and General Principles
G.R. No. L-12287 August 7, 1918
VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,

vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy
Collector of Internal Revenue, defendants-appellees.
MALCOLM, J.:
This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to
the Civil Code, a law of Spanish origin.
STATEMENT OF THE CASE.
Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage
was contracted under the provisions of law concerning conjugal partnerships (sociedad de
gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form
with the Collector of Internal Revenue, showing, as his total net income for the year 1914, the sum of
P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent
his income for the year 1914, but was in fact the income of the conjugal partnership existing between
himself and his wife Susana Paterno, and that in computing and assessing the additional income tax
provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should
be divided into two equal parts, one-half to be considered the income of Vicente Madrigal and the
other half of Susana Paterno. The general question had in the meantime been submitted to the
Attorney-General of the Philippine Islands who in an opinion dated March 17, 1915, held with the
petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence together with this
opinion was forwarded to Washington for a decision by the United States Treasury Department. The
United States Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and
thus decided against the claim of Madrigal.
After payment under protest, and after the protest of Madrigal had been decided adversely by the
Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in
the Court of First Instance of the city of Manila against Collector of Internal Revenue and the Deputy
Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been
wrongfully and illegally collected by the defendants from the plaintiff, Vicente Madrigal, under the
provisions of the Act of Congress known as the Income Tax Law. The burden of the complaint was
that if the income tax for the year 1914 had been correctly and lawfully computed there would have
been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of a
total of P5,842.18 instead of P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente
Madrigal, with the result that plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in
excess of the sum lawfully due and payable.
The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the
stipulation, sets forth the basis of defendants' stand in the following way: The income of Vicente
Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1) P362,407.67,
the profits made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50, the profits made
by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by Vicente Madrigal
in a pawnshop company. The sum of these three items is P383,181.97, the gross income of Vicente
Madrigal and Susana Paterno for the year 1914. General deductions were claimed and allowed in the
sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the
Taxation 1 Full Text Cases C.a.- C.g. | 1

normal tax of one per cent on the net income there were allowed as specific deductions the following:
(1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption
granted to Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93
was the sum upon which the normal tax of one per cent was assessed. The normal tax thus arrived at
was P2,716.15.
The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the
Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without costs.
ISSUES.
The contentions of plaintiffs and appellants having to do solely with the additional income tax, is that
is should be divided into two equal parts, because of the conjugal partnership existing between them.
The learned argument of counsel is mostly based upon the provisions of the Civil Code establishing
the sociedad de gananciales. The counter contentions of appellees are that the taxes imposed by the
Income Tax Law are as the name implies taxes upon income tax and not upon capital and property;
that the fact that Madrigal was a married man, and his marriage contracted under the provisions
governing the conjugal partnership, has no bearing on income considered as income, and that the
distinction must be drawn between the ordinary form of commercial partnership and the conjugal
partnership of spouses resulting from the relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been given the
course of history. The final stage has been the selection of income as the norm of taxation.
(See Seligman, "The Income Tax," Introduction.) The Income Tax Law of the United States, extended
to the Philippine Islands, is the result of an effect on the part of the legislators to put into statutory form
this canon of taxation and of social reform. The aim has been to mitigate the evils arising from
inequalities of wealth by a progressive scheme of taxation, which places the burden on those best
able to pay. To carry out this idea, public considerations have demanded an exemption roughly
equivalent to the minimum of subsistence. With these exceptions, the income tax is supposed to reach
the earnings of the entire non-governmental property of the country. Such is the background of the
Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential difference between capital
and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time
is called capital. A flow of services rendered by that capital by the payment of money from it or any
other benefit rendered by a fund of capital in relation to such fund through a period of time is called an
income. Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital
and Income.") The Supreme Court of Georgia expresses the thought in the following figurative
language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital
is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a
tax on property. "Income," as here used, can be defined as "profits or gains." (London County
Council vs. Attorney-General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week.
Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax, second edition [1915], Chapter IV; Black
on Income Taxes, second edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and
Towne vs. Eisner, decided by the United States Supreme Court, January 7, 1918.)
A regulation of the United States Treasury Department relative to returns by the husband and wife not
living apart, contains the following:

The husband, as the head and legal representative of the household and general custodian of its
income, should make and render the return of the aggregate income of himself and wife, and for the
purpose of levying the income tax it is assumed that he can ascertain the total amount of said income.
If a wife has a separate estate managed by herself as her own separate property, and receives an
income of more than $3,000, she may make return of her own income, and if the husband has other
net income, making the aggregate of both incomes more than $4,000, the wife's return should be
attached to the return of her husband, or his income should be included in her return, in order that a
deduction of $4,000 may be made from the aggregate of both incomes. The tax in such case, however,
will be imposed only upon so much of the aggregate income of both shall exceed $4,000. If either
husband or wife separately has an income equal to or in excess of $3,000, a return of annual net
income is required under the law, and such return must include the income of both, and in such case
the return must be made even though the combined income of both be less than $4,000. If the
aggregate net income of both exceeds $4,000, an annual return of their combined incomes must be
made in the manner stated, although neither one separately has an income of $3,000 per annum.
They are jointly and separately liable for such return and for the payment of the tax. The single or
married status of the person claiming the specific exemption shall be determined as one of the time of
claiming such exemption which return is made, otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in force in the Philippine Islands, we
turn for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership.
Recently in two elaborate decisions in which a long line of Spanish authorities were cited, this court in
speaking of the conjugal partnership, decided that "prior to the liquidation the interest of the wife and
in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither
a 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 the liquidation and settlement." (Nable Jose vs. Nable Jose [1916], 15
Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente
Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights
and in the ultimate ownership of property acquired as income after such income has become capital.
Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being
seized of a separate estate, Susana Paterno 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 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. The husband and wife are only entitled to the exemption of P8,000 specifically granted
by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not
be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership
and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law
must be given effect.
The point we are discussing has heretofore been considered by the Attorney-General of the Philippine
Islands and the United States Treasury Department. The decision of the latter overruling the opinion
of the Attorney-General is as follows:
TREASURY DEPARTMENT, Washington.
Income Tax.

FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.
SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of
correspondence "from the Philippine authorities relative to the method of submission of income
tax returns by marred person."
You advise that "The Governor-General, in forwarding the papers to the Bureau, advises that
the Insular Auditor has been authorized to suspend action on the warrants in question until an
authoritative decision on the points raised can be secured from the Treasury Department."
From the correspondence it appears that Gregorio Araneta, married and living with his wife,
had an income of an amount sufficient to require the imposition of the net income was properly
computed and then both income and deductions and the specific exemption were divided in
half and two returns made, one return for each half in the names respectively of the husband
and wife, so that under the returns as filed there would be an escape from the additional tax;
that Araneta claims the returns are correct on the ground under the Philippine law his wife is
entitled to half of his earnings; that Araneta has dominion over the income and under the
Philippine law, the right to determine its use and disposition; that in this case the wife has no
"separate estate" within the contemplation of the Act of October 3, 1913, levying an income
tax.
It appears further from the correspondence that upon the foregoing explanation, tax was
assessed against the entire net income against Gregorio Araneta; that the tax was paid and
an application for refund made, and that the application for refund was rejected, whereupon
the matter was submitted to the Attorney-General of the Islands who holds that the returns
were correctly rendered, and that the refund should be allowed; and thereupon the question
at issue is submitted through the Governor-General of the Islands and Bureau of Insular Affairs
for the advisory opinion of this office.
By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be
administered as in the United States but by the appropriate internal-revenue officers of the
Philippine Government. You are therefore advised that upon the facts as stated, this office
holds that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this
case was taxable to Gregorio Araneta, both for the normal and additional tax, and that the
application for refund was properly rejected.
The separate estate of a married woman within the contemplation of the Income Tax Law is
that which belongs to her solely and separate and apart from her husband, and over which her
husband has no right in equity. It may consist of lands or chattels.
The statute and the regulations promulgated in accordance therewith provide that each person
of lawful age (not excused from so doing) having a net income of $3,000 or over for the taxable
year shall make a return showing the facts; that from the net income so shown there shall be
deducted $3,000 where the person making the return is a single person, or married and not
living with consort, and $1,000 additional where the person making the return is married and
living with consort; but that where the husband and wife both make returns (they living
together), the amount of deduction from the aggregate of their several incomes shall not
exceed $4,000.

The only occasion for a wife making a return is where she has income from a sole and separate
estate in excess of $3,000, but together they have an income in excess of $4,000, in which
the latter event either the husband or wife may make the return but not both. In all instances
the income of husband and wife whether from separate estates or not, is taken as a whole for
the purpose of the normal tax. Where the wife has income from a separate estate makes return
made by her husband, while the incomes are added together for the purpose of the normal tax
they are taken separately for the purpose of the additional tax. In this case, however, the wife
has no separate income within the contemplation of the Income Tax Law.
Respectfully,
DAVID A. GATES.
Acting Commissioner.
In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax
Law was drafted by the Congress of the United States and has been by the Congress extended to the
Philippine Islands. Being thus a law of American origin and being peculiarly intricate in its provisions,
the authoritative decision of the official who is charged with enforcing it has peculiar force for the
Philippines. It has come to be a well-settled rule that great weight should be given to the construction
placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution.
(U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2 Phil., 630;
Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of
Nueva Segovia [1915], 32 Phil., 634.) We conclude that the judgment should be as it is hereby affirmed
with costs against appellants. So ordered.

G.R. No. 78953 July 31, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.
SARMIENTO, J.:
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote
in his income tax return that a sum of money that he erroneously received and already spent is the
subject of a pending litigation and there did not declare it as income is liable to pay the 50% penalty
for filing a fraudulent return.
This question is the subject of the petition for review before the Court of the portion of the
Decision1 dated July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled,
"Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of Internal Revenue,"
which orders the deletion of the 50% surcharge from Javier's deficiency income tax assessment on
his income for 1977.
The respondent CTA in a Resolution2 dated May 25, 1987, denied the Commissioner's Motion for
Reconsideration3 and Motion for New Trial4 on the deletion of the 50% surcharge assessment or
imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and
incorporated in the assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private
respondent herein), received from the Prudential Bank and Trust Company in Pasay City the
amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks
in the United States, among which is Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First
Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the
petitioner (private respondent herein), his wife and other defendants, claiming that its
remittance of US$1,000,000.00 was a clerical error and should have been US$1,000.00 only,
and praying that the excess amount of US$999,000.00 be returned on the ground that the
defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear,
immediate, and continuing duty to return the said amount from the moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with
the then Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner
(private respondent herein) and his wife with the crime of estafa, alleging that they
misappropriated, misapplied, and converted to their own personal use and benefit the amount
of US$999,000.00 which they received under an implied trust for the benefit of Mellon Bank
and as a result of the mistake in the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax
Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income of
P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of some

money received from abroad which he presumed to be a gift but turned out to be an error and
is now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein) received a
letter from the acting Commissioner of Internal Revenue dated November 14, 1980, together
with income assessment notices for the years 1976 and 1977, demanding that petitioner
(private respondent herein) pay on or before December 15, 1980 the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years 1976 and 1977 respectively. . . .
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of
Internal Revenue that he was paying the deficiency income assessment for the year 1976 but
denying that he had any undeclared income for the year 1977 and requested that the
assessment for 1977 be made to await final court decision on the case filed against him for
filing an allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting
Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply
to his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous
remittance which you were able to dispose, is definitely taxable." . . .5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal6 before the respondent Court of Tax Appeals on December 10,
1981.
The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the
concluding portion:
We note that in the deficiency income tax assessment under consideration, respondent
(petitioner here) further requested petitioner (private respondent here) to pay 50% surcharge
as provided for in Section 72 of the Tax Code, in addition to the deficiency income tax of
P4,888,615.00 and interest due thereon. Since petitioner (private respondent) filed his income
tax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by
respondent (petitioner) because he considered the return filed false or fraudulent. This
additional requirement, to our mind, is much less called for because petitioner (private
respondent), as stated earlier, reflected in as 1977 return as footnote that "Taxpayer was
recipient of some money received from abroad which he presumed to be gift but turned out to
be an error and is now subject of litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting of
deception willfully and deliberately done or resorted to by petitioner (private respondent) in
order to induce the Government to give up some legal right, or the latter, due to a false return,
was placed at a disadvantage so as to prevent its lawful agents from proper assessment of
tax liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519),
because petitioner literally "laid his cards on the table" for respondent to examine. Error or
mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.).
Besides, Section 29 is not too plain and simple to understand. Since the question involved in
this case is of first impression in this jurisdiction, under the circumstances, the 50% surcharge
imposed in the deficiency assessment should be deleted.7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the
matter to us, by the present petition, raising the main issue as to:

WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum,9 that he "did not appeal the decision
which held him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)."
However, he submitted in the same memorandum "that the issue may be raised in the case not for
the purpose of correcting or setting aside the decision which held him liable for deficiency income tax,
but only to show that there is no basis for the imposition of the surcharge." This subsequent disavowal
therefore renders moot and academic the posturings articulated in as Comment10 on the non-taxability
of the amount he erroneously received and the bulk of which he had already disbursed. In any event,
an appeal at that time (of the filing of the Comments) would have been already too late to be
seasonable. The petitioner, through the office of the Solicitor General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record clearly shows that private respondent is
self-convinced, and so acted, that he is the beneficial owner, and of which reason is liable to
tax. Put another way, the studied insinuation that private respondent may not be the beneficial
owner of the money or income flowing to him as enhanced by the studied claim that the amount
is "subject of litigation" is belied by the record and clearly exposed as a fraudulent ploy, as
witness what transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK
for the amount of private respondent's wife was $999,000.00 after opening a dollar account
with Prudential Bank in the amount of $999,993.70, private respondent and his wife, with haste
and dispatch, within a span of eleven (11) electric days, specifically from June 3 to June 14,
1977, effected a total massive withdrawal from the said dollar account in the sum of
$975,000.00 or P7,020,000.00. . . .11
In reply, the private respondent argues:
xxx xxx xxx
The petitioner contends that the private respondent committed fraud by not declaring the
"mistaken remittance" in his income tax return and by merely making a footnote thereon which
read: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift
but turned out to be an error and is now subject of litigation." It is respectfully submitted that
the said return was not fraudulent. The footnote was practically an invitation to the petitioner
to make an investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50
F [2d] 782), that is, it must be stronger than the "mere preponderance of evidence" which
would be sufficient to sustain a judgment on the issue of correctness of the deficiency itself
apart from the fraud penalty. (Frank A. Neddas, 40 BTA 672). The following circumstances
attendant to the case at bar show that in filing the questioned return, the private respondent
was guided, not by that "willful and deliberate intent to prevent the Government from making
a proper assessment" which constitute fraud, but by an honest doubt as to whether or not the
"mistaken remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case"
was given very, very wide publicity by media; and only one who is not in his right mind would
have entertained the idea that the BIR would not make an assessment if the amount in
question was indeed subject to the income tax.

Second, as the respondent Court ruled, "the question involved in this case is of first impression
in this jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the
authorities are not unanimous in holding that similar receipts are subject to the income tax. It
should be noted that the decision in the Rutkin case is a five-to-four decision; and in the very
case before this Honorable Court, one out of three Judges of the respondent Court was of the
opinion that the amount in question is not taxable. Thus, even without the footnote, the failure
to declare the "mistaken remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he was being
sued by the Mellon Bank for the return of the money, and was being prosecuted by the
Government for estafa committed allegedly by his failure to return the money and by converting
it to his personal benefit. The basic tax amounted to P4,899,377.00 (See p. 6 of the Petition)
and could not have been paid without using part of the mistaken remittance. Thus, it was not
unreasonable for the private respondent to simply state in his income tax return that the
amount received was still under litigation. If he had paid the tax, would that not constitute
estafa for using the funds for his own personal benefit? and would the Government refund it
to him if the courts ordered him to refund the money to the Mellon Bank?12
xxx xxx xxx
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue
Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from
him or of the deficiency tax in case payment has been made on the basis of the return filed before the
discovery of the falsity or fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the
filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on
his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from
abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation
that it was an "error or mistake of fact or law" not constituting fraud, that such notation was practically
an invitation for investigation and that Javier had literally "laid his cards on the table."13
In Aznar v. Court of Tax Appeals,14 fraud in relation to the filing of income tax return was discussed in
this manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce another
to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud
with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing
with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be
considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal
Revenue committed mistakes in making entries in the returns and in the assessment,
respectively, under the inventory method of determining tax liability, it would be unfair to treat
the mistakes of the petitioner as tainted with fraud and those of the respondent as made in
good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at
most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the
purpose of tax evasion.15
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not
be, Rick v. U.S., App. D.C., 161 F. 2d 897, 898.16

In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading
of the government agency concerned, the Bureau of Internal Revenue, headed by the herein
petitioner. The government was not induced to give up some legal right and place itself at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier
did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to collect
taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of
1âwphi1
the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling
charges, perhaps even for greed by spending most of the money he received, but the records lack a
clear showing of fraud committed because he did not conceal the fact that he had received an amount
of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the
50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the
deficiency assessment should be deleted.
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is
AFFIRMED. No costs.
SO ORDERED.

G.R. No. 167679 July 22, 2015
ING BANK N.V., engaged in banking operations in the Philippines as ING BANK N.V. MANILA
BRANCH, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
LEONEN, J.:
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.
This is a Petition for Review3 appealing the April 5, 2005 Decision4 of the Court of Tax Appeals En
Banc, which in turn affirmed the August 9, 2004 Decision5 and November 12, 2004 Resolution6 of the
Court of Tax Appeals Second Division. The August 9, 2004 Decision held petitioner ING Bank, N.V.
Manila Branch (ING Bank) liable for (a) deficiency documentary stamp tax for the taxable years 1996
and 1997 in the total amount of ₱238,545,052.38 inclusive of surcharges; (b) deficiency onshore tax
for the taxable year 1996 in the total amount of ₱997,333.89 inclusive of surcharges and interest; and
(c) deficiency withholding tax on compensation for the taxable years 1996 and 1997 in the total amount
of ₱564,542.67 inclusive of interest. The Resolution denied ING Bank’s Motion for Reconsideration.7
While this case was pending before this court, ING Bank filed a Manifestation and Motion8 stating that
it availed itself of the government’s tax amnesty program under Republic Act No. 9480 with respect to
its deficiency documentary stamp tax and deficiency onshore tax liabilities.9 What is at issue now is
whether ING Bank is entitled to the immunities and privileges under Republic Act No. 9480,and
whether the assessment for deficiency withholding tax on compensation is proper.
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."10
On January 3, 2000, ING Bank received a Final Assessment Notice11 dated December 3, 1999.12 The
Final Assessment Notice also contained the Details of Assessment13 and 13 Assessment Notices
"issued by the Enforcement Service of the Bureau of Internal Revenue through its Assistant
Commissioner Percival T. Salazar[.]"14 The Final Assessment Notice covered the following deficiency
tax assessments for taxable years 1996 and 1997:15
Particulars Basic Tax( ) Surcharge( ) Interest( ) Total( )
Deficiency Income Tax
1996 (ST-INC-96-0174-99) 20,916,785.03 11,346,639.55 32,263,424.58
1997 (ST-INC-97-0185-99) 133,533,114.54 45,730,518.68 179,263,633.22

Deficiency Withholding Tax
on Compensation
1996 (ST-WC-96-0175-99) 1,027,267.20 602,288.17 1,629,555.37
1997 (ST-WC-97-0184-99) 2,505,925.25 968,042.36 3,473,967.61
Deficiency Onshore Tax
1996 (ST-OT-96-0176-99) 8,267,437.54 4,847,209.95 13,114,647.49
Deficiency Branch Profit

Remittance Tax
1996 (ST-RT-96-0177-99) 39,215,700.00 22,992,218[.]63 62,207,918.63
1997 (ST-RT-97-0181-99) 92,587,381.60 6,729,180.18 40,799,690.39 140,116,252.17
Deficiency Documentary
Stamp Tax
1996 (ST-DST-96-0178-99 3,838,753.06 959,688.27 4,798,441.33
1997 (ST-DST-97-0181- 1,569,990.18 392,497.55 1,962,487.73

99)
1997 (ST-DST-97-0180- 186,997,288.84 46,749,322.21 233,746,611.05

99)
Compromise Penalty
1996 (ST-CP-96-0179-99) 1,000.00 1,000.00
1997 (ST-CP-97-0186-99) 1,000.00 1,000.00
Deficiency Final Tax
1997 (ST-FT-97-0183-99) 53,200.89 20,551.58 73,752.47
TOTALS

490,514,844.13 54,830,688.21 127,307,159.31 672,652,691.65
============= ============= ============= =============
On February 2, 2000, ING Bank "paid the deficiency 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
ING Bank filed a Petition for Review before the Court of Tax Appeals on October 26, 2000. This case
was docketed as C.T.A. Case No. 6187.18 The Petition was filed to seek "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
withholding tax on compensation mentioned above."19
After trial, the Court of Tax Appeals Second Division rendered its Decision on August 9, 2004, with the
following disposition:
WHEREFORE, the assessments for 1996 and 1997 deficiency income tax, 1996 and 1997 deficiency
branch profit remittance tax and 1997 deficiency documentary stamp tax on IBCLs exceeding five
days are hereby CANCELLED and WITHDRAWN. However, the assessments for 1996 and 1997
deficiency withholding tax on compensation, 1996 deficiency onshore tax and 1996 and 1997
deficiency documentary stamp tax on special savings accounts are hereby UPHELD in the following
amounts:
Particulars Basic Tax Surcharge Interest Total
Deficiency Withholding Tax

on Compensation
1996 (ST-WC-96-0175-99) P 105,939.86 P 61,445.11 P 167,384.97
1997 (ST-WC-97-0184-99) 287,795.44 109,362.26 397,157.70
Deficiency Onshore Tax
1996 (ST-OT-96-0176-99) 544,991.20 P 136,247.80 316,094.89 997,333.89
Deficiency Documentary
Stamp Tax
1996 (ST-DST-96-0178-99) 3,838,753.06 959,688.27 4,798,441.33
1997 (ST-DST-97-0180-99) 186,997,288.84 46,749,322.21 233,746,611.05
TOTALS ₱191,774,768.40 ₱47,845,258.28 P 486,902.26 ₱240,106,928.94

Accordingly, petitioner is ORDERED to PAY the respondent the aggregate amount of
₱240,106,928.94, plus 20% delinquency interest per annum from February 3, 2000 until fully paid,
pursuant to Section 249(C) of the National Internal Revenue Code of 1997.
SO ORDERED.20 (Emphasis in the original)
Both the Commissioner of Internal Revenue and ING Bank filed their respective Motions for
Reconsideration.21 Both Motions were denied through the Second Division’s Resolution dated
November 12, 2004, as follows:
WHEREFORE, the respondent’s Motion for Partial Reconsideration and the petitioner’s Motion for
Reconsideration are hereby DENIED for lack of merit. The pronouncement reached in the assailed
decision is REITERATED.
SO ORDERED.22
On December 8, 2004, ING Bank filed its appeal before the Court of Tax Appeals En Banc.23 The Court
of Tax Appeals En Banc denied due course to ING Bank’s Petition for Review and dismissed the same
for lack of merit in the Decision promulgated on April 5, 2005.24
Hence, ING Bank filed its Petition for Review25 before this court. The Commissioner of Internal
Revenue filed its Comment26 on October 5, 2005 and ING Bank its Reply27 on December 14, 2005.
Pursuant to this court’s Resolution28 dated January 25, 2006, the Commissioner of Internal Revenue
filed its Manifestation and Motion29 on February 14, 2006, stating that it is adopting its Comment as its
Memorandum, and ING Bank filed its Memorandum30 on March 9, 2006.
On December 20, 2007, ING Bank filed a Manifestation and Motion31 informing this court that it had
availed itself of the tax amnesty authorized and granted under Republic Act 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, together with the following documents:
(1) Statement of Assets, Liabilities and Net Worth (SALN) as of December 31, 2005 (original
and amended declarations);34
(2) Tax Amnesty Return For Taxable Year 2005 and Prior Years (BIR Form No. 2116); 35 and
(3) Tax Amnesty Payment Form (Acceptance of Payment Form) for Taxable Year 2005 and
Prior Years (BIR Form No. 0617)36 showing payment of the amnesty tax in the amount of
₱500,000.00.
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[.]"37
Pursuant to this court’s Resolution38 dated January 23, 2008, the Commissioner of Internal Revenue
filed its Comment39 and ING Bank, its Reply.40
Originally, ING Bank raised the following issues in its pleadings:

First, whether "[t]he Court of Tax Appeals En Banc erred in concluding that petitioner’s Special Saving
Accounts are subject to documentary stamp tax (DST) as certificates of deposit under Section 180 of
the 1977 Tax Code";41
Second, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for deficiency
onshore tax considering that under the 1977 Tax Code and the pertinent revenue regulations, the
obligation to pay the ten percent (10%) final tax on onshore interest income rests on the payors-
borrowers and not on petitioner as payee-lender";42 and
Third, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for deficiency
withholding tax on compensation for the accrued bonuses in the taxable years 1996 and 1997
considering that these were not distributed to petitioner’s officers and employees during those taxable
years, hence, were not yet subject to withholding tax."43
However, ING Bank availed itself of the tax amnesty under Republic Act No. 9480, with respect to its
liabilities for deficiency documentary stamp taxes on its special savings accounts for the taxable years
1996 and 1997 and deficiency tax on onshore interest income under the foreign currency deposit
system for taxable year 1996.
Consequently, the issues now for resolution are:
First, whether petitioner ING Bank may validly avail itself of the tax amnesty granted by Republic Act
No. 9480; and
Second, whether petitioner ING Bank is liable for deficiency withholding tax on accrued bonuses for
the taxable years 1996 and 1997.
Tax amnesty availment
Petitioner ING Bank asserts that it is "qualified to avail of the tax amnesty under Section 5 [of Republic
Act No. 9480] and . . . not disqualified under Section 8 [of the same law]."44 Respondent Commissioner
of Internal Revenue, for its part, does not deny the authenticity of the documents submitted by
petitioner ING Bank or dispute the payment of the amnesty tax. However, respondent Commissioner
of Internal Revenue claims that petitioner ING Bank is not qualified to avail itself of the tax amnesty
granted under Republic Act No. 9480 because both the Court of Tax Appeals En Banc and Second
Division ruled in its favor that confirmed the liability of petitioner ING Bank for deficiency documentary
stamp taxes, onshore taxes, and withholding taxes.45
Respondent Commissioner of Internal Revenue asserts that BIR Revenue Memorandum Circular No.
19-2008 specifically excludes "cases which were ruled by any court (even without finality) in favor of
the BIR prior to amnesty availment of the taxpayer" from the coverage of the tax amnesty under
Republic Act No. 9480.46 In any case, respondent Commissioner of Internal Revenue argues that
petitioner ING Bank’s availment of the tax amnesty is still subject to its evaluation, 47 that it is
"empowered to exercise [its] sound discretion . . . in the implementation of a tax amnesty in favor of a
taxpayer,"48 and "petitioner cannot presume that its application . . . would be granted[.]"49 Accordingly,
respondent Commissioner of Internal Revenue prays that "petitioner [ING Bank’s] motion be denied
for lack of merit."50
Petitioner ING Bank counters that BIR Revenue Memorandum Circular No. 19-2008 cannot override
Republic Act No. 9480 and its Implementing Rules and Regulations, which only exclude from tax
amnesty "tax cases subject of final and [executory] judgment by the courts."51 Petitioner ING Bank
asserts that its full compliance with the conditions prescribed in Republic Act No. 9480 (the conditions

being submission of the requisite documents and payment of the amnesty tax), which respondent
Commissioner of Internal Revenue does not dispute, confirms that it is "qualified to avail itself, and
has actually availed itself, of the tax amnesty."52 It argues that there is nothing in the law that gives
respondent Commissioner of Internal Revenue the discretion to rescind or erase the legal effects of
its tax amnesty availment.53 Thus, the issue is no longer about whether "[it] is entitled to avail itself of
the tax amnesty[,]"54 but rather whether the effects of its tax amnesty availment extend to the
assessments of deficiency documentary stamp taxes on its special savings accounts for 1996 and
1997 and deficiency tax on onshore interest income for 1996.55
Petitioner ING Bank points out the Court of Tax Appeals’ ruling in Metropolitan Bank and Trust
Company v. Commissioner of Internal Revenue,56 to the effect that full compliance with the
requirements of the tax amnesty law extinguishes the tax deficiencies subject of the amnesty
availment.57 Thus, with its availment of the tax amnesty and full compliance with all the conditions
prescribed in the statute, petitioner ING Bank asserts that it is entitled to all the immunities and
privileges under Section 6 of Republic Act No. 9480.58
Withholding tax on compensation
Petitioner ING Bank claims that it is not liable for withholding taxes on bonuses accruing to its officers
and employees during taxable years 1996 and 1997.59 It maintains its position that the liability of the
employer to withhold the tax does not arise until such bonus is actually distributed. It cites Section 72
of the 1977 National Internal Revenue Code, which states that "[e]very employer making payment of
wages shall deduct and withhold upon such wages a tax," and BIR Ruling No. 555-88 (November 23,
1988) declaring that "[t]he withholding tax on the bonuses should be deducted upon the distribution of
the same to the officers and employees[.]"60 Since the supposed bonuses were not distributed to the
officers and employees in 1996 and 1997 but were distributed in the succeeding year when the
amounts of the bonuses were finally determined, petitioner ING Bank asserts that its duty as employer
to withhold the tax during these taxable years did not arise.61
Petitioner ING Bank further argues that the Court of Tax Appeals’ discussion on Section 29(j) of the
1993 National Internal Revenue Code and Section 3 of Revenue Regulations No. 8-90 is not
applicable because the issue in this case "is not whether the accrued bonuses should be allowed as
deductions from petitioner’s taxable income but, rather, whether the accrued bonuses are subject to
withholding tax on compensation in the respective years of accrual[.]"62 Respondent Commissioner of
Internal Revenue counters that petitioner ING Bank’s application of BIR Ruling No. 555-88 is
misplaced because as found by the Second Division of the Court of Tax Appeals, the factual milieu is
different:63
In that ruling, bonuses are determined and distributed in the succeeding year "[A]fter [sic] the audit of
each company is completed (on or before April 15 of the succeeding year)". The withholding and
remittance of income taxes were also made in the year they were distributed to the employees. . . .
In petitioner’s case, bonuses were determined during the year but were distributed in the succeeding
year. No withholding of income tax was effected but the bonuses were claimed as an expense for the
year. . . .
Since the bonuses were not subjected to withholding tax during the year they were claimed as an
expense, the same should be disallowed pursuant to the above-quoted law.64
Respondent Commissioner of Internal Revenue contends that petitioner ING Bank’s act of "claim[ing]
[the] subject bonuses as deductible expenses in its taxable income although it has not yet withheld
and remitted the [corresponding withholding] tax"65 to the Bureau of Internal Revenue contravened

Section 29(j) of the 1997 National Internal Revenue Code, as amended.66 Respondent Commissioner
of Internal Revenue claims that "subject bonuses should also be disallowed as deductible expenses
of petitioner."67
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."69 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 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,71 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. 9480.72
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.
II
Petitioner ING Bank showed that it complied with the requirements set forth under Republic Act No.
9480. Respondent Commissioner of Internal Revenue never questioned or rebutted that petitioner
ING Bank fully complied with the requirements for tax amnesty under the law. Moreover, the
contestability period of one (1) year from the time of petitioner ING Bank’s availment of the tax amnesty
law on December 14, 2007 lapsed. Correspondingly, it is fully entitled to the immunities and privileges
mentioned under Section 6 of Republic Act No. 9480. This is clear from the following provisions:
SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to avail himself of the
tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR)
a notice and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth
(SALN) as of December 31, 2005, in such form asmay be prescribed in the implementing rules and
regulations (IRR) of this Act, and pay the applicable amnesty tax within six months from the effectivity
of the IRR.

....
SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31, 2005 shall be
considered as true and correct except where the amount of declared networth is understated to the
extent of thirty percent (30%) or more as may be established in proceedings initiated by, or at the
instance of, parties other than the BIR or its agents: Provided, That such proceedings must be initiated
within one year following the date of the filing of the tax amnesty return and the SALN. Findings of or
admission in congressional hearings, other administrative agencies of government, and/or courts shall
be admissible to prove a thirty percent (30%) under-declaration. . . . .
SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax amnesty under Section
5 hereof, and have fully complied with all its conditions shall be entitled to the following immunities
and privileges:
a. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and
the appurtenant civil, criminal or administrative penalties under the National Internal Revenue
Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes
for taxable year 2005 and prior years.
b. The taxpayer’s Tax Amnesty Returns and the SALN as of December 31, 2005 shall not be
admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years,
insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or
administrative bodies in which he is a defendant or respondent, and except for the purpose of
ascertaining the networth beginning January 1, 2006, the same shall not be examined, inquired
or looked into by any person or government office. However, the taxpayer may use this as a
defense, whenever appropriate, in cases brought against him.
c. The books of accounts and other records of the taxpayer for the years covered by the tax
amnesty availed of shall not be examined: Provided, That the Commissioner of Internal
Revenue may authorize in writing the examination of the said books of accounts and other
records to verify the validity or correctness of a claim for any tax refund, tax credit (other than
refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing
laws. (Emphasis supplied)
Contrary to respondent Commissioner of Internal Revenue’s stance, 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 204 73 of the
1997 National Internal Revenue Code that is within the discretion of respondent Commissioner of
Internal Revenue,74 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. III.
The Court of Tax Appeals En Banc affirmed the factual finding of the Second Division that accrued
bonuses were recorded in petitioner ING Bank’s books as expenses for taxable years 1996 and 1997,
although no withholding of tax was effected:
With the preceding defense notwithstanding, petitioner now maintained that the portion of the
disallowed bonuses in the amounts of ₱3,879,407.85 and ₱9,004,402.63 for the respective years 1996
and 1997, were actually payments for reimbursements of representation, travel and entertainment
expenses of its officers. These expenses according to petitioner are not considered compensation of
employees and likewise not subject to withholding tax.
In order to prove that the discrepancy in the accrued bonuses represents reimbursement of expenses,
petitioner availed of the services of an independent CPA pursuant to CTA Circular No. 1-95, as
amended. As a consequence, Mr. Ruben Rubio was commissioned by the court to verify the accuracy
of petitioner’s position and to check its supporting documents.
In a report dated January 29, 2002, the commissioned independent CPA noted the following pertinent
findings: . . .
Findings and Observations 1997 1996
Supporting document is under the P 930,307.56 P 1,849,040.70

name of the employee
Supporting document is not under 537,456.37 53,384.80

the name of the Bank nor its
employees (addressee is
"cash"/blank)
Supporting document is under the 7,039,976.36 1,630,292.14

name of the Bank
Supporting document is in the name 362,919.59 62,615.91

of another person (other than the
employee claiming the expense)
Supporting document is not dated 13,404.00 423,199.07

within the period (i.e., 1996 and
1997)

Date/year of transaction is not 31,510.00 26,126.49
Indicated
Amount is not supported by 313,319.09 935,044.28

liquidation document(s)
TOTAL ₱9,228,892.97 ₱4,979,703.39
Based on the above report, only the expenses in the name of petitioner’s employee and those under
its name can be given credence. Therefore, the following expenses are valid expenses for income tax
purposes:
1996 1997
Supporting document is under the ₱1,849,040.70 P 930,307.56

name of the employee
Supporting document is under the 1,630,292.14 7,039,976.36

name of the Bank
TOTAL ₱3,479,332.84 P 7,970,283.92
Consequently, petitioner is still liable for the amounts of ₱167,384.97 and ₱397,157.70 representing
deficiency withholding taxes on compensation for the respective years of 1996 and 1997, computed
as follows:
1996 1997
Total Disallowed Accrued Bonus P 3,879,407.85 P 9,004,402.63
Less: Substantiated
Reimbursement of Expense 3,479,332.84 7,970,283.92
Unsubstantiated P 400,075.01 P 1,034,119.43
Tax Rate 26.48% 27.83%
Basic Withholding Tax Due
Thereon P 105,939.86 P 287,795.44

Interest (Sec. 249) 61,445.11 109,362.26
Deficiency Withholding Tax on
Compensation P 167,384.97 P 397,157.70
An expense, whether the same is paid or payable, "shall be allowed as a deduction only if it is shown
that the tax required to be deducted and withheld therefrom [was] paid to the Bureau of Internal
Revenue[.]"79
Section 29(j) of the 1977 National Internal Revenue Code80 (now Section 34(K) of the 1997 National
Internal Revenue Code) provides:
Section 29. Deductions from gross income. — In computing taxable income subject to tax under Sec.
21(a); 24(a), (b) and (c); and 25(a) (1), there shall be allowed as deductions the items specified in
paragraphs (a) to (i) of this section: . . . .
....
(a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal services actually rendered; travelling
expenses while away from home in the pursuit of a trade, profession or business, rentals or other
payments required to be made as a condition to the continued use or possession, for the purpose of
the trade, profession or business, of property to which the taxpayer has not taken or is not taking title
or in which he has no equity.
....
(j) Additional requirement for deductibility of certain payments. — Any amount paid or payable which
is otherwise deductible from, or taken into account in computing gross income for which depreciation
or amortization may be allowed under this section, shall be allowed as a deduction only if it is shown
that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal
Revenue in accordance with this section, Sections 5181 and 7482 of this Code. (Emphasis supplied)
Section 3 of Revenue Regulations No. 8-90 (now Section 2.58.5 of Revenue Regulations No. 2-98)
provides:
Section 3. Section 9 of Revenue Regulations No. 6-85 is hereby amended to read as follows:
Section 9. (a) Requirement for deductibility. Any income payment, which is otherwise deductible under
Sections 29 and 54 of the Tax Code, as amended, shall be allowed as a deduction from the payor’s
gross income only if it is shown that the tax required to be withheld has been paid to the Bureau of
Internal Revenue in accordance with Sections 50, 51, 72, and 74 also of the Tax Code.(Emphasis
supplied)

Under the National Internal Revenue Code, every form of compensation for personal services is
subject to income tax and, consequently, to withholding tax. The term "compensation" means all
remunerations paid for services performed by an employee for his or her employer, whether paid in
cash or in kind, unless specifically excluded under Sections 32(B)83 and 78(A)84 of the 1997 National
Internal Revenue Code.85 The name designated to the remuneration for services is immaterial. Thus,
"salaries, wages, emoluments and honoraria, bonuses, allowances (such as transportation,
representation, entertainment, and the like), [taxable] fringe benefits[,] pensions and retirement pay,
and other income of a similar nature constitute compensation income"86 that is taxable.
Hence, 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.
Petitioner ING Bank insists, however, 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 (i.e., in 1997 and 1998) when the amounts were finally determined.
Petitioner ING Bank’s contention is untenable.
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 appropriate taxes on
compensation.87 Taxes withheld are creditable in nature.88 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.89 For over withholding, the employee is refunded.90 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.
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.
Section 72 of the 1977 National Internal Revenue Code, as amended,91 states:
SECTION 72. Income tax collected at source. — (a) Requirement of withholding. — Every employer
making payment of wages shall deduct and withhold upon such wages a tax determined in accordance
with regulations to be prepared and promulgated by the Minister of Finance. (Emphasis supplied)
Sections 7 and 14 of Revenue Regulations No. 6-82,92 as amended,93 relative to the withholding of tax
on compensation income, provide:
Section 7. Requirement of withholding.— Every employer or any person who pays or controls the
payment of compensation to an employee, whether resident citizen or alien, non-resident citizen, or
nonresident alien engaged in trade or business in the Philippines, must withhold from such
compensation paid, an amount computed in accordance with these regulations.
I. Withholding of tax on compensation paid to resident employees. – (a)In general, every employer
making payment of compensation shall deduct and withhold from such compensation income for the
entire calendar year, a tax determined in accordance with the prescribed new Withholding Tax Tables
effective January 1, 1992 (ANNEX "A").
....

Section 14. Liability for the Tax.— The employer is required to collect the tax by deducting and
withholding the amount thereof from the employee’s compensation as when paid, either actually or
constructively. An employer is required to deduct and withhold the tax notwithstanding that the
compensation is paid in something other than money (for example, compensation paid in stocks or
bonds) and to pay the tax to the collecting officer. If compensation is paid in property other than money,
the employer should make necessary arrangements to ensure that the amount of the tax required to
be withheld is available for payment to the collecting officer.
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. If, for example, the employer
deducts less than the correct amount of tax, or if he fails to deduct any part of the tax, he is
nevertheless liable for the correct amount of the tax. However, if the employer in violation of the
provisions of Chapter XI, Title II 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,
however, 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)
Constructive payment of compensation is further defined in Revenue Regulations No. 6-82:
Section 25. Applicability; constructive receipt of compensation.
—....
Compensation is constructively paid within the meaning of these regulations when it is credited to the
account of or set apart for an employee so that it may be drawn upon by him at any time although not
then actually reduced to possession. To constitute payment in such a case, the compensation must
be credited or set apart for the employee without any substantial limitation or restriction as to the time
or manner of payment or condition upon which payment is to be made, and must be made available
to him so that it may be drawn upon at any time, and its payment brought within his control and
disposition. (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.
In Commissioner of Internal Revenue v. Isabela Cultural Corporation,94 this court explained the accrual
method of accounting, as against the cash method:
Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions. . . .

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is
authorized to deduct certain expenses and other allowable deductions for the current year but failed
to do so cannot deduct the same for the next year.
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.
For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1) fixing
of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination
of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the amount
1âw phi1
of income or liability be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation
may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability
does not have to be determined exactly; it must be determined with "reasonable accuracy.
"Accordingly, the term "reasonable accuracy" implies something less than anex act or completely
accurate amount.95 (Emphasis supplied, citations omitted)
Thus, if the taxpayer is on cash basis, he expense is deductible in the year it was paid, regardless of
the year it was incurred. If he is on the accrual method, he can deduct the expense upon accrual
thereof. An item that is reasonably ascertained as to amount and acknowledged to be due has
"accrued"; actual payment is not essential to constitute "expense."
Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the obligation to pay
is already fixed; (2) the amount can be determined with reasonable accuracy; and (3) it is already
knowable or the taxpayer can reasonably be expected to have known at the closing of its books for
the taxable year.
Section 29(j) of the 1977 National Internal Revenue Code96 (Section 34(K) of the 1997 National Internal
Revenue Code) expressly requires, as a condition for deductibility of an expense, that the tax required
to be withheld on the amount paid or payable is shown to have been remitted to the Bureau of Internal
Revenue by the taxpayer constituted as a withholding agent of the government.
The provision of Section 72 of the 1977 National Internal Revenue Code (Section 79 of the 1997
National Internal Revenue Code) regarding withholding on wages must be read and construed in
harmony with Section 29(j) of the 1977 National Internal Revenue Code (Section 34(K) of the 1997
National Internal Revenue Code) on deductions from gross income. This is in accordance with the rule
on statutory construction that an interpretation is to be sought which gives effect to the whole of the
statute, such that every part is made effective, harmonious, and sensible,97 if possible, and not
defeated nor rendered insignificant, meaningless, and nugatory.98 If we go by the theory of petitioner
ING Bank, then the condition imposed by Section 29(j) would have been rendered nugatory, or we

would in effect have created an exception to this mandatory requirement when there was none in the
law.
Reading together the two provisions, we hold that the obligation of the payor/employer to deduct and
withhold the related withholding tax arises at the time the income was paid or accrued or recorded as
an expense in the payor’s/employer’s books, whichever comes first.
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,99 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."100 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.101 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.102 Moreover, petitioner already deducted as business expense the said amounts as
interests due to the foreign corporation.103 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 ₱400,075.0l (1996) and Pl,034,119.43 (1997) on which deficiency
withholding taxes of Pl67,384.97 (1996) and ₱397,157.70 (1997) 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.
WHEREFORE, the Petition is PARTLY GRANTED. The assessments with respect to petitioner ING
Bank's liabilities for deficiency documentary stamp taxes on its special savings accounts for the
taxable years 1996 and 1997 and deficiency tax on onshore interest income under the foreign currency
deposit system for taxable year 1996 are hereby SET ASIDE solely in view of petitioner ING Bank's
availment of the tax amnesty program under Republic Act No. 9480. The April 5, 2005 Decision of the
Court of Tax Appeals En Banc, which affirmed the August 9, 2004 Decision and November 12, 2004
Resolution of the Court of Tax Appeals Second Division holding petitioner ING Bank liable for
deficiency withholding tax on compensation for the taxable years 1996 and 1997 in the total amount
of ₱564,542.67 inclusive of interest, is AFFIRMED.
SO ORDERED.

G.R. No. 169507, January 11, 2016
AIR CANADA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a general sales
agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable under
Section 28(A)(1), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to
any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic
of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 1/2% of
its gross revenues earned from the sale of its tickets in the Philippines.
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax Appeals En
Banc, which in turn affirmed the December 22, 2004 Decision3 and April 8, 2005 Resolution4 of the
Court of Tax Appeals First Division denying Air Canada's claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"5 On April 24,
2000, it was granted an authority to operate as an offline carrier by the Civil Aeronautics Board, subject
to certain conditions, which authority would expire on April 24, 2005.6 "As an off-line carrier, [Air
Canada] does not have flights originating from or coming to the Philippines [and does not] operate any
airplane [in] the Philippines[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales
agent in the Philippines.8 Aerotel "sells [Air Canada's] passage documents in the Philippines."9
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada,
through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross
Philippine Billings in the total amount of P5,185,676.77,10 detailed as follows:
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29,2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30,2001 522,465.39
2nd Qtr 2001 August 29,2001 1,033,423.34
3rd Qtr 2001 November 29,2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30,2002 594,850.13
2nd Qtr 2002 August 29,2002 1,164,664.11
TOTAL P 5,185,676.77"cralawlawlibrary
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income

taxes amounting to P5,185,676.77 before the Bureau of Internal Revenue,12 Revenue District Office
No. 47-East Makati.13 It found basis from the revised definition14 of Gross Philippine Billings under
Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of
two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail originating from the Philippines in
a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place
of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged
and/or indorsed to another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any port outside the
Philippines on another airline, only-the aliquot portion of the cost of the ticket corresponding to the leg
flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(Emphasis supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the
Court of Tax Appeals on November 29, 2002.15 The case was docketed as C.T.A. Case No. 6572.16
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the
Petition for Review and, hence, the claim for refund.17 It found that Air Canada was engaged in
business in the Philippines through a local agent that sells airline tickets on its behalf. As such, it
should be taxed as a resident foreign corporation at the regular rate of 32%.18 Further, according to
the Court of Tax Appeals First Division, Air Canada was deemed to have established a "permanent
establishment"19 in the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax
Treaty20 by the appointment of the local sales agent, "in which [the] petitioner uses its premises as an
outlet where sales of [airline] tickets are made[.]"21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of
Tax Appeals First Division's Resolution dated April 8, 2005 for lack of merit. 22 The First Division held
that while Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it
was nevertheless liable to pay the 32% corporate income tax on income derived from the sale of airline
tickets within the Philippines pursuant to Section 28(A)(1).
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Bane.24 The appeal was
docketed as CTAEB No. 86.
In the Decision dated August 26, 2005, the Court of Tax Appeals En Bane affirmed the findings of the
First Division.26 The En Banc ruled that Air Canada is subject to tax as a resident foreign corporation
doing business in the Philippines since it sold airline tickets in the Philippines.27 The Court of Tax
Appeals En Bane disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and
accordingly, DISMISSED for lack of merit.28cralawlawlibrary

Hence, this Petition for Review29 was filed. The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier selling passage documents
through a general sales agent in the Philippines, is-a resident foreign corporation within the meaning
of Section 28(A)(1) of the 1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 21/2% tax on Gross Philippine Billings
pursuant to Section 28(A)(3). If not, whether an offline international carrier selling passage documents
through a general sales agent can be subject to the regular corporate income tax of 32% on taxable
income pursuant to Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls under the
definition of "permanent establishment" under Article V(2)(i) of the Republic of the Philippines-
Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of P5,185,676.77 pertaining allegedly to
erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to the second quarter
of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax on resident
foreign corporations provided under Section 28(A)(1) of the 1997 National Internal Revenue Code
does not apply to "international carriers,"31 which are especially classified and taxed under Section
28(A)(3).32 It adds that the fact that it is no longer subject to Gross Philippine Billings tax as ruled in
the assailed Court of Tax Appeals Decision "does not render it ipso facto subject to 32% income tax
on taxable income as a resident foreign corporation."33 Petitioner argues that to impose the 32%
regular corporate income tax on its income would violate the Philippine government's covenant under
Article VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a tax higher than 1 Vi%
of the carrier's gross revenue derived from sources within the Philippines.34 It would also allegedly
result in "inequitable tax treatment of on-line and off-line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was
income from services and not income from sales of personal property.36 Petitioner cites the
deliberations of the Bicameral Conference Committee on House Bill No. 9077 (which eventually
became the 1997 National Internal Revenue Code), particularly Senator Juan Ponce Enrile's
statement,37 to reveal the "legislative intent to treat the revenue derived from air carriage as income
from services, and that the carriage of passenger or cargo as the activity that generates the
income."38 Accordingly, applying the principle on the situs of taxation in taxation of services, petitioner
claims that its income derived "from services rendered outside the Philippines [was] not subject to
Philippine income taxation."
Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner
cannot be considered to have a "permanent establishment"40 in the Philippines pursuant to Article V(6)
of the Republic of the Philippines-Canada Tax Treaty.41 It points out that Aerotel is an "independent
general sales agent that acts as such for ... other international airline companies in the ordinary course
of its business."42 Aerotel sells passage tickets on behalf of petitioner and receives a commission for

its services.43 Petitioner states that even the Bureau of Internal Revenue— through VAT Ruling No.
003-04 dated February 14, 2004—has conceded that an offline international air carrier, having no flight
operations to and from the Philippines, is not deemed engaged in business in the Philippines by merely
appointing a general sales agent.44 Finally, petitioner maintains that its "claim for refund of erroneously
paid Gross Philippine Billings cannot be denied on the ground that [it] is subject to income tax under
Section 28 (A) (I)"45 since it has not been assessed at all by the Bureau of Internal Revenue for any
income tax liability.
On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax as
a resident foreign corporation doing business in the Philippines. Petitioner's total payment of
P5,185,676.77 allegedly shows that petitioner was earning a sizable income from the sale of its plane
tickets within the Philippines during the relevant period.47 Respondent further points out that this court
in Commissioner of Internal Revenue v. American Airlines, Inc.,48 which in turn cited the cases
involving the British Overseas Airways Corporation and Air India, had already settled that "foreign
airline companies which sold tickets in the Philippines through their local agents . . . [are] considered
resident foreign corporations engaged in trade or business in the country."49 It also cites Revenue
Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing business in the
Philippines" as including "regular sale of tickets in the Philippines by offline international airlines either
by themselves or through their agents."
Respondent further contends that petitioner is not entitled to its claim for refund because the amount
of P5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of 2001 was still
short of the 32% income tax due for the period.51 Petitioner cannot allegedly claim good faith in its
failure to pay the right amount of tax since the National Internal Revenue Code became operative on
January 1, 1998 and by 2000, petitioner should have already been aware of the implications of Section
28(A)(3) and the decided cases of this court's ruling on the taxability of offline international carriers
selling passage tickets in the Philippines.52
At the outset, we affirm the Court of Tax Appeals' ruling that petitioner, as an offline international carrier
with no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings under Section
28(A)(3) of the 1997 National Internal Revenue Code:

from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment
of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the passenger boards a plane
in a port or point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine Billings. (Emphasis
supplied)

Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage,
cargo, and mail originated from the Philippines in a continuous and uninterrupted flight, regardless of
where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine
Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls
within the definition of resident • foreign corporation under Section 28(A)(1) of the 1997 National
Internal Revenue Code, thus, it may be subject to 32%53 tax on its taxable income:

(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized,
or existing under the laws of any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty- three percent (33%); and effective January 1, 2000
and thereafter, the rate shall be thirty-two percent (32%54). (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout the
amendments of the National Internal Revenue Code. All versions refer to "a foreign corporation
engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June
15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation engaged in trade
or business within the Philippines or having an office or place of business therein."
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110,
approved on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any
foreign country, except a foreign life insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the Philippines.56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939
National Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was amended, but
it still provides that "[a] corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection

(a) of this section upon the total net income received in the preceding taxable year from all sources
within the Philippines[.]"57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation58 declared British Overseas Airways Corporation, an international air carrier with no
landing rights in the Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the airline company.59 This
court discussed that:
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business.
Each case must be judged in the light of its peculiar environmental circumstances. The term implies
a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to,
and in progressive prosecution of commercial gain or for the purpose and object of the
business organization. "In order that a foreign corporation may be regarded as doing business within
a State, there must be continuity of conduct and intention to establish a continuous business, such as
the appointment of a local agent, and not one of a temporary character. ["]
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in
the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing
tickets; (2) breaking down the whole trip into series of trips — each trip in the series corresponding to
a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating
to the various airline companies on the basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." Those activities were in exercise of the functions which are normally incident to, and are
in progressive pursuit of, the purpose and object of its organization as an international air carrier. In
fact, the regular sale of tickets, its main activity, is the very lifeWood of the airline business, the
generation of sales being the paramount objective. There should be no doubt then that BOAC was
"engaged in" business in the Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines.60 (Emphasis supplied,
citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition
of "doing business" with regard to foreign corporations. Section 3(d) of the law enumerates the
activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred
eighty (180) days or more; participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of the purpose and object of the
business organization: Provided, however, That' the phrase "doing business" shall not be deemed
to include mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a nominee director
or officer to represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own
account[.]61 (Emphasis supplied)

While Section 3(d) above states that "appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account" is not considered as
"doing business," the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that
"doing business" includes "appointing representatives or distributors, operating under full control of
the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country
for a period or periods totaling one hundred eighty (180) days or more[.]"
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who
maintains office or who has designated or appointed agents or employees in the Philippines, who sells
or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate
for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts,
or arranges for such transportation."
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics]
Board for such authority."64 Each offline carrier must file with the Civil Aeronautics Board a monthly
report containing information on the tickets sold, such as the origin and destination of the passengers,
carriers involved, and commissions received.
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose
of petitioner's business. The activities of Aerotel bring direct receipts or profits to petitioner.66 There is
nothing on record to show that Aerotel solicited orders alone and for its own account and without
interference from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any
contract on behalf of [petitioner Air Canada] without the express written consent of [the latter,]" 67 and
it must perform its functions according to the standards required by petitioner.68 Through Aerotel,
petitioner is able to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline
carrier in the Philippines for a period of five years, or from April 24, 2000 until April 24, 2005.
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources
within the Philippines. Petitioner's income from sale of airline tickets, through Aerotel, is income
realized from the pursuit of its business activities in the Philippines.
Ill
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National
Internal Revenue Code must consider the existence of an effective tax treaty between the Philippines
and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court held
that Section 28(A)(3)(a) does not categorically exempt all international air carriers from the coverage
of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule under
Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an international air
carrier would be liable for the tax under Section 28(A)(1).
This court in South African Airways declared that the correct interpretation of these provisions is that:
"international air carrier[s] maintaining] flights to and from the Philippines . . . shall be taxed at the rate
of 21/2% of its Gross Philippine Billings[;] while international air carriers that do not have flights to and

from the Philippines but nonetheless earn income from other activities in the country [like sale of airline
tickets] will be taxed at the rate of 32% of such [taxable] income."
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double
taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and
according fair and equitable tax treatment to foreign residents or nationals."73Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc.74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination
of international juridical double taxation, which is defined as the imposition of comparable taxes in two
or more states on the same taxpayer in respect of the same subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and persons between countries, conditions deemed
vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection against double taxation
is crucial in creating such a climate.75 (Emphasis in the original, citations omitted)
Observance of any treaty obligation binding upon the government of the Philippines is anchored on
the constitutional provision that the Philippines "adopts the generally accepted principles of
international law as part of the law of the land[.]" 76Pacta sunt servanda is a fundamental international
law principle that requires agreeing parties to comply with their treaty obligations in good faith.
Hence, the application of the provisions of the National Internal Revenue Code must be subject to the
provisions of tax treaties entered into by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court stressed the
binding effects of tax treaties. It dealt with the issue of "whether the failure to strictly comply with
[Revenue Memorandum Order] RMO No. 1-200079 will deprive persons or corporations of the benefit
of a tax treaty."80 Upholding the tax treaty over the administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles of international law as part of the
law of the land. The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the agreement.
Every treaty in force is binding upon the parties, and obligations under the treaty must be performed
by them in good faith. More importantly, treaties have the force and effect of law in this
jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and,
in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v. S.C.
Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international investment climate and the protection against

double taxation is crucial in creating such a climate." Simply put, tax treaties are entered into to
minimize, if not eliminate the harshness of international juridical double taxation, which is why they are
also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken. " Thus,
laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional requirements that would negate the availment of
the reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty
does not provide for any pre-requisite for the availment of the benefits under said agreement.
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty
relief as required by RMO No. 1 -2000 should not operate to divest entitlement to the relief as it would
constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty
relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has negative implications on international relations,
and unduly discourages foreign investors. While the consequences sought to be prevented by RMO
No. 1-2000 involve an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of the Republic of the Philippines and
for the government of Canada signed the Convention between the Philippines and Canada for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
(Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent establishment"
as a "fixed place of business in which the business of the enterprise is wholly or partly carried on."
Even though 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 under certain conditions there is a
person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person
acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an
agent of independent status to whom paragraph 6 applies) shall be deemed to be a permanent
establishment in the first-mentioned State if . . . he has and habitually exercises in that State an
authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the
purchase of goods or merchandise for that enterprise[.]" The provision seems to refer to one who
would be considered an agent under Article 186883 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be
deemed to have a permanent establishment in the other Contracting State merely because it carries
on business in that other State through a broker, general commission agent or any other agent of an
independent status, where such persons are acting in the ordinary course of their business."

Considering Article XV86 of the same Treaty, which covers dependent personal services, the term
"dependent" would imply a relationship between the principal and the agent that is akin to an employer-
employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter exercises
comprehensive control and detailed instructions over the means and results of the activities of the
agent.
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the
Philippines, defines a general sales agent as "a person, not a bonafide employee of an air carrier, who
pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale any air
transportation, or negotiates for, or holds himself out by solicitation, advertisement or otherwise as one
who sells, provides, furnishes, contracts or arranges for, such air transportation."88 General sales
agents and their property, property rights, equipment, facilities, and franchise are subject to the
regulation and control of the Civil Aeronautics Board.89 A permit or authorization issued by the Civil
Aeronautics Board is required before a general sales agent may engage in such an activity.
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a
"permanent"establishment" in the Philippines as defined under the Republic of the Philippines-Canada
Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of transportation
on petitioner and handle reservations, appointment, and supervision of International Air Transport
Association-approved and petitioner-approved sales agents, including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every
matter relating to this Agreement;
....
c) Promotion of passenger transportation on AC;

....
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA
[Philippines], of traffic documents issued by AC outside the said territory of the GSA [Philippines], as
required by the passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and
publicity material provided by AC in accordance with the reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of any press or public
relations inquiries to AC;
....
o) Submission for AC's approval, of an annual written sales plan on or before a date to be
determined by AC and in a form acceptable to AC;

....
q) Submission of proposals for AC's approval of passenger sales agent incentive plans at a
reasonable time in advance of proposed implementation.
....
r) Provision of assistance on request, in its relations with Governmental and other authorities, offices
and agencies in the Territory [Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless
otherwise stated in the guidelines, refer all such claims and complaints to AC.91cralawlawlibrary
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own
expense and acceptable to [petitioner Air Canada], adequate and suitable premises, qualified staff,
equipment, documentation, facilities and supervision and in consideration of the remuneration and
expenses payable[,] [will] defray all costs and expenses of and incidental to the Agency." 92 "[I]t is the
sole employer of its employees and . . . is responsible for [their] actions ... or those of any
subcontractor."93 In remuneration for its services, Aerotel would be paid by petitioner a commission
on sales of transportation plus override commission on flown revenues.94 Aerotel would also be
reimbursed "for all authorized expenses supported by original supplier invoices."95
Aerotel is required to keep "separate books and records of account, including supporting documents,
regarding all transactions at, through or in any way connected with [petitioner Air Canada] business."96
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased
way."97 Aerotel cannot "accept additional appointments as General Sales Agent of any other carrier
without the prior written consent of [petitioner Air Canada]."
The Passenger General Sales Agency Agreement "may be terminated by either party without cause
upon [no] less than 60 days' prior notice in writing[.]"99 In case of breach of any provisions of the
Agreement, petitioner may require Aerotel "to cure the breach in 30 days failing which [petitioner Air
Canada] may terminate [the] Agreement[.]"100
The following terms are indicative of Aerotel's dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes control
of another entity or merges with or is acquired or controlled by another person or entity[,]" 101 Except
with the written consent of petitioner, Aerotel must not acquire a substantial interest in the ownership,
management, or profits of a passenger sales agent affiliated with the International Air Transport
Association or a non-affiliated passenger sales agent nor shall an affiliated passenger sales agent
acquire a substantial interest in Aerotel as to influence its commercial policy and/or management
decisions.102 Aerotel must also provide petitioner "with a report on any interests held by [it], its owners,
directors, officers, employees and their immediate families in companies and other entities in the
aviation industry or ... industries related to it[.]"103 Petitioner may require that any interest be divested
within a set period of time.104
Second, in carrying out the services, Aerotei cannot enter into any contract on behalf of petitioner
without the express written consent of the latter;105 it must act according to the standards required by
petitioner;106 "follow the terms and provisions of the [petitioner Air Canada] GS A Manual [and all]
written instructions of [petitioner Air Canada;]"107 and "[i]n the absence of an applicable provision in

the Manual or instructions, [Aerotei must] carry out its functions in accordance with [its own] standard
practices and procedures[.]"108
Third, Aerotei must only "issue traffic documents approved by [petitioner Air Canada] for all
transportation over [its] services[.]"109 All use of petitioner's name, logo, and marks must be with the
written consent of petitioner and according to petitioner's corporate standards and guidelines set out
in the Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation
sold by Aerotei are for the account of petitioner, except in the case of negligence of Aerotei. 111
Aerotei is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales
Agency Agreement executed between the parties. It has the authority or power to conclude contracts
or bind petitioner to contracts entered into in the Philippines. A third-party liability on contracts of
Aerotei is to petitioner as the principal, and not to Aerotei, and liability to such third party is enforceable
against petitioner. While Aerotei maintains a certain independence and its activities may not be
devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the Agreement, it
must carry out its functions solely for the benefit of petitioner and according to the latter's Manual and
written instructions. Aerotei is required to submit its annual sales plan for petitioner's approval.
In essence, Aerotei extends to the Philippines the transportation business of petitioner. It is a conduit
or outlet through which petitioner's airline tickets are sold.
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax 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);.]"113 Thus, income attributable to Aerotel or from business activities effected by
petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air Transport) of the same Treaty,
the tax imposed on income derived from the operation of ships or aircraft in international traffic should
not exceed 1 1/2% of gross revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code on its taxable income116 from sale of airline tickets in the Philippines, it
could only be taxed at a maximum of 1 1/2% of gross revenues, pursuant to Article VIII of the Republic
of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign corporation organized and
existing under the laws of Canada[.]"
Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory construction
principle that specific laws prevail over general ones.
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became
valid and effective on that date. On the other hand, the applicable provisions120 relating to the taxability
of resident foreign corporations and the rate of such tax found in the National Internal Revenue Code
became effective on January 1, 1998.121 Ordinarily, the later provision governs over the earlier
one.122 In this case, however, the provisions of the Republic of the Philippines-Canada Tax Treaty are
more specific than the provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:

SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by
at least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international obligations become binding.
Article II, Section 2 of the Constitution deals with international obligations that are incorporated, while
Article VII, Section 21 deals with international obligations that become binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as definite
prestations have effects equivalent to a statute. Thus, these specific treaty provisions may amend
statutory provisions. Statutory provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international obligations erga
omnes. We are also not required to rule in this case on the effect of international customary norms
especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting State derived
by an enterprise of the other Contracting State from the operation of ships or aircraft in international
traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of
a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the
lowest rate of Philippine tax imposed on such profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the government of
Canada on Air Transport, entered into on January 14, 1997, reiterates the effectivity of Article VIII of
the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention
between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered
into force on December 21, 1977, and any amendments thereto, in respect of the operation of aircraft
in international traffic.123cralawlawlibrary
Petitioner's income from sale of ticket for international carriage of passenger is income derived from
international operation of aircraft. The sale of tickets is closely related to the international operation of
aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited
to a certain extent[.]"124 Thus, we are bound to extend to a Canadian air carrier doing business in the
Philippines through a local sales agent the benefit of a lower tax equivalent to 1 1/2% on business
profits derived from sale of international air transportation.
V
Finally, we reject petitioner's contention that the Court of Tax Appeals erred in denying its claim for
refund of erroneously paid Gross Philippine Billings tax on the ground that it is subject to income tax
under Section 28(A)(1) of the National Internal Revenue Code because (a) it has not been assessed
at all by the Bureau of Internal Revenue for any income tax liability;125 and (b) internal revenue taxes

cannot be the subject of set-off or compensation,126 citing Republic v. Mambulao Lumber Co., et
al.127 and Francia v. Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we have ruled that
"[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may
determine whether there are taxes that should have been paid in lieu of the taxes paid."130 The
determination of the proper category of tax that should have been paid is incidental and necessary to
resolve the issue of whether a refund should be granted.131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax
or other taxes at the first instance. The Court of Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner's
transactions are subject to capital gains tax, however, the Court of Tax Appeals was not making an
assessment. It was merely determining the proper category of tax that petitioner should have paid, in
view of its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-
registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund.
The issue of petitioner's claim for tax refund is intertwined with the issue of the proper taxes that are
due from petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct.
If the tax return filed was not proper, the correctness of the amount paid and, therefore, the claim for
refund become questionable. In that case, the court must determine if a taxpayer claiming refund of
erroneously paid taxes is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for
refund of its erroneously paid 2 1/2% taxes on its gross Philippine billings. This court did not
immediately grant South African's claim for refund. This is because although this court found that
South African Airways was not subject to the 2 1/2% tax on its gross Philippine billings, this court also
found that it was subject to 32% tax on its taxable income.
In this case, petitioner's claim that it erroneously paid the 5% final tax is an admission that the quarterly
tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the refund
being claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed not liable
for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in South African
Airways, petitioner's request for refund can neither be granted nor denied outright without such
determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the
taxpayer's liability should be computed and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving
solely the issue of the taxpayer's entitlement to refund. The question of tax deficiency is distinct and
unrelated to the question of petitioner's entitlement to refund. Tax deficiencies should be subject to
assessment procedures and the rules of prescription. The court cannot be expected to perform the
BIR's duties whenever it fails to do so either through neglect or oversight. Neither can court processes
be used as a tool to circumvent laws protecting the rights of taxpayers.
Hence, the Court of Tax Appeals properly denied petitioner's claim for refund of allegedly erroneously
paid tax on its Gross Philippine Billings, on the ground that it was liable instead for the regular 32%
tax on its taxable income received from sources within the Philippines. Its determination of petitioner's

liability for the 32% regular income tax was made merely for the purpose of ascertaining petitioner's
entitlement to a tax refund and not for imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are
based on different circumstances. In both cited cases,133 the taxpayer claimed that his (its) tax liability
was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al, Mambulao Lumber contended that the
amounts it paid to the government as reforestation charges from 1947 to 1956, not having been used
in the reforestation of the area covered by its license, may be set off or applied to the payment of forest
charges still due and owing from it.134 Rejecting Mambulao's claim of legal compensation, this court
ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law
on compensation is inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their own right are
creditors and debtors of each other. With respect to the forest charges which the defendant Mambulao
Lumber Company has paid to the government, they are in the coffers of the government as taxes
collected, and the government does not owe anything to defendant Mambulao Lumber Company. So,
it is crystal clear that the Republic of the Philippines and the Mambulao Lumber Company are not
creditors and debtors of each other, because compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy
in an action or any indebtedness of the state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of
the contract or transaction sued on. * * *. (80 C.J.S. 73-74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but grow out
of a duty to, and are the positive acts of the government, to the making and enforcing of which, the
personal consent of individual taxpayers is not required. * * * If the taxpayer can properly refuse to pay
his tax when called upon by the Collector, because he has a claim against the governmental body
which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must
be curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide the result
of a lawsuit, and meanwhile the financial affairs of the government will be thrown into great confusion.
(47 Am. Jur. 766-767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal compensation
provided under Article 1279 were present.136 In that case, a portion of Francia's property in Pasay was
expropriated by the national government,137 which did not immediately pay Francia. In the meantime,
he failed to pay the real property tax due on his remaining property to the local government of Pasay,
which later on would auction the property on account of such delinquency. He then moved to set aside
the auction sale and argued, among others, that his real property tax delinquency was extinguished
by legal compensation on account of his unpaid claim against the national government.139 This court
ruled against Francia:

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their
own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code).
The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;
xxx xxx xxx
(3) that the two debts be due.

xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the
government.
There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount
of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited
with the Philippine National Bank long before the sale at public auction of his remaining property.
Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the
bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the
deposit so that he could pay the tax obligation thus aborting the sale at public
auction.140cralawlawlibrary
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission
on Audit141 and Philex Mining Corporation v. Commissioner of Internal Revenue.142 In Caltex, this
court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the government. Taxes
cannot be the subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to beset-off.143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its sovereign
capacity."144 Rejecting Philex Mining's assertion that the imposition of surcharge and interest was
unjustified because it had no obligation to pay the excise tax liabilities within the prescribed period
since, after all, it still had pending claims for VAT input credit/refund with the Bureau of Internal
Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has
a pending tax claim for refund or credit against the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax payer can defer
the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this

would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a claim against the government or that the collection of the
tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex's theory
that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise
to confusion and abuse, depriving the government of authority over the manner by which taxpayers
credit and offset their tax liabilities.145 (Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax
on the ground that the tax liabilities were off-set against any alleged claim the taxpayer may have
against the government. Such would merely be in keeping with the basic policy on prompt collection
of taxes as the lifeblood of the government.
Here, what is involved is a denial of a taxpayer's refund claim on account of the Court of Tax Appeals'
finding of its liability for another tax in lieu of the Gross Philippine Billings tax that was allegedly
erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on the denial
of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax
refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner's supplemental
motion for reconsideration alleging bringing to said court's attention the existence of the deficiency
income and business tax assessment against Citytrust. The fact of such deficiency assessment is
intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax
refund for the same year. To award such refund despite the existence of that deficiency assessment
is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to
refund and at the same time be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to
and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by
itself and without unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law
when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list,
statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax collected under such
assessment shall be recovered by any suits unless it is proved that the said list, statement, or return
was not false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should
subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery
of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years
after discovery of the falsity, fraud or omission in the false or fraudulent return involved. This would
necessarily require and entail additional efforts and expenses on the part of the Government, impose
a burden on and a drain of government funds, and impede or delay the collection of much-needed
revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be
resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the
true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that
the taxpayer and the Government alike be given equal opportunities to avail of remedies under the
law to defeat each other's claim and to determine all matters of dispute between them in one single
case. It is important to note that in determining whether or not petitioner is entitled to the refund of the
amount paid, it would [be] necessary to determine how much the Government is entitled to collect as
taxes. This would necessarily include the determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res judicata on both parties as to all the matters
subject thereof or necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997
NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt.
As such, we cannot grant the prayer for a refund.146 (Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue,147 this court
upheld the denial of the claim for refund based on the Court of Tax Appeals' finding that the taxpayer
had, through erroneous deductions on its gross income, underpaid its Gross Philippine Billing tax on
cargo revenues for 1999, and the amount of underpayment was even greater than the refund sought
for erroneously paid Gross Philippine Billings tax on passenger revenues for the same taxable
period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the
rate of 1 1/2% of its gross revenues amounting to P345,711,806.08149 from the third quarter of 2000
to the second quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(1) of the
1997 National Internal Revenue Code [32% of taxable income, that is, gross income less deductions]
will exceed the maximum ceiling of 1 1/2% of gross revenues as decreed in Article VIII of the Republic
of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated
April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED. SO ORDERED.

G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous.
We have carefully studied it and find it is not; on the contrary, it is supported by law and doctrine. So
finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. 1 The purchase price was
to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments were made in cash
and through irrevocable letters of credit. 3 Fourteen promissory notes were signed for the balance by
the NDC and, as required by the shipbuilders, guaranteed by the Republic of the
Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon were remitted in due
time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in
Tokyo. 5
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the
balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on
such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon served
on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. 6 The NDC
went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of
P900.00, representing the compromise penalty. 7 The NDC then came to this Court in a petition
for certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the
Tax Code, thus:
SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within
the Philippines. — The following items of gross income shall be treated as gross income from
sources within the Philippines:
(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision
because all the related activities — the signing of the contract, the construction of the vessels, the
payment of the stipulated price, and their delivery to the NDC — were done in Tokyo. 8 The law,

however, does not speak of activity but of "source," which in this case is the NDC. This is a domestic
and resident corporation with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's right to levy and collect
income tax on interest received by foreign corporations not engaged in trade or business within
the Philippines is not planted upon the condition that 'the activity or labor — and the sale from
which the (interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest
derived from sources within the Philippines, and interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or
activity' of non-resident corporations in the Philippines, or place where the contract is signed.
The residence of the obligor who pays the interest rather than the physical location of the
securities, bonds or notes or the place of payment, is the determining factor of the source of
interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk &
Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if
the obligor is a resident of the Philippines the interest payment paid by him can have no other
source than within the Philippines. The interest is paid not by the bond, note or other interest-
bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)
Here in the case at bar, petitioner National Development Company, a corporation duly
organized and existing under the laws of the Republic of the Philippines, with address and
principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay
the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel, the
balance of the contract price of the twelve (12) ocean-going vessels purchased and acquired
by it from the Japanese corporations, including the interest on the principal sum at the rate of
five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par.
11, Partial Stipulation of Facts.) And pursuant to the terms and conditions of these promisory
notes, which are duly signed by its Vice Chairman and General Manager, petitioner remitted
to the Japanese shipbuilders in Japan during the years 1960, 1961, and 1962 the sum of
$830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid
balance of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation
of Facts.)
The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid
the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly organized and existing under the laws of the Philippines,
it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue
Code.) The interest paid by petitioner, which is admittedly a resident of the Philippines, is on
the promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese
shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of
the vessels acquired by petitioner is interest derived from sources within the Philippines
subject to income tax under the then Section 24(b)(1) of the National Internal Revenue Code. 9
There is no basis for saying that the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)[4] of the Tax Code, reading as follows:
SEC. 29. Gross Income. — xxxx xxx xxx xxx

(b) Exclusion from gross income. — The following items shall not be included in gross income
and shall be exempt from taxation under this Title:
xxx xxx xxx
(4) Interest on Government Securities. — Interest upon the obligations of the Government of
the Republic of the Philippines or any political subdivision thereof, but in the case of such
obligations issued after approval of this Code, only to the extent provided in the act authorizing
the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in
fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization
but, like R.A. No. 1407, does not exempt from taxes the interests on such securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest
remitted because of the undertaking signed by the Secretary of Finance in each of the promissory
notes that:
Upon authority of the President of the Republic of the Philippines, the undersigned, for value
received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of
the Philippines, the due and punctual payment of both principal and interest of the above note.10
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not
established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied
but must be categorically and unmistakably expressed. 11 Any doubt concerning this question must be
resolved in favor of the taxing power. 12
Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes.
In fact, such undertaking was made by the government in consonance with and certainly not against
the following provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership
(companies colectivas), in whatever capacity acting, including lessees or mortgagors of real
or personal capacity, executors, administrators, receivers, conservators, fiduciaries,
employers, and all officers and employees of the Government of the Philippines having control,
receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments, or other fixed or determinable annual
or categorical gains, profits and income of any nonresident alien individual, not engaged in
trade or business within the Philippines and not having any office or place of business therein,
shall (except in the cases provided for in subsection (a) of this section) deduct and withhold
from such annual or periodical gains, profits and income a tax to twenty (now 30%) per centum
thereof: ...
Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines and
not having any office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in section fifty-three a tax
equal to thirty (now 35%) per centum thereof, and such tax shall be returned and paid in the
same manner and subject to the same conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations
of the NDC but without diminution of its taxing power under existing laws.

In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines,
the petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its
proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests
earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of
the Philippines that was subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to
withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the
Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax
under this section shall make return thereof, in duplicate, on or before the fifteenth day of April
of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the
amount withheld to the officer of the Government of the Philippines authorized to receive it.
Every such person is made personally liable for such tax, and is indemnified against the claims
and demands of any person for the amount of any payments made in accordance with the
provisions of this section. (As amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax
Appeals, 13 the Court quoted with approval the following regulation of the BIR on the responsibilities of
withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax due,
and promptly causing a query to be addressed to the Commissioner of Internal Revenue for
the determination whether or not the income paid to an individual is not subject to withholding.
In case the Commissioner of Internal Revenue decides that the income paid to an individual
is not subject to withholding, the withholding agent may thereupon remit the amount of a tax
withheld. (2nd par., Sec. 200, Income Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he could be released from
liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon
exemption from taxation; hence, an exempting provision should be construed strictissimi juris." 14
The petitioner was remiss in the discharge of its obligation as the withholding agent of the government
an so should be held liable for its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so

ordered.

INCOME TAXATION: Gross Income
G.R. No. L-12954 February 28, 1961
COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ARTHUR HENDERSON, respondent.
x---------------------------------------------------------x
G.R. No. L-13049 February 28, 1961
ARTHUR HENDERSON, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
PADILLA, J.:
These are petitioner filed by the Collector of Internal Revenue (G.R. No. L-12954) and by Arthur
Henderson (G.R. No. L-13049) under the provisions of section 18, Republic Act No. 1125, for review
of a judgment dated 26 June 1957 and a resolution dated 28 September 1957 rendered and adopted
by the Court of Tax Appeals in Case No. 237.
The spouses Artuhur Henderson and Marie B. Henderson (later referred to as the taxpayers) filed with
the Bureau of Internal Revenue returns of annual net income for the years 1948 to 1952, inclusive,
where the following net incomes, personal exemptions and amounts subject to tax appear:
1948:
Net Income P29,573.79
.......................................................
Less:Personal Exemption 2,500.00
..............................
Amount subject to tax P27,073.79
.......................................
1949:
.......................................................
..............................
.......................................
1950:
.......................................................
..............................
.......................................

1951:
........................................................
..............................
.......................................
1952:
.......................................................
..............................
.......................................
(Exhibits 1, 3, 5, 7, 9, A, F, J, N, R). In due time the taxpayers received from the Bureau of Internal
Revenue assessment notices Nos. 15804-48, 25450-49, 15255-50, 25705-51 and 22527-52 and paid
the amounts assessed as follows:
1948:
14 May 1949, O.R. No. 52991, Exhibit B ....……….. P2,068.12
12 September 1950, O.R. No. 160473, Exhibit B-1 2,068.11
.
Total Paid ......................................................... P4,136.23
1949:
13 May 1950, O.R. No. 232366, Exhibit G ...........… P2,314.95
15 September 1950, O.R. No. 247918, Exhibit G-1 2,314.94
.
Total Paid ......................................................... P4,629.89
1950:
27 April 1951, O.R. No. 323173, Exhibit K ...………. P7,273.00
1951:
Amount withheld from salary and paid by employer P5,780.40
.
15 May 1952, O.R. No. 33250, Exhibit O 360.50
.................
15 August 1952, O.R. No. 383318, Exhibit O-1 361.20
..…..
Total Paid ......................................................... P6,502.10
1952:
Amount withheld from salary and paid by employer P5,660.40
.
18 May 1953, O.R. No. 438026, Exhibit T 1,160.30
..…………

13 August 1953, O.R. No. 443483, Exhibit T-1 1,160.30
...…..
Total Paid ......................................................... P7,981.00
On 28 November 1953, after investigation and verification, the Bureay of Internal Revenue reassessed
the taxpayers'income for the years 1948 to 1952, inclusive, as follows:
1948:
Net income per return
..................................……………………… P29,573.79
Add:
Rent expense
.........................................................…….. 7,200.00
Additional bonus for 1947 received May 13, 1948 6,500.00
.………
Other income:
Manager's residential expense (2/29/48 a/c/#4.51) 1,400.00
Manager's residential expense (refer to 1948 P & L) 1,849.32
..
Entrance fee — Marikina Gun & Country Club ..…….. 200.00
Net income per investigation P46,723.11
.........................................………...
Less: Personal exemption
...............................................………. 2,500.00
Net taxable income
..........................................................……… P44,223.11
Tax due thereon
...............................................................……… P8,562.47
Less: Amount of tax already paid per OR #52991 &
160473
..……………………………………………………… 4,136.23
Deficiency tax still due & assessable ............................ P4,426.24
1949:
..................................……………………… P31,817.66
Add: disallowances —
Capital loss (no capital gain) ................... P3,248.84
Undeclared bonus
...................………….. 3,857.75
Rental allowance from A.I.U. ................... 1,800.00
Subsistence allowance from A.I.U.
.…….. 6,051.30 14,958.09

.........................................………...
Less: Personal exemption 2,500.00
...............................................………..
Amount of income subject to tax 43,275.75
..................................………….
Tax due thereon P8,292.21
...............................................................……….
Less: tax already assessed & paid per OR Nos. 232366 & 4,629.89
247918
Deficiency tax due P3,662.23
............................................................……….
(Should be) ...................................................................... 3,662.32
1950:
..................................……………………… P34,815.74
Add:
Rent, electricity, water allowances
.......................……….. 8,373.73
.........................................………...
...............................................………..
Net taxable income P40,189.47
..........................................................………..
...............................................................……….
Less: tax already paid per OR No. #323173 7,273.00
Deficiency tax due & assessable P3,023.00
.................……………………..
1951:
..................................……………………… P32,605.83
Add: house rental allowance from AIU 5,782.91
Net income per investigation
.........................................………... P83,388.74
Less: Personal exemption
...............................................……….. 3,000.00
Amount of income subject to tax
..................................………….. P35,388.74
Tax due thereon
...............................................................………. P 8,560.00

Less: tax already assessed and paid per O.R. Nos. A33250
& 383318 .......................……………………………………… 6,502.00
Deficiency tax due
.................………………………………………. P2,058.00
1952:
..................................……………………… P36,780.11
Add:
Withholding tax paid by company
..................................... 600.00
Travelling allowances
....................................................... 3,247.40
Allowances for rent, telephone, water, electricity, etc.
..... 7,044.67
.........................................………...
...............................................………..
..................................…………………………
...............................................................……….
Less: Tax already withheld P5,660.40
Tax already paid per O.R. Nos. #438026, 443484 2,320.60 7,981.00
Deficiency tax still due & collectible P4,108.00
...............................…………
(Exhibits 2, 4, 6, 8, 10) and demanded payment of thedeficiency taxes on or before 28 February 1954
with respectto those due for the years 1948, 1949, 1950 and 1952and on or before 15 February 1954
with respect to thatdue for the year 1951 (Exhibits B-2, H, L, P, S).
In the foregoing assessments, the Bureau of InternalRevenue considered as part of their taxable
income thetaxpayer-husband's allowances for rental, residential expenses,subsistence, water,
electricity and telephone; bonuspaid to him; withholding tax and entrance fee to the Marikinagun and
Country Bluc paid by his employer for hisaccount; and travelling allowance of his wife. On 26 and27
January 1954 the taxpayers asked for reconsiderationof the foregoing assessment (pp. 29, 31, BIR
rec.) andon 11 Februayr 1954 and 28 February 1955 stated thegrounds and reasons in support of
their request for reconsideration (pp. 36-38, 62-66, BIR rec.). The claimthat as regards the husband-
taxpayer's allowances forrental and utilities such as water, electricity and telephone,he did not receive
the money for said allowances, but thatthey lieved in the apartment furnished and paid for byhis
employer for its convenience; that they had no choicebut live in the said apartment furnished by his
employer,otherwise they would have lived in a less expensive one;that as regards his allowances for
rental of P7,200 andresidential expenses of P1,400 and P1,849.32 in 1948, rentalof P1,800 and
subsistence of P6,051.50 (the latter merelyconsisting of allowances for rent and utilities such as
light,water, telephone, etc.) in 1949 rental, electricity and waterof P8,373.73 in 1950, rental of
P5,782.91 in 1951 and rental,telephone, water, electricity, etc. of P7,044.67 in 1952, onlythe amount
of P3,900 for each year, which is the amountthey would have spent for rental of an apartment

includingutilities, should be taxed; that as regards the amount ofP200 representing entrance fee to the
Marikina Gun andCountry Club paid for him by his employer in 1948, thesame should not be
considered as part of their income forit was an expense of his employer and his membershiptherein
was merely incidental to his duties of increasingand sustaining the business of his employer; and that
asregards the wife-taxpayer's travelling allowance of P3,247.40 in 1952, it should not be considered
as part of theirincome because she merely accompanied him in his businesstrip to New York as his
secretary and, at the behestof her husband's employer, to study and look into the detailsof the plans
and decorations of the building intendedto be constructed byn his employer in its property at
DeweyBoulevard. On 15 and 27 February 1954, the taxpayerspaid the deficiency taxes assessed
under Official ReceiptsNos. 451841, 451842, 451843, 451748 and 451844 (ExhibitsC, I, M, Q, and
Y). After hearing conducted by theConference Staff of the Bureau of Internal Revenue on5 October
1954 (pp. 74-85, BIR rec.), on 27 May 1955the Staff recommended to the Collector of Internal
Revenuethat the assessments made on 28 November 1953 (Exhibits2, 4, 6, 8, 10) be sustained except
that the amountof P200 as entrance fee to the Marikina Gun and CountryClub paid for the husband-
taxpayer's account by his employerin 1948 should not be considered as part of thetaxpayers' taxable
income for that year (pp. 95-107, BIRrec.). On 14 July 1955, in line with the recommendationof the
Conference Staff, the Collector of Internal Revenuedenied the taxpayers' request for reconsideration,
exceptas regards the assessment of their income tax due for theyear 1948, which was modified as
follows:
Net income per return P29,573.79

Add: Rent expense 7,200.00
Additional bonus for 1947 received
on May 13, 1948 6,500.00
Manager's residential expense
(2/29/48 a/c #4.41) 1,400.00
Manager's residential expense
(1948 profit and loss) 1,849.32
Tax due thereon P 8,506.47
Less; Amount already paid 4,136.23
Deficiency tax still due P 4,370.24
and demanded payment of the deficiency taxes of P4,370.24for 1948, P3,662.23 for 1949, P3,023 for
1950, P2,058 for1951 and P4,108 for 1952, 5% surcharge and 1% monthlyinterest thereon from 1
March 1954 to the date of paymentand P80 as administrative penalty for late payment,to the City
Treasurer of Manila not later than 31 July1955 (Exhibit 14). On 30 January 1956 the taxpayersagain
sought a reconsideration of the denial of their requestfor reconsideration and offered to settle the case
ona more equitable basis by increasing the amount of thetaxable portion of the husband-taxpayer's
allowances forrental, etc. from P3,000 yearly to P4,800 yearly, which "isthe value to the employee of
the benefits he derived therefrommeasured by what he had saved on account thereof'in the ordinary
course of his life ... for which hewould have spent in any case'". The taxpayers also reiteratedtheir
previous stand regarding the transportationallowance of the wife-taxpayer of P3,247.40 in 1952
andrequested the refund of the amounts of P3,477.18, P569.33,P1,294, P354 and P2,164, or a total
of P7,858.51, (Exhibit Z). On 10 February 1956 the taxpayers again requestedthe Collector of Internal
Revenue to refund to them theamounts allegedly paid in excess as income taxes for theyears 1948 to

1952, inclusive (Exhibit Z-1). The Collectorof Internal Revenue did not take any action on the
taxpayers'request for refund.
On 15 February 1956 the taxpayers filed in the Courtof Tax Appeals a petition to review the decision
of theCollector of Internal Revenue (C.T.A. Case No. 237). Afterhearing, on 26 June 1957 the Court
rendered judgmentholding "that the inherent nature of petitioner's(the husband-taxpayer) employment
as president of theAmerican International Underwriters as president of theAmerican International
Underwriters of the Philippines,Inc. does not require him to occupy the apartments suppliedby his
employer-corporation;" that, however, onlythe amount of P4,800 annually, the ratable value to him
ofthe quarters furnished constitutes a part of taxable income;that since the taxpayers did not receive
any benefitout of the P3,247.40 traveling expense allowance grantedin 1952 to the wife-taxpayer and
that she merely undertookthe trip abroad at the behest of her husband's employer,the same could not
be considered as income; andthat even if it were considered as such, still it could not besubject to tax
because it was deductible as travel expense;and ordering the Collector of Internal Revenue to refundto
the taxpayers the amount of P5,109.33 with interestfrom 27 February 1954, without pronouncement
as tocosts. The taxpayers filed a motion for reconsiderationclaiming that the amount of P5,986.61 is
the amount refundableto them because the amounts of P1,400 and P1,849.32 as manager's
residential expenses in 1948 shouldnot be included in their taxable net income for the reasonthat they
are of the same nature as the rentals for theapartment, they being mainly expenses for utilities aslight,
water and telephone in the apartment furnished bythe husbant-taxpayer's employer. The Collector of
InternalRevenue filed an opposition to their motion for reconsideration.He also filed a separate motion
for reconsiderationof the decision claiming that his assessmentunder review was correct and should
have been affirmed.The taxpayers filed an opposition to this motion for reconsiderationof the Collector
of Internal Revenue; thelatter, a reply thereto. On 28 September 1957 the Courtdenied both motions
for reconsideration. On 7 October1957 the Collector of Internal Revenue filed a notice ofappeal in the
Court of Tax Appeals and on 21 October1957, within the extension of time previously granted bythis
Court, a petition for review (G.R. No. L-12954). On29 October 1957 the taxpayers filed a notice of
appealin the Court of Tax Appeals and a petition for review inthis Court (G.R. No. L-13049).
The Collector of Internal Revenue had assigned the followingerrors allegedly committed by the Court
of TaxAppeals:
I. The Court of Tax Appeals erred in finding that theherein respondent did not have any choice
in the selection ofthe living quarters occupied by him.
II. The Court of Tax Appeals erred in not consideringthe fact that respondent is not a minor
company official butthe President of his employer-corporation, in the appreciationof
respondent's alleged lack of choice in the matter of the selectionof the quarters occupied by
him.
III. The Court of Tax Appeals erred in giving full weightand credence to respondent's allegation,
a self-serving and unsupported declaration that the ratable value to him of the living quarters
and subsistence allowance was only P400.00 a month.
IV. The Court of Tax Appeals erred in holding that only the ratable value of P4,800.00 per
annum, or P400.00 a month constitutes income to respondent.
V. The Court of Tax Appeals erred in arbitrarily fixing the amount of P4,800.00 per annum, or
P400.00 a month as the only amount taxable aganst respondent during the five tax years in
question.

VI. The Court of Tax Appeals erred in not finding that travelling allowance in the amount of
P3,247.40 constituted income to respondent and, therefore, subject to the income tax.
VII. The Court of Tax Appeals erred in ordering the refund of the sum of P5,109.33 with interest
from February 17, 1954. (G.R. No. L-12954.)
The taxpayers have assigned the following errors allegedly committed by the Court of Tax Appeals:
I. The Court of Tax Appeals erred in its computation of the 1948 income tax and consequently
in the amount that should be refunded for that year.
II. The Court of Tax Appeals erred in denying our motion for reconsideration as contained in
its resolution dated September 28, 1957. (G.R. No. L-13049.)
The Government's appeal:
The Collector of Internal Revenue raises questions of fact. He claims that the evidence is not sufficient
to support the findings and conclusion of the Court of Tax Appeals that the quarters occupied by the
taxpayers were not of their choice but that of the husband-taxpayer's employer; that it did not take into
consideration the fact that the husband-taxpayer is not a mere minor company official, but the highest
executive of his employer-corporation; and that the wife-taxpayer's trip abroad in 1952 was not, as
found by the Court, a business but a vacation trip. In Collector of Internal Revenue vs. Aznar, 56, Off.
Gaz. 2386, this Court held that in petitions for review under section 18, Republic Act No. 1125, it may
review the findings of fact of the Court of Tax Appeals.
The determination of the main issue in the case requires a review of the evidence. Are the allowances
for rental of the apartment furnished by the husband-taxpayer's employer-corporation, including
utilities such as light, water, telephone, etc. and the allowance for travel expenses given by his
employer-corporation to his wife in 1952 part of taxable income? Section 29, Commonwealth Act No.
466, National Internal Revenue Code, provides:
"Gross income" includes gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever form paid, or from
professions, vocations, trades, businesses, commerce, sales, or dealings in property, whether
real or personal, growing out of the ownership or use of or interest in such property; also from
interest, rents dividend, securities, or the transaction of any business carried on for gain or
profit, or gains, profits, and income derived from any source whatever. (Emphasis ours.)
The Court of Tax Appeals found that the husband-taxpayer "is the president of the American
International Underwriters for the Philippines, Inc., a domestic corporation engaged in insurance
business;" that the taxpayers "entertained officials, guests and customers of his employer-corporation,
in apartments furnished by the latter and successively occupied by him as president thereof; that "In
1952, petitioner's wife, Mrs. Marie Henderson, upon request o Mr. C. V. Starr, chairman of the parent
corporation of the American International Underwriters for the Philippines, Inc., undertook a trip to New
York in connection with the purchase of a lot in Dewey Boulevardby petitioner's employer-corporatio,
the construction of a building thereon, the drawing of prospectus and plans for said building, and other
related matters."
Arthur H. Henderson testified that he is the President of American International Underwriters for the
Philippines, Inc., which representa a group of American insurance companies engagad in the business
of general insurance except life insurance; that he receives a basic annual salary of P30,000 and
allowance for house rental and utilities like light, water, telephone, etc.; that he and his wife are

childless and are the only two in the family; that during the years 1948 to 1952, they lived in apartments
chosen by his employer; that from 1948 to the early part of 1950, they lived at the Embassy Apartments
on Dakota Street, Manila, where they had a large sala, three bedrooms, dining room, two bathrooms,
kitchen and a large porch, and from the early part of 1950 to 1952, they lived at the Rosaria Apartments
on the same street where they had a kitchen, sala, dining room two bedrooms and bathroom; that
despite the fact that they were the only two in the family, they had to live in apartments of the size
beyond their personal needs because as president of the corporation, he and his wife had to entertain
and put up houseguests; that during all those years of 1948 to 1952, inclusive, they entertained and
put up houseguests of his company's officials, guests and customers such as the president of C, V.
Starr & Company, Inc., who spent four weeks in his apartment, Thomas Cocklin, a lawyer from
Washington, D.C., and Manuel Elizalde, a stockholder of AIUPI; that were he not required by his
employer to live in those apartments furnished to him, he and his wife would have chosen an apartment
only large enough for them and spend from P300 to P400 monthly for rental; that of the allowances
granted to him, only the amount of P4,800 annually, the maximum they would have spent for rental,
should be considered as taxable income and the excess treated as expense of the company; and that
the trip to New York undertaken by his wife in 1952, for which she was granted by his employer-
corporation travelling expense allowance of P3,247.40, was made at the behest of his employer to
assist its architect in the preparation of the plans for a proposed building in Manila and procurement
of supplies and materials for its use, hence the said amount should not be considered as part of taxable
income. In support of his claim, letters written by his wife while in New York concerning the proposed
building, inquiring about the progress made in the acquisition of the lot, and informing him of the wishes
of Mr. C. V. Starr, chairman of the board of directors of the parent-corporation (Exhibits U-1, U-1-A, V,
V-1 and W) and a letter written by the witness to Mr. C. V. Starr concerning the proposed building
(Exhibits X, X-1) were presented in evidence.
Mrs. Marie Henderson testified that for almost three years, she and her husband gave parties every
Friday night at their apartment for about 18 to 20 people; that their guests were officials of her
husband's employer-corporation and other corporations; that during those parties movies for the
entertainment of the guests were shown after dinner; that they also entertained during luncheons and
breakfasts; that these involved and necessitated the services of additional servants; and that in 1952
she was asked by Mr. C. V. Starr to come to New York to take up problems concerning the proposed
building and entertainment because her husband could not make the trip himself, and because "the
woman of the family is closer to those problems."
The evidence presented at the hearing of the case substantially supports the findings of the Court of
Tax Appeals. The taxpayers are childless and are the only two in the family. The quarters, therefore,
that they occupied at the Embassy Apartments consisting of a large sala, three bedrooms, dining
room, two bathrooms, kitchen and a large porch, and at the Rosaria Apartments consisting of a
kitchen, sala dining room, two bedrooms and a bathroom, exceeded their personal needs. But the
exigencies of the husband-taxpayer's high executive position, not to mention social standing,
demanded and compelled them to live in amore spacious and pretentious quarters like the ones they
had occupied. Although entertaining and putting up houseguests and guests of the husbnad-
taxpayer's employer-corporation were not his predominand occupation as president, yet he and his
wife had to entertain and put up houseguests in their apartments. That is why his employer-corporation
had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of
those extra expenses for rental and utilities in excess of their personal needs. Hence, the fact that the
taxpayers had to live or did not have to live in the apartments chosen by the husband-taxpayer's
employer-corporation is of no moment, for no part of the allowances in question redounded to their
personal benefit or was retained by them. Their bills for rental and utilities were paid directly by the
employer-corporation to the creditors (Exhibit AA to DDD, inclusive; pp. 104, 170-193, t.s.n.).
Neverthelss, as correctly held by the Court of Tax Appeals, the taxpayers are entitled only to a ratable
value of the allowances in question, and only the amount of P4,800 annually, the reasonable amount

they would have spent for house rental and utilities such as light, water, telephone, etc., should be the
amount subject to tax, and the excess considered as expenses of the corporation.
Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to make the trip to New
York at the behest of her husband's employer-corporation to help in drawing up the plans and
specificatins of a proposed building, is also supported by the evidence. The parts of the letters written
by the wife-taxpayer to her husband while in New York and the letter written by the husband-taxpayer
to Mr. C. V. Starr support the said findings (Exhibits U-2, V-1, W-1, X). No part of the allowance for
travellking expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by
them. The fact that she had herself operated on for tumors while in New York wsa but incidental to her
stay there and she must have merely taken advantage of her presence in that city to undergo the
operation.
The taxpayers' appeal:
The taxpayers claim that the Court of Tax Appeals erred in considering the amounts of P1,400 and
P1,849.32, or a total of P3,249.32, for "manager's residential expense" in 1948 as taxable income
despite the fact "that they were of the same nature as the rentals for the apartment, they being
expenses for utilities, such as light, water and telephone necessarily incidental to the apartment
furnished to him by his employer."
Mrs. Crescencia Perez Ramos, an examiner of the Bureau of Internal Revenue who examined the
books of accound of the American International Underwriters for the Philippines, Inc., testified that he
total amount of P3,249.32 was reflected in its books as "living expenses of Mr. and Mrs. Arthur
Henderson in the quarters they occupied in 1948;" and that "the amount of P1,400 was included as
manager's residential expense while the amount of P1,849.32 was entered as profit and loss account."
Buenaventura Loberiza, acting head of the accouting department of the American International
Underwriters for the Philippines, Inc., testified that rentals, utilities, water, telephone and electric bills
of executives of the corporation were entered in the books of account as "subsistence allowances and
expenses;" that there was a separate account for salaries and wages of employees and officers; and
that expenses for rentals and other utilities were not charged to salary accounts.
The taxpayers' claim is supported by the evidence. The total amount of P3,249.32 "for manager's
residential expense" in 1948 should be treated as rentals for apartments and utilities and should not
form part of the ratable value subject to tax.
The computation made by the taxpayers is correct. Adding to the amount of P29,573.79, their net
income per return, the amount of P6,500, the bonus received in 1948, and P4,800, the taxable ratable
value of the allowances, brings up their gross income to P40,873.79. Deducting therefrom the amount
of P2,500 for personal exemption, the amount of P38,373.79 is the amount subject to income tax. The
income tax due on this amount is P6,957.19 only. Deducting the amount of income tax due, P6,957.19,
from the amount already paid, P8,562.47 (Exhibits B, B-1, C), the amount of P1,605.28 is the amount
refundable to the taxpayers. Add this amount to P563.33, P1,294.00, P354.00 and P2,154.00,
refundable to the taxpayers for 1949, 1950, 1951 and 1952 and the total is P5,986.61.
The judgment under review is modified as above indicated. The Collector of Internal Revenue is
ordered to refund to the taxpayers the sum of P5,986.61, without pronouncement as to costs.

G.R. No. 157264 January 31, 2008
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner,

vs.
CARPIO MORALES, J.:
Petitioner, the Philippine Long Distance Telephone Company (PLDT), claiming that it terminated in
1995 the employment of several rank-and-file, supervisory, and executive employees due to
redundancy; that in compliance with labor law requirements, it paid those separated employees
separation pay and other benefits; and that as employer and withholding agent, it deducted from the
separation pay withholding taxes in the total amount of P23,707,909.20 which it remitted to the Bureau
of Internal Revenue (BIR), filed on November 20, 1997 with the BIR a claim for tax credit or refund of
the P23,707,909.20, invoking Section 28(b)(7)(B) of the 1977 National Internal Revenue Code1 which
excluded from gross income
[a]ny amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer due
to death, sickness or other physical disability or for any cause beyond the control of the said
official or employee.2 (Underscoring supplied)
As the BIR took no action on its claim, PLDT filed a claim for judicial refund before the Court of Tax
Appeals (CTA).
In its Answer,3 respondent, the Commissioner of Internal Revenue, contended that PLDT failed to
show proof of payment of separation pay and remittance of the alleged withheld taxes.4
PLDT later manifested on March 19, 1998 that it was reducing its claim to P16,439,777.61 because a
number of the separated employees opted to file their respective claims for refund of taxes erroneously
withheld from their separation pay.5
PLDT thereafter retained Sycip Gorres Velayo and Company (SGV) to conduct a special audit
examination of various receipts, invoices and other long accounts, and moved to avail of the procedure
laid down in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, allowing the presentation
of a certification of an independent certified public accountant in lieu of voluminous documents. 6 The
CTA thereupon appointed Amelia Cabal (Cabal) of SGV as Commissioner of the court.7 Cabal's audit
report, which formed part of PLDT's evidence,8 adjusted PLDT's claim to P6,679,167.72.9
By Decision10 of July 25, 2000, the CTA denied PLDT's claim on the ground that it "failed to sufficiently
prove that the terminated employees received separation pay and that taxes were withheld therefrom
and remitted to the BIR."11
PLDT filed a Motion for New Trial/Reconsideration, praying for an opportunity to present the receipts
and quitclaims executed by the employees and prove that they received their separation
pay.12 Justifying its motion, PLDT alleged that
x x x [t]hese Receipts and Quitclaims could not be presented during the course of the trial
despite diligent efforts, the files having been misplaced and were only recently found. Through
excusable mistake or inadvertence, undersigned counsel relied on the audit of SGV & Co. of
the voluminous cash salary vouchers, and was thus not made wary of the fact that the cash

salary vouchers for the rank and file employees do not have acknowledgement receipts, unlike
the cash salary vouchers for the supervisory and executive employees. If admitted in evidence,
these Receipts and Quitclaims, together with the cash salary vouchers, will prove that the rank
and file employees received their separation pay from petitioner.13 (Underscoring supplied)
The CTA denied PLDT's motion.14
PLDT thus filed a Petition for Review15 before the Court of Appeals which, by Decision16 of February
11, 2002, dismissed the same. PLDT's Motion for Reconsideration17 having been denied,18 it filed the
present Petition for Review on Certiorari,19 faulting the appellate court to have committed grave abuse
of discretion
A.
. . . WHEN IT HELD THAT PROOF OF PAYMENT OF SEPARATION PAY TO THE

EMPLOYEES IS REQUIRED IN ORDER TO AVAIL OF REFUND OF TAXES
ERRONEOUSLY PAID TO THE BUREAU OF INTERNAL REVENUE.
B.
. . . WHEN IT HELD THAT PETITIONER FAILED TO ESTABLISH THAT PETITIONER'S

EMPLOYEES RECEIVED THEIR SEPARATION PAY.
C.
. . . IN DISREGARDING THE CERTIFICA-TION/REPORT OF SGV & CO., WHICH

CERTIFIED THAT PETITIONER IS ENTITLED TO A REFUND OF THE AMOUNT
OF P6,679,167.72.
D.
. . . IN NOT ORDERING A NEW TRIAL TO ALLOW PETITIONER TO PRESENT ADDITIONAL

EVIDENCE IN SUPPORT THEREOF.20
PLDT argues against the need for proof that the employees received their separation pay and proffers
the issue in the case in this wise:
It is not essential to prove that the separation pay benefits were actually received by the
terminated employees. This issue is not for the CTA, nor the Court of Appeals to resolve, but
is a matter that falls within the competence and exclusive jurisdiction of the Department of
Labor and Employment and/or the National Labor Relations Commission. x x x
Proving, or submitting evidence to prove, receipt of separation pay would have been material,
relevant and necessary if its deductibility as a business expense has been put in issue. But
this has never been an issue in the instant case. The issue is whether or not the withholding
taxes, which Petitioner remitted to the BIR, should be refunded for having been erroneously
withheld and paid to the latter.
For as long as there is no legal basis for the payment of taxes to the BIR, the taxpayer is
entitled to claim a refund therefore. Hence, any taxes withheld from separation benefits
and paid to the BIR constitute erroneous payment of taxes and should therefore, be

refunded/credited to the taxpayer/withholding agent, regardless of whether or not
separation pay was actually paid to the concerned employees.21 (Emphasis in the original;
underscoring supplied)
PLDT's position does not lie. Tax refunds, like tax exemptions, are construed strictly against the
taxpayer and liberally in favor of the taxing authority, and the taxpayer bears the burden of establishing
the factual basis of his claim for a refund.22
Under the earlier quoted portion of Section 28 (b)(7)(B) of the National Internal Revenue Code of 1977
(now Section 32(B)6(b) of the National Internal Revenue Code of 1997), it is incumbent on PLDT as a
claimant for refund on behalf of each of the separated employees to show that each employee did
x x x reflect in his or its own return the income upon which any creditable tax is required to be
withheld at the source. Only when there is an excess of the amount of tax so withheld over the
tax due on the payee's return can a refund become possible.
A taxpayer must thus do two things to be able to successfully make a claim for the tax refund:
(a) declare the income payments it received as part of its gross income and (b) establish the
fact of withholding. On this score, the relevant revenue regulation provides as follows:
"Section 10. Claims for tax credit or refund. - Claims for tax credit or refund of income
tax deducted and withheld on income payments shall be given due course only when
it is shown on the return that the income payment received was declared as part of the
gross income and the fact of withholding is established by a copy of the statement duly
issued by the payer to the payee (BIR Form No. 1743.1) showing the amount paid and
the amount of tax withheld therefrom."23 (Underscoring supplied)
In fine, PLDT must prove that the employees received the income payments as part of gross income
and the fact of withholding.
The CTA found that PLDT failed to establish that the redundant employees actually received
separation pay and that it withheld taxes therefrom and remitted the same to the BIR, thus:
With respect to the redundant rank and file employees' final payment/terminal pay x x x, the
cash salary vouchers relative thereto have no payment acknowledgement receipts.
Inasmuch as these cash vouchers were not signed by the respective employees to prove
actual receipt of payment, the same merely serves as proofs of authorization for payment and
not actual payment by the Petitioner of the redundant rank and file employees' separation pay
and other benefits. In other words, Petitioner failed to prove that the rank and file employees
were actually paid separation pay and other benefits.
To establish that the withholding taxes deducted from the redundant employees' separation
pay/other benefits were actually remitted to the BIR, therein petitioner submitted the following:
Exhibit
a) Monthly Remittance Return of Income Taxes D

Withheld for December 1995
b) Revised SGV & Co. Certification E to E-3-d

c) Annual Information Return of Income Tax E-6
Withheld on Compensation, Expanded and
Final Withholding Taxes for the year 1995
d) Summary of Income Taxes Withheld for the E-6-a
calendar year ended December 31, 1995
e) Summary of Gross Compensation and Tax E-6-b to E-6-e
Withheld
However, it cannot be determined from the above documents whether or not Petitioner actually
remitted the total income taxes withheld from the redundant employees' taxable compensation
(inclusive of the separation pay/other benefits) for the year 1995. The amounts of total taxes
withheld for each redundant employees (Exhs. E-4, E-5, E-7, inclusive) cannot be
verified against the "Summary of Gross Compensation and Tax Withheld for 1995"
(Exhs. E-6-b to E-6-e, inclusive) due to the fact that this summary enumerates the
amounts of income taxes withheld from Petitioner's employees on per district/area
basis. The only schedule (with names, corresponding gross compensation, and withholding
taxes) attached to the summary was for the withholding taxes on service terminal pay (Exh. E-
6-e). However, the names listed thereon were not among the names of the redundant
separated employees being claimed by petitioner.
xxxx
It is worthy to note that Respondent presented a witness in the person of Atty. Rodolfo L.
Salazar, Chief of the BIR Appellate Division, who testified that a portion of the Petitioner's
original claim for refund of P23,706,908.20 had already been granted. He also testified that
out of 769 claimants, who opted to file directly with the BIR, 766 had been processed and
granted. In fact, x x x three claims were not processed because the concerned taxpayer failed
to submit the income tax returns and withholding tax certificates. Considering that no
documentary evidence was presented to bolster said testimony, We have no means of
counter checking whether the 766 alleged to have been already granted by the
Respondent pertained to the P16,439,777.61 claim for refund withdrawn by the
Petitioner from the instant petition or to the remaining balance of P6,679,167.72 which
is the subject of this claim.24 (Emphasis and underscoring supplied)
The appellate court affirmed the foregoing findings of the CTA. Apropos is this Court's ruling in Far
East Bank and Trust Company v. Court of Appeals:25
The findings of fact of the CTA, a special court exercising particular expertise on the subject
of tax, are generally regarded as final, binding, and conclusive upon this Court, especially if
these are substantially similar to the findings of the C[ourt of] A[ppeals] which is normally the
final arbiter of questions of fact.26 (Underscoring supplied)
While SGV certified that it had "been able to trace the remittance of the withheld taxes summarized in
the C[ash] S[alary] V[ouchers] to the Monthly Remittance Return of Income Taxes Withheld for the
appropriate period covered by the final payment made to the concerned executives, supervisors, and
rank and file staff members of PLDT,"27 the same cannot be appreciated in PLDT's favor as the courts
cannot verify such claim. While the records of the case contain the Alphabetical List of Employee from
Whom Taxes Were Withheld for the year 1995 and the Monthly Remittance Returns of Income Taxes
Withheld for December 1995, the documents from which SGV "traced" the former to the latter have
not been presented. Failure to present these documents is fatal to PLDT's case. For the relevant
portions of CTA Circular 1-95 instruct:

1. The party who desires to introduce as evidence such voluminous documents must, after
motion and approval by the Court, present: (a) a Summary containing, among others, a
chronological listing of the numbers, dates and amounts covered by the invoices or receipts
and the amount/s of tax paid; and (b) a Certification of an independent Certified Public
Accountant attesting to the correctness of the contents of the summary after making an
examination, evaluation and audit of the voluminous receipts and invoices x x x
2. The method of individual presentation of each and every receipt, invoice or account for
marking, identification and comparison with the originals thereof need not be done before the
Court or Clerk of Court anymore after the introduction of the summary and CPA certification. It
is enough that the receipts, invoices, vouchers or other documents covering the said
accounts or payment to be introduced in evidence must be pre-marked by the party
concerned and submitted to the Court in order to be made accessible to the adverse party
who desires to check and verify the correctness of the summary and CPA certification.
Likewise the originals of the voluminous receipts, invoices and accounts must be ready for
verification and comparison in case of doubt on the authenticity thereof is raised during the
hearing or resolution of the formal offer of evidence. (Emphasis and underscoring supplied)
Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal

Revenue,28 citing Commissioner of Internal Revenue v. Manila Mining Corporation29 explains the need
for the promulgation of the immediately-cited CTA Circular and its effect:
x x x The circular, in the interest of speedy administration of justice, was promulgated to avoid
the time-consuming procedure of presenting, identifying and marking of documents before the
Court. It does not relieve respondent of its imperative task of premarking photocopies of
sales receipts and invoices and submitting the same to the court after the independent CPA
shall have examined and compared them with the originals. Without presenting these pre-
marked documents as evidence - from which the summary and schedules were based, the
court cannot verify the authenticity and veracity of the independent auditor's
conclusions. (Italics in the original; Emphasis and underscoring supplied).30
On the denial of PLDT's motion for new trial: new trial may be granted on either of these grounds:
a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have
guarded against and by reason of which such aggrieved party has probably been impaired in
his rights; or
b) Newly discovered evidence, which he could not, with reasonable diligence, have discovered
and produced at the trial, and which if presented would probably alter the result.31
Newly discovered evidence as a basis of a motion for new trial should be supported by affidavits of
the witnesses by whom such evidence is expected to be given, or by duly authenticated documents
which are proposed to be introduced in evidence.32 And the grant or denial of a new trial is, generally
speaking, addressed to the sound discretion of the court which cannot be interfered with unless a clear
abuse thereof is shown.33 PLDT has not shown any such abuse, however.
The affirmance by the appellate court of the CTA's denial of PLDT's motion for new trial on the ground
of "newly discovered evidence," viz:
xxxx

The petitioner appended to its "Motion for New Trial", etc. , unnotarized copies of "Receipts,
Release and Quitclaim" bearing the signatures purportedly of those employees for whom the
Petitioner filed the "Petition" before the CTA, dated December 28, 1995 x x x[.]34
xxxx
Although the Rules require the appendage, by the Petitioner, of the "Affidavits of Witnesses"
it intends to present in a new trial, the Petitioner failed to append to its "Motion for New
Trial" any affidavits of said witnesses. The "Receipts, Releases, and Quitclaims" appended
to the Petition are not authenticated. Indeed, the said deeds were not notarized, despite their
having been signed, allegedly by the employees, as early as December 28, 1995, or
approximately two (2) years before the Petitioner filed the Petition before the CTA. It behooved
the Petitioner to have appended the Affidavits of the separated employees to authenticate
the "Receipts, Releases and Quitclaims" purportedly executed by them, respectively. The
petitioner did not.
The Petitioner wanted the CTA to believe that the employees executed the
aforesaid "Receipts, Releases and Quitclaims" as early as December 28, 1995, and kept
the same in its possession and custody. However, the petitioner divulged the existence of said
Receipts, etc., only when it filed its "Motion for New Trial, etc." on August 18, 2000, or
an interregnum of almost five (5) years. None of the responsible officers of the Petitioner,
especially the custodian of said Receipts, etc., executed an "Affidavit" explaining why the
same (a) were not notarized on or about December 28, 1995; (b) whether the said deeds were
turned over to its counsel when it filed the Petition at bench; (c) why it failed to present the said
Receipts to the SGV & Co., while the latter was conducting its examination and/or audit of the
records of the Petitioner. It is incredible that, if it is true, as claimed by Petitioner, the
employees, indeed, signed the said Receipts on December 28, 1995, the Petitioner, one of
the biggest corporations in the Philippines and laden with competent execu-
tives/officers/employees, did not bother having the same notarized on or about December 28,
1995. For sure, when the Petitioner endorsed the preparation and filing of the Petition to its
counsel, it should have collated all the documents necessary to support its Petition and submit
the same to its counsel. If the Petitioner did, its counsel has not explained why it failed to
present the same before the Commissioner and/or adduce the same in evidence during the
hearing of the Petition on its merits with the CTA. We are convinced that the said Receipts,
etc. were antedated and executed only after the CTA rendered its Decision and only in
anticipation of the "Motion for New Trial, etc." filed by the Petitioner.35 (Emphasis and
underscoring in the original),
is thus in order.
Finally, on PLDT's plea for a liberal application of the rules of procedure,36 Commissioner of Internal
Revenue v. A. Soriano Corporation37 furnishes a caveat on the matter:
Perhaps realizing that under the Rules the said report cannot be admitted as newly discovered
evidence, the petitioner invokes a liberal application of the Rules. He submits that Section 8 of
the Rules of the Court of Tax Appeals declaring that the latter shall not be governed strictly by
technical rules of evidence mandates a relaxation of the requirements of new trial on the basis
of newly discovered evidence. This is a dangerous proposition and one which we refuse to
countenance. We cannot agree more with the Court of Appeals when it stated thus,
"To accept the contrary view of the petitioner would give rise to a dangerous precedent
in that there would be no end to a hearing before respondent court because, every

time a party is aggrieved by its decision, he can have it set aside by asking to be
allowed to present additional evidence without having to comply with the requirements
of a motion for new trial based on newly discovered evidence. Rule 13, Section 5 of
the Rules of the Court of Tax Appeals should not be ignored at will and at random to
the prejudice of the orderly presentation of issues and their resolution. To do so would
affect, to a considerable extent, the stability of judicial decisions."
We are left with no recourse but to conclude that this is a simple case of negligence on the
part of the petitioner. For this act of negligence, the petitioner cannot be allowed to seek refuge
in a liberal application of the Rules. For it should not be forgotten that the first and fundamental
concern of the rules of procedure is to secure a just determination of every action. In the case
at bench, a liberal application of the rules of procedure to suit the petitioner's purpose would
clearly pave the way for injustice as it would be rewarding an act of negligence with undeserved
tolerance.38 (Underscoring supplied)
At all events, the alleged "newly discovered evidence" that PLDT seeks to offer does not suffice to
establish its claim for refund, as it would still have to comply with Revenue Regulation 6-85 by proving
that the redundant employees, on whose behalf it filed the claim for refund, declared the separation
pay received as part of their gross income. Furthermore, the same Revenue Regulation requires that
"the fact of withholding is established by a copy of the statement duly issued by the payor to the payee
(BIR Form No. 1743.1) showing the amount paid and the amount of tax withheld therefrom."
WHEREFORE, the petition is DENIED.
Costs against petitioner.
SO ORDERED.

G.R. No. 184450
JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES, MARAH

SHARYN M. DE CASTRO and CRIS P. TENORIO, Petitioners,
vs.
SECRETARY OF FINANCE and the COMMISSIONER OF INTERNAL REVENUE, Respondents.
x-----------------------x
G.R. No. 184508
SENATOR MANUEL A. ROXAS, Petitioner,

vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and LILIAN
B. HEFTI, in her capacity as Commissioner of the Bureau of Internal Revenue, Respondents.
x-----------------------x
G.R. No. 184538
TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), represented by its President,

DEMOCRITO T. MENDOZA, Petitioner,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and LILIAN
B. HEFTI, in her capacity as Commissioner of the Bureau of Internal Revenue, Respondents.
x-----------------------x
G.R. No. 185234
SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT ASSOCIATION OF THE

PHILIPPINES, INC. and ERNESTO G. EBRO, Petitioners,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and SIXTO
S. ESQUIVIAS IV, in his capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.
SERENO, CJ.:
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 personal and
additional exemptions for individual 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. They
further challenge the BIR's adoption of the prorated application of the new set of personal and
additional exemptions for taxable year 2008. They also contest the validity of the RR's alleged

imposition of a condition for the availment by MWEs of the exemption provided by R.A. 9504.
Supposedly, in the event they receive other benefits in excess of ₱30,000, they can no longer avail
themselves of that exemption. Petitioners contend that the law provides for the unconditional
exemption of MWEs from income tax and, thus, pray that the RR be nullified.
ANTECEDENT FACTS
R.A. 9504
On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill No. (S.B.) 2293.
On 21 May 2008, former President Gloria M. Arroyo certified the passage of the bill as urgent through
a letter addressed to then Senate President Manuel Villar. On the same day, the bill was passed on
second reading IN the Senate and, on 27 May 2008, on third reading. The following day, 28 May 2008,
the Senate sent S.B. 2293 to the House of Representatives for the latter's concurrence.
On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an amendment to
House Bill No. (H.B.) 3971.
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:
1. It increased the basic personal exemption from ₱20,000 for a single individual, ₱25,000 for
the head of the family, and ₱32,000 for a married individual to P50,000 for each individual.
2. It increased the additional exemption for each dependent not exceeding four from ₱8,000
to ₱25,000.
3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from 10% of gross
income to 40% of the gross receipts or gross sales.
4. It introduced the OSD to corporate taxpayers at no more than 40% of their gross income.
5. It granted MWEs exemption from payment of income tax on their minimum wage, holiday
pay, overtime pay, night shift differential pay and hazard pay. 1
Section 9 of the law provides that it shall take effect 15 days following its publication in the Official
Gazette or in at least two newspapers of general circulation. Accordingly, R.A. 9504 was published in
the Manila Bulletin and Malaya on 21 June 2008. On 6 July 2008, the end of the 15-day period, the
law took effect.
RR 10-2008
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:
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income.

xxxx
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered
in determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross income under Section 32
(b) (7) (e) of the Code. Provided that, the excess of the 'de minimis' benefits over their respective
ceilings prescribed by these regulations shall be considered as part of 'other benefits' and the
employee receiving it will be subject to tax only on the excess over the ₱30,000.00 ceiling. Provided,
further, that MWEs receiving 'other benefits' exceeding the ₱30,000.00 limit shall be taxable on
the excess benefits, as well as on his salaries, wages and allowances, just like an employee
receiving compensation income beyond the SMW.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income payments are
exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the Statutory
Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board
(RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where
he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and
Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment (DOLE). The RTWPB of each region shall determine the
wage rates in the different regions based on established criteria and shall be the basis of exemption
from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned
MWE shall likewise be covered by the above exemption. Provided, however, that an employee who
receives/earns additional compensation such as commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory amount of ₱30,000.00, taxable allowances and
other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire
earnings are not exempt from income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or practice of
profession, except income subject to final tax, in addition to compensation income are not exempted
from income tax on their entire income earned during the taxable year. This rule, notwithstanding, the
SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt
from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs
who were actually assigned to danger or strife-torn areas, disease-infested places, or in distressed or
isolated stations and camps, which expose them to great danger of contagion or peril to life. Any
hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject to income tax
and consequently, to withholding tax.

xxxx
SECTION 3. Section 2. 79 of RR 2-98, as amended, is hereby further amended to read as follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income. --
(A) Requirement of Withholding. - Every employer must withhold from compensation paid an amount
computed in accordance with these Regulations. Provided, that no withholding of tax shall be required
on the SMW, including holiday pay, overtime pay, night shift differential and hazard pay of MWEs in
the private/public sectors as defined in these Regulations. Provided, further, that an employee who
receives additional compensation such as commissions, honoraria, fringe benefits, benefits in
excess of the allowable statutory amount of ₱30,000.00, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential
pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax and, consequently, shall be subject to withholding tax.
xxxx
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
₱25,000, and for each qualified dependent child (QDC), ₱12,500.
xxxx
SECTION 9. Effectivity. -
These Regulations shall take effect beginning July 6, 2008. (Emphases supplied)
The issuance and effectivity of RR 10-2008 implementing R.A. 9504 spawned the present Petitions. 1âwphi1
G.R. No. 184450
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for the prorated
application of the personal and additional exemptions for taxable year 2008 to begin only effective 6
July 2008 for being contrary to Section 4 of Republic Act No. 9504.2
Petitioners argue that the prorated application of the personal and additional exemptions under RR
10-2008 is not "the legislative intendment in this jurisdiction."3 They stress that Congress has always
maintained a policy of "full taxable year treatment"4 as regards the application of tax exemption laws.
They allege further that R.A. 9504 did not provide for a prorated application of the new set of personal
and additional exemptions. 5
G.R. No. 184508
Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full taxable
year treatment of the income tax benefits of the new law. He relies on what he says is clear legislative
intent. In his "Explanatory Note of Senate Bill No. 103," he stresses "the very spirit of enacting the
subject tax exemption law"6 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.7 (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;8 that Umali v. Estanislao9serves as jurisprudential basis for his position that R.A. 9504 should be
applied on a full-year basis to taxable year 2008; 10 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. 11
On the scope of exemption of MWEs under R.A. 9504, Senator Roxas argues that the exemption of
MWEs is absolute, regardless of the amount of the other benefits they receive. Thus, he posits that
the Department of Finance (DOF) and the BIR committed grave abuse of discretion amounting to lack
and/or excess of jurisdiction. They supposedly did so when they provided in Section l of RR 10-2008
the condition that an MWE who receives "other benefits" exceeding the ₱30,000 limit would lose the
tax exemption. 12 He further contends that the real intent of the law is to grant income tax exemption to
the MWE without any limitation or qualification, and that while it would be reasonable to tax the benefits
in excess of ₱30,000, it is unreasonable and unlawful to tax both the excess benefits and the salaries,
wages and allowances. 13
G.R. No. 184538
Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A. 9504 provide
for the application of the tax exemption for the full calendar year 2008. It also espouses the
interpretation that R.A. 9504 provides for the unqualified tax exemption of the income of MWEs
regardless of the other benefits they receive. 14 In conclusion, it says that RR 10-2008, which is only
an implementing rule, amends the original intent of R.A. 9504, which is the substantive law, and is
thus null and void.
G.R. No. 185234
Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the Philippines,
Inc., and Ernesto Ebro allege that R.A. 9504 unconditionally grants MWEs exemption from income tax
on their taxable income, as well as increased personal and additional exemptions for other individual
taxpayers, for the whole year 2008. They note that the assailed RR 10-2008 restricts the start of the
exemptions to 6 July 2008 and provides that those MWEs who received "other benefits" in excess of
₱30,000 are not exempt from income taxation. Petitioners believe this RR is a "patent nullity" 15 and
therefore void.
Comment of the OSG
The Office of the Solicitor General (OSG) filed a Consolidated Comment16 and took the position that
the application of R.A. 9504 was intended to be prospective, and not retroactive. This was supposedly
the general 1ule 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. 17
The OSG contends that Umali v. Estanislao is not applicable to the present case. It explains that R.A.
1âw phi 1
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 believes that the grant of personal exemptions no longer took into account
the poverty threshold level under R.A. 9504, because the amounts of personal exemption far exceeded
the poverty threshold levels. 18
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.
ISSUES
Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may be distilled
into three major ones:
First, whether 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.
Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008 only.
Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing that an MWE
who receives other benefits in excess of the statutory limit of ₱30,000 19 is no longer entitled to the
exemption provided by R.A. 9504.
THE COURT'S RULING
I.
Whether the increased personal and additional exemptions provided by R.A. 9504 should be
applied to the entire taxable year 2008 or prorated, considering that the law took effect only on
6 July 2008
The personal and additional exemptions established by R.A. 9504 should be applied to the entire
taxable year 2008.
Umali is applicable.
Umali v. Estanislao20supports this Comi's stance that R.A. 9504 should be applied on a full-year basis
for the entire taxable year 2008.21 In Umali, Congress enacted R.A. 7167 amending the 1977 National
Internal Revenue Code (NIRC). The amounts of basic personal and additional exemptions given to
individual income taxpayers were adjusted to the poverty threshold level. R.A. 7167 came into law on
30 January 1992. Controversy arose when the Commission of Internal Revenue (CIR) promulgated
RR 1-92 stating that the regulation shall take effect on compensation income earned beginning 1
January 1992. The issue posed was whether the increased personal and additional exemptions could
be applied to compensation income earned or received during calendar year 1991, given that R.A.
7167 came into law only on 30 January 1992, when taxable year 1991 had already closed.
This Court ruled in the affirmative, considering that the increased exemptions were already available
on or before 15 April 1992, the date for the filing of individual income tax returns. Further, the law itself
provided that the new set of personal and additional exemptions would be immediately available upon
its effectivity. While R.A. 7167 had not yet become effective during calendar year 1991, the Court

found that it was a piece of social legislation that was in part intended to alleviate the economic plight
of the lower-income taxpayers. For that purpose, the new law provided for adjustments "to the poverty
threshold level" prevailing at the time of the enactment of the law. The relevant discussion is quoted
below:
[T]he Court is of the considered view that Rep. Act 7167 should cover or extend to compensation
income earned or received during calendar year 1991.
Sec. 29, par.(L), Item No. 4 of the National Internal Revenue Code, as amended, provides:
Upon the recommendation of the Secretary of Finance, the President shall automatically adjust not
more often than once every three years, the personal and additional exemptions taking into account,
among others, the movement in consumer price indices, levels of minimum wages, and bare
subsistence levels.
As the personal and additional exemptions of individual taxpayers were last adjusted in 1986, the
President, upon the recommendation of the Secretary of Finance, could have adjusted the personal
and additional exemptions in 1989 by increasing the same even without any legislation providing for
such adjustment. But the President did not.
However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act 7167, was
introduced in the House of Representatives in 1989 although its passage was delayed and it did not
become effective law until 30 January 1992. A perusal, however, of the sponsorship remarks of
Congressman Hernando B. Perez, Chairman of the House Committee on Ways and Means, on House
Bill 28970, provides an indication of the intent of Congress in enacting Rep. Act 716 7. The pertinent
legislative journal contains the following:
At the outset, Mr. Perez explained that the Bill Provides for increased personal additional exemptions
to individuals in view of the higher standard of living.
The Bill, he stated, limits the amount of income of individuals subject to income tax to enable them to
spend for basic necessities and have more disposable income.
xxxx
Mr. Perez added that inflation has raised the basic necessities and that it had been three years since
the last exemption adjustment in 1986.
xxxx
Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the effects of the
current inflation and of the implementation of the salary standardization law. Stating that it is imperative
for the government to take measures to ease the burden of the individual income tax filers, Mr. Perez
then cited specific examples of how the measure can help assuage the burden to the taxpayers.
He then reiterated that the increase in the prices of commodities has eroded the purchasing power of
the peso despite the recent salary increases and emphasized that the Bill will serve to compensate
the adverse effects of inflation on the taxpayers. x x x (Journal of the House of Representatives, May
23, 1990, pp. 32-33).

It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides for, as
adjustments "to the poverty threshold level." Certainly, "the poverty threshold level" is the poverty
threshold level at the time Rep. Act 7167 was enacted by Congress, not poverty threshold levels in
futuro, at which time there may be need of further adjustments in personal exemptions. 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 ofthe 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.
And then, Rep. Act 7167 says that the increased personal exemptions that it provides for shall be
available thenceforth, that is, after Rep. Act 7167 shall have become effective. In other words,
these exemptions are available upon the filing of personal income tax returns which is, under
the National Internal Revenue Code, done not later than the 15th day of April after the end of a
calendar year. Thus, under Rep. Act 7167, which became effective, as aforestated, on 30
January 1992, the increased exemptions are literally available on or before 15 April 1992
(though not before 30 January 1992). But these increased exemptions can be available on 15 April
1992 only in respect of compensation income earned or received during the calendar year 1991.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available in respect
of compensation income received during the 1990 calendar year; the tax due in respect of said income
had already accrued, and been presumably paid, by 15 April 1991 and by 15 July 1991, at which time
Rep. Act 7167 had not been enacted. To make Rep. Act 7167 refer back to income received during
1990 would require language explicitly retroactive in purport and effect, language that would have to
authorize the payment of refunds of taxes paid on 15 April 1991 and 15 July 1991: such language is
simply not found in Rep. Act 7167.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available only
in respect of compensation income received during 1992, as the implementing Revenue
Regulations No. 1-92 purport to provide. Revenue Regulations No. 1-92 would in effect
postpone the availability of the increased exemptions to 1 January-15 April 1993, and thus
literally defer the effectivity of Rep. Act 7167 to 1 January 1993. Thus, the implementing
regulations collide frontally with Section 3 of Rep. Act 7167 which states that the statute "shall take
effect upon its approval." The objective of the Secretary of Finance and the Commissioner of Internal
Revenue in postponing through Revenue Regulations No. 1-92 the legal effectivity of Rep. Act 7167
is, of course, entirely understandable - to defer to 1993 the reduction of governmental tax revenues
which irresistibly follows from the application of Rep. Act 7167. But the law-making authority has
spoken and the Court can not refuse to apply the law-maker's words. Whether or not the government
can afford the drop in tax revenues resulting from such increased exemptions was for Congress (not
this Court) to decide.22 (Emphases supplied)
In this case, Senator Francis Escudero's sponsorship speech for Senate Bill No. 2293 reveals two
important points about R.A. 9504: (1) it is a piece of social legislation; and (2) its intent is to make the
proposed law immediately applicable, that is, to taxable year 2008:
Mr. President, distinguished colleagues, Senate Bill No. 2293 seeks, among others, to exempt
minimum wage earners from the payment of income and/or withholding tax. It is an attempt to help
our people cope with the rising costs of commodities that seem to be going up unhampered
these past few months.

Mr. President, a few days ago, the Regional Tripartite and Wages Productivity Board granted an
increase of ₱20 per day as far as minimum wage earners are concerned. By way of impact, Senate
Bill No. 2293 would grant our workers an additional salary or take-home pay of approximately ₱34 per
day, given the exemption that will be granted to all minimum wage earners. It might be also worthy of
note that on the part of the public sector, the Senate Committee on Ways and Means included, as
amongst those who will be exempted from the payment of income tax and/or withholding tax,
government workers receiving Salary Grade V. We did not make any distinction so as to include Steps
1 to 8 of Salary Grade V as long as one is employed in the public sector or in government.
In contradistinction with House Bill No. 3971 approved by the House of Representatives pertaining to
a similar subject matter, the House of Representatives, very much like the Senate, adopted the same
levels of exemptions which are:
From an allowable personal exemption for a single individual of ₱20,000, to a head of family of
₱25,000, to a married individual of ₱32,000, both the House and the Senate versions contain a higher
personal exemption of ₱50,000.
Also, by way of personal additional exemption as far as dependents are concerned, up to four, the
House, very much like the Senate, recommended a higher ceiling of ₱25,000 for each dependent not
exceeding four, thereby increasing the maximum additional exemptions and personal additional
exemptions to as high as ₱200,000, depending on one's status in life.
The House also, very much like the Senate, recommended by way of trying to address the revenue
loss on the part of the government, an optional standard deduction (OSD) on gross sales, and/or gross
receipts as far as individual taxpayers are concerned. However, the House, unlike the Senate,
recommended a Simplified Net Income Tax Scheme (SNITS) in order to address the remaining
balance of the revenue loss.
By way of contrast, the Senate Committee on Ways and Means recommended, in lieu of SNITS, an
optional standard deduction of 40% for corporations as far as their gross income is concerned.
Mr. President, if we total the revenue loss as well as the gain
brought about by the 40% OSD on individuals on gross sales and receipts and 40% on gross income
as far as corporations are concerned, with a conservative availment rate as computed by the
Department of Finance, the government would still enjoy a gain of ₱.78 billion or ₱780 million if we
use the high side of the computation however improbable it may be.
For the record, we would like to state that if the availment rate is computed at 15% for individuals and
10% for corporations, the potential high side of a revenue gain would amount to approximately ₱18.08
billion.
Mr. President, we have received many suggestions increasing the rate of personal exemptions and
personal additional exemptions. We have likewise received various suggestions pertaining to the
expansion of the coverage of the tax exemption granted to minimum wage earners to encompass as
well other income brackets.
However, the only suggestion other than or outside the provisions contained in House Bill No. 3971
that the Senate Committee on Ways and Means adopted, was an expansion of the exemption to cover
overtime, holiday, nightshift differential, and hazard pay also being enjoyed by minimum wage earners.
It entailed an additional revenue loss of ₱l billion approximately on the part of the government.

However, Mr. President, that was taken into account when I stated earlier that there will still be a
revenue gain on the conservative side on the part of government of ₱780 million.
Mr. President, [my distinguished colleagues in the Senate, we wish to provide a higher exemption
for our countrymen because of the incessant and constant increase in the price of
goods. Nonetheless, not only Our Committee, but also the Senate and Congress, must act
responsibly in recognizing that much as we would like to give all forms of help that we can and must
provide to our people, we also need to recognize the need of the government to defray its expenses
in providing services to the public. This is the most that we can give at this time because the
government operates on a tight budget and is short on funds when it comes to the discharge of its
main expenses.]23
Mr. President, time will perhaps come and we can improve on this version, but at present, this
is the best, I believe, that we can give our people. But by way of comparison, it is still ₱10 higher
than what the wage boards were able to give minimum wage earners. Given that, we were able to
increase their take-home pay by the amount equivalent to the tax exemption we have granted.
We urge our colleagues, Mr. President, to pass this bill in earnest so that we can immediately
grant relief to our people.
Thank you, Mr. President. (Emphases Supplied)24
Clearly, Senator Escudero expressed a sense of urgency for passing what would subsequently
become R.A. 9504. He was candid enough to admit that the bill needed improvement, but because
time was of the essence, he urged the Senate to pass the bill immediately. The idea was immediate
tax relief to the individual taxpayers, particularly low-compensation earners, and an increase in their
take-home pay.25
Senator Miriam Defensor-Santiago also remarked during the deliberations that "the increase in
personal exemption from ₱20,000 to ₱50,000 is timely and appropriate given the increased cost of
living. Also, the increase in the additional exemption for dependent children is necessary and timely."26
Finally, we consider the President's certification of the necessity of the immediate enactment of Senate
Bill No. 2293. That certification became the basis for the Senate to dispense with the three-day
rule27 for passing a bill. It evinced the intent of the President to afford wage earners immediate tax relief
from the impact of a worldwide increase in the prices of commodities. Specifically, the certification
stated that the purpose was to "address the urgent need to cushion the adverse impact of the global
escalation of commodity prices upon the most vulnerable within the low income group by providing
expanded income tax relief."28
In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly intended to
afford immediate tax relief to individual taxpayers, particularly low-income compensation earners.
Indeed, if R.A. 9504 was to take effect beginning taxable year 2009 or half of the year 2008 only, then
the intent of Congress to address the increase in the cost of living in 2008 would have been negated.
Therefore, following Umali, the test is whether the new set of personal and additional exemptions was
available at the time of the filing of the income tax return. In other words, while the status of the
individual taxpayers is determined at the close of the taxable year, 29 their personal and additional
exemptions - and consequently the computation of their taxable income - are reckoned when the tax
becomes due, and not while the income is being earned or received.

The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be computed
on the basis of the calendar year.30 The taxpayer is required to file an income tax return on the 15th of
April of each year covering income of the preceding taxable year. 31 The tax due thereon shall be paid
at the time the return is filed. 32
It stands to reason that the new set of personal and additional exemptions, adjusted as a form of social
legislation to address the prevailing poverty threshold, should be given effect at the most opportune
time as the Court ruled in Umali.
The test provided by Umali is consistent with Ingalls v. Trinidad, 33 in which the Court dealt with the
matter of a married person's reduced exemption. As early as 1923, the Court already provided the
reference point for determining the taxable income:
[T]hese statutes dealing with the manner of collecting the income tax and with the deductions to be
made in favor of the taxpayer have reference to the time when the return is filed and the tax assessed.
If Act No. 2926 took, as it did take, effect on January 1, 1921, its provisions must be applied to income
tax returns filed, and assessments made from that date. This is the reason why Act No. 2833, and Act
No. 2926, in their respective first sections, refer to income received during the preceding civil
year. (Italics in the original)
There, the exemption was reduced, not increased, and the Court effectively ruled that income tax due
from the individual taxpayer is properly determined upon the filing of the return. This is done after the
end of the taxable year, when all the incomes for the immediately preceding taxable year and the
corresponding personal exemptions and/or deductions therefor have been considered. Therefore, the
taxpayer was made to pay a higher tax for his income earned during 1920, even if the reduced
exemption took effect on 1 January 1921.
In the present case, the increased exemptions were already available much earlier than the required
time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008, more than nine
months before the deadline for the filing of the income tax return for taxable year 2008. Hence,
individual taxpayers were entitled to claim the increased amounts for the entire year 2008. This was
true despite the fact that incomes were already earned or received prior to the law's effectivity on 6
July 2008.
Even more compelling is the fact that R.A. 9504 became effective during the taxable year in question.
In Umali, the Court ruled that the application of the law was prospective, even if the amending law took
effect after the close of the taxable year in question, but before the deadline for the filing of the return
and payment of the taxes due for that year. Here, not only did R.A. 9504 take effect before the deadline
for the filing of the return and payment for the taxes due for taxable year 2008, it took effect way before
the close of that taxable year. Therefore, the operation of the new set of personal and additional
exemption in the present case was all the more prospective.
Additionally, as will be discussed later, the rule of full taxable year treatment for the availment of
personal and additional exemptions was established, not by the amendments introduced by R.A. 9504,
but by the provisions of the 1997 Tax Code itself. The new law merely introduced a change in the
amounts of the basic and additional personal exemptions. Hence, the fact that R.A. 9504 took effect
only on 6 July 2008 is irrelevant.
The present case issubstantially

identical with Umali and not with
Pansacola.

Respondents argue that Umali is not applicable to the present case. They contend that the increase
in personal and additional exemptions were necessary in that case to conform to the 1991 poverty
threshold level; but that in the present case, the amounts under R.A. 9504 far exceed the poverty
threshold level. To support their case, respondents cite figures allegedly coming from the National
Statistical Coordination Board. According to those figures, in 2007, or one year before the effectivity
of R.A. 9504, the poverty threshold per capita was ₱14,866 or ₱89,196 for a family of six. 34
We are not persuaded.
The variance raised by respondents borders on the superficial. The message of Umali is that there
must be an event recognized by Congress that occasions the immediate application of the increased
amounts of personal and additional exemptions. In Umali, that event was the failure to adjust the
personal and additional exemptions to the prevailing poverty threshold level. In this case, the
legislators specified the increase in the price of commodities as the basis for the immediate availability
of the new amounts of personal and additional exemptions.
We find the facts of this case to be substantially identical to those of Umali.
First, both cases involve an amendment to the prevailing tax code. The present petitions call for the
interpretation of the effective date of the increase in personal and additional exemptions. Otherwise
stated, the present case deals with an amendment (R.A. 9504) to the prevailing tax code (R.A. 8424
or the 1997 Tax Code). Like the present case, Umali involved an amendment to the then prevailing
tax code - it interpreted the effective date of R.A. 7167, an amendment to the 1977 NIRC, which also
increased personal and additional exemptions.
Second, the amending law in both cases reflects an intent to make the new set of personal and
additional exemptions immediately available after the effectivity of the law. As already pointed out,
in Umali, R.A. 7167 involved social legislation intended to adjust personal and additional exemptions.
The adjustment was made in keeping with the poverty threshold level prevailing at the time.
Third, both cases involve social legislation intended to cure a social evil - R.A. 7167 was meant to
adjust personal and additional exemptions in relation to the poverty threshold level, while R.A. 9504
was geared towards addressing the impact of the global increase in the price of goods.
Fourth, in both cases, it was clear that the intent of the legislature was to hasten the enactment of the
law to make its beneficial relief immediately available.
Pansacola is not applicable.
In lieu of Umali, the OSG relies on our ruling in Pansacola v.Commissioner of Internal Revenue. 35 In
that case, the 1997 Tax Code (R.A. 8424) took effect on 1 January 1998, and the petitioner therein
pleaded for the application of the new set of personal and additional exemptions provided thereunder
to taxable year 1997. R.A. 8424 explicitly provided for its effectivity on 1 January 1998, but it did not
provide for any retroactive application.
We ruled against the application of the new set of personal and additional exemptions to the previous
taxable year 1997, in which the filing and payment of the income tax was due on 15 April 1998, even
if the NIRC had already taken effect on 1 January 1998. This court explained that the NIRC could not
be given retroactive application, given the specific mandate of the law that it shall take effect on 1
January 1998; and given the absence of any reference to the application of personal and additional
exemptions to income earned prior to 1January 1998. We further stated that what the law considers

for the purpose of determining the income tax due is the status at the close of the taxable year, as
opposed to the time of filing of the return and payment of the corresponding tax.
The facts of this case are not identical with those of Pansacola.
First, Pansacola interpreted the effectivity of an entirely new tax code - R.A. 8424, the Tax Reform
Act of 1997. The present case, like Umali, involves a mere amendment of some specific provisions of
the prevailing tax code: R.A. 7167 amending then P.D. 1158 (the 1977 NIRC) in Umali and R.A. 9504
amending R.A. 8424 herein.
Second, in Pansacola, the new tax code specifically provided for an effective date - the beginning of
the following year - that was to apply to all its provisions, including new tax rates, new taxes, new
requirements, as well as new exemptions. The tax code did not make any exception to the effectivity
of the subject exemptions, even if transitory provisions36 specifically provided for different effectivity
dates for certain provisions.
Hence, the Court did not find any legislative intent to make the new rates of personal and additional
exemptions available to the income earned in the year previous to R.A. 8424's effectivity. In the present
case, as previously discussed, there was a clear intent on the part of Congress to make the new
amounts of personal and additional exemptions immediately available for the entire taxable year 2008.
R.A. 9504 does not even need a provision providing for retroactive application because, as mentioned
above, it is actually prospective - the new law took effect during the taxable year in question.
Third, in Pansacola, the retroactive application of the new rates of personal and additional exemptions
would result in an absurdity - new tax rates under the new law would not apply, but a new set of
personal and additional exemptions could be availed of. This situation does not obtain in this case,
however, precisely because the new law does not involve an entirely new tax code. The new law is
merely an amendment to the rates of personal and additional exemptions.
Nonetheless, R.A. 9504 can still be made applicable to taxable year 2008, even if we apply
the Pansacola test. We stress that Pansacola considers the close of the taxable year as the reckoning
date for the effectivity of the new exemptions. In that case, the Court refused the application of the
new set of personal exemptions, since they were not yet available at the close of the taxable year. In
this case, however, at the close of the taxable year, the new set of exemptions was already available.
In fact, it was already available during the taxable year - as early as 6 July 2008 - when the new law
took effect.
There may appear to be some dissonance between the Court's declarations in Umali and those
in Pansacola, which held:
Clearly from the abovequoted provisions, what the law should consider for the purpose of determining
the tax due from an individual taxpayer is his status and qualified dependents at the close of the
taxable year and not at the time the return is filed and the tax due thereon is paid. Now comes Section
35(C) of the NIRC which provides,
xxxx
Emphasis must be made that Section 35(C) of the NIRC allows a taxpayer to still claim the
corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional
dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry, turn 21
years old; or become gainfully employed. It is as if the changes in his or his dependents status took
place at the close of the taxable year.

Consequently, his correct taxable income and his corresponding allowable deductions e.g.
personal and additional deductions, if any, had already been determined as of the end of the
calendar year.
x x x. Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional
exemptions under Section 35, can only be allowed as deductions from the individual taxpayers gross
or net income, as the case maybe, for the taxable year 1998 to be filed in 1999. The NIRC made no
reference that the personal and additional exemptions shall apply on income earned before January
1, 1998.37
It must be remembered, however, that the Court therein emphasized that Umali was interpreting a
social legislation:
In Umali, we noted that despite being given authority by Section 29(1)(4) of the National Internal
Revenue Code of 1977 to adjust these exemptions, no adjustments were made to cover 1989. Note
that Rep. Act No. 7167 is entitled "An Act Adjusting the Basic Personal and Additional Exemptions
Allowable to Individuals for Income Tax Purposes to the Poverty Threshold Level, Amending for the
Purpose Section 29, Paragraph (L), Items (1) and (2) (A), of the National Internal Revenue Code, As
Amended, and For Other Purposes." Thus, we said in Umali, that the adjustment provided by Rep. Act
No. 7167 effective 1992, should consider the poverty threshold level in 1991, the time it was enacted.
And we observed therein that since the exemptions would especially benefit lower and middle-income
taxpayers, the exemption should be made to cover the past year 1991. To such an extent, Rep. Act
No. 7167 was a social legislation intended to remedy the non-adjustment in 1989. And as cited
in Umali, this legislative intent is also clear in the records of the House of Representatives' Journal.
This is not so in the case at bar. There is nothing in the NIRC that expresses any such intent. The
policy declarations in its enactment do not indicate it was a social legislation that adjusted
personal and additional exemptions according to the poverty threshold level nor is there any
indication that its application should retroact. x x x.38 (Emphasis Supplied)
Therefore, the seemingly inconsistent pronouncements in Umali and Pansacola are more apparent
than real. The circumstances of the cases and the laws interpreted, as well as the legislative intents
thereof, were different.
The policy in this jurisdiction is full
taxable year treatment.
We have perused R.A. 9504, and we see nothing that expressly provides or even suggests a prorated
application of the exemptions for taxable year 2008. On the other hand, the policy of full taxable year
treatment, especially of the personal and additional exemptions, is clear under Section 35, particularly
paragraph C of R.A. 8424 or the 1997 Tax Code:
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided in Section 24(A) of this Title, there shall
be allowed a basic personal exemption as follows:
xxxx

(B) Additional Exemption for Dependents.-There shall be allowed an additional exemption of... for each
dependent not exceeding four (4).
x x xx
(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined
above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the
case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such
dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the
taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the
dependents died, or as if such dependents married, became twenty-one (21) years old or became
gainfully employed at the close of such year. (Emphases supplied)
Note that paragraph C does not allow the prorating of the personal and additional exemptions provided
in paragraphs A and B, even in case a status-changing event occurs during the taxable year. Rather,
it allows the fullest benefit to the individual taxpayer. This manner of reckoning the taxpayer's status
for purposes of the personal and additional exemptions clearly demonstrates the legislative intention;
that is, for the state to give the taxpayer the maximum exemptions that can be availed, notwithstanding
the fact that the latter's actual status would qualify only for a lower exemption if prorating were
employed.
We therefore see no reason why we should make any distinction between the income earned prior to
the effectivity of the amendment (from 1 January 2008 to 5 July 2008) and that earned thereafter (from
6 July 2008 to 31 December 2008) as none is indicated in the law. The principle that the courts should
not distinguish when the law itself does not distinguish squarely app1ies to this case. 39
We note that the prorating of personal and additional exemptions was employed in the 1939 Tax Code.
Section 23(d) of that law states:
Change of status. - - If the status of the taxpayer insofar as it affects the personal and additional
exemptions for himself or his dependents, changes during the taxable year, the amount of the
personal and additional exemptions shall be apportioned, under rules and regulations
prescribed by the Secretary of Finance, in accordance with the number of months before and
after such change. For the purpose of such apportionment a fractional part of a month shall be
disregarded unless it amounts to more than half a month, in which case it shall be considered as a
month.40 (Emphasis supplied)
On 22 September 1950, R.A. 590 amended Section 23(d) of the 1939 Tax Code by restricting the
operation of the prorating of personal exemptions. As amended, Section 23(d) reads:
(d) Change of status. - If the status of the taxpayer insofar as it affects the personal and additional
exemption for himself or his dependents, changes during the taxable year by reason of his death,
the amount of the personal and additional exemptions shall be apportioned, under rules and
regulations prescribed by the Secretary of Finance, in accordance with the number of months before
and after such change. For the purpose of such apportionment a fractional part of a month shall be

disregarded unless it amounts to more than half a month, in which case it shall be considered as a
month.41 (Emphasis supplied)
Nevertheless, in 1969, R. A. 6110 ended the operation of the prorating scheme in our jurisdiction when
it amended Section 23(d) of the 1939 Tax Code and adopted a full taxable year treatment of the
personal and additional exemptions. Section 23(d), as amended, reads:
(d) Change of status. -
If the taxpayer married or should have additional dependents as defined in subsection (c) above during
the taxable year the taxpayer may claim the corresponding personal exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal and additional
deductions for himself and his dependents as if he died at the close of such year.
If the spouse or any of the dependents should die during the year, the taxpayer may still claim the
same deductions as if they died at the close of such year.
P.D. 69 followed in 1972, and it retained the full taxable year scheme. Section 23(d) thereof reads as
follows:
(d) Change of status. - If the taxpayer marries or should have additional dependents as defined in
subsection (c) above during the taxable year the taxpayer may claim the corresponding personal
exemptions in full for such year.
deductions for himself and his dependents as if he died at the close of such year.
If the spouse or any of the dependents should die or become twenty-one years old during the taxable
year, the taxpayer may still claim the same exemptions as if they died, or as if such dependents
became twenty-one years old at the close of such year.
The 1977 Tax Code continued the policy of full taxable year treatment. Section 23(d) thereof states:
(d) Change of status.- If the taxpayer married or should have additional dependents as defined in
subsection (c) above during the taxable year, the taxpayer may claim the corresponding personal
exemption in full for such year.
exemptions for himself and his dependents as if he died at the close of such year.
If the spouse or any of the dependents should die or become
twenty-one years old during the taxable year, the taxpayer may still claim the same exemptions as if
they died, or as if such dependents became twenty-one years old at the close of such year.
While Section 23 of the 1977 Tax Code underwent changes, the provision on full taxable year
treatment in case of the taxpayer's change of status was left untouched.42 Executive Order No. 37,
issued on 31 July 1986, retained the change of status provision verbatim. The provision appeared
under Section 30(1)(3) of the NIRC, as amended:

(3) Change of status.- If the taxpayer married or should have additional dependents as defined above
during the taxable year, the taxpayer may claim the corresponding personal and additional
exemptions, as the case may be, in full for such year.
exemptions for himself and his dependents as if he died at the close of such year.
If the spouse or any of the dependents should die or if any of such
dependents becomes twenty-one years old during the taxable year, the taxpayer may still claim the
same exemptions as if they died, or if such dependents become twenty-one years old at the close of
such year.
Therefore, the legislative policy of full taxable year treatment of the personal and additional exemptions
has been in our jurisdiction continuously since 1969. The prorating approach has long since been
abandoned. Had Congress intended to revert to that scheme, then it should have so stated in clear
and unmistakeable terms. There is nothing, however, in R.A. 9504 that provides for the reinstatement
of the prorating scheme. On the contrary, the change-of-status provision utilizing the full-year scheme
in the 1997 Tax Code was left untouched by R.A. 9504.
We now arrive at this important point: the policy of full taxable year treatment is established, not by
the amendments introduced by R.A. 9504, but by the provisions of the 1997 Tax Code, which adopted
the policy from as early as 1969.
There is, of course, nothing to prevent Congress from again adopting a policy that prorates the
effectivity of basic personal and additional exemptions. This policy, however, must be explicitly
provided for by law - to amend the prevailing law, which provides for full-year treatment. As already
pointed out, R.A. 9504 is totally silent on the matter. This silence cannot be presumed by the BIR as
providing for a half-year application of the new exemption levels. Such presumption is unjust, as
incomes do not remain the same from month to month, especially for the MWEs.
Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new personal and
additional exemptions. In so doing, respondents overstepped the bounds of their rule-making power.
It is an established rule that administrative regulations are valid only when these are consistent with
the law. 43 Respondents cannot amend, by mere regulation, the laws they administer.44 To do so would
violate the principle of non-delegability of legislative powers.45
The prorated application of the new set of personal and additional exemptions for the year 2008, which
was introduced by respondents, cannot even be justified under the exception to the canon of non-
delegability; that is, when Congress makes a delegation to the executive branch.46 The delegation
would fail the two accepted tests for a valid delegation of legislative power; the completeness test and
the sufficient standard test.47 The first test requires the law to be complete in all its terms and
conditions, such that the only thing the delegate will have to do is to enforce it.48 The sufficient standard
test requires adequate guidelines or limitations in the law that map out the boundaries of the delegate's
authority and canalize the delegation.49
In this case, respondents went beyond enforcement of the law, given the absence of a provision in
R.A. 9504 mandating the prorated application of the new amounts of personal and additional
exemptions for 2008. Further, even assuming that the law intended a prorated application, there are
no parameters set forth in R.A. 9504 that would delimit the legislative power surrendered by Congress
to the delegate. In contrast, Section 23(d) of the 1939 Tax Code authorized not only the prorating of

the exemptions in case of change of status of the taxpayer, but also authorized the Secretary of
Finance to prescribe the corresponding rules and regulations.
II.
Whether an MWE is exempt for the entire taxable

year 2008 or from 6 July 2008 only
The MWE is exempt for the entire taxable year 2008.
As in the case of the adjusted personal and additional exemptions, the MWE exemption should apply
to the entire taxable year 2008, and not only from 6 July 2008 onwards. We see no reason
why Umali cannot be made applicable to the MWE exemption, which is undoubtedly a piece of social
legislation. It was intended to alleviate the plight of the working class, especially the low-income
earners. In concrete terms, the exemption translates to a ₱34 per day benefit, as pointed out by
Senator Escudero in his sponsorship speech.50
As it stands, the calendar year 2008 remained as one taxable year for an individual taxpayer.
Therefore, RR 10-2008 cannot declare the income earned by a minimum wage earner from 1 January
2008 to 5 July 2008 to be taxable and those earned by him for the rest of that year to be tax-exempt.
To do so would be to contradict the NIRC and jurisprudence, as taxable income would then cease to
be determined on a yearly basis.
Respondents point to the letter of former Commissioner of Internal Revenue Lilia B. Hefti dated 5 July
2008 and petitioner Sen. Escudero's signature on the Conforme portion thereof. This letter and the
conforme supposedly establish the legislative intent not to make the benefits of R.A. 9504 effective as
of 1 January 2008.
We are not convinced. The conforme is irrelevant in the determination of legislative intent.
We quote below the relevant portion of former Commissioner Hefti's letter:
Attached herewith are salient features of the proposed regulations to implement RA 9504 x x x. We
have tabulated critical issues raised during the public hearing and comments received from the public
which we need immediate written resolution based on the inten[t]ion of the law more particularly the
effectivity clause. Due to the expediency and clamor of the public for its immediate implementation,
may we request your confirmation on the proposed recommendation within five (5) days from receipt
hereof. Otherwise, we shall construe your affirmation. 51
We observe that a Matrix of Salient Features of Proposed Revenue Regulations per R.A. 9504 was
attached to the letter.52 The Matrix had a column entitled "Remarks" opposite the Recommended
Resolution. In that column, noted was a suggestion coming from petitioner TMAP:
TMAP suggested that it should be retroactive considering that it was [for] the benefit of the majority
and to alleviate the plight of workers. Exemption should be applied for the whole taxable year as
provided in the NIRC. x x x Umali v. Estanislao [ruled] that the increase[d] exemption in 1992 [was
applicable] [to] 1991.
Majority issues raised during the public hearing last July 1, 2008 and emails received suggested [a]
retroactive implementation. 53(Italics in the original)

The above remarks belie the claim that the conforme is evidence of the legislative intent to make the
benefits available only from 6 July 2008 onwards. There would have been no need to make the
remarks if the BIR had merely wanted to confirm was the availability of the law's benefits to income
earned starting 6 July 2008. Rather, the implication is that the BIR was requesting the conformity of
petitioner Senator Escudero to the proposed implementing rules, subject to the remarks contained in
the Matrix. Certainly, it cannot be said that Senator Escudero's conforme is evidence of legislative
intent to the effect that the benefits of the law would not apply to income earned from 1 January 2008
to 5 July 2008.
Senator Escudero himself states in G.R. No. 185234:
In his bid to ensure that the BIR would observe the effectivity dates of the grant of tax exemptions and
increased basic personal and additional exemptions under Republic Act No. 9504, Petitioner
Escudero, as Co-Chairperson of the Congressional Oversight Committee on Comprehensive Tax
Reform Program, and his counterpart in the House of Representatives, Hon. Exequiel B. Javier,
conveyed through a letter, dated 16 September 2008, to Respondent Teves the legislative intent that
"Republic Act (RA) No. 9504 must be made applicable to the entire taxable year 2008" considering
that it was "a social legislation intended to somehow alleviate the plight of minimum wage earners or
low income taxpayers". They also jointly expressed their "fervent hope that the corresponding
Revenue Regulations that will be issued reflect the true legislative intent and rightful statutory
interpretation of R.A. No. 9504." 54
Senator Escudero repeats in his Memorandum:
On 16 September 2008, the Chairpersons (one of them being herein Petitioner Sen. Escudero) of the
Congressional Oversight Committee on Comprehensive Tax Reform Program of both House of
Congress wrote Respondent DOF Sec. Margarito Teves, and requested that the revenue regulations
(then yet still to be issued)55 to implement Republic Act No. 9504 reflect the true intent and rightful
statutory interpretation thereof, specifically that the grant of tax exemption and increased basic
personal and additional exemptions be made available for the entire taxable year 2008. Yet, the DOF
promulgated Rev. Reg. No. 10-2008 in contravention of such legislative intent.x x x.56
We have gone through the records and we do not see anything that would to suggest that respondents
deny the senator's assertion.
Clearly, Senator Escudero's assertion is that the legislative intent is to make the MWE' s tax exemption
and the increased basic personal and additional exemptions available for the entire year 2008. In the
face of his assertions, respondents' claim that his conforme to Commissioner Hefti's letter was
evidence of legislative intent becomes baseless and specious. The remarks described above and the
subsequent letter sent to DOF Secretary Teves, by no less than the Chairpersons of the Bi-camera!
Congressional Oversight Committee on Comprehensive Tax Reform Program, should have settled for
respondents the matter of what the legislature intended for R.A. 9504's exemptions.
Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the availment of the MWE's
tax exemption and the increased personal and additional exemptions beginning only on 6 July 2008
is in contravention of the law it purports to implement.
A clarification is proper at this point. Our ruling that the MWE exemption is available for the entire
taxable year 2008 is premised on the fact of one's status as an MWE; that is, whether the employee
during the entire year of 2008 was an MWE as defined by R.A. 9504. When the wages received
exceed the minimum wage anytime during the taxable year, the employee necessarily loses the MWE

qualification. Therefore, wages become taxable as the employee ceased to be an MWE. But the
exemption of the employee from tax on the income previously earned as an MWE remains.
This rule reflects the understanding of the Senate as gleaned from the exchange between Senator
Miriam Defensor-Santiago and Senator Escudero:
Asked by Senator Defensor-Santiago on how a person would be taxed if, during the year, he is
promoted from Salary Grade 5 to Salary Grade 6 in July and ceases to be a minimum wage employee,
Senator Escudero said that the tax computation would be based starting on the new salary in July. 57
As the exemption is based on the employee's status as an MWE, the operative phrase is "when the
employee ceases to be an MWE. Even beyond 2008, it is therefore possible for one employee to be
exempt early in the year for being an MWE for that period, and subsequently become taxable in the
middle of the same year with respect to the compensation income, as when the pay is increased higher
than the minimum wage. The improvement of one's lot, however, cannot justly operate to make the
employee liable for tax on the income earned as an MWE.
Additionally, on the question of whether one who ceases to be an MWE may still be entitled to the
personal and additional exemptions, the answer must necessarily be yes. The MWE exemption is
separate and distinct from the personal and additional exemptions. One's status as an MWE does not
preclude enjoyment of the personal and additional exemptions. Thus, when one is an MWE during a
part of the year and later earns higher than the minimum wage and becomes a non-MWE, only
earnings for that period when one is a non-MWE is subject to tax. It also necessarily follows that such
an employee is entitled to the personal and additional exemptions that any individual taxpayer with
taxable gross income is entitled.
A different interpretation will actually render the MWE exemption a totally oppressive legislation. It
would be a total absurdity to disqualify an MWE from enjoying as much as ₱150,00058 in personal and
additional exemptions just because sometime in the year, he or she ceases to be an MWE by earning
a little more in wages. Laws cannot be interpreted with such absurd and unjust outcome. It is axiomatic
that the legislature is assumed to intend right and equity in the laws it passes.59
Critical, therefore, is how an employee ceases to become an MWE and thus ceases to be entitled to
an MWE's exemption.
III.
Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in
declaring that an MWE who receives other benefits in excess of the
statutory limit of ₱30,000 is no longer entitled to the exemption provided
by R.A. 9504, is consistent with the law.
Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively declaring that
an MWE who receives other benefits in excess of the statutory limit of ₱30,000 is no longer entitled to
the exemption provided by R.A. 9504.
The BIR added a requirement not

found in the law.

The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder for easier reference.
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -
(A) Compensation Income Defined. – x x x
xxxx
(3) Facilities and privileges of relatively small value. - Ordinarily, facilities, and privileges (such as
entertainment, medical services, or so-called "courtesy" discounts on purchases), otherwise known
as "de minimis benefits," furnished or offered by an employer to his employees, are not considered as
compensation subject to income tax and consequently to withholding tax, if such facilities or privileges
are of relatively small value and are offered or furnished by the employer merely as means of
promoting the health, goodwill, contentment, or efficiency of his employees.
The following shall be considered as "de minimis" benefits not subject to income tax, hence, not
subject to withholding tax on compensation income of both managerial and rank and file employees:
(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the
year and the monetized value of leave credits paid to government officials and employees;
(b) Medical cash allowance to dependents of employees not exceeding ₱750.00 per employee per
semester or ₱125 per month;
(c) Rice subsidy of ₱l,500.00 or one (1) sack of 50-kg. rice per month amounting to not more than
₱l,500.00;
(d) Uniforms and clothing allowance not exceeding ₱4,000.00 per annum;
(e) Actual yearly medical benefits not exceeding ₱10,000.00 per annum;
(f) Laundry allowance not exceeding ₱300.00 per month;
(g) Employees achievement awards, e.g., for length of service or safety achievement, which must be
in the form of a tangible personal property other than cash or gift certificate, with an annual monetary
value not exceeding ₱10,000.00 received by the employee under an established written plan which
does not discriminate in favor of highly paid employees;
(h) Gifts given during Christmas and major anniversary celebrations not exceeding ₱5,000.00per
employee per annum;
(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on
account of illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic
minimum wage.60

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered
in determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross income under Section
32(b)(7)(e) of the Code. Provided that, the excess of the 'de minimis' benefits over their respective
ceilings prescribed by these regulations shall be considered as part of 'other benefits' and the
employee receiving it will be subject to tax only on the excess over the ₱30,000.00 ceiling. Provided,
further, that MWEs receiving 'other benefits' exceeding the P30,000.00 limit shall be taxable on
the excess benefits, as well as on his salaries, wages and allowances, just like an employee
receiving compensation income beyond the SMW.
Any amount given by the employer as benefits to its employees, whether classified as 'de
minimis' benefits or fringe benefits, shall constitute [a] deductible expense upon such employer.
Where compensation is paid in property other than money, the employer shall make necessary
arrangements to ensure that the amount of the tax required to be withheld is available for payment to
the Bureau of Internal Revenue.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income payments are
exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work
in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by Regional
Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity Commission
(NWPC), applicable to the place where he/she is assigned.
"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and
Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment (DOLE). The RTWPB of each region shall determine the
wage rates in the different regions based on established criteria and shall be the basis of exemption
from income tax for this purpose.
receives/earns additional compensation such as commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory amount of ₱30,000.00, taxable allowances and
other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire
earnings are not exempt form income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or practice
of profession, except income subject to final tax, in addition to compensation income are not
exempted from income tax on their entire income earned during the taxable year. This rule,
notwithstanding, the [statutory minimum wage], [h]oliday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean x x x.
In case of hazardous employment, x x x
The NWPC shall officially submit a Matrix of Wage Order by region x x x
Any reduction or diminution of wages for purposes of exemption from income tax shall constitute
misrepresentation and therefore, shall result to the automatic disallowance of expense, i.e.
compensation and benefits account, on the part of the employer. The offenders may be criminally
prosecuted under existing laws.
(14) Compensation income of employees in the public sector with compensation income of not
more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC, applicable to the place
where he/she is assigned.
The basic salary of MWEs in the public sector shall be equated to the SMW in the non-agricultural
sector applicable to the place where he/she is assigned. The determination of the SMW in the public
sector shall likewise adopt the same procedures and consideration as those of the private sector.
MWE in the public sector shall likewise be covered by the above exemption. Provided, however, that
a public sector employee who receives additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime
pay, night shift differential pay and hazard pay shall not enjoy the privilege of being a MWE and,
therefore, his/her entire earnings are not exempt from income tax and, consequently, from
withholding tax.
notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and hazard
pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean xxx
In case of hazardous employment, x x x
xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read as follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income. -
(A) Requirement of Withholding. - Every employer must withhold from compensation paid an amount
computed in accordance with these Regulations. Provided, that no withholding of tax shall be required
on the SMW, including holiday pay, overtime pay, night shift differential and hazard pay of MWEs in
the private/public sectors as defined in these Regulations. Provided, further, that an employee who
receives additional compensation such as commissions, honoraria, fringe benefits, benefits in

excess of the allowable statutory amount of₱30,000.00, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential
pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax and, consequently, shall be subject to withholding tax.
xxxx
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
₱25,000, and for each qualified dependent child (QDC), ₱12,500.
On the other hand, the pertinent provisions of law, which are supposed to be implemented by the
above-quoted sections of RR10-2008, read as follows:
SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the National
Internal Revenue Code of 1997, is hereby further amended by adding the following definitions after
Subsection (FF) to read as follows:
Section 22. Definitions.- when used in this Title:61
(A) x x x
(FF) x x x
(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment (DOLE).
(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid the
statutory minimum wage, or to an employee in the public sector with compensation income of
not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.
SECTION 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the National
Internal Revenue Code of 1997, is hereby further amended to read as follows:
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. -
(l)x x x
x x x x; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D)of this Section, derived for each taxable year from all sources within the
Philippines by an individual alien who is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with
and at the rates established in the following schedule:

xxxx
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall
compute separately their individual income tax based on their respective total taxable income:
Provided, That if any income cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be divided equally between the spouses
for the purpose of determining their respective taxable income.
Provided, That mm1mum wage earners as defined in Section 22(HH) of this Code shall be
exempt from the payment of income tax on their taxable income: Provided, further, That the
holiday pay, ovr.rtime pay, night shift differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt from income tax.
xxxx
SECTION 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise known as the National
SEC. 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file
an income tax return:
(a) x x x
xxxx
(2) The following individuals shall not be required to file an income tax return:
(a) x x x
(b) An individual with respect to pure compensation income, as defined in Section 32(A)(l), derived
from sources within the Philippines, the income tax on which has been correctly withheld under the
provisions of Section 79 of this Code:
Provided, That an individual deriving compensation concurrently from two or more employers at any
time during the taxable year shall file an income tax return;
(c) x x x; and
(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is
exempt from income tax pursuant to the provisions of this Code and other laws, general or special.
xxxx
SECTION 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the National

SEC. 79. Income Tax Collected at Source. –
(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. (Emphases supplied)
Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed by the
assailed provisions of RR 10-2008. The provisions of the law are clear and precise; they leave no
room for interpretation - they do not provide or require any other qualification as to who are MWEs.
To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says he/she must
be one who is paid the statutory minimum wage if he/she works in the private sector, or not more than
the statutory minimum wage in the non-agricultural sector where he/she is assigned, if he/she is a
government employee. Thus, one is either an MWE or he/she is not. Simply put, MWE is the status
acquired upon passing the litmus test - whether one receives wages not exceeding the prescribed
minimum wage.
The minimum wage referred to in the definition has itself a clear and definite meaning. The law
explicitly refers to the rate fixed by the Regional Tripartite Wage and Productivity Board, which is a
creation of the Labor Code.62 The Labor Code clearly describes wages and Minimum Wage under Title
II of the Labor Code. Specifically, Article 97 defines "wage" as follows:
(f) "Wage" paid to any employee shall mean the remuneration or earnings, however designated,
capable of being expressed in terms of money, whether fixed or ascertained on a time, task, piece, or
commission basis, or other method of calculating the same, which is payable by an employer to an
employee under a written or unwritten contract of employment for work done or to be done, or for
services rendered or to be rendered and includes the fair and reasonable value, as determined by the
Secretary of Labor and Employment, of board, lodging, or other facilities customarily furnished by the
employer to the employee. "Fair and reasonable value" shall not include any profit to the employer, or
to any person affiliated with the employer.
While the Labor Code's definition of "wage" appears to encompass any payments of any designation
that an employer pays his or her employees, the concept of minimum wage is distinct.63 "Minimum
wage" is wage mandated; one that employers may not freely choose on their own to designate in any
which way.
In Article 99, minimum wage rates are to be prescribed by the
Regional Tripartite Wages and Productivity Boards. In Articles 102 to 105, specific instructions are
given in relation to the payment of wages. They must be paid in legal tender at least once every two
weeks, or twice a month, at intervals not exceeding 16 days, directly to the worker, except in case
of force majeure or death of the worker.
These are the wages for which a minimum is prescribed. Thus, the minimum wage exempted by R.A.
9504 is that which is referred to in the Labor Code. It is distinct and different from other payments
including allowances, honoraria, commissions, allowances or benefits that an employer may pay or
provide an employee.
Likewise, the other compensation incomes an MWE receives that are also exempted by R.A. 9504
are all mandated by law and are based on this minimum wage. Additional compensation in the form
of overtime pay is mandated for work beyond the normal hours based on the employee's regular

wage.64 Those working between ten o'clock in the evening and six o'clock in the morning are required
to be paid a night shift differential based on their regular wage.65 Holiday/premium pay is mandated
whether one works on regular holidays or on one's scheduled rest days and special holidays. In all of
these cases, additional compensation is mandated, and computed based on the employee's regular
wage.66
R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess of the
minimum wage as determined by the wage boards, including the corresponding holiday, overtime,
night differential and hazard pays.
In other words, the law exempts from income taxation the most basic compensation an employee
receives - the amount afforded to the lowest paid employees by the mandate of law. In a way, the
legislature grants to these lowest paid employees additional income by no longer demanding from
them a contribution for the operations of government. This is the essence of R.A. 9504 as a social
legislation. The government, by way of the tax exemption, affords increased purchasing power to this
sector of the working class.
This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator Roxas:
This bill seeks to exempt minimum wage earners in the private sector and government workers in
Salary Grades 1 to 3, amending certain provisions of Republic Act 8424, otherwise known as the
National Internal Revenue Code of 1997, as amended.
As per estimates by the National Wages and Productivity Board, there are 7 million workers
earning the minimum wage and even below. While these workers are in the verge of poverty, it
is unfair and unjust that the Government, under the law, is taking away a portion of their already
subsistence-level income.
Despite this narrow margin from poverty, the Government would still be mandated to take a
slice away from that family's meager resources. Even if the Government has recently exempted
minimum wage earners from withholding taxes, they are still liable to pay income taxes at the
end of the year. The law must be amended to correct this injustice. (Emphases supplied)
The increased purchasing power is estimated at about ₱9,500 a year.67 RR 10-2008, however, takes
this away. In declaring that once an MWE receives other forms of taxable income like commissions,
honoraria, and fringe benefits in excess of the non-taxable statutory amount of ₱30,000, RR 10-2008
declared that the MWE immediately becomes ineligible for tax exemption; and otherwise non-taxable
minimum wage, along with the other taxable incomes of the MWE, becomes taxable again.
Respondents acknowledge that R.A.9504 is a social legislation meant for social justice,68 but they insist
that it is too generous, and that consideration must be given to the fiscal position and financial
capability of the government.69 While they acknowledge that the intent of the income tax exemption of
MWEs is to free low-income earners from the burden of taxation, respondents, in the guise of
clarification, proceed to redefine which incomes may or may not be granted exemption. These
respondents cannot do without encroaching on purely legislative prerogatives.
By way of review, this ₱30,000 statutory ceiling on benefits has its beginning in 1994 under R. A. 7833,
which amended then Section 28(b )(8) of the 1977 NIRC. It is substantially carried over as Section
32(B) (Exclusion from Gross Income) of Chapter VI (Computation of Gross Income) of Title II (Tax on
Income) in the 1997 NIRC (R.A. 8424). R.A. 9504 does not amend that provision of R.A. 8424, which
reads:

SEC. 32. Gross Income.-
(A) General Definition.- x x x
(B) Exclusions from Gross Income.- The following items shall not be included in gross income and
shall be exempt from taxation under this title:
(1) x x x
xxxx
(7) Miscellaneous Items. -
(a) x x x
xxxx
(e) 13th Month Pay and Other Benefits.- Gross benefits received by officials and employees of public
and private entities: Provided, however, That the total exclusion under this subparagraph shall not
exceed Thirty thousand pesos (₱30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to
Republic Act No. 668670;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851 71, as amended by
Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as
amended by Memorandum Order No. 28, dated August 13, 1986;and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the
ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and regulations issued by
the Secretary of Finance, upon recommendation of the Commissioner, after considering among
others, the effect on the same of the inflation rate at the end of the taxable year.
(f) x x x
The exemption granted to MWEs by R.A. 9504 reads:
Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be exempt
from the payment of income tax on their taxable income: Provided, further, That the holiday pay,
overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall
likewise be exempt from income tax.
"Taxable income" is defined as follows:
SEC. 31. Taxable Income Defined.- The term taxable income means the pertinent items of gross
income specified in this Code, less the deductions and/or personal and additional exemptions, if any,
authorized for such types of income by this Code or other special laws.

A careful reading of these provisions will show at least two distinct groups of items of compensation.
On one hand are those that are further exempted from tax by R.A. 9504; on the other hand are items
of compensation that R.A. 9504 does not amend and are thus unchanged and in no need to be
disturbed.
First are the different items of compensation subject to tax prior to R.A. 9504. These are included in
the pertinent items of gross income in Section 31. "Gross income" in Section 32 includes, among
many other items, "compensation for services in whatever form paid, including, but not limited to
salaries, wages, commissions, and similar items." R.A. 9504 particularly exempts the minimum wage
and its incidents; it does not provide exemption for the many other forms of compensation.
Second are the other items of income that, prior to R.A. 9504, were excluded from gross income and
were therefore not subject to tax. Among these are other payments that employees may receive from
employers pursuant to their employer-employee relationship, such as bonuses and other benefits.
These are either mandated by law (such as the 13th month pay) or granted upon the employer's
prerogative or are pursuant to collective bargaining agreements (as productivity incentives). These
items were not changed by R.A. 9504.
It becomes evident that the exemption on benefits granted by law in 1994 are now extended to wages
of the least paid workers under R.A. 9504. Benefits not beyond ₱30,000 were exempted; wages not
beyond the SMW are now exempted as well. Conversely, benefits in excess of ₱30,000 are subject
to tax and now, wages in excess of the SMW are still subject to tax.
What the legislature is exempting is the MWE's minimum wage and other forms statutory
compensation like holiday pay, overtime pay, night shift differential pay, and hazard pay. These are
not bonuses or other benefits; these are wages. Respondents seek to frustrate this exemption granted
by the legislature.
In respondents' view, anyone receiving 13th month pay and other benefits in excess of ₱30,000 cannot
be an MWE. They seek to impose their own definition of "MWE" by arguing thus:
It should be noted that the intent of the income tax exemption of MWEs is to free the low-income
earner from the burden of tax. R.A. No. 9504 and R.R. No. 10-2008 define who are the low-income
earners. Someone who earns beyond the incomes and benefits above-enumerated is definitely not a
low-income earner. 72
We do not agree.
As stated before, nothing to this effect can be read from R.A. 9504. The amendment is silent on
whether compensation-related benefits exceeding the ₱30,000 threshold would make an MWE lose
exemption. R.A. 9504 has given definite criteria for what constitutes an MWE, and R.R. 10-2008
cannot change this.
An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to the
requirements provided by law. To do so constitutes lawmaking, which is generally reserved for
Congress. 73 In CIR v. Fortune Tobacco, 74 we applied the plain meaning rule when the Commissioner
of Internal Revenue ventured into unauthorized administrative lawmaking:
[A]n administrative agency issuing regulations may not enlarge, alter or restrict the provisions of the
law it administers, and it cannot engraft additional requirements not contemplated by the
legislature. The Court emphasized that tax administrators are not allowed to expand or contract
the legislative mandate and that the "plain meaning rule" or verba legis in statutory

construction should be applied such that where the words of a statute are clear, plain and free
from ambiguity, it must be given its literal meaning and applied without attempted
interpretation.
As we have previously declared, rule-making power must be confined to details for regulating the
mode or proceedings in order to carry into effect the law as it has been enacted, and it cannot be
extended to amend or expand the statutory requirements or to embrace matters not covered by the
statute. Administrative regulations must always be in harmony with the provisions of the law because
any resulting discrepancy between the two will always be resolved in favor of the basic
law. 75 (Emphases supplied)
We are not persuaded that RR 10-2008 merely clarifies the law. The CIR' s clarification is not
warranted when the language of the law is plain and clear. 76
The deliberations of the Senate reflect its understanding of the outworking of this MWE exemption in
relation to the treatment of benefits, both those for the ₱30,000 threshold and the de minimis benefits:
Senator Defensor Santiago. Thank you. Next question: How about employees who are only receiving
a minimum wage as base pay, but are earning significant amounts of income from sales, commissions
which may be even higher than their base pay? Is their entire income from commissions also tax-
free? Because strictly speaking, they are minimum wage earners. For purposes of ascertaining
entitlement to tax exemption, is the basis only the base pay or should it be the aggregate compensation
that is being received, that is, inclusive of commissions, for example?
Senator Escudero. Mr. President, what is included would be only the base pay and, if any, the hazard
pay, holiday pay, overtime pay and night shift differential received by a minimum wage earner. As far
as commissions are concerned, only to the extent of ₱30,000 would be exempted. Anything in
excess of ₱30,000 would already be taxable if it is being received by way of commissions. Add
to that de minimis benefits being received by an employee, such as rice subsidy or clothing allowance
or transportation allowance would also be exempted; but they are exempted already under the existing
law.
Senator Defensor Santiago. I would like to thank the sponsor. That makes it clear. 77 (Emphases
supplied)
Given the foregoing, the treatment of bonuses and other benefits that an employee receives from the
employer in excess of the ₱30,000 ceiling cannot but be the same as the prevailing treatment prior to
R.A. 9504 - anything in excess of ₱30,000 is taxable; no more, no less.
The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the exemption
explicitly granted by R.A. 9504.
The government's argument that the

RR avoids a tax distortion has no
merit.
The government further contends that the "clarification" avoids a situation akin to wage distortion and
discourages tax evasion. They claim that MWE must be treated equally as other individual
compensation income earners "when their compensation does not warrant exemption under R.A. No.
9504. Otherwise, there would be gross inequity between and among individual income
taxpayers."78 For illustrative purposes, respondents present three scenarios:

37.1. In the first scenario, a minimum wage earner in the National Ca[ital Region receiving ₱382.00
per day has an annual salary of ₱119,566.00, while a non-minimum wage earner with a basic pay of
₱385.00 per day has an annual salary of ₱120,505.00. The difference in their annual salaries amounts
to only ₱939.00, but the non-minimum wage earner is liable for a tax of ₱8,601.00, while the minimum
wage earner is tax-exempt?
37.2. In the second scenario, the minimum wage earner's "other benefits" exceed the threshold of
₱30,000.00 by ₱20,000.00. The non-minimum wage earner is liable for ₱8,601.00, while the minimum
wage earner is still tax-exempt.
37.3. In the third scenario, both workers earn "other benefits" at ₱50,000.00 more than the ₱30,000
threshold. The non-minimum wage earner is liable for the tax of ₱l8,601.00, while the minimum wage
earner is still tax-exempt.79 (Underscoring in the original)
Again, respondents are venturing into policy-making, a function that properly belongs to Congress.
In British American Tobacco v. Camacho, we explained:80
We do not sit in judgment as a supra-legislature to decide, after a law is passed by Congress, which
state interest is superior over another, or which method is better suited to achieve one, some or all of
the state's interests, or what these interests should be in the first place. This policy-determining power,
by constitutional fiat, belongs to Congress as it is its function to determine and balance these interests
or choose which ones to pursue. Time and again we have ruled that the judiciary does not settle
policy issues. The Court can only declare what the law is and not what the law should be. Under our
system of government, policy issues are within the domain of the political branches of government and
of the people themselves as the repository of all state power. Thus, the legislative classification under
the classification freeze provision, after having been shown to be rationally related to achieve certain
legitimate state interests and done in good faith, must, perforce, end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited extent, one of its avowed
objectives (i.e. promoting fair competition among the players in the industry) would suggest that, by
Congress's own standards, the current excise tax system on sin products is imperfect. But, certainly,
we cannot declare a statute unconstitutional merely because it can be improved or that it does not
tend to achieve all of its stated objectives. This is especially true for tax legislation which
simultaneously addresses and impacts multiple state interests. Absent a clear showing of breach of
constitutional limitations, Congress, owing to its vast experience and expertise in the field of taxation,
must be given sufficient leeway to formulate and experiment with different tax systems to address the
complex issues and problems related to tax administration. Whatever imperfections that may occur,
the same should be addressed to the democratic process to refine and evolve a taxation
system which ideally will achieve most, if not all, of the state's objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of Congress and
the method by which the latter sought to achieve the same. But its remedy is with Congress
and not this Court. (Emphases supplied and citations deleted)
Respondents cannot interfere with the wisdom of R.A. 9504. They must respect and implement it as
enacted.
Besides, the supposed undesirable "income distortion" has been addressed in the Senate
deliberations. The following exchange between Senators Santiago and Escudero reveals the view that
the distortion impacts only a few - taxpayers who are single and have no dependents:

Senator Santiago.... It seems to me awkward that a person is earning just Pl above the minimum wage
is already taxable to the full extent simply because he is earning ₱l more each day, or o more than
P30 a month, or ₱350 per annum. Thus, a single individual earning ₱362 daily in Metro Manila pays
no tax but the same individual if he earns ₱363 a day will be subject to tax, under the proposed
amended provisions, in the amount of ₱4,875 - I no longer took into account the deductions of SSS,
e cetera- although that worker is just ₱360 higher than the minimum wage.
xxxx
I repeat, I am raising respectfully the point that a person who is earning just Pl above the minimum
wage is already taxable to the full extent just for a mere Pl. May I please have the Sponsor's comment.
Senator Escudero...I fully subscribe and accept the analysis and computation of the distinguished
Senator, Mr. President, because this was the very concern of this representation when we were
discussing the bill. It will create wage distortions up to the extent wherein a person is paying or rather
receiving a salary which is only higher by ₱6,000 approximately from that of a minimum wage earner.
So anywhere between P1 to approximately ₱6,000 higher, there will be a wage distortion, although
distortions disappears as the salary goes up.
However, Mr. President, as computed by the distinguished Senator, the distortion is only made
apparent if the taxpayer is single or is not married and has no dependents. Because at two
dependents, the distortion would already disappear; at three dependents, it would not make a
difference anymore because the exemption would already cover approximately the wage
distortion that would be created as far as individual or single taxpayers are
concerned.81 (Emphases in the original)
Indeed, there is a distortion, one that RR 10-2008 actually engenders. While respondents insist that
MWEs who are earning purely compensation income will lose their MWE exemption the moment they
receive benefits in excess of ₱30,000, RR 10-2008 does not withdraw the MWE exemption from those
who are earning other income outside of their employer-employee relationship. Consider the following
provisions of RR 10-2008:
Section 2.78.l (B):
(B) Exemptions from Withholding Tax on Compensation. -
The following income payments are exempted from the requirements of withholding tax on
compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board
(RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where
he/she is assigned.
xxxx
receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in
excess of the allowable statutory amount of ₱30,000.00, taxable allowances and other taxable income

other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income
tax, and consequently, from withholding tax.
xxxx
(14) Compensation income of employees in the public sector with compensation income of not
more than the SMW in the nonagricultural sector, as fixed by RTWPB/NWPC, applicable to the place
where he/she is assigned.
xxxx
MWE in the public sector shall likewise be covered by the above exemption. Provided, however, that
a public sector employee who receives additional compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable statutory amount of ₱30,000.00, taxable allowances
and other taxable income other than the SMW, holiday pay, overtime pay, night shift differential pay
and hazard pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings
are not exempt from income tax and, consequently, from withholding tax.
These provisions of RR 10-2008 reveal a bias against those who are purely compensation earners. In
their consolidated comment, respondents reason:
Verily, the interpretation as to who is a minimum wage earner as petitioners advance will open
the opportunity for tax evasion by the mere expedient of pegging the salary or wage of a worker at
the minimum and reflecting a worker's other incomes as some other benefits. This situation will not
only encourage tax evasion, it will likewise discourage able employers from paying salaries or
wages higher than the statutory minimum. This should never be countenanced. 82
Again, respondents are delving into policy-making they presume bad faith on the part of the employers,
and then shift the burden of this presumption and lay it on the backs of the lowest paid workers. This
presumption of bad faith does not even reflect pragmatic reality. It must be remembered that a worker's
holiday, overtime and night differential pays are all based on the worker's regular wage. Thus, there
will always be pressure from the workers to increase, not decrease, their basic pay.
What is not acceptable is the blatant inequity between the treatment that RR 10-2008 gives to those
who earn purely compensation income and that given to those who have other sources of income.
Respondents want to tax the MWEs who serve their employer well and thus receive higher bonuses
or performance incentives; but exempts the MWEs who serve, in addition to their employer, their other
business or professional interests.

We cannot sustain respondent’s position.
In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable income
received in excess of the minimum wage, but the MWEs will not lose their exemption as such. Workers
who receive the statutory minimum wage their basic pay remain MWEs. The receipt of any other
income during the year does not disqualify them as MWEs. They remain MWEs, entitled to exemption
as such, but the taxable income they receive other than as MWEs may be subjected to appropriate
taxes.
R.A. 9504 must be liberally construed.
We are mindful of the strict construction rule when it comes to the interpretation of tax exemption
laws. 83 The canon, however, is tempered by several exceptions, one of which is when the taxpayer
falls within the purview of the exemption by clear legislative intent. In this situation, the rule of liberal
interpretation applies in favor of the grantee and against the government. 84
In this case, there is a clear legislative intent to exempt the minimum wage received by an MWE who
earns additional income on top of the minimum wage. As previously discussed, this intent can be seen
from both the law and the deliberations.
Accordingly, we see no reason why we should not liberally interpret R.A. 9504 in favor of the taxpayers.
R.A. 9504 is a grant of tax relief long overdue.
We do not lose sight of the fact that R.A. 9504 is a tax relief that is long overdue.
Table 1 below shows the tax burden of an MWE over the years. We use as example one who is a
married individual without dependents and is working in the National Capital Region (NCR). For
illustration purposes, R.A. 9504 is applied as if the worker being paid the statutory minimum wage is
not tax exempt:
Table 1 -Tax Burden of MWE over the years
Law Effective NCR Minimum Daily Wage85 Taxable Tax Due Tax
Income86 Burden87
(Annual)
RA 716788 1992 WO 3 (1993 Dec) ₱135.00 ₱24,255 ₱1,343.05 3.2%
WO 5 (1997 May) ₱185.00 ₱39,905 ₱3,064.55 5.3%
RA 749689
RA 842490 1998 WO 6 (1998 Feb) ₱198.00 ₱29,974 ₱2,497.40 40.%
WO 13 (2007 ₱362.00 ₱81,306 ₱10,761.20 9.5%
(1997
Aug)
NIRC)
WO 14 (2008 ₱382.00 ₱87,566 ₱12,013.20 10.0%
June)
RA 950491 2008 WO 14 (2008 ₱382.00 ₱69,566 ₱8,434.90 7.1%
Aug)

WO 20 (2016 ₱491.00 ₱103,683 ₱15,236.60 9.9%
June)
As shown on Table 1, we note that in 1992, the tax burden upon an MWE was just about 3.2%, when
Congress passed R.A. 7167, which increased the personal exemptions for a married individual without
dependents from ₱12,000 to ₱18,000; and R.A. 7496, which revised the table of graduated tax rates
(tax table).
Over the years, as the minimum wage increased, the tax burden of the MWE likewise increased. In
1997, the MWE's tax burden was about 5.3%. When R.A. 8424 became effective in 1998, some relief
in the MWE's tax burden was seen as it was reduced to 4.0%. This was mostly due to the increase in
personal exemptions, which were increased from ₱18,000 to ₱32,000 for a married individual without
dependents. It may be noted that while the tax table was revised, a closer scrutiny of Table 3 below
would show that the rates actually increased for those who were earning less.
As the minimum wage continued to increase, the MWE's tax burden likewise did - by August 2007, it
was 9.5%. This means that in 2007, of the ₱362 minimum wage, the MWE's take-home pay was only
₱327.62, after a tax of ₱34.38.
This scenario does not augur well for the wage earners. Over the years, even with the occasional
increase in the basic personal and additional exemptions, the contribution the government exacts from
its MWEs continues to increase as a portion of their income. This is a serious social issue, which R.A.
9504 partly addresses. With the ₱20 increase in minimum wage from ₱362 to ₱382 in 2008, the tax
due thereon would be about ₱30. As seen in their deliberations, the lawmakers wanted all of this
amount to become additional take-home pay for the MWEs in 2008.92
The foregoing demonstrates the effect of inflation. When tax tables do not get adjusted, inflation has
a profound impact in terms of tax burden. "Bracket creep," "the process by which inflation pushes
individuals into higher tax brackets,"93 occurs, and its deleterious results may be explained as follows:
[A]n individual whose dollar income increases from one year to the next might be obliged to pay tax at
a higher marginal rate (say 25% instead of 15%) on the increase, this being a natural consequence of
rate progression. If, however, due to inflation the benefit of the increase is wiped out by a
corresponding increase in the cost of living, the effect would be a heavier tax burden with no real
improvement in the taxpayer's economic position. Wage and salary-earners are especially
vulnerable. Even if a worker gets a raise in wages this year, the raise will be illusory if the prices
of consumer goods rise in the same proportion. If her marginal tax rate also increased, the
result would actually be a decrease in the taxpayer's real disposable income.94
Table 2 shows how MWEs get pushed to higher tax brackets with higher tax rates due only to the
periodic increases in the minimum wage. This unfortunate development illustrates how "bracket creep"
comes about and how inflation alone increases their tax burden:
Table 2
Highest
Applicable
NCR Minimum Daily Tax Due Tax
Law Effective Tax Rate
Wage95 (Annual) Burden96
(Bracket
Creep)

WO 3 (1993 11%
RA 716797 1992 ₱135.00 ₱1,343.05 3.2%
Dec)
WO 5 (1997 11%
RA 749698 ₱185.00 ₱3,064.55 5.3%
May)
RA 842499 WO 6 (1998 10%
1998 ₱198.00 ₱2,497.40 4.0%
Feb)
(1997
WO 13 (2007 20%
NIRC) ₱362.00 ₱10,761.20 9.5%
Aug)
WO 14 (2008 20%
₱382.00 ₱12,013.20 10.0%
June)
RA 9504100 2008 WO 14 (2008 15%
₱382.00 ₱8,434.90 7.1%
Aug)
WO 20 (2016 20%
₱491.00 ₱15,236.60 9.9%
June)
The overall effect is the diminution, if not elimination, of the progressivity of the rate structure under
the present Tax Code. We emphasize that the graduated tax rate schedule for individual taxpayers,
which takes into account the ability to pay, is intended to breathe life into the constitutional requirement
of equity. 101
R.A. 9504 provides relief by declaring that an MWE, one who is paid the statutory minimum wage
(SMW), is exempt from tax on that income, as well as on the associated statutory payments for
hazardous, holiday, overtime and night work.
R.R. 10-2008, however, unjustly removes this tax relief. While R.A. 9504 grants MWEs zero tax rights
from the beginning or for the whole year 2008, RR 10-2008 declares that certain workers - even if they
are being paid the SMW, "shall not enjoy the privilege."
Following RR10-2008's "disqualification" injunction, the MWE will continue to be pushed towards the
higher tax brackets and higher rates. As Table 2 shows, as of June 2016, an MWE would already
belong to the 4th highest tax bracket of 20% (see also Table 3), resulting in a tax burden of 9.9%. This
means that for every ₱100 the MWE earns, the government takes back ₱9.90.
Further, a comparative view of the tax tables over the years (Table 3) shows that while the highest tax
rate was reduced from as high as 70% under the 1977 NTRC, to 35% in 1992, and 32% presently, the
lower income group actually gets charged higher taxes. Before R.A. 8424, one who had taxable
income of less than ₱2,500 did not have to pay any income tax; under R.A. 8424, he paid 5% thereof.
The MWEs now pay 20% or even more, depending on the other benefits they receive including
overtime, holiday, night shift, and hazard pays.
Table 3 – Tax Tables: Comparison of Tax Brackets and Rates
Taxable Income Bracket Rates under R. A. Rates under R. A. Rates under R.

7496 (1992) 8424 (1998) A. 9504 (2008)
Not Over ₱2,500 0% 5% 5%

Over ₱2,500 but not over
1%
₱5,000
3%
₱10,000
7%
₱20,000
10% 10%
11%
₱30,000
₱40,000
15% 15% 15%
₱60,000
₱70,000
19%
₱100,000
20% 20%
₱140,000
24%
25% 25%
₱250,000
29% 30% 30%
₱500,000
Over ₱500,00 35% 34% 32%
The relief afforded by R.A.9504 is thus long overdue. The law must be now given full effect for the
entire taxable year 2008, and without the qualification introduced by RR 10-2008. The latter cannot
disqualify MWEs from exemption from taxes on SMW and on their on his SMW, holiday, overtime,
night shift differential, and hazard pay.
CONCLUSION
The foregoing considered, we find that respondents committed grave abuse of discretion in
promulgating Sections 1 and 3 of RR 10-2008, insofar as they provide for (a) the prorated application
of the personal and additional exemptions for taxable year 2008 and for the period of applicability of
the MWE exemption for taxable year 2008 to begin only on 6 July 2008; and (b) the disqualification of
MWEs who earn purely compensation income, whether in the private or public sector, from the
privilege of availing themselves of the MWE exemption in case they receive compensation-related
benefits exceeding the statutory ceiling of ₱30,000.
As an aside, we stress that the progressivity of the rate structure under the present Tax Code has lost
its strength. In the main, it has not been updated since its revision in 1997, or for a period of almost
20 years. The phenomenon of "bracket creep" could be prevented through the inclusion of an
indexation provision, in which the graduated tax rates are adjusted periodically without need of

amending the tax law. The 1997 Tax Code, however, has no such indexation provision. It should be
emphasized that indexation to inflation is now a standard feature of a modern tax code. 102
We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and Commissioner
of Internal Revenue the positive duty to periodically review the other benefits, in consideration of the
effect of inflation thereon, as provided under Section 32(B)(7)(e) entitled" 13th Month Pay and Other
Benefits":
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the
ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and regulations issued by
the Secretary of Finance, upon recommendation of the Commissioner, after considering among
others, the effect on the same of the inflation rate at the end of the taxable year.
This same positive duty, which is also imposed upon the same officials regarding the de
minimis benefits provided under Section 33(C)(4), is a duty that has been exercised several times.
The provision reads:
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(l) x x x
xxxx
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
WHEREFORE, the Court resolves to
(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and
(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 10-2008:
(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation income from the
privilege of the MWE exemption in case they receive bonuses and other compensation-related benefits
exceeding the statutory ceiling of ₱30,000;
(ii) Section 3 insofar as it provides for the prorated application of the personal and additional
exemptions under R.A. 9504 for taxable year 2008, and for the period of applicability of the MWE
exemption to begin only on 6 July 2008.
(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue to grant a
refund, or allow the application of the refund by way of withholding tax adjustments, or allow a claim
for tax credits by (i) all individual taxpayers whose incomes for taxable year 2008 were the subject of
the prorated increase in personal and additional tax exemption; and (ii) all MWEs whose minimum
wage incomes were subjected to tax for their receipt of the 13th month pay and other bonuses and
benefits exceeding the threshold amount under Section 32(B)(7)(e) of the 1997 Tax Code.
SO ORDERED.

G.R. No. 165617 February 25, 2011
SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S. ALVAREZ, Petitioners,

vs.
BPI FAMILY SAVINGS BANK, INC., Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 165837
BPI FAMILY SAVINGS BANK, INC., Petitioner,

vs.
SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S. ALVAREZ, Respondents.
VILLARAMA, JR., J.:
This case involves the question of the correct redemption price payable to a mortgagee bank as
purchaser of the property in a foreclosure sale.
On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director, Moises C. Alvarez,
and Paulita S. Alvarez, obtained a loan in the amount of ₱9,853,000.00 from BPI Family Savings Bank
with a 714-square meter lot covered by Transfer Certificate of Title No. T-79193 in the name of Moises
C. Alvarez and Paulita S. Alvarez, as collateral.1
For non-payment of the loan, the mortgage was extrajudicially foreclosed and the property was sold
to the bank as the highest bidder in the public auction conducted by the Office of the Provincial Sheriff
of Lucena City. On August 7, 1996, a Certificate of Sale2 was issued in favor of the bank and the same
was registered on October 1, 1996.
Before the expiration of the one-year redemption period, the mortgagors notified the bank of their
intention to redeem the property. Accordingly, the following Statement of Account3 was prepared by
the bank indicating the total amount due under the mortgage loan agreement:
xxxx
Balance of Principal P 9,551,827.64
Add: Interest Due 1,417,761.24
Late Payment Charges 155,546.25
MRI 0.00
Fire Insurance 0.00
Foreclosure Expenses 155,817.23

Sub-total P 11,280,952.36
Less: Unapplied Payment 908,241.01
Total Amount Due As Of 08/07/96 (Auction Date) 10,372,711.35
Add: Attorney’s Fees (15%) 1,555,906.70
Liquidated Damages (15%) 1,555,906.70
Interest on P 10,372,711.35 from 08/07/96 to 1,207,772.58

04/07/97 (243 days) at 17.25% p.a.
x x x x
Asset Acquired Expenses:
Documentary Stamps 155,595.00
Capital Gains Tax 518,635.57
Foreclosure Fee 207,534.23
Registration and Filing Fee 23,718.00
Add’l. Registration & Filing Fee 660.00 906,142.79
Interest on P 906,142.79 from 08/07/96 to 105,509.00

04/07/97 (243 days)
at 17.25% p.a.
Cancellation Fee 300.00
Total Amount Due As Of 04/07/97 (Subject to Audit) P 15,704,249.12
xxxx
The mortgagors requested for the elimination of liquidated damages and reduction of attorney’s fees
and interest (1% per month) but the bank refused. On May 21, 1997, the mortgagors redeemed the

property by paying the sum of ₱15,704,249.12. A Certificate of Redemption4 was issued by the bank
on May 27, 1997.
On June 11, 1997, the mortgagors filed a complaint against the bank to recover the allegedly unlawful
and excessive charges totaling ₱5,331,237.77, with prayer for damages and attorney’s fees, docketed
as Civil Case No. 97-72 of the Regional Trial Court of Lucena City, Branch 57.
In its Answer with Special and Affirmative Defenses and Counterclaim, the bank asserted that the
redemption price reflecting the stipulated interest, charges and/or expenses, is valid, legal and in
accordance with documents duly signed by the mortgagors. The bank further contended that the
claims are deemed waived and the mortgagors are already estopped from questioning the terms and
conditions of their contract.
On September 30, 1997, the bank filed a motion to set the case for hearing on the special and
affirmative defenses by way of motion to dismiss. The trial court denied the motion on January 8, 1998
and also denied the bank’s motion for reconsideration. The bank elevated the matter to the Court of
Appeals (CA-G.R. SP No. 47588) which dismissed the petition for certiorari on February 26, 1999.
On February 14, 2002, the trial court rendered its decision5 dismissing the complaint and the bank’s
counterclaims. The trial court held that plaintiffs-mortgagors are bound by the terms of the mortgage
loan documents which clearly provided for the payment of the following interest, charges and
expenses: 18% p.a. on the loan, 3% post-default penalty, 15% liquidated damages, 15% attorney’s
fees and collection and legal costs. Plaintiffs-mortgagors’ claim that they paid the redemption price
demanded by the defendant bank under extreme pressure was rejected by the trial court since there
was active negotiation for the final redemption price between the bank’s representatives and plaintiffs-
mortgagors who at the time had legal advice from their counsel, together with Orient Development
Banking Corporation which committed to finance the redemption.
According to the trial court, plaintiffs-mortgagors are estopped from questioning the correctness of the
redemption price as they had freely and voluntarily signed the letter-agreement prepared by the
defendant bank, and along with Orient Bank expressed their conformity to the terms and conditions
therein, thus:
May 14, 1997
ORIENT DEVELOPMENT BANKING CORPORATION

7th Floor Ever Gotesco Corporate Center
C.M. Recto Avenue corner Matapang Street
Manila
Attention: MS. AIDA C. DELA ROSA

Senior Vice-President
Gentlemen:
This refers to your undertaking to settle the account of SUPREME TRANS LINER, INC. and spouses
MOISES C. ALVAREZ and PAULITA S. ALVAREZ, covering the real estate property located in the
Poblacion, City of Lucena under TCT No. T-79193 which was foreclosed by BPI FAMILY SAVINGS
BANK, INC.

With regard to the proposed refinancing of the account, we interpose no objection to the annotation of
your mortgage lien thereon subject to the following conditions:
1. That all expenses for the registration of the annotation of mortgage and other incidental
registration and cancellation expenses shall be borne by the borrower.
2. That you will recognize our mortgage liens as first and superior until the loan with us is fully
paid.
3. That you will annotate your mortgage lien and pay us the full amount to close the loan within
five (5) working days from the receipt of the titles. If within this period, you have not registered
the same and paid us in full, you will immediately and unconditionally return the titles to us
without need of demand, free from liens/encumbrances other than our lien.
4. That in case of loss of titles, you will undertake and shoulder the cost of re-issuance of a
new owner’s titles.
5. That we will issue the Certificate of Redemption after full payment of P15,704,249.12.
representing the outstanding balance of the loan as of May 15, 1997 including interest and
other charges thereof within a period of five (5) working days after clearance of the check
payment.
6. That we will release the title and the Certificate of Redemption and other pertinent papers
only to your authorized representative with complete authorization and identification.
7. That all expenses related to the cancellation of your annotated mortgage lien should the
Bank be not fully paid on the period above indicated shall be charged to you.
If you find the foregoing conditions acceptable, please indicate your conformity on the space provided
below and return to us the duplicate copy.
Very truly yours,
BPI FAMILY BANK
BY:
(SGD.) LOLITA C. CARRIDO

Manager
CONFORME:
ORIENT DEVELOPMENT BANKING CORPORATION

(SGD.) AIDA C. DELA ROSA
Senior Vice President
CONFORME:
SUPREME TRANS LINER, INC.

(SGD.) MOISES C. ALVAREZ/PAULITA S. ALVAREZ
Mortgagors6
(Underscoring in the original; emphasis supplied.)
As to plaintiffs-mortgagors’ contention that the amounts representing attorney’s fees and liquidated
damages were already included in the ₱10,372,711.35 bid price, the trial court said this was belied by
their own evidence, the Statement of Account showing the breakdown of the redemption price as
computed by the defendant bank.
The mortgagors appealed to the CA (CA-G.R. CV No. 74761) which, by Decision7 dated April 6, 2004
reversed the trial court and decreed as follows:
WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE.
A new one is hereby entered as follows:
1. Plaintiffs-appellants’ complaint for damages against defendant-appellee is hereby

REINSTATED;
2. Defendant-appellee is hereby ORDERED to return to plaintiffs-appellees (sic) the invalidly

collected amount of P3,111,813.40 plus six (6) percent legal interest from May 21, 1997 until
fully returned;
3. Defendant-appellee is hereby ORDERED to pay plaintiffs-appellees (sic) the amount of

P100,000.00 as moral damages, P100,000.00 as exemplary damages and P100,000.00 as
attorney’s fees;
4. Costs against defendant-appellee.
SO ORDERED.8
The CA ruled that attorney’s fees and liquidated damages were already included in the bid price of
₱10,372,711.35 as per the recitals in the Certificate of Sale that said amount was paid to the
foreclosing mortgagee to satisfy not only the principal loan but also "interest and penalty charges, cost
of publication and expenses of the foreclosure proceedings." These "penalty charges" consist of 15%
attorney’s fees and 15% liquidated damages which the bank imposes as penalty in cases of violation
of the terms of the mortgage deed. The total redemption price thus should only be ₱12,592,435.72
and the bank should return the amount of ₱3,111,813.40 representing attorney’s fees and liquidated
damages. The appellate court further stated that the mortgagors cannot be deemed estopped to
question the propriety of the charges because from the very start they had repeatedly questioned the
imposition of attorney’s fees and liquidated damages and were merely constrained to pay the
demanded redemption price for fear that the redemption period will expire without them redeeming
their property.9
By Resolution10 dated October 12, 2004, the CA denied the parties’ respective motions for
reconsideration.
Hence, these petitions separately filed by the mortgagors and the bank.
In G.R. No. 165617, the petitioners-mortgagors raise the single issue of whether the foreclosing
mortgagee should pay capital gains tax upon execution of the certificate of sale, and if paid by the

mortgagee, whether the same should be shouldered by the redemptioner. They specifically prayed for
the return of all asset-acquired expenses consisting of documentary stamps tax, capital gains tax,
foreclosure fee, registration and filing fee, and additional registration and filing fee totaling
₱906,142.79, with 6% interest thereon from May 21, 1997.11
On the other hand, the petitioner bank in G.R. No. 165837 assails the CA in holding that –
1. … the Certificate of Sale, the bid price of P10,372,711.35 includes penalty charges and as
such for purposes of computing the redemption price petitioner can no longer impose upon
the private respondents the penalty charges in the form of 15% attorney’s fees and the 15%
liquidated damages in the aggregate amount of P3,111,813.40, although the evidence
presented by the parties show otherwise.
2. … private respondents cannot be considered to be under estoppel to question the propriety

of the aforestated penalty charges despite the fact that, as found by the Honorable Trial Court,
"there was very active negotiation between the parties in the computation of the redemption
price" culminating into the signing freely and voluntarily by the petitioner, the private
respondents and Orient Bank, which financed the redemption of the foreclosed property, of
Exhibit "3", wherein they mutually agreed that the redemption price is in the sum of
P15,704,249.12.
3. … petitioner [to] pay private respondents damages in the aggregate amount of P300,000.00
on the ground that the former acted in bad faith in the imposition upon them of the aforestated
penalty charges, when in truth it is entitled thereto as the law and the contract expressly
provide and that private respondents agreed to pay the same.12
On the correct computation of the redemption price, Section 78 of Republic Act No. 337, otherwise
known as the General Banking Act, governs in cases where the mortgagee is a bank.13 Said provision
reads:
SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real
estate which is security for any loan granted before the passage of this Act or under the provisions of
this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or
extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution,
within the purview of this Act shall have the right, within one year after the sale of the real estate as a
result of the foreclosure of the respective mortgage, to redeem the property by paying the amount
fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case
may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and
other expenses incurred by the bank or institution concerned by reason of the execution and sale and
as a result of the custody of said property less the income received from the property. x x x x (Emphasis
supplied.)
Under the Mortgage Loan Agreement,14 petitioners-mortgagors undertook to pay the attorney’s fees
and the costs of registration and foreclosure. The following contract terms would show that the said
items are separate and distinct from the bid price which represents only the outstanding loan balance
with stipulated interest thereon.
23. Application of Proceeds of Foreclosure Sale. The proceeds of sale of the mortgaged property/ies
shall be applied as follows:
a) To the payment of the expenses and cost of foreclosure and sale, including the attorney’s
fees as herein provided;

b) To the satisfaction of all interest and charges accruing upon the obligations herein and
hereby secured.
c) To the satisfaction of the principal amount of the obligations herein and hereby secured.
d) To the satisfaction of all other obligations then owed by the Borrower/Mortgagor to the Bank
or any of its subsidiaries/affiliates such as, but not limited to BPI Credit Corporation; or to Bank
of the Philippine Islands or any of its subsidiaries/affiliates such as, but not limited to BPI
Leasing Corporation, BPI Express Card Corporation, BPI Securities Corporation and BPI
Agricultural Development Bank; and
e) The balance, if any, to be due to the Borrower/Mortgagor.
xxxx
31. Attorney’s Fees: In case the Bank should engage the services of counsel to enforce its rights under
this Agreement, the Borrower/Mortgagor shall pay an amount equivalent to fifteen (15%) percent of
the total amount claimed by the Bank, which in no case shall be less than P2,000.00, Philippine
currency, plus costs, collection expenses and disbursements allowed by law, all of which shall be
secured by this mortgage.15
Additionally, the Disclosure Statement on Loan/Credit Transaction16 also duly signed by the
petitioners-mortgagors provides:
10. ADDITIONAL CHARGES IN CASE CERTAIN STIPULATIONS ARE NOT MET BY THE
BORROWER
a. Post Default Penalty 3.00% per month
b. Attorney’s Services 15% of sum due but not less than P2,000.00
c. Liquidated Damages 15% of sum due but not less than P10,000.00
d. Collection & Legal Cost As provided by the Rules of Court
e. Others (Specify)
As correctly found by the trial court, that attorney’s fees and liquidated damages were not yet included
in the bid price of ₱10,372,711.35 is clearly shown by the Statement of Account as of April 4, 1997
prepared by the petitioner bank and given to petitioners-mortgagors. On the other hand, par. 23 of the
Mortgage Loan Agreement indicated that asset acquired expenses were to be added to the redemption
price as part of "costs and other expenses incurred" by the mortgagee bank in connection with the
foreclosure sale.
Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors’ argument that
there is no legal basis for the inclusion of this charge in the redemption price. Under Revenue
Regulations (RR) No. 13-85 (December 12, 1985), every sale or exchange or other disposition of real
property classified as capital asset under Section 34(a)17 of the Tax Code shall be subject to the final
capital gains tax. The term sale includes pacto de retro and other forms of conditional sale. Section
2.2 of Revenue Memorandum Order (RMO) No. 29-86 (as amended by RMO No. 16-88 and as further
amended by RMO Nos. 27-89 and 6-92) states that these conditional sales "necessarily include

mortgage foreclosure sales (judicial and extrajudicial foreclosure sales)." Further, for real property
foreclosed by a bank on or after September 3, 1986, the capital gains tax and documentary stamp tax
must be paid before title to the property can be consolidated in favor of the bank.18
Under Section 63 of Presidential Decree No. 1529 otherwise known as the Property Registration
Decree, if no right of redemption exists, the certificate of title of the mortgagor shall be cancelled, and
a new certificate issued in the name of the purchaser. But where the right of redemption exists, the
certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order
confirming the sale shall be registered by brief memorandum thereof made by the Register of Deeds
upon the certificate of title. In the event the property is redeemed, the certificate or deed of redemption
shall be filed with the Register of Deeds, and a brief memorandum thereof shall be made by the
Register of Deeds on the certificate of title.
It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property
until after the expiration of the one-year redemption period as provided in Act No. 3135 and title thereto
is consolidated in the name of the mortgagee in case of non-redemption. In the interim, the mortgagor
is given the option whether or not to redeem the real property. The issuance of the Certificate of Sale
does not by itself transfer ownership.19
RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the payment of
Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital assets
initiated by banks, finance and insurance companies.
SEC. 3. CAPITAL GAINS TAX. –
(1) In case the mortgagor exercises his right of redemption within one year from the issuance
of the certificate of sale, no capital gains tax shall be imposed because no capital gains has
been derived by the mortgagor and no sale or transfer of real property was realized. x x x
(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale imposed under
Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid price
of the highest bidder but only upon the expiration of the one-year period of redemption
provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid
within thirty (30) days from the expiration of the said one-year redemption period.
SEC. 4. DOCUMENTARY STAMP TAX. –
(1) In case the mortgagor exercises his right of redemption, the transaction shall only be
subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of
1997 because no land or realty was sold or transferred for a consideration.
(2) In case of non-redemption, the corresponding documentary stamp tax shall be levied,
collected and paid by the person making, signing, issuing, accepting, or transferring the real
property wherever the document is made, signed, issued, accepted or transferred where the
property is situated in the Philippines. x x x (Emphasis supplied.)
Although the subject foreclosure sale and redemption took place before the effectivity of RR No. 4-99,
its provisions may be given retroactive effect in this case.
Section 246 of the NIRC of 1997 states:

SEC. 246. Non-Retroactivity of Rulings. – Any revocation, modification, or reversal of any of the rules
and regulations promulgated in accordance with the preceding Sections or any of the rulings or
circulars promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayers, except in the following cases:
(a) where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue;
(b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or
(c) where the taxpayer acted in bad faith.
In this case, the retroactive application of RR No. 4-99 is more consistent with the policy of aiding the
exercise of the right of redemption. As the Court of Tax Appeals concluded in one case, RR No. 4-99
"has curbed the inequity of imposing a capital gains tax even before the expiration of the redemption
period [since] there is yet no transfer of title and no profit or gain is realized by the mortgagor at the
time of foreclosure sale but only upon expiration of the redemption period."20 In his commentaries, De
Leon expressed the view that while revenue regulations as a general rule have no retroactive effect,
if the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation
shall have retroactive operation as to affect past transactions, because a wrong construction of the
law cannot give rise to a vested right that can be invoked by a taxpayer.21
Considering that herein petitioners-mortgagors exercised their right of redemption before the
expiration of the statutory one-year period, petitioner bank is not liable to pay the capital gains tax due
on the extrajudicial foreclosure sale. There was no actual transfer of title from the owners-mortgagors
to the foreclosing bank. Hence, the inclusion of the said charge in the total redemption price was
unwarranted and the corresponding amount paid by the petitioners-mortgagors should be returned to
them.
WHEREFORE, premises considered, both petitions are PARTLY GRANTED.
In G.R. No. 165617, BPI Family Savings Bank, Inc. is hereby ordered to RETURN the amounts
representing capital gains and documentary stamp taxes as reflected in the Statement of Account To
Redeem as of April 7, 1997, to petitioners Supreme Transliner, Inc., Moises C. Alvarez and Paulita
Alvarez, and to retain only the sum provided in RR No. 4-99 as documentary stamps tax due on the
foreclosure sale.1awphi1
In G.R. No. 165837, petitioner BPI Family Savings Bank, Inc. is hereby declared entitled to the
attorney’s fees and liquidated damages included in the total redemption price paid by Supreme
Transliner, Inc., Moises C. Alvarez and Paulita Alvarez. The sums awarded as moral and exemplary
damages, attorney’s fees and costs in favor of Supreme Transliner, Inc., Moises C. Alvarez and Paulita
Alvarez are DELETED.
The Decision dated April 6, 2004 of the Court of Appeals in CA-G.R. CV No. 74761 is
accordingly MODIFIED.
SO ORDERED.

INCOME TAXATION: Deductions from Gross Income
G.R. No. 164050 July 20, 2011
MERCURY DRUG CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
PEREZ, J.:
This petition for review on certiorari calls for an interpretation of the term "cost" as used in Section 4(a)
of Republic Act No. 7432, otherwise known as "An Act to Maximize the Contribution of Senior Citizens
to Nation Building, Grant Benefits and Special Privileges and For Other Purposes."
A rundown of the pertinent facts is presented below.
Pursuant to Republic Act No. 7432, petitioner Mercury Drug Corporation (petitioner), a retailer of
pharmaceutical products, granted a 20% sales discount to qualified senior citizens on their purchases
of medicines. For the taxable year April to December 1993 and January to December 1994, the
amounts representing the 20% sales discount totalled ₱3,719,287.681 and
₱35,500,593.44, respectively, which petitioner claimed as deductions from its gross income.
2
Realizing that Republic Act No. 7432 allows a tax credit for sales discounts granted to senior citizens,
petitioner filed with the Commissioner of Internal Revenue (CIR) claims for refund in the amount of
₱2,417,536.00 for the year 1993 and ₱23,075,386.00 for the year 1994. Petitioner presented a
computation3 of its overpayment of income tax, thus:
TAXABLE YEAR 1993
SALES, Net P10,228,518,335.00
Add: Cost of 20% Discount to Senior Citizens 3,719,288.00
SALES, Gross P10,232,237,623.00
COST OF SALES
Merchandise Inventory, Beg. P2,427,972,150.00
Purchases 8,717,393,710.00
Goods Available for Sales P11,145,365,860.00
Merchandise Inventory, End 2,458,743,127.00 8,686,622,733.00

GROSS PROFIT P1,545,614,890.00
Add: Miscellaneous Income 58,247,973.00
TOTAL INCOME P1,603,862,863.00
OPERATING EXPENSES 1,226,816,343.00
NET INCOME BEFORE TAX P 377,046,520.00
Less: Income subjected to final income tax 20,966,602.00
NET TAXABLE INCOME P 356,079,918.00
INCOME TAX PAYABLE P 124,627,972.00
LESS: TAX CREDIT
(20% Sales Discount to Senior Citizens) P 3,719,288.00
TAX ACTUALLY PAID 123,326,220.00 127,045,508.00
TAX REFUNDABLE P 2,417,536.00
xxxx
TAXABLE YEAR 1994
SALES, Net P 11,671,366,402.00
Add: Cost of 20% Sales Discount to Senior Citizens 35,500,594.00

SALES, Gross P11,706,866,996.00
COST OF SALES
Purchases 10,316,941,308.00
Less: Merchandise Inventory, End 2,928,397,228.00 9,847,287,207.00
NET INCOME BEFORE TAX 428,967,008.00
Less: Income subjected to final Income tax 25,591,586.00
NET TAXABLE INCOME P 403, 375,422.00
LESS: TAX CREDIT
(Cost of 20% Discount to Senior Citizens) P 35,500,594.00

When the CIR failed to act upon petitioner’s claims, the latter filed a petition for review with the Court
of Tax Appeals. On 6 September 2000, the Court of Tax Appeals rendered the following judgment:4
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, Revenue Regulations No. 2-94 of the Respondent is declared null and void
insofar as it treats the 20% discount given by private establishments as a deduction from gross sales.
Respondent is hereby ORDERED to GRANT A REFUND OR ISSUE A TAX CREDIT CERTIFICATE
to Petitioner in the reduced amount of ₱1,688,178.43 representing the latter’s overpaid income tax for
the taxable year 1993. However, the claim for refund for taxable year 1994 is denied for lack of merit.5
The Court of Tax Appeals favored petitioner by declaring that the 20% sales discount should be treated
as tax credit rather than a mere deduction from gross income. The Court of Tax Appeals however
found some discrepancies and irregularities in the cash slips submitted by petitioner as basis for the
tax refund. Hence, it disallowed the claim for taxable year 1994 and some portion of the amount
claimed for 1993 by petitioner, viz:
So, contrary to the allegation of Petitioner that it granted 20% sales discounts to senior citizens in the
total amount of ₱3,719,888.00 for taxable year 1993 and ₱35,500,554.00 for taxable year 1994, this
Court’s study and evaluation of the evidence show that for taxable year 1993 only the amounts of
₱3,522,123.25 and for 1994, the amount of ₱8,789,792.27 were properly substantiated. The amount
of ₱3,522,123.25 corresponding to 1993 will be further reduced to ₱2,989,930.43 as this Court’s
computation is based on the cost of the 20% discount and not on the total amount of the 20% discount
based on the decision of the Court of Appeals in Commissioner of Internal Revenue v. Elmas Drug
Corporation, CA-SP No. 49946 promulgated on October 19, 1999, where it ruled:
"Thus the cost of the 20% discount represents the actual amount spent by drug corporations in
complying with the mandate of RA 7432. Working on this premise, it could not have been the intention
of the lawmakers to grant these companies the full amount of the 20% discount as this could be
extending to them more than what they actually sacrificed when they gave the 20% discount to senior
citizens." (Underscoring supplied).
Similarly the amount of ₱8,789,792.27 corresponding to taxable year 1994 will be reduced to
₱7,393,094.28 based on the aforequoted Court of Appeals decision. These reductions are illustrated
as follows:
TAXABLE YEAR 1993
Cost of Sales P
8,686,622,733.00
Divided by Gross Sales 10,232,237,623.00

Cost of Sales Percentage 84.89%
Adjusted Amount of 20% Discount given to 3,522,123.25

Senior Citizens
Multiply by 84.89%
Allowable Tax Credit P 2,989,930.43
TAXABLE YEAR 1994
Cost of Sales P9,847,287,207.00
Adjusted Amount of 20% Discount given to P 8,789,792.27

Senior Citizens
Multiply by 84.11%
Allowable Tax Credit P 7,393,094.28
With the foregoing changes in the amount of discounts granted by Petitioner in 1993 and 1994, it
necessarily follows that adjustments have to be made in the computation of the refundable amount
which is entirely different from the computation presented by the Petitioner. This Court’s conclusion is
that Petitioner is only entitled to a tax credit of P1,688,178.43 for taxable year 1993 detailed as follows:
TAXABLE YEAR 1993

1av vphil
Sales, Net P10,228,518,335.00

Add: Cost of 20% Discount
given to Senior Citizens 3,719,288.00
SALES, Gross P10,232,237,623.00
COST OF SALES
Add: Purchases 8,717,393,710.00
Total goods available for sale P1,145,365,860.00
GROSS PROFIT P 1,545,614,890.00
TOTAL INCOME P 1,603,862,863.00
LESS: TAX CREDIT

(20% Sales Discount
given to Senior Citizens) P 2,989,930.43
and no refund or tax credit for taxable year 1994 as the computation below shows that Petitioner,
instead of having a tax credit of P23,075,386.00 as claimed in the Petition, still has a tax due of
P5,032,113.72 detailed as follows:
TAXABLE YEAR 1994
SALES, Net P11,671,366,402.00
Add: Cost of 20% Sales Discount

given to Senior Citizens 35,500,594.00
SALES, Gross 11,706,866,996.00
COST OF SALES
Add: Purchases 10,316,941,308.00
Total goods available for sale P12,775,684,435.00
GROSS PROFIT P 1,859,579,789.00
TOTAL INCOME P 1,928,389,653.00

Less: Income subjected to final income 25,591,586.00
Tax
LESS: TAX CREDIT
(Cost of 20% Discount given to Senior P7,393,094.28

Citizens)
TAX STILL DUE P 5,032,113.72
The conclusion of tax liability instead of tax overpayment pertaining to taxable year 1994 has the effect
of negating the tax refund of Petitioner because the basis of such refund is the fact that there is tax
credit. Under the circumstances, instead to tax credit, Petitioner has a tax liability of P5,032,113.72,
hence the refund for the period must fail.6
Moreover, the Court of Tax Appeals stated that the claim for tax credit must be based on the actual
cost of the medicine and not the whole amount of the 20% senior citizens discount. It applied the
formula: cost of sales/gross sales x amount of 20% sales discount.
Petitioner moved for partial reconsideration. In a Resolution dated 20 December 2000, the Court of
Tax Appeals modified its earlier ruling by increasing the creditable tax amount to ₱18,038,489.71,
inclusive of the taxable years 1993 and 1994. The Court of Tax Appeals finally granted the claim for
refund for the taxable year 1994 on the basis of the cash slips submitted by petitioner, in the sum of
₱16,350,311.28, thus:
TAXABLE YEAR 1994

a) Computation of adjusted amount of 20% discount given to senior citizens:
Sales discount to be considered as basis for disallowance P35,414,211.68
Less: Disallowances
a) Sales discount without supporting documents P224,269.15
b) Sales discounts twice recorded 7,462.66
c) Overstatement of sales discount 648,988.28 880,720.09
Adjusted amount of 20% sales discount P34,211,769.45
b) Computation of the allowable tax credit on the 20% sales discount:
Cost of Sales P9,847,287,207.00
Adjusted Amount of 20% discount

given to Senior Citizens P34,211,769.45
Multiply by 84.11%
P28,775,519.28
c) Computation of the refundable amount:
SALES, Net P11,671,366,402.00
Add: Cost of 20% Sales discount given

to Senior Citizens 35,500,594.00

SALES, Gross P11,706,866,996.00
COST OF SALES 9,847,287,207.00
GROSS PROFIT P 1,859,579,789.00
TOTAL INCOME P 1,928,389,653.00
LESS: TAX CREDIT
(Cost of 20% Discount given to Senior Citizens) P28,775,519.28
AMOUNT REFUNDABLE FOR

TAXABLE YEAR 1994 P 16,350,311.287
Petitioner elevated the case to the Court of Appeals via a Petition for Review under Rule 43. Petitioner
sought a partial modification of the above resolution raising as legal issue the basis of the computation
of tax credit. Petitioner contended that the actual discount granted to the senior citizens, rather than
the acquisition cost of the item availed by senior citizens, should be the basis for computation of tax
credit.
On 20 October 2003, the Court of Appeals rendered a Decision8 sustaining the Court of Tax Appeals
and dismissing the petition. Citing the Court of Appeals cases of Commissioner of Internal Revenue
v. Elmas Drug Corporation and Trinity Franchising and Management Corp. v. Commissioner of Internal

Revenue, the appellate court interpreted the term "cost" as used in Section 4(a) of Republic Act No.
7432 to mean the acquisition cost of the medicines sold to senior citizens. Therefore, it upheld the
computation provided by the Court of Tax Appeals in its 20 December 2000 Resolution.
Petitioner filed a motion for partial reconsideration which the Court of Appeals denied in a
Resolution9 dated 23 June 2004. This prompted petitioner to file the instant petition for review.
Petitioner raises the following legal grounds for the allowance of its petition:
I.
LIMITING THE TAX CREDIT ON THE ACQUISITION COST OF THE MEDICINES SOLD
AMOUNTS TO A TAKING OF PROPERTY FOR PUBLIC USE WITHOUT JUST
COMPENSATION.
II.
FORCING PETITIONER TO GRANT 20% DISCOUNT ON SALE OF MEDICINE TO SENIOR

CITIZENS WITHOUT FULLY REIMBURSING IT FOR THE AMOUNT OF DISCOUNT
GRANTED VIOLATES THE DUE PROCESS CLAUSE FOR BEING OPPRESSIVE,
UNREASONABLE, CONFISCATORY, AND AN UNDUE RESTRAINT OF TRADE.
III.
EVEN THE COURT OF APPEALS HAD AN INTERPRETATION OF THE TERM "COST"

THAT IS DIFFERENT FROM, AND BROADER THAN THE INTERPRETATION OF THE
COURT OF TAX APPEALS. YET, THE COURT OF APPEALS AFFIRMED IN TOTO THE
COURT OF TAX APPEALS’ DECISION.
IV.
THE COURT MAY CONSIDER THE SPIRIT AND REASON OF THE LAW WHERE A
LITERAL MEANING WOULD LEAD TO INJUSTICE OR DEFEAT THE CLEAR INTENT OF
THE LAWMAKERS.
V.
RESPONDENT MUST ACCORD PETITIONER THE SAME TREATMENT AS MAR-TESS

DRUG IN ACCORDANCE WITH THE PRINCIPLE OF EQUAL PROTECTION OF LAWS.10
Petitioner adopts a two-tiered approach towards defending its thesis. First, petitioner explains that in
addition to the direct expenses incurred in acquiring the medicine intended for re-sale to senior
citizens, operating expenses or administrative overhead are likewise incurred. Limiting the tax credit
on the acquisition cost of the medicines sold amounts to a taking of property for public use without just
compensation, petitioner argues. Moreover, petitioner contends that to compel it to grant 20% discount
on sale of medicine to senior citizens without fully reimbursing it for the amount of discount granted
violates the due process clause for being oppressive, unreasonable, confiscatory and an undue
restraint of trade. In the second tier, petitioner maintains that the term "cost" should at least include all
business expenses directly incurred to produce the merchandise and to bring them to their present
location and use. Petitioner alleges that while the Court of Appeals subscribes to the above
interpretation, it nevertheless affirmed in toto the Court of Tax Appeals’ erroneous decision.

In lieu of its Comment, the Office of the Solicitor General (OSG) filed a Manifestation and Motion
supporting petitioner’s theory that the amount of tax credit should be computed based on sales
discounts properly substantiated by petitioner. The OSG adverted to the case of Bicolandia Drug
Corporation (Formerly Elmas Drug Corporation) v. Commissioner of Internal Revenue 11 wherein we
held that the term "cost" refers to the amount of the 20% discount extended by a private establishment
to senior citizens in their purchase of medicines, which amount should be applied as a tax credit. The
OSG opines that the allowance of claim for additional tax credits should be based on sales discounts
properly substantiated before the Court of Appeals.
The main thrust of the petition is to determine whether the claim for tax credit should be based on the
full amount of the 20% senior citizens’ discount or the acquisition cost of the merchandise sold.
Preliminarily, Republic Act No. 7432 is a piece of social legislation aimed to grant benefits and
privileges to senior citizens. Among the highlights of this Act is the grant of sales discounts on the
purchase of medicines to senior citizens. Section 4(a) of Republic Act No. 7432 reads:
SEC. 4. Privileges for the Senior Citizens. — The senior citizens shall be entitled to the following:
a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of
transportation services, hotels and similar lodging establishments, restaurants and recreation centers
and purchase of medicines anywhere in the country: Provided, That private establishments may claim
the cost as tax credit;
The burden imposed on private establishments amounts to the taking of private property for public use
with just compensation in the form of a tax credit.12
The foregoing proviso specifically allows the 20% senior citizens' discount to be claimed by the private
establishment as a tax credit and not merely as a tax deduction from gross sales or gross income. The
law however is silent as to how the "cost of the discount" as tax credit should be construed.
Indeed, there is nothing novel in the issues raised in this petition. Our rulings in Bicolandia Drug
Corporation (Formerly Elmas Drug Corporation) v. Commissioner of Internal Revenue,13 Cagayan
Valley Drug Corporation v. Commissioner of Internal Revenue,14 and M.E. Holding Corporation v.
Court of Appeals15 operate as stare decisis16 with respect to this legal question.
In Bicolandia, we construed the term "cost" as referring to the amount of the 20% discount extended
by a private establishment to senior citizens in their purchase of medicines.17 The Court of Appeals’
decision in Commissioner of Internal Revenue v. Elmas Drug Corporation dated 19 October 1999 was
relied upon by the Court of Appeals as basis for its interpretation of the term "cost" when it decided
the instant case in 20 October 2003. As correctly pointed out by the OSG, said case had been elevated
to this Court and had been eventually resolved with finality on 22 June 2006 in the case entitled
Bicolandia Drug Corporation v. Commissioner of Internal Revenue. lawphi 1
We reiterated this ruling in the 2008 case of Cagayan Valley Drug by holding that petitioner therein is
entitled to a tax credit for the full 20% sales discounts it extended to qualified senior citizens. This
holds true despite the fact that petitioner suffered a net loss for that taxable year.18
The most recent case in point is M.E. Holding Corporation which bears a strikingly similar set of facts
and issues with the case at bar. Both petitioners filed their respective income tax return initially treating
the 20% sales discount to senior citizens as deductions from its gross income. When advised that the
discount should be treated as tax credit, they both filed a claim for overpayment. The Bureau of Internal
Revenue on both occasions failed to act timely on the claims, hence they appealed before the Court

of Tax Appeals. The Court of Tax Appeals in M.E. Holding concedes that the 20% sales discount
granted to qualified senior citizens should be treated as tax credit but it placed reliance on the Court
of Appeals’ decision in Commissioner of Internal Revenue v. Elmas Drug Corporation where the term
"cost of the discount" was interpreted to mean only the direct acquisition cost, excluding administrative
and other incremental costs. This was the very same case relied upon by the Court of Appeals in the
present case. We finally affirmed in M.E. Holding that the tax credit should be equivalent to the actual
20% sales discount granted to qualified senior citizens.
It is worthy to mention that Republic Act No. 7432 had undergone two (2) amendments; first in 2003
by Republic Act No. 9257 and most recently in 2010 by Republic Act No. 9994. The 20% sales discount
granted by establishments to qualified senior citizens is now treated as tax deduction and not as tax
credit. As we have likewise declared in Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,19 this case covers the taxable years 1993 and 1994, thus, Republic Act No. 7432 applies.
Based on the foregoing, we sustain petitioner’s argument that the cost of discount should be computed
on the actual amount of the discount extended to senior citizens. However, we give full accord to the
factual findings of the Court of Tax Appeals with respect to the actual amount of the 20% sales
discount, i.e., the sum of ₱3,522,123.25. for the year 1993 and ₱34,211,769.45 for the year 1994.
Therefore, petitioner is entitled to a tax credit equivalent to the actual amounts of the 20% sales
discount as determined by the Court of Tax Appeals. A new computation for tax refund is in order, to
wit:
TAXABLE YEAR 1993
SALES, Net P10,228,518,335.00
Add: Cost of 20% Discount to Senior Citizens 3,522,123.25
SALES, Gross P10,232,040,458.25
COST OF SALES
Purchases 8,717,393,710.00
Merchandise Inventory, End 2,458,743,127.00 8,686,622,733.00

LESS: TAX CREDIT
(20% Sales Discount to Senior Citizens) P 3,522,123.25
TAX REFUNDABLE ₱ 2,289,381.71
TAXABLE YEAR 1994
SALES, Net P 11,671,366,402.00
Add: Cost of 20% Sales Discount 34,211,769.45

to Senior Citizens
SALES, Gross P11,705,578,171.45
COST OF SALES

Purchases 10,316,941,308.00
Less: Income subjected to final Income tax 25,591,586.00
LESS: TAX CREDIT
(Cost of 20% Discount to Senior Citizens) P 34,211,769.45
TAX REFUNDABLE ₱ 22,237,650.34
WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of
Appeals are REVERSED and SET ASIDE. Respondent Commissioner of Internal Revenue is

ORDERED to issue tax credit certificates in favor of petitioner in the amounts of ₱2,289,381.71 and
₱22,237,650.34.
SO ORDERED.
G.R. No. 143672 April 24, 2003

vs.
GENERAL FOODS (PHILS.), INC., respondent.
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution1 of the Court of
Appeals reversing the decision2 of the Court of Tax Appeals which in turn denied the protest filed by
respondent General Foods (Phils.), Inc., regarding the assessment made against the latter for
deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the
manufacture of beverages such as "Tang," "Calumet" and "Kool-Aid," filed its income tax return for the
fiscal year ending February 28, 1985. In said tax return, respondent corporation claimed as deduction,
among other business expenses, the amount of P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by
respondent corporation. Consequently, respondent corporation was assessed deficiency income
taxes in the amount of P2,635, 141.42. The latter filed a motion for reconsideration but the same was
denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the appeal
was dismissed:
With such a gargantuan expense for the advertisement of a singular product, which even
excludes "other advertising and promotions" expenses, we are not prepared to accept that
such amount is reasonable "to stimulate the current sale of merchandise" regardless of
Petitioner’s explanation that such expense "does not connote unreasonableness considering
the grave economic situation taking place after the Aquino assassination characterized by
capital fight, strong deterioration of the purchasing power of the Philippine peso and the
slacking demand for consumer products" (Petitioner’s Memorandum, CTA Records, p. 273).
We are not convinced with such an explanation. The staggering expense led us to believe that
such expenditure was incurred "to create or maintain some form of good will for the taxpayer’s
trade or business or for the industry or profession of which the taxpayer is a member." The
term "good will" can hardly be said to have any precise signification; it is generally used to
denote the benefit arising from connection and reputation (Words and Phrases, Vol. 18, p. 556
citing Douhart vs. Loagan, 86 III. App. 294). As held in the case of Welch vs. Helvering, efforts
to establish reputation are akin to acquisition of capital assets and, therefore, expenses related
thereto are not business expenses but capital expenditures. (Atlas Mining and Development
Corp. vs. Commissioner of Internal Revenue, supra). For sure such expenditure was meant
not only to generate present sales but more for future and prospective benefits. Hence,

"abnormally large expenditures for advertising are usually to be spread over the period of years
during which the benefits of the expenditures are received" (Mertens, supra, citing Colonial Ice
Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we hereby
RESOLVE to DISMISS the instant petition for lack of merit and ORDER the Petitioner to pay
the respondent Commissioner the assessed amount of P2,635,141.42 representing its
deficiency income tax liability for the fiscal year ended February 28, 1985."3
Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which rendered a
decision reversing and setting aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as a deduction is
excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby

GRANTED. Accordingly, the Decision, dated 8 February 1994 of respondent Court of Tax
Appeals is REVERSED and SET ASIDE and the letter, dated 31 May 1988 of respondent
Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.4
Thus, the instant petition, wherein the Commissioner presents for the Court’s consideration a lone
issue: whether or not the subject media advertising expense for "Tang" incurred by respondent
corporation was an ordinary and necessary expense fully deductible under the National Internal
Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority;5 and he who claims an exemption must be
able to justify his claim by the clearest grant of organic or statute law. An exemption from the common
burden cannot be permitted to exist upon vague implications.6
Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions
are strictly construed, then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media advertising expense
for "Tang" paid or incurred by respondent corporation for the fiscal year ending February 28, 1985
"necessary and ordinary," hence, fully deductible under the NIRC? Or was it a capital expenditure,
paid in order to create "goodwill and reputation" for respondent corporation and/or its products, which
should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
(a) In general.- There shall be allowed as deduction from gross income all ordinary
and necessary expenses paid or incurred during the taxable year in carrying on, or
which are directly attributable to, the development, management, operation and/or
conduct of the trade, business or exercise of a profession.

Simply put, to be deductible from gross income, the subject advertising expense must comply with the
following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.7
The parties are in agreement that the subject advertising expense was paid or incurred within the
corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was
necessary. However, their views conflict as to whether or not it was ordinary. To be deductible, an
advertising expense should not only be necessary but also ordinary. These two requirements must be
met.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that
it failed the two conditions set by U.S. jurisprudence: first, "reasonableness" of the amount incurred
and second, the amount incurred must not be a capital outlay to create "goodwill" for the product
and/or private respondent’s business. Otherwise, the expense must be considered a capital
expenditure to be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising
expense. There being no hard and fast rule on the matter, the right to a deduction depends on a
number of factors such as but not limited to: the type and size of business in which the taxpayer is
engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention
of the taxpayer and the general economic conditions. It is the interplay of these, among other factors
and properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone was almost
one-half of its total claim for "marketing expenses." Aside from that, respondent-corporation also
claimed P2,678,328 as "other advertising and promotions expense" and another P1,548,614, for
consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost double the
amount of respondent corporation’s P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then
Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or
use of services and (2) advertising designed to stimulate the future sale of merchandise or use of
services. The second type involves expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which
the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as
to the question of the reasonableness of amount, there is no doubt such expenditures are deductible
as business expenses. If, however, the expenditures are for advertising of the second kind, then
normally they should be spread out over a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the second kind.
Not only was the amount staggering; the respondent corporation itself also admitted, in its letter
protest8 to the Commissioner of Internal Revenue’s assessment, that the subject media expense was
incurred in order to protect respondent corporation’s brand franchise, a critical point during the period
under review.

The protection of brand franchise is analogous to the maintenance of goodwill or title to one’s property.
This is a capital expenditure which should be spread out over a reasonable period of time.9
Respondent corporation’s venture to protect its brand franchise was tantamount to efforts to establish
a reputation. This was akin to the acquisition of capital assets and therefore expenses related thereto
were not to be considered as business expenses but as capital expenditures.10
True, it is the taxpayer’s prerogative to determine the amount of advertising expenses it will incur and
where to apply them.11 Said prerogative, however, is subject to certain considerations. The first relates
to the extent to which the expenditures are actually capital outlays; this necessitates an inquiry into
the nature or purpose of such expenditures.12 The second, which must be applied in harmony with the
first, relates to whether the expenditures are ordinary and necessary. Concomitantly, for an expense
to be considered ordinary, it must be reasonable in amount. The Court of Tax Appeals ruled that
respondent corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the subject advertising
expense in order to protect its brand franchise. We consider this as a capital outlay since it created
goodwill for its business and/or product. The P9,461,246 media advertising expense for the promotion
of a single product, almost one-half of petitioner corporation’s entire claim for marketing expenses for
that year under review, inclusive of other advertising and promotion expenses of P2,678,328 and
P1,548,614 for consumer promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the conclusions of quasi-judicial
agencies such as the Court of Tax Appeals, a highly specialized body specifically created for the
purpose of reviewing tax cases. The CTA, by the nature of its functions, is dedicated exclusively to the
study and consideration of tax problems. It has necessarily developed an expertise on the subject. We
extend due consideration to its opinion unless there is an abuse or improvident exercise of
authority.13 Since there is none in the case at bar, the Court adheres to the findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible error when it declared the subject
media advertising expense to be deductible as an ordinary and necessary expense on the ground that
"it has not been established that the item being claimed as deduction is excessive." It is not incumbent
upon the taxing authority to prove that the amount of items being claimed is unreasonable. The burden
of proof to establish the validity of claimed deductions is on the taxpayer.14 In the present case, that
burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision of the
Court of Appeals is hereby REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of the
Tax Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay its deficiency income tax
in the amount of P2,635,141.42, plus 25% surcharge for late payment and 20% annual interest
computed from August 25, 1989, the date of the denial of its protest, until the same is fully paid.
SO ORDERED.

G.R. No. L-26911 January 27, 1981
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner,

vs.
G.R. No. L-26924 January 27, 1981

vs.
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION and COURT OF TAX
APPEALS, respondents.
DE CASTRO, J.:
These are two (2) petitions for review from the decision of the Court of Tax Appeals of October 25,
1966 in CTA Case No. 1312 entitled "Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue." One (L-26911) was filed by the Atlas Consolidated Mining &
Development Corporation, and in the other L-26924), the Commissioner of Internal Revenue is the
petitioner.
This tax case (CTA No. 1312) arose from the 1957 and 1958 deficiency income tax assessments
made by the Commissioner of Internal Revenue, hereinafter referred to as Commissioner, where the
Atlas Consolidated Mining and Development Corporation, hereinafter referred to as Atlas, was
assessed P546,295.16 for 1957 and P215,493.96 for 1958 deficiency income taxes.
Atlas is a corporation engaged in the mining industry registered under the laws of the Philippines. On
August 20, 1962, the Commissioner assessed against Atlas the sum of P546,295.16 and P215,493.96
or a total of P761,789.12 as deficiency income taxes for the years 1957 and 1958. For the year 1957,
it was the opinion of the Commissioner that Atlas is not entitled to exemption from the income tax
under Section 4 of Republic Act 909 1 because same covers only gold mines, the provision of which
reads:
New mines, and old mines which resume operation, when certified to as such by the
Secretary of Agriculture and Natural Resources upon the recommendation of the
Director of Mines, shall be exempt from the payment of income tax during the first three
(3) years of actual commercial production. Provided that, any such mine and/or mines
making a complete return of its capital investment at any time within the said period,
shall pay income tax from that year.
For the year 1958, the assessment of deficiency income tax of P761,789.12 covers the disallowance
of items claimed by Atlas as deductible from gross income.
On October 9, 1962, Atlas protested the assessment asking for its reconsideration and
cancellation. 2 Acting on the protest, the Commissioner conducted a reinvestigation of the case.
On October 25, 1962, the Secretary of Finance ruled that the exemption provided in Republic Act 909
embraces all new mines and old mines whether gold or other minerals. 3 Accordingly, the
Commissioner recomputed Atlas deficiency income tax liabilities in the light of the ruling of the

Secretary of Finance. On June 9, 1964, the Commissioner issued a revised assessment entirely
eliminating the assessment of P546,295.16 for the year 1957. The assessment for 1958 was reduced
from P215,493.96 to P39,646.82 from which Atlas appealed to the Court of Tax Appeals, assailing the
disallowance of the following items claimed as deductible from its gross income for 1958:
Transfer agent's fee.........................................................P59,477.42
Stockholders relation service fee....................................25,523.14
U.S. stock listing expenses..................................................8,326.70
Suit expenses..........................................................................6,666.65
Provision for contingencies..................................... .........60,000.00
Total....................................................................P159,993.91
After hearing, the Court of Tax Appeals rendered a decision on October 25, 1966 allowing the above
mentioned disallowed items, except the items denominated by Atlas as stockholders relation service
fee and suit expenses. 4 Pertinent portions of the decision of the Court of Tax Appeals read as follows:
Under the facts, circumstances and applicable law in this case, the unallowable
deduction from petitioner's gross income in 1958 amounted to P32,189.79.
Stockholders relation service fee.................................... P25,523.14
Suit and litigation expenses................................................ 6,666.65
Total................................................................................... P32,189.79
As the exemption of petitioner from the payment of corporate income tax under Section
4, Republic Act 909, was good only up to the Ist quarter of 1958 ending on March 31
of the same year, only three-fourth (3/4) of the net taxable income of petitioner is
subject to income tax, computed as follows:
1958
Total net income for 1958.................................P1,968,898.27
Net income corresponding to
taxable period April 1 to
Dec. 31, 1958, 3/4 of
P1,968,898.27..........................................................1,476,673.70
Add: 3/4 of promotion fees
of P25,523.14..............................................................P19,142.35

Litigation
expenses.........................................................................6, 666.65
Net income per decision..........................................11, 02,4 2.70
Tax due thereon.........................................................412,695.00
Less: Amount already assessed .............................405,468.00
DEFICIENCY INCOME TAX DUE............................P7,227.00
Add: 1/2 % monthly interest
from 6-20-59 to 6-20-62 (18%)....................................P1,300.89
TOTAL AMOUNT DUE & COLLECTIBLE............P8,526.22
From the Court of Tax Appeals' decision of October 25, 1966, both parties appealed to this Court by
way of two (2) separate petitions for review docketed as G. R. No. L-26911 (Atlas, petitioner) and G.
R. No. L-29924 (Commissioner, petitioner).
G. R. No. L-26911—Atlas appealed only that portion of the Court of Tax Appeals' decision disallowing
the deduction from gross income of the so-called stockholders relation service fee amounting to
P25,523.14, making a lone assignment of error that —
THE COURT OF TAX APPEALS ERRED IN ITS CONCLUSION THAT THE

EXPENSE IN THE AMOUNT OF P25,523.14 PAID BY PETITIONER IN 1958 AS
ANNUAL PUBLIC RELATIONS EXPENSES WAS INCURRED FOR ACQUISITION
OF ADDITIONAL CAPITAL, THE SAME NOT BEING SUPPORTED BY THE
EVIDENCE.
It is the contention of Atlas that the amount of P25,523.14 paid in 1958 as annual public relations
expenses is a deductible expense from gross income under Section 30 (a) (1) of the National Internal
Revenue Code. Atlas claimed that it was paid for services of a public relations firm, P.K Macker & Co.,
a reputable public relations consultant in New York City, U.S.A., hence, an ordinary and necessary
business expense in order to compete with other corporations also interested in the investment market
in the United States. 5 It is the stand of Atlas that information given out to the public in general and to
the stockholder in particular by the P.K MacKer & Co. concerning the operation of the Atlas was aimed
at creating a favorable image and goodwill to gain or maintain their patronage.
The decisive question, therefore, in this particular appeal taken by Atlas to this Court is whether or not
the expenses paid for the services rendered by a public relations firm P.K MacKer & Co. labelled as
stockholders relation service fee is an allowable deduction as business expense under Section 30 (a)
(1) of the National Internal Revenue Code.
The principle is recognized that when a taxpayer claims a deduction, he must point to some specific
provision of the statute in which that deduction is authorized and must be able to prove that he is
entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses
as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the National
Internal Revenue which allows a deduction of "all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or business." An item of expenditure, in order
to be deductible under this section of the statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a
business expense, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred
in carrying in a trade or business. 6 In addition, not only must the taxpayer meet the business test, he
must substantially prove by evidence or records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and
necessary does not justify its deduction. 7
While it is true that there is a number of decisions in the United States delving on the interpretation of
the terms "ordinary and necessary" as used in the federal tax laws, no adequate or satisfactory
definition of those terms is possible. Similarly, this Court has never attempted to define with precision
the terms "ordinary and necessary." There are however, certain guiding principles worthy of serious
consideration in the proper adjudication of conflicting claims. Ordinarily, an expense will be considered
"necessary" where the expenditure is appropriate and helpful in the development of the taxpayer's
business. 8 It is "ordinary" when it connotes a payment which is normal in relation to the business of
the taxpayer and the surrounding circumstances. 9 The term "ordinary" does not require that the
payments be habitual or normal in the sense that the same taxpayer will have to make them often; the
payment may be unique or non-recurring to the particular taxpayer affected. 10
There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on
the particular facts and the relation of the payment to the type of business in which the taxpayer is
engaged. The intention of the taxpayer often may be the controlling fact in making the
determination. 11 Assuming that the expenditure is ordinary and necessary in the operation of the
taxpayer's business, the answer to the question as to whether the expenditure is an allowable
deduction as a business expense must be determined from the nature of the expenditure itself, which
in turn depends on the extent and permanency of the work accomplished by the expenditure. 12
It appears that on December 27, 1957, Atlas increased its capital stock from P15,000,000 to
P18,325,000. 13 It was claimed by Atlas that its shares of stock worth P3,325,000 were sold in the
United States because of the services rendered by the public relations firm, P. K. Macker & Company.
The Court of Tax Appeals ruled that the information about Atlas given out and played up in the mass
communication media resulted in full subscription of the additional shares issued by Atlas;
consequently, the questioned item, stockholders relation service fee, was in effect spent for the
acquisition of additional capital, ergo, a capital expenditure.
We sustain the ruling of the tax court that the expenditure of P25,523.14 paid to P.K. Macker & Co. as
compensation for services carrying on the selling campaign in an effort to sell Atlas' additional capital
stock of P3,325,000 is not an ordinary expense in line with the decision of U.S. Board of Tax Appeals
in the case of Harrisburg Hospital Inc. vs. Commissioner of Internal Revenue. 14 Accordingly, as found
by the Court of Tax Appeals, the said expense is not deductible from Atlas gross income in 1958
because expenses relating to recapitalization and reorganization of the corporation (Missouri-Kansas
Pipe Line vs. Commissioner of Internal Revenue, 148 F. (2d), 460; Skenandos Rayon Corp. vs.
Commissioner of Internal Revenue, 122 F. (2d) 268, Cert. denied 314 U.S. 6961), the cost of obtaining
stock subscription (Simons Co., 8 BTA 631), promotion expenses (Beneficial Industrial Loan Corp. vs.
Handy, 92 F. (2d) 74), and commission or fees paid for the sale of stock reorganization (Protective
Finance Corp., 23 BTA 308) are capital expenditures.
That the expense in question was incurred to create a favorable image of the corporation in order to
gain or maintain the public's and its stockholders' patronage, does not make it deductible as business

expense. As held in the case of Welch vs. Helvering, 15 efforts to establish reputation are akin to
acquisition of capital assets and, therefore, expenses related thereto are not business expense but
capital expenditures.
We do not agree with the contention of Atlas that the conclusion of the Court of Tax Appeals in holding
that the expense of P25,523.14 was incurred for acquisition of additional capital is not supported by
the evidence. The burden of proof that the expenses incurred are ordinary and necessary is on the
taxpayer 16 and does not rest upon the Government. To avail of the claimed deduction under Section
30(a) (1) of the National Internal Revenue Code, it is incumbent upon the taxpayer to adduce
substantial evidence to establish a reasonably proximate relation petition between the expenses to
the ordinary conduct of the business of the taxpayer. A logical link or nexus between the expense and
the taxpayer's business must be established by the taxpayer.
G. R. No. L-26924-In his petition for review, the Commissioner of Internal Revenue assigned as errors
the following:
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM

GROSS INCOME OF THE SO- CALLED TRANSFER AGENT'S FEES ALLEGEDLY
PAID BY RESPONDENT;
II
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM

GROSS INCOME OF LISTING EXPENSES ALLEGEDLY INCURRED BY
RESPONDENT;
III
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE AMOUNT OF

P60,000 REPRESENTED BY RESPONDENT AS "PROVISION FOR
CONTINGENCIES" WAS ADDED BACK BY RESPONDENT TO ITS GROSS
INCOME IN COMPUTING THE INCOME TAX DUE FROM IT FOR 1958;
IV
THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY THE AMOUNT

OF P6,666.65 AS SUIT EXPENSES, THE CORRECT AMOUNT THAT SHOULD
HAVE BEEN DISALLOWED BEING P17,499.98.
It is well to note that only in the Court of Tax Appeals did the Commissioner raise for the first time (in
his memorandum) the question of whether or not the business expenses deducted from Atlas gross
income in 1958 may be allowed in the absence of proof of payments. 17 Before this Court, the
Commissioner reiterated the same as ground against deductibility when he claimed that the Court of
Tax Appeals erred in allowing the deduction of transfer agent's fee and stock listing fee from gross
income in the absence of proof of payment thereof.
The Commissioner contended that under Section 30 (a) (1) of the National Internal Revenue Code, it
is a requirement for an expense to be deductible from gross income that it must have been "paid or
incurred during the year" for which it is claimed; that in the absence of convincing and satisfactory

evidence of payment, the deduction from gross income for the year 1958 income tax return cannot be
sustained; and that the best evidence to prove payment, if at all any has been made, would be the
vouchers or receipts issued therefor which ATLAS failed to present.
Atlas admitted that it failed to adduce evidence of payment of the deduction claimed in its 1958 income
tax return, but explains the failure with the allegation that the Commissioner did not raise that question
of fact in his pleadings, or even in the report of the investigating examiner and/or letters of demand
and assessment notices of ATLAS which gave rise to its appeal to the Court of Tax Appeal. 18 It was
emphasized by Atlas that it went to trial and finally submitted this case for decision on the assumption
that inasmuch as the fact of payment was never raised as a vital issue by the Commissioner in his
answer to the petition for review in the Court of Tax Appeal, the issues is limited only to pure question
of law—whether or not the expenses deducted by petitioner from its gross income for 1958 are
sanctioned by Section 30 (a) (1) of the National Internal Revenue Code.
On this issue of whether or not the Commissioner can raise the fact of payment for the first time on
appeal in its memorandum in the Court of Tax Appeal, we fully agree with the ruling of the tax court
that the Commissioner on appeal cannot be allowed to adopt a theory distinct and different from that
he has previously pursued, as shown by the BIR records and the answer to the amended petition for
review. 19 As this Court said in the case of Commissioner of Customs vs. Valencia 20 such change in
the nature of the case may not be made on appeal, specially when the purpose of the latter is to seek
a review of the action taken by an administrative body, forming part of a coordinate branch of the
Government, such as the Executive department. In the case at bar, the Court of Tax Appeal found
that the fact of payment of the claimed deduction from gross income was never controverted by the
Commissioner even during the initial stages of routinary administrative scrutiny conducted by BIR
examiners. 21 Specifically, in his answer to the amended petition for review in the Court of Tax Appeal,
the Commissioner did not deny the fact of payment, merely contesting the legitimacy of the deduction
on the ground that same was not ordinary and necessary business expenses. 22
As consistently ruled by this Court, the findings of facts by the Court of Tax Appeal will not be reviewed
in the absence of showing of gross error or abuse. 23 We, therefore, hold that it was too late for the
Commissioner to raise the issue of fact of payment for the first time in his memorandum in the Court
of Tax Appeals and in this instant appeal to the Supreme Court. If raised earlier, the matter ought to
have been seriously delved into by the Court of Tax Appeals. On this ground, we are of the opinion
that under all the attendant circumstances of the case, substantial justice would be served if the
Commissioner be held as precluded from now attempting to raise an issue to disallow deduction of
the item in question at this stage. Failure to assert a question within a reasonable time warrants a
presumption that the party entitled to assert it either has abandoned or declined to assert it.
On the second assignment of error, aside from alleging lack of proof of payment of the expense
deducted, the Commissioner contended that such expense should be disallowed for not being ordinary
and necessary and not incurred in trade or business, as required under Section 30 (a) (1) of the
National Internal Revenue Code. He asserted that said fees were therefore incurred not for the
production of income but for the acquisition petition of capital in view of the definition that an expense
is deemed to be incurred in trade or business if it was incurred for the production of income, or in the
expectation of producing income for the business. In support of his contention, the Commissioner cited
the ruling in Dome Mines, Ltd vs. Commisioner of Internal Revenue 24 involving the same issue as in
the case at bar where the U.S. Board of Tax Appeal ruled that expenses for listing capital stock in the
stock exchange are not ordinary and necessary expenses incurred in carrying on the taxpayer's
business which was gold mining and selling, which business is strikingly similar to Atlas.

On the other hand, the Court of Tax Appeal relied on the ruling in the case of Chesapeake Corporation
of Virginia vs. Commissioner of Internal Revenue 25 where the Tax Court allowed the deduction of stock
exchange fee in dispute, which is an annually recurring cost for the annual maintenance of the listing.
We find the Chesapeake decision controlling with the facts and circumstances of the instant case.
In Dome Mines, Ltd case the stock listing fee was disallowed as a deduction not only because the
expenditure did not meet the statutory test but also because the same was paid only once, and the
benefit acquired thereby continued indefinitely, whereas, in the Chesapeake Corporation case, fee
paid to the stock exchange was annual and recurring. In the instant case, we deal with the stock listing
fee paid annually to a stock exchange for the privilege of having its stock listed. It must be noted that
the Court of Tax Appeal rejected the Dome Mines case because it involves a payment made only
once, hence, it was held therein that the single payment made to the stock exchange was a capital
expenditure, as distinguished from the instant case, where payments were made annually. For this
reason, we hold that said listing fee is an ordinary and necessary business expense
On the third assignment of error, the Commissioner contended that the Court of Tax Appeal erred
when it held that the amount of P60,000 as "provisions for contingencies" was in effect added back to
Atlas income.
On this issue, this Court has consistently ruled in several cases adverted to earlier, that in the absence
of grave abuse of discretion or error on the part of the tax court its findings of facts may not be disturbed
by the Supreme Court. 26 It is not within the province of this Court to resolve whether or not the P60,000
representing "provision for contingencies" was in fact added to or deducted from the taxable income.
As ruled by the Court of Tax Appeals, the said amount was in effect added to Atlas taxable
income. 27 The same being factual in nature and supported by substantial evidence, such findings
should not be disturbed in this appeal.
Finally, in its fourth assignment of error, the Commissioner contended that the CTA erred in disallowing
only the amount of P6,666.65 as suit expenses instead of P17,499.98.
It appears that petitioner deducted from its 1958 gross income the amount of P23,333.30 as attorney's
fees and litigation expenses in the defense of title to the Toledo Mining properties purchased by Atlas
from Mindanao Lode Mines Inc. in Civil Case No. 30566 of the Court of First Instance of Manila for
annulment of the sale of said mining properties. On the ground that the litigation expense was a capital
expenditure under Section 121 of the Revenue Regulation No. 2, the investigating revenue examiner
recommended the disallowance of P13,333.30. The Commissioner, however, reduced this amount of
P6,666.65 which latter amount was affirmed by the respondent Court of Tax Appeals on appeal.
There is no question that, as held by the Court of Tax Ap- peals, the litigation expenses under
consideration were incurred in defense of Atlas title to its mining properties. In line with the decision
of the U.S. Tax Court in the case of Safety Tube Corp. vs. Commissioner of Internal Revenue, 28 it is
well settled that litigation expenses incurred in defense or protection of title are capital in nature and
not deductible. Likewise, it was ruled by the U.S. Tax Court that expenditures in defense of title of
property constitute a part of the cost of the property, and are not deductible as expense. 29
Surprisingly, however, the investigating revenue examiner recommended a partial disallowance of

P13,333.30 instead of the entire amount of P23,333.30, which, upon review, was further reduced by
the Commissioner of Internal Revenue. Whether it was due to mistake, negligence or omission of the
officials concerned, the arithmetical error committed herein should not prejudice the Government. This
Court will pass upon this particular question since there is a clear error committed by officials
concerned in the computation of the deductible amount. As held in the case of Vera vs.
Fernandez, 30 this Court emphatically said that taxes are the lifeblood of the Government and their

prompt and certain availability are imperious need. Upon taxation depends the Government's ability
to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect or
omission of government officials entrusted with the collection of taxes should not be allowed to bring
harm or detriment to the people, in the same manner as private persons may be made to suffer
individually on account of his own negligence, the presumption being that they take good care of their
personal affair. This should not hold true to government officials with respect to matters not of their
own personal concern. This is the philosophy behind the government's exception, as a general rule,
from the operation of the principle of estoppel. 31
WHEREFORE, judgment appealed from is hereby affirmed with modification that the amount of
P17,499.98 (3/4 of P23,333.00) representing suit expenses be disallowed as deduction instead of
P6,666.65 only. With this amount as part of the net income, the corresponding income tax shall be
paid thereon, with interest of 6% per annum from June 20, 1959 to June 20,1962.
SO ORDERED.
G.R. No. L-24059 November 28, 1969
C. M. HOSKINS & CO., INC., petitioner,

vs.
TEEHANKEE, J.:
We uphold in this taxpayer's appeal the Tax Court's ruling that payment by the taxpayer to its
controlling stockholder of 50% of its supervision fees or the amount of P99,977.91 is not a deductible
ordinary and necessary expense and should be treated as a distribution of earnings and profits of the
taxpayer.
Petitioner, a domestic corporation engaged in the real estate business as brokers, managing agents
and administrators, filed its income tax return for its fiscal year ending September 30, 1957 showing a
net income of P92,540.25 and a tax liability due thereon of P18,508.00, which it paid in due course.
Upon verification of its return, respondent Commissioner of Internal Revenue, disallowed four items
of deduction in petitioner's tax returns and assessed against it an income tax deficiency in the amount
of P28,054.00 plus interests. The Court of Tax Appeals upon reviewing the assessment at the
taxpayer's petition, upheld respondent's disallowance of the principal item of petitioner's having paid
to Mr. C. M. Hoskins, its founder and controlling stockholder the amount of P99,977.91 representing
50% of supervision fees earned by it and set aside respondent's disallowance of three other minor
items. The Tax Court therefore determined petitioner's tax deficiency to be in the amount of
P27,145.00 and on November 8, 1964 rendered judgment against it, as follows:
WHEREFORE, premises considered, the decision of the respondent is hereby modified.

Petitioner is ordered to pay to the latter or his representative the sum of P27,145.00,
representing deficiency income tax for the year 1957, plus interest at 1/2% per month from
June 20, 1959 to be computed in accordance with the provisions of Section 51(d) of the
National Internal Revenue Code. If the deficiency tax is not paid within thirty (30) days from
the date this decision becomes final, petitioner is also ordered to pay surcharge and interest
as provided for in Section 51 (e) of the Tax Code, without costs.

Petitioner questions in this appeal the Tax Court's findings that the disallowed payment to Hoskins
was an inordinately large one, which bore a close relationship to the recipient's dominant stockholdings
and therefore amounted in law to a distribution of its earnings and profits.
We find no merit in petitioner's appeal.
As found by the Tax Court, "petitioner was founded by Mr. C. M. Hoskins in 1937, with a capital stock
of 1,000 shares at a par value of P1.00 each share; that of these 1,000 shares, Mr. C. M. Hoskins
owns 996 shares (the other 4 shares being held by the other four officers of the corporation), which
constitute exactly 99.6% of the total authorized capital stock (p. 92, t.s.n.); that during the first four
years of its existence, Mr. C. M. Hoskins was the President, but during the taxable period in question,
that is, from October 1, 1956 to September 30, 1957, he was the chairman of the Board of Directors
and salesman-broker for the company (p. 93, t.s.n.); that as chairman of the Board of Directors, he
received a salary of P3,750.00 a month, plus a salary bonus of about P40,000.00 a year (p. 94, t.s.n.);
that he was also a stockholder and officer of the Paradise Farms, Inc. and Realty Investments, Inc.,
from which petitioner derived a large portion of its income in the form of supervision fees and
commissions earned on sales of lots (pp. 97-99, t.s.n.; Financial Statements, attached to Exhibit '1',
p. 11, BIR rec.); that as chairman of the Board of Directors of petitioner, his duties were: "To act as a
salesman; as a director, preside over meetings and to get all of the real estate business I could for the
company by negotiating sales, purchases, making appraisals, raising funds to finance real estate
operations where that was necessary' (p. 96, t.s.n.); that he was familiar with the contract entered into
by the petitioner with the Paradise Farms, Inc. and the Realty Investments, Inc. by the terms of which
petitioner was 'to program the development, arrange financing, plan the proposed subdivision as
outlined in the prospectus of Paradise Farms, Inc., arrange contract for road constructions, with the
provision of water supply to all of the lots and in general to serve as managing agents for the Paradise
Farms, Inc. and subsequently for the Realty Investment, Inc." (pp. 96-97. t.s.n.)
Considering that in addition to being Chairman of the board of directors of petitioner corporation, which
bears his name, Hoskins, who owned 99.6% of its total authorized capital stock while the four other
officers-stockholders of the firm owned a total of four-tenths of 1%, or one-tenth of 1% each, with their
respective nominal shareholdings of one share each was also salesman-broker for his company,
receiving a 50% share of the sales commissions earned by petitioner, besides his monthly salary of
P3,750.00 amounting to an annual compensation of P45,000.00 and an annual salary bonus of
P40,000.00, plus free use of the company car and receipt of other similar allowances and benefits, the
Tax Court correctly ruled that the payment by petitioner to Hoskins of the additional sum of P99,977.91
as his equal or 50% share of the 8% supervision fees received by petitioner as managing agents of
the real estate, subdivision projects of Paradise Farms, Inc. and Realty Investments, Inc. was
inordinately large and could not be accorded the treatment of ordinary and necessary expenses
allowed as deductible items within the purview of Section 30 (a) (i) of the Tax Code.
If such payment of P99,977.91 were to be allowed as a deductible item, then Hoskins would receive
on these three items alone (salary, bonus and supervision fee) a total of P184,977.91, which would
be double the petitioner's reported net income for the year of P92,540.25. As correctly observed by
respondent. If independently, a one-time P100,000.00-fee to plan and lay down the rules for
supervision of a subdivision project were to be paid to an experienced realtor such as Hoskins, its
fairness and deductibility by the taxpayer could be conceded; but here 50% of the supervision fee of
petitioner was being paid by it to Hoskins every year since 1955 up to 1963 and for as long as its
contract with the subdivision owner subsisted, regardless of whether services were actually rendered
by Hoskins, since his services to petitioner included such planning and supervision and were already
handsomely paid for by petitioner.

The fact that such payment was authorized by a standing resolution of petitioner's board of directors,
since "Hoskins had personally conceived and planned the project" cannot change the picture. There
could be no question that as Chairman of the board and practically an absolutely controlling
stockholder of petitioner, holding 99.6% of its stock, Hoskins wielded tremendous power and influence
in the formulation and making of the company's policies and decisions. Even just as board chairman,
going by petitioner's own enumeration of the powers of the office, Hoskins, could exercise great power
and influence within the corporation, such as directing the policy of the corporation, delegating powers
to the president and advising the corporation in determining executive salaries, bonus plans and
pensions, dividend policies, etc.1
Petitioner's invoking of its policy since its incorporation of sharing equally sales commissions with its
salesmen, in accordance with its board resolution of June 18, 1946, is equally untenable. Petitioner's
Sales Regulations provide:
Compensation of Salesmen
8. Schedule I — In the case of sales to prospects discovered and worked by a salesman, even
though the closing is done by or with the help of the Sales Manager or other members of the
staff, the salesmen get one-half (1/2) of the total commission received by the Company, but
not exceeding five percent (5%). In the case of subdivisions, when the office commission
covers general supervision, the 1/2-rule does not apply, the salesman's share being stipulated
in the case of each subdivision. In most cases the salesman's share is 4%. (Exh. "N-1").2
It will be readily seen therefrom that when the petitioner's commission covers general supervision, it
is provided that the 1/2 rule of equal sharing of the sales commissions does not apply and that the
salesman's share is stipulated in the case of each subdivision. Furthermore, what is involved here is
not Hoskins' salesman's share in the petitioner's 12% sales commission, which he presumably
collected also from petitioner without respondent's questioning it, but a 50% share besides in
petitioner's planning and supervision fee of 8% of the gross sales, as mentioned above. This is evident
from petitioner's board's resolution of July 14, 1953 (Exhibit 7), wherein it is recited that in addition to
petitioner's sales commission of 12% of gross sales, the subdivision owners were paying to petitioner
8% of gross sales as supervision fee, and a collection fee of 5% of gross collections, or total fees of
25% of gross sales.
The case before us is similar to previous cases of disallowances as deductible items of officers' extra
fees, bonuses and commissions, upheld by this Court as not being within the purview of ordinary and
necessary expenses and not passing the test of reasonable compensation.3 In Kuenzle & Streiff, Inc.
vs. Commissioner of Internal Revenue decided by this Court on May 29, 1969,4 we reaffirmed the test
of reasonableness, enunciated in the earlier 1967 case involving the same parties, that: "It is a general
rule that 'Bonuses to employees made in good faith and as additional compensation for the services
actually rendered by the employees are deductible, provided such payments, when added to the
stipulated salaries, do not exceed a reasonable compensation for the services rendered' (4 Mertens
Law of Federal Income Taxation, Sec. 25.50, p. 410). The conditions precedent to the deduction of
bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for
personal services actually rendered; and (3) the bonuses, when added to the salaries, are 'reasonable
. . . when measured by the amount and quality of the services performed with relation to the business
of the particular taxpayer' (Idem., Sec. 25, 44, p. 395).
"There is no fixed test for determining the reasonableness of a given bonus as compensation. This
depends upon many factors, one of them being 'the amount and quality of the services performed with
relation to the business.' Other tests suggested are: payment must be 'made in good faith'; 'the
character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type

and extent of the services rendered, the salary policy of the corporation'; 'the size of the particular
business'; 'the employees' qualifications and contributions to the business venture'; and 'general
economic conditions' (4 Mertens, Law of Federal Income Taxation, Secs. 25.44, 25.49, 25.50, 25.51,
pp. 407-412). However, 'in determining whether the particular salary or compensation payment is
reasonable, the situation must be considered as whole. Ordinarily, no single factor is decisive. . . . it is
important to keep in mind that it seldom happens that the application of one test can give satisfactory
answer, and that ordinarily it is the interplay of several factors, properly weighted for the particular
case, which must furnish the final answer."
Petitioner's case fails to pass the test. On the right of the employer as against respondent
Commissioner to fix the compensation of its officers and employees, we there held further that while
the employer's right may be conceded, the question of the allowance or disallowance thereof as
deductible expenses for income tax purposes is subject to determination by respondent Commissioner
of Internal Revenue. Thus: "As far as petitioner's contention that as employer it has the right to fix the
compensation of its officers and employees and that it was in the exercise of such right that it deemed
proper to pay the bonuses in question, all that We need say is this: that right may be conceded, but
for income tax purposes the employer cannot legally claim such bonuses as deductible expenses
unless they are shown to be reasonable. To hold otherwise would open the gate of rampant tax
evasion.
"Lastly, We must not lose sight of the fact that the question of allowing or disallowing as deductible
expenses the amounts paid to corporate officers by way of bonus is determined by respondent
exclusively for income tax purposes. Concededly, he has no authority to fix the amounts to be paid to
corporate officers by way of basic salary, bonus or additional remuneration — a matter that lies more
or less exclusively within the sound discretion of the corporation itself. But this right of the corporation
is, of course, not absolute. It cannot exercise it for the purpose of evading payment of taxes legitimately
due to the State."
Finally, it should be noted that we have here a case practically of a sole proprietorship of C. M. Hoskins,
who however chose to incorporate his business with himself holding virtually absolute control thereof
with 99.6% of its stock with four other nominal shareholders holding one share each. Having chosen
to use the corporate form with its legal advantages of a separate corporate personality as distinguished
from his individual personality, the corporation so created, i.e., petitioner, is bound to comport itself in
accordance with corporate norms and comply with its corporate obligations. Specifically, it is bound to
pay the income tax imposed by law on corporations and may not legally be permitted, by way of
corporate resolutions authorizing payment of inordinately large commissions and fees to its controlling
stockholder, to dilute and diminish its corresponding corporate tax liability.
ACCORDINGLY, the decision appealed from is hereby affirmed, with costs in both instances against
petitioner.

G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of the
Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of
Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices
for deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue
(BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86,
and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the
amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and security
services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December
31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for the
months of April and May 1986.6
(2) The alleged understatement of ICC’s interest income on the three promissory notes due
from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00
deduction for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995,
however, it received a final notice before seizure demanding payment of the amounts stated in the
said notices. Hence, it brought the case to the CTA which held that the petition is premature because
the final notice of assessment cannot be considered as a final decision appealable to the tax court.
This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the
payment of deficiency tax, amounts to a final decision on the protested assessment and may therefore
be questioned before the CTA. This conclusion was sustained by this Court on July 1, 2001, in G.R.
No. 135210.8 The case was thus remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for professional and security services

were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC
in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof
could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory notes. It
found that it was the BIR which made an overstatement of said income when it compounded the
interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the
absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance,
like delay in payment or breach of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation receipts it
presented as evidence. The dispositive portion of the CTA’s Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges
and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were rendered
to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time, hence, it could
be considered as deductible expenses only in 1986 when ICC received the billing statements for said
services. It further ruled that ICC did not understate its interest income from the promissory notes of
Realty Investment, Inc., and that ICC properly withheld and remitted taxes on the payments for security
services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that
since ICC is using the accrual method of accounting, the expenses for the professional services that
accrued in 1984 and 1985, should have been declared as deductions from income during the said
years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable
year 1986. As to the alleged deficiency interest income and failure to withhold expanded withholding
tax assessment, petitioner invoked the presumption that the assessment notices issued by the BIR
are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the
expenses for professional and security services from ICC’s gross income; and (2) held that ICC did
not understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC
withheld the required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary
and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been
paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is further qualified by
Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided

for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’,
dependent upon the method of accounting upon the basis of which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions.12 In the instant case, the accounting method used by ICC is the accrual
method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is
authorized to deduct certain expenses and other allowable deductions for the current year but failed
to do so cannot deduct the same for the next year.13
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.14
For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1) fixing
of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination
of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the amount
of income or liability be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation
may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability
does not have to be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an exact or
completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
year.[16] Accrual method of accounting presents largely a question of fact; such that the taxpayer
bears the burden of proof of establishing the accrual of an item of income or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an
exemption must be able to justify the same by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications. And since
a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be
strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICC’s tax problems for the year 1984. As testified by the
Treasurer of ICC, the firm has been its counsel since the 1960’s.19 From the nature of the claimed

deductions and the span of time during which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year when they
could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount
of their obligation to the firm, especially so that it is using the accrual method of accounting. For
another, it could have reasonably determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer
bears the burden of establishing the accrual of an expense or income. However, ICC failed to
discharge this burden. As to when the firm’s performance of its services in connection with the 1984
tax problems were completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information necessary to compute
the amount of said liability with reasonable accuracy, are questions of fact which ICC never
established. It simply relied on the defense of delayed billing by the firm and the company, which under
the circumstances, is not sufficient to exempt it from being charged with knowledge of the reasonable
amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for
the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed
to present evidence showing that even with only "reasonable accuracy," as the standard to ascertain
its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said
company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the said
year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred by ICC
in 198620 and could therefore be properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one should
have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the
application of compounded interest.21 Under Article 1959 of the Civil Code, unless there is a stipulation
to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts.22 Hence, the Assessment Notice for deficiency
expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency
income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for
security services. Said Assessment is valid as to the BIR’s disallowance of ICC’s expenses for
professional services. The Court of Appeal’s cancellation of Assessment Notice No. FAS-1-86-90-
000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court
of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment Notice
No. FAS-1-86-90-000680, which disallowed the expense deduction of Isabela Cultural Corporation for
professional and security services, is declared valid only insofar as the expenses for the professional
fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson,
are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability under
Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.
G.R. No. L-22265 December 22, 1967
COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
GOODRICH INTERNATIONAL RUBBER CO., respondent.
CONCEPCION, C.J.:
Appeal by the Government from a decision of the Court of Tax Appeals, setting aside the assessments
made by the Commissioner of Internal Revenue, in the sums of P14,128.00 and P8,439.00, as
deficiency income taxes allegedly due from respondent Goodrich International Rubber Company —
hereinafter referred to as Goodrich — for the years 1951 and 1952, respectively.
These assessments were based on disallowed deductions, claimed by Goodrich, consisting of several
alleged bad debts, in the aggregate sum of P50,455.41, for the year 1951, and the sum of P30,138.88,
as representation expenses allegedly incurred in the year 1952. Goodrich had appealed from said
assessments to the Court of Tax Appeals, which, after appropriate proceedings, rendered, on June 8,
1963, a decision allowing the deduction for bad debts, but disallowing the alleged representation
expenses. On motion for reconsideration and new trial, filed by Goodrich, on November 19, 1963, the
Court of Tax Appeals amended its aforementioned decision and allowed said deductions for
representation expenses. Hence, this appeal by the Government.
The alleged representation expenses are:
1. Expenses at Elks Club P10,959.21

2. Manila Polo Club 4,947.35
3. Army and Navy Club 2,812.95
4. Manila Golf Club 4,478.45
5. Wack Wack Golf Club, Casino 6,940.92
Español, etc.
TOTAL P30,138.88

The claim for deduction thereof is based upon receipts issued, not by the entities in which the alleged
expenses had been incurred, but by the officers of Goodrich who allegedly paid them.
The claim must be rejected. If the expenses had really been incurred, receipts or chits would have
been issued by the entities to which the payments had been made, and it would have been easy for
Goodrich or its officers to produce such receipts. These issued by said officers merely attest to
lawphil
their claim that they had incurred and paid said expenses. They do not establish payment of said
alleged expenses to the entities in which the same are said to have been incurred. The Court of Tax
Appeals erred, therefore, in allowing the deduction thereof.
The alleged bad debts are:
1. Portillo's Auto Seat Cover P630.31

2. Visayan Rapid Transit 17,810.26
3. Bataan Auto Seat Cover 373.13
4. Tres Amigos Auto Supply 1,370.31
5. P. C. Teodoro lawphil 650.00
6. Ordnance Service, P.A. 386.42
7. Ordnance Service, P.C. 796.26
8. National land Settlement Administration 3,020.76
9. National Coconut Corporation 644.74
10. Interior Caltex Service Station 1,505.87
11. San Juan Auto Supply 4,530.64
12. P A C S A 45.36
13. Philippine Naval Patrol 14.18
14. Surplus Property Commission 277.68
15. Alverez Auto Supply 285.62
16. Lion Shoe Store 1,686.93
17. Ruiz Highway Transit 2,350.00
18. Esquire Auto Seat Cover 3,536.94
TOTAL P50,455.41*
The issue, in connection with these debts is whether or not the same had been properly deducted as
bad debts for the year 1951. In this connection, we find:
Portillo's Auto Seat Cover (P730.00):
This debt was incurred in 1950. In 1951, the debtor paid P70.00, leaving a balance of P630.31. That
same year, the account was written off as bad debt (Exhibit 3-C-4). Counsel for Goodrich had merely

sent two (2) letters of demand in 1951 (Exh. B-14). In 1952, the debtor paid the full balance (Exhibit
A).
Visayan Rapid Transit (P17,810.26):
This debt was, also, incurred in 1950. In 1951, it was charged off as bad debt, after the debtor had
paid P275.21. No other payment had been made. Taxpayer's Accountant testified that, according to
lawphil
its branch manager in Cebu, he had been unable to collect the balance. The debtor had merely
promised and kept on promising to pay. Taxpayer's counsel stated that the debtor had gone out of
business and became insolvent, but no proof to this effect. was introduced.
Bataan Auto Seat Cover (P373.13):
This is the balance of a debt of P474.13 contracted in 1949. In 1951, the debtor paid P100.00. That
same year, the balance of P373.13 was charged off as bad debt. The next year, the debtor paid the
additional sum of P50.00.
Tres Amigos Auto Supply (P1,370.31):
This account had been outstanding since 1949. Counsel for the taxpayer had merely sent demand
letters (Exh. B-13) without success.
P. C. Teodoro (P650.00):
In 1949, the account was P751.91. In 1951, the debtor paid P101.91, thus leaving a balance of
P650.00, which the taxpayer charged off as bad debt in the same year. In 1952, the debtor made
another payment of P150.00.
Ordinance Service, P.A. (P386.42):
In 1949, the outstanding account of this government agency was P817.55. Goodrich's counsel sent
demand letters (Exh. B-8). In 1951, it paid Goodrich P431.13. The balance of P386.42 was written off
as bad debt that same year.
Ordinance Service, P.C. (P796.26):
In 1950, the account was P796.26. It was referred to counsel for collection. In 1951, the account was
lawphil
written off as a debt. In 1952, the debtor paid it in full.
National Land Settlement Administration (P3,020.76):
The outstanding account in 1949 was P7,041.51. Collection letters were sent (Exh. B-7). In 1951, the
debtor paid P4,020.75, leaving a balance of P3,020.76, which was written off, that same year, as a
bad debt. This office was under liquidation, and its Board of Liquidators promised to pay when funds
shall become available.
National Coconut Corporation (P644.74):
This account had been outstanding since 1949. Collection letters were sent (Exh. B-12) without
success. It was written off as bad debt in 1951, while the corporation was under a Board of Liquidators,
which promised to pay upon availability of funds. In 1961, the debt was fully paid.

Interior Caltex Service Station (P1,505.87):
The original account was P2,705.87, when, in 1950, it was turned over for collection to counsel for
Goodrich (p. 156, CTA Records). Counsel began sending letters of collection in April 1950. Interior
Caltex made partial payments, so that as of December, 1951, the balance outstanding was
P1,505.87. The debtor paid P200, in 1952; P113.20, in 1954; P750.00, in 1961; and P300.00.00 in
lawphil.net
1962. The account had been written off as bad debt in 1951.
The claim for deduction of these ten (10) debts should be rejected. Goodrich has not established either
that the debts are actually worthless or that it had reasonable grounds to believe them to be so in
1951. Our statute permits the deduction of debts "actually ascertained to be worthless within the
taxable year," obviously to prevent arbitrary action by the taxpayer, to unduly avoid tax liability.
The requirement of ascertainment of worthlessness requires proof of two facts: (1) that the taxpayer
did in fact ascertain the debt to be worthlessness, in the year for which the deduction is sought; and
(2) that, in so doing, he acted in good faith.1
Good faith on the part of the taxpayer is not enough. He must show, also, that he had reasonably
investigated the relevant facts and had drawn a reasonable inference from the information thus
obtained by him.2 Respondent herein has not adequately made such showing.
The payments made, some in full, after some of the foregoing accounts had been characterized as
bad debts, merely stresses the undue haste with which the same had been written off. At any rate,
respondent has not proven that said debts were worthless. There is no evidence that the debtors can
not pay them. It should be noted also that, in violation of Revenue Regulations No. 2, Section 102,
lawphil.net
respondent had not attached to its income tax returns a statement showing the propriety of the
deductions therein made for alleged bad debts.
Upon the other hand, we find that the following accounts were properly written off:
San Juan Auto Supply (P4,530.64):
This account was contracted in 1950. Referred, for collection, to respondent's counsel, the latter
secured no payment. In November, 1950, the corresponding suit for collection was filed (Exh. C). The
debtor's counsel was allowed to withdraw, as such, the debtor having failed to meet him. In fact, the
debtor did not appear at the hearing of the case. Judgment was rendered in 1951 for the creditor
lawphil .net
(Exh. C-2). The corresponding writ of execution (Exh. C-3) was returned unsatisfied, for no properties
could be attached or levied upon.
PACSA (P45.36),
Philippine Naval Patrol (P14.18),
Surplus Property Commission (P277.68),
Alvarez Auto Supply (P285.62):
These four (4) accounts were 2 or 3 years old in 1951. After the collectors of the creditor had failed to
collect the same, its counsel wrote letters of demand (Exhs. B-10, B-11, B-6 and B-2) to no avail.
Considering the small amounts involved in these accounts, the taxpayer was justified in feeling that
the unsuccessful efforts therefore exerted to collect the same sufficed to warrant their being written
off.3

Lion Shoe Store (P11,686.93),
Ruiz Highway Transit (P2,350.00), and
Esquire Auto Seat Cover (P3,536.94):
These three (3) accounts were among those referred to counsel for Goodrich for collection. Up to
1951, when they were written off, counsel had sent 17 Letters of demand to Lion Shoe Store (Exh. B);
16 demand letters to Ruiz Highway Transit (Exh. B-1); and 6 letters of demand to Esquire Auto Seat
Cover (Exit. B-5) In 1951, Lion Shoe Store, Ruiz Highway Transit, and Esquire Auto Seat Cover had
made partial payments in the sums of P1,050.00, P400.00, and P300.00 respectively. Subsequent to
the write-off, additional small payments were made and accounted for as income of Goodrich. Counsel
interviewed the debtors, investigated their ability to pay and threatened law suits. He found that the
debtors were in strained financial condition and had no attachable or leviable property. Moreover, Lion
Shoe Store was burned twice, in 1948 and 1949. Thereafter, it continued to do business on limited
scale. Later; it went out of business. Ruiz Highway Transit, had more debts than assets. Counsel,
therefore, advised respondent to write off these accounts as bad debts without going to court, for it
would be "foolish to spend good money after bad."
The deduction of these eight (8) accounts, aggregating P22,627.35, as bad debts should be allowed.
WHEREFORE, the decision appealed from should be, as it is hereby, modified, in the sense that
respondent's alleged representation expenses are totally disallowed, and its claim for bad debts
allowed up to the sum of P22,627.35 only. Without special pronouncement as to costs. It is so ordered.

INCOME TAXATION: Income Tax on Corporations
G.R. No. 169507, January 11, 2016
AIR CANADA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a general sales
agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable under
Section 28(A)(1), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to
any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic
of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 1/2% of
its gross revenues earned from the sale of its tickets in the Philippines.
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax Appeals En
Banc, which in turn affirmed the December 22, 2004 Decision3 and April 8, 2005 Resolution4 of the
Court of Tax Appeals First Division denying Air Canada's claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"5 On April 24,
2000, it was granted an authority to operate as an offline carrier by the Civil Aeronautics Board, subject
to certain conditions, which authority would expire on April 24, 2005.6 "As an off-line carrier, [Air
Canada] does not have flights originating from or coming to the Philippines [and does not] operate any
airplane [in] the Philippines[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales
agent in the Philippines.8 Aerotel "sells [Air Canada's] passage documents in the Philippines."9
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada,
through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross
Philippine Billings in the total amount of P5,185,676.77,10 detailed as follows:
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29,2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30,2001 522,465.39
2nd Qtr 2001 August 29,2001 1,033,423.34
3rd Qtr 2001 November 29,2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30,2002 594,850.13
2nd Qtr 2002 August 29,2002 1,164,664.11
TOTAL P 5,185,676.77"cralawlawlibrary

On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income
taxes amounting to P5,185,676.77 before the Bureau of Internal Revenue,12 Revenue District Office
No. 47-East Makati.13 It found basis from the revised definition14 of Gross Philippine Billings under
Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:

from carriage of persons, excess baggage, cargo and mail originating from the Philippines in
a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place
of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged
and/or indorsed to another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any port outside the
Philippines on another airline, only-the aliquot portion of the cost of the ticket corresponding to the leg
flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(Emphasis supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the
Court of Tax Appeals on November 29, 2002.15 The case was docketed as C.T.A. Case No. 6572.16
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the
Petition for Review and, hence, the claim for refund.17 It found that Air Canada was engaged in
business in the Philippines through a local agent that sells airline tickets on its behalf. As such, it
should be taxed as a resident foreign corporation at the regular rate of 32%.18 Further, according to
the Court of Tax Appeals First Division, Air Canada was deemed to have established a "permanent
establishment"19 in the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax
Treaty20 by the appointment of the local sales agent, "in which [the] petitioner uses its premises as an
outlet where sales of [airline] tickets are made[.]"21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of
Tax Appeals First Division's Resolution dated April 8, 2005 for lack of merit.22 The First Division held
that while Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it
was nevertheless liable to pay the 32% corporate income tax on income derived from the sale of airline
tickets within the Philippines pursuant to Section 28(A)(1).
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Bane. 24 The appeal was
docketed as CTAEB No. 86.
In the Decision dated August 26, 2005, the Court of Tax Appeals En Bane affirmed the findings of the
First Division.26 The En Banc ruled that Air Canada is subject to tax as a resident foreign corporation
doing business in the Philippines since it sold airline tickets in the Philippines.27 The Court of Tax
Appeals En Bane disposed thus:

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and
accordingly, DISMISSED for lack of merit.28cralawlawlibrary
Hence, this Petition for Review29 was filed. The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier selling passage documents
through a general sales agent in the Philippines, is-a resident foreign corporation within the meaning
of Section 28(A)(1) of the 1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 21/2% tax on Gross Philippine Billings
pursuant to Section 28(A)(3). If not, whether an offline international carrier selling passage documents
through a general sales agent can be subject to the regular corporate income tax of 32% on taxable
income pursuant to Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls under the
definition of "permanent establishment" under Article V(2)(i) of the Republic of the Philippines-
Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of P5,185,676.77 pertaining allegedly to
erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to the second quarter
of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax on resident
foreign corporations provided under Section 28(A)(1) of the 1997 National Internal Revenue Code
does not apply to "international carriers,"31 which are especially classified and taxed under Section
28(A)(3).32 It adds that the fact that it is no longer subject to Gross Philippine Billings tax as ruled in
the assailed Court of Tax Appeals Decision "does not render it ipso facto subject to 32% income tax
on taxable income as a resident foreign corporation."33 Petitioner argues that to impose the 32%
regular corporate income tax on its income would violate the Philippine government's covenant under
Article VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a tax higher than 1 Vi%
of the carrier's gross revenue derived from sources within the Philippines.34 It would also allegedly
result in "inequitable tax treatment of on-line and off-line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was
income from services and not income from sales of personal property.36 Petitioner cites the
deliberations of the Bicameral Conference Committee on House Bill No. 9077 (which eventually
became the 1997 National Internal Revenue Code), particularly Senator Juan Ponce Enrile's
statement,37 to reveal the "legislative intent to treat the revenue derived from air carriage as income
from services, and that the carriage of passenger or cargo as the activity that generates the
income."38 Accordingly, applying the principle on the situs of taxation in taxation of services, petitioner
claims that its income derived "from services rendered outside the Philippines [was] not subject to
Philippine income taxation."
Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner
cannot be considered to have a "permanent establishment"40 in the Philippines pursuant to Article V(6)

of the Republic of the Philippines-Canada Tax Treaty.41 It points out that Aerotel is an "independent
general sales agent that acts as such for ... other international airline companies in the ordinary course
of its business."42 Aerotel sells passage tickets on behalf of petitioner and receives a commission for
its services.43 Petitioner states that even the Bureau of Internal Revenue— through VAT Ruling No.
003-04 dated February 14, 2004—has conceded that an offline international air carrier, having no flight
operations to and from the Philippines, is not deemed engaged in business in the Philippines by merely
appointing a general sales agent.44 Finally, petitioner maintains that its "claim for refund of erroneously
paid Gross Philippine Billings cannot be denied on the ground that [it] is subject to income tax under
Section 28 (A) (I)"45 since it has not been assessed at all by the Bureau of Internal Revenue for any
income tax liability.
On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax as
a resident foreign corporation doing business in the Philippines. Petitioner's total payment of
P5,185,676.77 allegedly shows that petitioner was earning a sizable income from the sale of its plane
tickets within the Philippines during the relevant period.47 Respondent further points out that this court
in Commissioner of Internal Revenue v. American Airlines, Inc.,48 which in turn cited the cases
involving the British Overseas Airways Corporation and Air India, had already settled that "foreign
airline companies which sold tickets in the Philippines through their local agents . . . [are] considered
resident foreign corporations engaged in trade or business in the country."49 It also cites Revenue
Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing business in the
Philippines" as including "regular sale of tickets in the Philippines by offline international airlines either
by themselves or through their agents."
Respondent further contends that petitioner is not entitled to its claim for refund because the amount
of P5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of 2001 was still
short of the 32% income tax due for the period.51 Petitioner cannot allegedly claim good faith in its
failure to pay the right amount of tax since the National Internal Revenue Code became operative on
January 1, 1998 and by 2000, petitioner should have already been aware of the implications of Section
28(A)(3) and the decided cases of this court's ruling on the taxability of offline international carriers
selling passage tickets in the Philippines.52
I
At the outset, we affirm the Court of Tax Appeals' ruling that petitioner, as an offline international carrier
with no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings under Section
28(A)(3) of the 1997 National Internal Revenue Code:

from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment
of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the passenger boards a plane
in a port or point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the

Philippines to the point of transshipment shall form part of Gross Philippine Billings. (Emphasis
supplied)
Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage,
cargo, and mail originated from the Philippines in a continuous and uninterrupted flight, regardless of
where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine
Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls
within the definition of resident • foreign corporation under Section 28(A)(1) of the 1997 National
Internal Revenue Code, thus, it may be subject to 32%53 tax on its taxable income:
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized,
or existing under the laws of any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty- three percent (33%); and effective January 1, 2000
and thereafter, the rate shall be thirty-two percent (32%54). (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout the
amendments of the National Internal Revenue Code. All versions refer to "a foreign corporation
engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June
15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation engaged in trade
or business within the Philippines or having an office or place of business therein."
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110,
approved on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any
foreign country, except a foreign life insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the Philippines.56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939
National Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was amended, but
it still provides that "[a] corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income received in the preceding taxable year from all sources
within the Philippines[.]"57

As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation58 declared British Overseas Airways Corporation, an international air carrier with no
landing rights in the Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the airline company. 59 This
court discussed that:
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business.
Each case must be judged in the light of its peculiar environmental circumstances. The term implies
a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to,
and in progressive prosecution of commercial gain or for the purpose and object of the
business organization. "In order that a foreign corporation may be regarded as doing business within
a State, there must be continuity of conduct and intention to establish a continuous business, such as
the appointment of a local agent, and not one of a temporary character. ["]
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in
the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing
tickets; (2) breaking down the whole trip into series of trips — each trip in the series corresponding to
a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating
to the various airline companies on the basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." Those activities were in exercise of the functions which are normally incident to, and are
in progressive pursuit of, the purpose and object of its organization as an international air carrier. In
fact, the regular sale of tickets, its main activity, is the very lifeWood of the airline business, the
generation of sales being the paramount objective. There should be no doubt then that BOAC was
"engaged in" business in the Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines.60 (Emphasis supplied,
citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition
of "doing business" with regard to foreign corporations. Section 3(d) of the law enumerates the
activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred
eighty (180) days or more; participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of the purpose and object of the
business organization: Provided, however, That' the phrase "doing business" shall not be deemed
to include mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a nominee director
or officer to represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own
account[.]61 (Emphasis supplied)
While Section 3(d) above states that "appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account" is not considered as
"doing business," the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that

"doing business" includes "appointing representatives or distributors, operating under full control of
the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country
for a period or periods totaling one hundred eighty (180) days or more[.]"
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who
maintains office or who has designated or appointed agents or employees in the Philippines, who sells
or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate
for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts,
or arranges for such transportation."
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics]
Board for such authority."64 Each offline carrier must file with the Civil Aeronautics Board a monthly
report containing information on the tickets sold, such as the origin and destination of the passengers,
carriers involved, and commissions received.
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose
of petitioner's business. The activities of Aerotel bring direct receipts or profits to petitioner.66 There is
nothing on record to show that Aerotel solicited orders alone and for its own account and without
interference from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any
contract on behalf of [petitioner Air Canada] without the express written consent of [the latter,]"67 and
it must perform its functions according to the standards required by petitioner.68 Through Aerotel,
petitioner is able to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline
carrier in the Philippines for a period of five years, or from April 24, 2000 until April 24, 2005.
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources
within the Philippines. Petitioner's income from sale of airline tickets, through Aerotel, is income
realized from the pursuit of its business activities in the Philippines.
Ill
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National
Internal Revenue Code must consider the existence of an effective tax treaty between the Philippines
and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court held
that Section 28(A)(3)(a) does not categorically exempt all international air carriers from the coverage
of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule under
Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an international air
carrier would be liable for the tax under Section 28(A)(1).
This court in South African Airways declared that the correct interpretation of these provisions is that:
"international air carrier[s] maintaining] flights to and from the Philippines . . . shall be taxed at the rate
of 21/2% of its Gross Philippine Billings[;] while international air carriers that do not have flights to and
from the Philippines but nonetheless earn income from other activities in the country [like sale of airline
tickets] will be taxed at the rate of 32% of such [taxable] income."
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.

A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double
taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and
according fair and equitable tax treatment to foreign residents or nationals."73Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc.74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination
of international juridical double taxation, which is defined as the imposition of comparable taxes in two
or more states on the same taxpayer in respect of the same subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and persons between countries, conditions deemed
vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection against double taxation
is crucial in creating such a climate.75 (Emphasis in the original, citations omitted)
Observance of any treaty obligation binding upon the government of the Philippines is anchored on
the constitutional provision that the Philippines "adopts the generally accepted principles of
international law as part of the law of the land[.]" 76Pacta sunt servanda is a fundamental international
law principle that requires agreeing parties to comply with their treaty obligations in good faith.
Hence, the application of the provisions of the National Internal Revenue Code must be subject to the
provisions of tax treaties entered into by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court stressed the
binding effects of tax treaties. It dealt with the issue of "whether the failure to strictly comply with
[Revenue Memorandum Order] RMO No. 1-200079 will deprive persons or corporations of the benefit
of a tax treaty."80 Upholding the tax treaty over the administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles of international law as part of the
law of the land. The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the agreement.
Every treaty in force is binding upon the parties, and obligations under the treaty must be performed
by them in good faith. More importantly, treaties have the force and effect of law in this
jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and,
in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v. S.C.
Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international investment climate and the protection against
double taxation is crucial in creating such a climate." Simply put, tax treaties are entered into to
minimize, if not eliminate the harshness of international juridical double taxation, which is why they are
also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those

modifications that may be necessary to ensure the fulfillment of the obligations undertaken. " Thus,
laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional requirements that would negate the availment of
the reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty
does not provide for any pre-requisite for the availment of the benefits under said agreement.
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty
relief as required by RMO No. 1 -2000 should not operate to divest entitlement to the relief as it would
constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty
relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has negative implications on international relations,
and unduly discourages foreign investors. While the consequences sought to be prevented by RMO
No. 1-2000 involve an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of the Republic of the Philippines and
for the government of Canada signed the Convention between the Philippines and Canada for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
(Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent establishment"
as a "fixed place of business in which the business of the enterprise is wholly or partly carried on."
Even though 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 under certain conditions there is a
person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person
acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an
agent of independent status to whom paragraph 6 applies) shall be deemed to be a permanent
establishment in the first-mentioned State if . . . he has and habitually exercises in that State an
authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the
purchase of goods or merchandise for that enterprise[.]" The provision seems to refer to one who
would be considered an agent under Article 186883 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be
deemed to have a permanent establishment in the other Contracting State merely because it carries
on business in that other State through a broker, general commission agent or any other agent of an
independent status, where such persons are acting in the ordinary course of their business."
Considering Article XV86 of the same Treaty, which covers dependent personal services, the term
"dependent" would imply a relationship between the principal and the agent that is akin to an employer-
employee relationship.

Thus, an agent may be considered to be dependent on the principal where the latter exercises
comprehensive control and detailed instructions over the means and results of the activities of the
agent.
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the
Philippines, defines a general sales agent as "a person, not a bonafide employee of an air carrier, who
pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale any air
transportation, or negotiates for, or holds himself out by solicitation, advertisement or otherwise as one
who sells, provides, furnishes, contracts or arranges for, such air transportation."88 General sales
agents and their property, property rights, equipment, facilities, and franchise are subject to the
regulation and control of the Civil Aeronautics Board.89 A permit or authorization issued by the Civil
Aeronautics Board is required before a general sales agent may engage in such an activity.
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a
"permanent"establishment" in the Philippines as defined under the Republic of the Philippines-Canada
Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of transportation
on petitioner and handle reservations, appointment, and supervision of International Air Transport
Association-approved and petitioner-approved sales agents, including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every
matter relating to this Agreement;
....
c) Promotion of passenger transportation on AC;

....
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA
[Philippines], of traffic documents issued by AC outside the said territory of the GSA [Philippines], as
required by the passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and
publicity material provided by AC in accordance with the reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of any press or public
relations inquiries to AC;
....
o) Submission for AC's approval, of an annual written sales plan on or before a date to be
determined by AC and in a form acceptable to AC;
....
q) Submission of proposals for AC's approval of passenger sales agent incentive plans at a
reasonable time in advance of proposed implementation.

....
r) Provision of assistance on request, in its relations with Governmental and other authorities, offices
and agencies in the Territory [Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless
otherwise stated in the guidelines, refer all such claims and complaints to AC.91
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own
expense and acceptable to [petitioner Air Canada], adequate and suitable premises, qualified staff,
equipment, documentation, facilities and supervision and in consideration of the remuneration and
expenses payable[,] [will] defray all costs and expenses of and incidental to the Agency."92 "[I]t is the
sole employer of its employees and . . . is responsible for [their] actions ... or those of any
subcontractor."93 In remuneration for its services, Aerotel would be paid by petitioner a commission
on sales of transportation plus override commission on flown revenues.94 Aerotel would also be
reimbursed "for all authorized expenses supported by original supplier invoices."
Aerotel is required to keep "separate books and records of account, including supporting documents,
regarding all transactions at, through or in any way connected with [petitioner Air Canada] business."
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased
way."97 Aerotel cannot "accept additional appointments as General Sales Agent of any other carrier
without the prior written consent of [petitioner Air Canada]."
The Passenger General Sales Agency Agreement "may be terminated by either party without cause
upon [no] less than 60 days' prior notice in writing[.]"99 In case of breach of any provisions of the
Agreement, petitioner may require Aerotel "to cure the breach in 30 days failing which [petitioner Air
Canada] may terminate [the] Agreement[.]"
The following terms are indicative of Aerotel's dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes control
of another entity or merges with or is acquired or controlled by another person or entity[,]" 101 Except
with the written consent of petitioner, Aerotel must not acquire a substantial interest in the ownership,
management, or profits of a passenger sales agent affiliated with the International Air Transport
Association or a non-affiliated passenger sales agent nor shall an affiliated passenger sales agent
acquire a substantial interest in Aerotel as to influence its commercial policy and/or management
decisions.102 Aerotel must also provide petitioner "with a report on any interests held by [it], its owners,
directors, officers, employees and their immediate families in companies and other entities in the
aviation industry or ... industries related to it[.]"103 Petitioner may require that any interest be divested
within a set period of time.
Second, in carrying out the services, Aerotei cannot enter into any contract on behalf of petitioner
without the express written consent of the latter;105 it must act according to the standards required by
petitioner;106 "follow the terms and provisions of the [petitioner Air Canada] GS A Manual [and all]
written instructions of [petitioner Air Canada;]"107 and "[i]n the absence of an applicable provision in
the Manual or instructions, [Aerotei must] carry out its functions in accordance with [its own] standard
practices and procedures[.]"108
Third, Aerotei must only "issue traffic documents approved by [petitioner Air Canada] for all
transportation over [its] services[.]"109 All use of petitioner's name, logo, and marks must be with the

written consent of petitioner and according to petitioner's corporate standards and guidelines set out
in the Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation
sold by Aerotei are for the account of petitioner, except in the case of negligence of Aerotei.111
Aerotei is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales
Agency Agreement executed between the parties. It has the authority or power to conclude contracts
or bind petitioner to contracts entered into in the Philippines. A third-party liability on contracts of
Aerotei is to petitioner as the principal, and not to Aerotei, and liability to such third party is enforceable
against petitioner. While Aerotei maintains a certain independence and its activities may not be
devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the Agreement, it
must carry out its functions solely for the benefit of petitioner and according to the latter's Manual and
written instructions. Aerotei is required to submit its annual sales plan for petitioner's approval.
In essence, Aerotei extends to the Philippines the transportation business of petitioner. It is a conduit
or outlet through which petitioner's airline tickets are sold.
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax 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);.]"113 Thus, income attributable to Aerotel or from business activities effected by
petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air Transport) of the same Treaty,
the tax imposed on income derived from the operation of ships or aircraft in international traffic should
not exceed 1 1/2% of gross revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code on its taxable income116 from sale of airline tickets in the Philippines, it
could only be taxed at a maximum of 1 1/2% of gross revenues, pursuant to Article VIII of the Republic
of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign corporation organized and
existing under the laws of Canada[.]"
Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory construction
principle that specific laws prevail over general ones.
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became
valid and effective on that date. On the other hand, the applicable provisions120 relating to the taxability
of resident foreign corporations and the rate of such tax found in the National Internal Revenue Code
became effective on January 1, 1998.121 Ordinarily, the later provision governs over the earlier
one.122 In this case, however, the provisions of the Republic of the Philippines-Canada Tax Treaty are
more specific than the provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:

SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by
at least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international obligations become binding.
Article II, Section 2 of the Constitution deals with international obligations that are incorporated, while
Article VII, Section 21 deals with international obligations that become binding through ratification.

"Valid and effective" means that treaty provisions that define rights and duties as well as definite
prestations have effects equivalent to a statute. Thus, these specific treaty provisions may amend
statutory provisions. Statutory provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international obligations erga
omnes. We are also not required to rule in this case on the effect of international customary norms
especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting State derived
by an enterprise of the other Contracting State from the operation of ships or aircraft in international
traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of
a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the
lowest rate of Philippine tax imposed on such profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the government of
Canada on Air Transport, entered into on January 14, 1997, reiterates the effectivity of Article VIII of
the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention
between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered
into force on December 21, 1977, and any amendments thereto, in respect of the operation of aircraft
in international traffic.123cralawlawlibrary
Petitioner's income from sale of ticket for international carriage of passenger is income derived from
international operation of aircraft. The sale of tickets is closely related to the international operation of
aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited
to a certain extent[.]"124 Thus, we are bound to extend to a Canadian air carrier doing business in the
Philippines through a local sales agent the benefit of a lower tax equivalent to 1 1/2% on business
profits derived from sale of international air transportation.
V
Finally, we reject petitioner's contention that the Court of Tax Appeals erred in denying its claim for
refund of erroneously paid Gross Philippine Billings tax on the ground that it is subject to income tax
under Section 28(A)(1) of the National Internal Revenue Code because (a) it has not been assessed
at all by the Bureau of Internal Revenue for any income tax liability;125 and (b) internal revenue taxes
cannot be the subject of set-off or compensation,126 citing Republic v. Mambulao Lumber Co., et
al.127 and Francia v. Intermediate Appellate Court.
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we have ruled that
"[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may
determine whether there are taxes that should have been paid in lieu of the taxes paid."130 The
determination of the proper category of tax that should have been paid is incidental and necessary to
resolve the issue of whether a refund should be granted.131 Thus:

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax
or other taxes at the first instance. The Court of Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner's
transactions are subject to capital gains tax, however, the Court of Tax Appeals was not making an
assessment. It was merely determining the proper category of tax that petitioner should have paid, in
view of its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-
registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund.
The issue of petitioner's claim for tax refund is intertwined with the issue of the proper taxes that are
due from petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct.
If the tax return filed was not proper, the correctness of the amount paid and, therefore, the claim for
refund become questionable. In that case, the court must determine if a taxpayer claiming refund of
erroneously paid taxes is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for
refund of its erroneously paid 2 1/2% taxes on its gross Philippine billings. This court did not
immediately grant South African's claim for refund. This is because although this court found that
South African Airways was not subject to the 2 1/2% tax on its gross Philippine billings, this court also
found that it was subject to 32% tax on its taxable income.
In this case, petitioner's claim that it erroneously paid the 5% final tax is an admission that the quarterly
tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the refund
being claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed not liable
for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in South African
Airways, petitioner's request for refund can neither be granted nor denied outright without such
determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the
taxpayer's liability should be computed and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving
solely the issue of the taxpayer's entitlement to refund. The question of tax deficiency is distinct and
unrelated to the question of petitioner's entitlement to refund. Tax deficiencies should be subject to
assessment procedures and the rules of prescription. The court cannot be expected to perform the
BIR's duties whenever it fails to do so either through neglect or oversight. Neither can court processes
be used as a tool to circumvent laws protecting the rights of taxpayers.
Hence, the Court of Tax Appeals properly denied petitioner's claim for refund of allegedly erroneously
paid tax on its Gross Philippine Billings, on the ground that it was liable instead for the regular 32%
tax on its taxable income received from sources within the Philippines. Its determination of petitioner's
liability for the 32% regular income tax was made merely for the purpose of ascertaining petitioner's
entitlement to a tax refund and not for imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are
based on different circumstances. In both cited cases,133 the taxpayer claimed that his (its) tax liability
was off-set by his (its) claim against the government.

Specifically, in Republic v. Mambulao Lumber Co., et al, Mambulao Lumber contended that the
amounts it paid to the government as reforestation charges from 1947 to 1956, not having been used
in the reforestation of the area covered by its license, may be set off or applied to the payment of forest
charges still due and owing from it.134 Rejecting Mambulao's claim of legal compensation, this court
ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law
on compensation is inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their own right are
creditors and debtors of each other. With respect to the forest charges which the defendant Mambulao
Lumber Company has paid to the government, they are in the coffers of the government as taxes
collected, and the government does not owe anything to defendant Mambulao Lumber Company. So,
it is crystal clear that the Republic of the Philippines and the Mambulao Lumber Company are not
creditors and debtors of each other, because compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy
in an action or any indebtedness of the state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of
the contract or transaction sued on. * * *. (80 C.J.S. 73-74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but grow out
of a duty to, and are the positive acts of the government, to the making and enforcing of which, the
personal consent of individual taxpayers is not required. * * * If the taxpayer can properly refuse to pay
his tax when called upon by the Collector, because he has a claim against the governmental body
which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must
be curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide the result
of a lawsuit, and meanwhile the financial affairs of the government will be thrown into great confusion.
(47 Am. Jur. 766-767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal compensation
provided under Article 1279 were present.136 In that case, a portion of Francia's property in Pasay was
expropriated by the national government,137 which did not immediately pay Francia. In the meantime,
he failed to pay the real property tax due on his remaining property to the local government of Pasay,
which later on would auction the property on account of such delinquency. He then moved to set aside
the auction sale and argued, among others, that his real property tax delinquency was extinguished
by legal compensation on account of his unpaid claim against the national government. 139 This court
ruled against Francia:
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their
own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code).
The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;

xxx xxx xxx
(3) that the two debts be due.

xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the
government.
There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount
of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited
with the Philippine National Bank long before the sale at public auction of his remaining property.
Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the
bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the
deposit so that he could pay the tax obligation thus aborting the sale at public
auction.140cralawlawlibrary
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission
on Audit141 and Philex Mining Corporation v. Commissioner of Internal Revenue.142 In Caltex, this
court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the government. Taxes
cannot be the subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to beset-off.143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its sovereign
capacity."144 Rejecting Philex Mining's assertion that the imposition of surcharge and interest was
unjustified because it had no obligation to pay the excise tax liabilities within the prescribed period
since, after all, it still had pending claims for VAT input credit/refund with the Bureau of Internal
Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has
a pending tax claim for refund or credit against the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax payer can defer
the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this
would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a claim against the government or that the collection of the
tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex's theory
that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise
to confusion and abuse, depriving the government of authority over the manner by which taxpayers
credit and offset their tax liabilities.145 (Citations omitted)

In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax
on the ground that the tax liabilities were off-set against any alleged claim the taxpayer may have
against the government. Such would merely be in keeping with the basic policy on prompt collection
of taxes as the lifeblood of the government.
Here, what is involved is a denial of a taxpayer's refund claim on account of the Court of Tax Appeals'
finding of its liability for another tax in lieu of the Gross Philippine Billings tax that was allegedly
erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on the denial
of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax
refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner's supplemental
motion for reconsideration alleging bringing to said court's attention the existence of the deficiency
income and business tax assessment against Citytrust. The fact of such deficiency assessment is
intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax
refund for the same year. To award such refund despite the existence of that deficiency assessment
is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to
refund and at the same time be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to
and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by
itself and without unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law
when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list,
statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax collected under such
assessment shall be recovered by any suits unless it is proved that the said list, statement, or return
was not false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should
subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery
of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years
after discovery of the falsity, fraud or omission in the false or fraudulent return involved. This would
necessarily require and entail additional efforts and expenses on the part of the Government, impose
a burden on and a drain of government funds, and impede or delay the collection of much-needed
revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be
resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the
true and correct amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that
the taxpayer and the Government alike be given equal opportunities to avail of remedies under the
law to defeat each other's claim and to determine all matters of dispute between them in one single
case. It is important to note that in determining whether or not petitioner is entitled to the refund of the
amount paid, it would [be] necessary to determine how much the Government is entitled to collect as
taxes. This would necessarily include the determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res judicata on both parties as to all the matters
subject thereof or necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997
NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt.
As such, we cannot grant the prayer for a refund.146 (Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue,147 this court
upheld the denial of the claim for refund based on the Court of Tax Appeals' finding that the taxpayer
had, through erroneous deductions on its gross income, underpaid its Gross Philippine Billing tax on
cargo revenues for 1999, and the amount of underpayment was even greater than the refund sought
for erroneously paid Gross Philippine Billings tax on passenger revenues for the same taxable
period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the
rate of 1 1/2% of its gross revenues amounting to P345,711,806.08149 from the third quarter of 2000
to the second quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(1) of the
1997 National Internal Revenue Code [32% of taxable income, that is, gross income less deductions]
will exceed the maximum ceiling of 1 1/2% of gross revenues as decreed in Article VIII of the Republic
of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated
April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED. SO ORDERED.

G.R. No. 195909 September 26, 2012
COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing
the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of
1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure question of law, which
involves the interpretation of Section 27(B) vis-à-vis Section 30(E) and (G) of the National Internal
Revenue Code of the Philippines (NIRC), on the income tax treatment of proprietary non-profit
hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to
the sick, diseased and disabled persons; provided that purely medical and surgical services
shall be performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;
(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;
(c) To carry on educational activities related to the maintenance and promotion of health as
well as provide facilities for scientific and medical researches which, in the opinion of the Board
of Trustees, may be justified by the facilities, personnel, funds, or other requirements that are
available;
(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;
xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to ₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to
₱63,935,351.57 during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax
rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's. According to
the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on
non-profit hospitals that were previously categorized as non-stock, non-profit corporations under
Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable
institutions and civic organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of ₱1,730,367,965
or approximately ₱1.73 billion from patient services in 1998. 7
St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating
expenses) of ₱334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of
any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA
that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment
of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section
30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR prays
that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and expanded withholding tax
for 1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding
of a part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no
ground for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of
Court, 11 this Court's review power is generally limited to "cases in which only an error or question of
law is involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized
exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision
dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the

amount of ₱110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby
ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable year
1998 in the respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of ₱6,275,370.38, x
x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the
total amount of ₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.
SO ORDERED. 13
The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came
from charitable activities. The CTA cancelled the remainder of the ₱63,113,952.79 deficiency
assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En
Banc held was not applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section
30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services to
its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical
Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes of St.
Luke's under its articles of incorporation and various documents 17 identifying St. Luke's as a charitable
institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a
charitable institution does not lose its charitable character and its consequent exemption from taxation
merely because recipients of its benefits who are able to pay are required to do so, where funds
derived in this manner are devoted to the charitable purposes of the institution x x x." 19 The generation
of income from paying patients does not per se destroy the charitable nature of St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled
that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those
corporations or associations which, otherwise, would be subject thereto, because of the existence of
x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on charitable institutions
of the old NIRC. Thus, in rejecting the argument that tax exemption is lost whenever there is net
income, the Court in Jesus Sacred Heart College declared: "[E]very responsible organization must be
run to at least insure its existence, by operating within the limits of its own resources, especially its
regular income. In other words, it should always strive, whenever possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA
explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit."
On the other hand, Congress specifically used the word "non-stock" to qualify a charitable "corporation
or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the present tax
code, indicating an intent to exempt this type of charitable organization from income tax. Section 27(B)
does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit
hospitals operated exclusively for charitable purpose are exempt from income tax on income received
by them as such, applying the provision of Section 30(E) of the NIRC of 1997, as amended." 25
The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise
only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider relevant
evidence. The CTA obviously considered the evidence and concluded that it is self-serving. The CTA
declared that it has "gone through the records of this case and found no other evidence aside from
the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge
under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time
prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20%
delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the
amount of ₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section
27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable
and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously enjoyed under Section 27(E) of
the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the NIRC of
1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. -
xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall
be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or hospital of its
primary purpose or function. A 'proprietary educational institution' is any private school maintained and

administered by private individuals or groups with an issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance
with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's focus
on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30
state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under
this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed under this Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of
the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section
30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be
construed together without the removal of such tax exemption. The effect of the introduction of Section
27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit
educational institutions 36 and proprietary non-profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate
rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any private school maintained and administered
by private individuals or groups" with a government permit. "Non-profit" means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu, 37 this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course. 38 The
club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently
with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and
hearts under the influence of education or religion, by assisting them to establish themselves in life or
[by] otherwise lessening the burden of government." 41 A non-profit club for the benefit of its members
fails this test. An organization may be considered as non-profit if it does not distribute any part of its
income to stockholders or members. However, despite its being a tax exempt institution, any income
such institution earns from activities conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by
the government is compensated by its relief from doing public works which would have been funded
by appropriations from the Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it. The power of Congress to tax implies the power to
exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o
law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly construed against the
taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the
government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise as Hospital
de San Juan 45 and Jesus Sacred Heart College 46 which says that receiving income from paying
patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined in
the hospital, or receives subsidies from the government, so long as the money received is devoted or
used altogether to the charitable object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the institution. 47
For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions, churches
and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation." 48 The test of exemption is not strictly a

requirement on the intrinsic nature or character of the institution. The test requires that the institution
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove from the
tax exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E)
of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution "actually, directly and exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted "exclusively"
for charitable purposes. The organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members,
trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized." 50 However, under Lung Center, any profit by a charitable institution must not only be
plowed back "whenever necessary or proper," but must be "devoted or used altogether to the
charitable object which it is intended to achieve." 51
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
"no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and improvements of the institution is but a
part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and exclusively"
for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:
to tax imposed under this Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x."
It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever
kind and character" of a charitable institution "from any of its activities conducted for profit, regardless
of the disposition made of such income, shall be subject to tax." Prior to the introduction of Section
27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under
Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot
be disputed that a hospital which receives approximately ₱1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived profits
from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to Patients"
in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R. No. 195909,
St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income after
expenses was allocated to free or charitable services" in 1998. 53
REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00
OPERATING EXPENSES
Professional care of patients ₱1,016,608,394.00
Administrative 287,319,334.00
Household and Property 91,797,622.00
₱1,395,725,350.00
INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%
INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%
OTHER INCOME 17,482,304.00
EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00
In Lung Center, this Court declared:
"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the words
"used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with
exclusively. 54
The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC.
Services to paying patients are activities conducted for profit. They cannot be considered any other
way. There is a "purpose to make profit over and above the cost" of services. 55 The ₱1.73 billion total
revenues from paying patients is not even incidental to St. Luke's charity expenditure of ₱218,187,498
for non-paying patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said that
the income is "devoted or used altogether to the charitable object which it is intended to achieve." 56 The
income is plowed back to the corporation not entirely for charitable purposes, but for profit as well. In
any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities
for profit is taxable "regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
"any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco,
who was a member of the Committee of Conference for the Senate, which introduced the phrase "or
from any activity conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es
una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?
xxxx
R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posición social económica, lo que se paga por estos enfermos debe estar sujeto a 'income tax',

y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity
conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase "or any activity conducted
for profit."
The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation. Being
a non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution
from tax. An institution cannot use its corporate form to prevent its profitable activities from being
taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text
of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be "operated
exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-
profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely
subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those which
improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers. 1âw phi1
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined
that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus exempt
from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said
that "good faith and honest belief that one is not subject to tax on the basis of previous interpretation
of government agencies tasked to implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc.
is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax
rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National

Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1,
Rule 45 of the Rules of Court. SO ORDERED.
G.R. No. 203514
COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
ST. LUKE’S MEDICAL CENTER, INC., Respondent
DEL CASTILLO, J.:
The doctrine of stare decisis dictates that "absent any powerful countervailing considerations, like
cases ought to be decided alike."1
This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the May 9, 2012
Decision3 and the September 17, 2012 Resolution4 of the Court of Tax Appeals (CTA) in CTA EB Case
No. 716.
Factual Antecedents
On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received from the Large
Taxpayers Service-Documents Processing and Quality Assurance Division of the Bureau of Internal
Revenue (BIR) Audit Results/Assessment Notice Nos. QA-07-0000965 and QA-07-000097,6 assessing
respondent SLMC deficiency income tax under Section 27(B)7 of the 1997 National Internal Revenue
Code (NIRC), as amended, for taxable year 2005 in the amount of ₱78,617,434.54 and for taxable
year 2006 in the amount of ₱57,119,867.33.
On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an
administrative protest8 assailing the assessments. SLMC claimed that as a non-stock, non-profit
charitable and social welfare organization under Section 30(E) and (G)9 of the 1997 NIRC, as
amended, it is exempt from paying income tax.
On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed Assessment10 dated
April 9, 2008 increasing the deficiency income for the taxable year 2005 tax to ₱82,419,522.21 and
for the taxable year 2006 to ₱60,259,885.94, computed as follows:
For Taxable Year 2005:
ASSESSMENT NO. QA-07-000096
PARTICULARS AMOUNT
Sales/Revenues/Receipts/Fees ?3,623,511,616.00
Less: Cost of Sales/Services 2,643,049, 769.00

Gross Income From Operation 980,461,847.00
Add: Non-Operating & Other Income -
Total Gross Income 980,461,847.00
Less: Deductions 481,266,883 .00
Net Income Subject to Tax 499, 194,964.00
XTaxRate 10%
Tax Due 49,919,496.40
Less: Tax Credits -
Deficiency Income Tax 49,919,496.40
Add: Increments
25% Surcharge 12,479,874.10
20% Interest Per Annum (4115/06-4/15/08) 19,995,151.71
Compromise Penalty for Late Payment 25,000.00
Total increments 32,500,025.81
Total Amount Due ?82,419,522.21
For Taxable Year 2006:
ASSESSMENT NO. QA-07-000097
PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees ?3,8 l 5,922,240.00
Less: Cost of Sales/Services 2,760,518,437.00
Gross Income From Operation 1,055,403,803.00
Add: Non-Operating & Other Income -
Total Gross Income 1,055,403,803.00

Less: Deductions 640,147,719.00
Net Income Subject to Tax 415,256,084.00
XTaxRate 10%
Tax.Due 41,525,608.40
Less: Tax Credits -
Deficiency Income Tax 41,525,608.40
Add: Increments -
25% Surcharge 10,381,402.10
20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44
Compromise Penalty for Late Payment 25,000.00
Total increments 18,734,277.54
Total Amount Due ?60,259,885.9411
Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,12 docketed as CTA Case
No. 7789.
Ruling of the Court of Tax Appeals Division
On August 26, 2010, the CTA Division rendered a Decision13 finding SLMC not liable for deficiency
income tax under Section 27(B) of the 1997 NIRC, as amended, since it is exempt from paying income
tax under Section 30(E) and (G) of the same Code. Thus:
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, Audit
Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097, assessing petitioner for alleged
deficiency income taxes for the taxable years 2005 and 2006, respectively, are hereby CANCELLED
and SET ASIDE.
SO ORDERED.14
CIR moved for reconsideration but the CTA Division denied the same in its December 28, 2010
Resolution.15
This prompted CIR to file a Petition for Review16 before the CTA En Banc.
Ruling of the Court of Tax Appeals En Banc

On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the Audit
Results/Assessment Notices issued against SLMC. It sustained the findings of the CTA Division that
SLMC complies with all the requisites under Section 30(E) and (G) of the 1997 NIRC and thus, entitled
to the tax exemption provided therein.17
On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.
Issue
Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that the CTA erred
in exempting SLMC from the payment of income tax.
Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and 195960,
entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.,18 finding SLMC not
entitled to the tax exemption under Section 30(E) and (G) of the NIRC of 1997 as it does not operate
exclusively for charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. Thus, the Court disposed of the case in this manner:
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc.
is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax
rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section I,
Rule 45 of the Rules of Court.
SO ORDERED.19
Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing the Court that on
April 30, 2013, it paid the BIR the amount of basic taxes due for taxable years 1998, 2000-2002, and
2004-2007, as evidenced by the payment confirmation21 from the BIR, and that it did not pay any
surcharge, interest, and compromise penalty in accordance with the above-mentioned Decision of the
Court. In view of the payment it made, SLMC moved for the dismissal of the instant case on the ground
of mootness.
CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a
competent proof of payment as it is a mere photocopy and does not even indicate the quarter/sand/or
year/s said payment covers.22
In reply,23 SLMC submitted a copy of the Certification24 issued by the Large Taxpayers Service of the
BIR dated May 27, 2013, certifying that, "[a]s far as the basic deficiency income tax for taxable years
2000, 2001, 2002, 2004, 2005, 2006, 2007 are concen1ed, this Office considers the cases closed due
to the payment made on April 30, 2013." SLMC likewise submitted a letter25 from the BIR dated
November 26, 2013 with attached Certification of Payment26 and application for abatement,27 which it
earlier submitted to the Court in a related case, G.R. No. 200688, entitled Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.28

Thereafter, the parties submitted their respective memorandum.
CIR 's Arguments
CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under Section
27(B) of the 1997 NIRC.29 It likewise asserts that SLMC is liable to pay compromise penalty pursuant
to Section 248(A)30 of the 1997 NIRC for failing to file its quarterly income tax returns.31
As to the alleged payment of the basic tax, CIR contends that this does not render the instant case
moot as the payment confirmation submitted by SLMC is not a competent proof of payment of its tax
liabilities.32
SLMC's Arguments
SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos. 195909
and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.)33 positing that
earning a profit by a charitable, benevolent hospital or educational institution does not result in the
withdrawal of its tax exempt privilege.34 SLMC further claims that the income it derives from operating
a hospital is not income from "activities conducted for profit."35 Also, it maintains that in accordance
with the ruling of the Court in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
St. Luke's Medical Center, Inc.),36 it is not liable for compromise penalties.37
In any case, SLMC insists that the instant case should be dismissed in view of its payment of the basic
taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on April 30, 2013.38
Our Ruling
SLMC is liable for income tax under

Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned
The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as
its revenues from paying patients are concerned has been settled in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),39 where the Court ruled
that:
x x x We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and
(G) on the other hand, can be construed together without the removal of such tax exemption. The
effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions,
namely, proprietary non-profit educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(l).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. 'Proprietary' means private, following the
definition of a 'proprietary educational institution' as 'any private school maintained and administered
by private individuals or groups' with a government permit. 'Non-profit' means no net income or asset

accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v. Club Filipino,
Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course. The
club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise.
The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable. Tue Court
defined 'charity' in Lung Center of the Philippines v. Quezon City as 'a gift, to be applied consistently
with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and
hearts under the influence of education or religion, by assisting them to establish themselves in life or
[by] otherwise lessening the burden of government.' A nonprofit club for the benefit of its members
fails this test. An organization may be considered as non-profit if it does not distribute any part of its
income to stockholders or members. However, despite its being a tax exempt institution, any income
such institution earns from activities conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity
in Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by
the government is compensated by its relief from doing public works which would have been funded
by appropriations from the Treasury.
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it. The power of Congress to tax implies the power to
exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that '[n]o
law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress.' The requirements for a tax exemption are strictly construed against the
taxpayer because an exemption restricts the collection of taxes necessary for the existence of the
government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise as Hospital
de San Juan and Jesus Sacred Heart College which says that receiving income from paying patients
does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether outpatient, or confined in
the hospital, or receives subsidies from the government, so long as the money received is devoted or
used altogether to the charitable object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the institution.
For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that '[c]haritable institutions, churches

and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.' The test of exemption is not strictly a requirement
on the intrinsic nature or character of the institution. The test requires that the institution use property
in a certain way, i.e., for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its lot for commercial
purposes. The effect of failing to meet the use requirement is simply to remove from the tax exemption
that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E)
of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution 'actually, directly and exclusively' use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted 'exclusively'
for charitable purposes. The organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as 'one where no part of its income is distributable as dividends to its members,
trustees, or officers' and that any profit 'obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized.' However, under Lung Center, any profit by a charitable institution must not only be
plowed back 'whenever necessary or proper,' but must be 'devoted or used altogether to the charitable
object which it is intended to achieve.'
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
'no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person.' The use of lands, buildings and improvements of the institution is but a
part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso
facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property 'actually, directly and exclusively' for charitable
purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be 'organized and operated exclusively' for charitable purposes. Likewise, to be

exempt from income taxes, Section 30(G) of the NIRC requires that the institution be 'operated
exclusively' for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized and operated
exclusively' by providing that:
to tax imposed under this Code.
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
'any' activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the '[n]on-stock corporation
or association [must be] organized and operated exclusively for . . . charitable . . . purposes . . . . ' It
likewise qualifies the requirement in Section 30(G) that the civic organization must be 'operated
exclusively' for the promotion of social welfare.
Thus, even if the charitable institution must be 'organized and operated exclusively' for charitable
purposes, it is nevertheless allowed to engage in 'activities conducted for profit' without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the 'income of whatever kind
and character' of a charitable institution 'from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax.' Prior to the introduction of Section 27(B),
the tax rate on such income from for-profit activities was the ordinary corporate rate under Section
27(A). With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately ₱l.73 billion from paying patients is not an
institution 'operated exclusively' for charitable purposes. Clearly, revenues from paying patients are
income received from 'activities conducted for profit.' Indeed, St. Luke's admits that it derived profits
from its paying patients. St. Luke's declared ₱l,730,367,965 as 'Revenues from Services to Patients'
in contrast to its 'Free Services' expenditure of ₱218,187,498. In its Comment in G.R. No. 195909, St.
Luke's showed the following 'calculation' to support its claim that 65.20% of its 'income after expenses
was allocated to free or charitable services' in 1998.
x x xx
In Lung Center, this Court declared:
'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as enjoying a privilege
exclusively.' . . . The words 'dominant use' or 'principal use' cannot be substituted for the words 'used
exclusively' without doing violence to the Constitution and thelaw. Solely is synonymous with
exclusively.
The Court cannot expand the meaning of the words 'operated exclusively' without violating the NIRC.
Services to paying patients are activities conducted for profit. They cannot be considered any other
way. There is a 'purpose to make profit over and above the cost' of services. The ₱l.73 billion total
revenues from paying patients is not even incidental to St. Luke's charity expenditure of ₱2l8,187,498
for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said that
the income is 'devoted or used altogether to the charitable object which it is intended to achieve.' The
income is plowed back to the corporation not entirely for charitable purposes, but for profit as well. In
any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities
for profit is taxable 'regardless of the disposition made of such income.'
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
'any activity conducted for profit.' However, it quoted a deposition of Senator Mariano Jesus Cuenco,
who was a member of the Committee of Conference for the Senate, which introduced the phrase 'or
from any activity conducted for profit.'
P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree V d que es
una actividad esencial dicho hospital para el funcionamiento def colegio de medicina
de dicha universidad?
x x x x x x xxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posicion social economica, lo que se paga por estos enfermos debe estar sujeto a 'income tax',
y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity
conducted for profit.'
The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
1awp++i 1
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase 'or any activity conducted
for profit.'
The question in Jesus Sacred Heart College involves an educational institution. However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation. Being
a non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution
from tax. An institution cannot use its corporate form to prevent its profitable activities from being
taxed.
The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text
of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be 'operated
exclusively' for charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-
profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely
subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be lin1ited to institutions beneficial to the public and those which

improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined
that St. Luke's is 'a corporation for purely charitable and social welfare purposes' and thus exempt
from income tax. In Michael J Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that
'good faith and honest belief that one is not subject to tax on the basis of previous interpretation of
government agencies tasked to implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest.'40
A careful review of the pleadings reveals that there is no countervailing consideration for the Court to
revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis, which states that "[o]nce a
case has been decided in one way, any other case involving exactly the same point at issue x x x
should be decided in the same manner,"41 the Court finds that SLMC is subject to 10% income tax
insofar as its revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G) of the
1997 NIRC requires said institution to operate exclusively for charitable or social welfare purpose. But
in case an exempt institution under Section 30(E) or (G) of the said Code earns income from its for-
profit activities, it will not lose its tax exemption. However, its income from for-profit activities will be
subject to income tax at the preferential 10% rate pursuant to Section 27(B) thereof.
SLMC is not liable for Compromise

Penalty.
As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997 NIRC for its
alleged failure to file its quarterly income tax returns, this has also been resolved in G.R Nos. 195909
and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),42 where the
imposition of surcharges and interest under Sections 24843 and 24944 of the 1997 NIRC were deleted
on the basis of good faith and honest belief on the part of SLMC that it is not subject to tax. Thus,
following the ruling of the Court in the said case, SLMC is not liable to pay compromise penalty under
Section 248(A) of the 1997 NIRC.
The Petition is rendered moot by the

payment made by SLMC on April 30,
2013.
However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the instant
Petition has become moot. 1avv phi 1
While the Court agrees with the CIR that the payment confirmation from the BIR presented by SLMC
is not a competent proof of payment as it does not indicate the specific taxable period the said payment
covers, the Court finds that the Certification issued by the Large Taxpayers Service of the BIR dated
May 27, 2013, and the letter from the BIR dated November 26, 2013 with attached Certification of

Payment and application for abatement are sufficient to prove payment especially since CIR never
questioned the authenticity of these documents. In fact, in a related case, G.R. No. 200688,
entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, lnc.,45 the Court dismissed
the petition based on a letter issued by CIR confirming SLMC's payment of taxes, which is the same
letter submitted by SLMC in the instant case.
In fine, the Court resolves to dismiss the instant Petition as the same has been rendered moot by the
payment made by SLMC of the basic taxes for the taxable years 2005 and 2006, in the amounts of
₱49,919,496.40 and ₱4 l,525,608.40, respectively.46
WHEREFORE, the Petition is hereby DISMISSED. SO ORDERED.
G.R. No. 215427 December 10, 2014
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his capacity
as Commissioner of the Bureau of Internal Revenue, and JOHN DOE and JANE DOE, who are
Promulgated: persons acting for, in behalf or under the authority of respondent, Respondents.
PERALTA, J.:
The present petition stems from the Motion for Clarification filed by petitioner Philippine Amusement
and Gaming Corporation (PAGCOR) on September 13, 2013 in the case entitled Philippine
Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal Revenue, et al.,1 which
was promulgated on March 15, 2011. The Motion for Clarification essentially prays for the clarification
of our Decision in the aforesaid case, as well the issuance of a Temporary Restraining Order and/or
Writ of Preliminary Injunction against the Bureau of Internal Revenue (BIR), their employees, agents
and any other persons or entities acting or claiming any right on BIR’s behalf, in the implementation
of BIR Revenue Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013.
At the onset, it bears stressing that while the instant motion was denominated as a "Motion for
Clarification," in the session of the Court En Bancheld on November 25, 2014, the members thereof
ruled to treat the same as a new petition for certiorari under Rule 65 of the Rules of Court, given that
petitioner essentially alleges grave abuse of discretion on the part of the BIR amounting to lack or
excess of jurisdiction in issuing RMC No. 33-2013. Consequently, a new docket number has been
assigned thereto, while petitioner has been ordered to pay the appropriate docket fees pursuant to the
Resolution dated November 25,2014, the pertinent portion of which reads:
G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, et
al.). – The Court Resolved to
(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining Order
and/or Preliminary Injunction Application dated September 6, 2013 filed by PAGCOR;
(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for Clarification,
subject to payment of the appropriate docket fees; and

(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for Clarification
within five (5) days from notice hereof. Brion, J., no part and on leave. Perlas-Bernabe, J., on
official leave.
Considering that the parties havefiled their respective pleadings relative to the instant petition, and the
appropriate docket fees have been duly paid by petitioner, this Court considers the instant petition
submitted for resolution.
The facts are briefly summarized as follows:
On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and Prohibition
(With Prayer for the Issuance of a Temporary Restraining Order and/or Preliminary Injunction) seeking
the declaration of nullity of Section 12 of Republic Act (R.A.)No. 93373 insofar as it amends Section
27(C)4 of R.A. No. 8424,5 otherwise known as the National Internal Revenue Code (NIRC) by excluding
petitioner from the enumeration of government-owned or controlled corporations (GOCCs) exempted
from liability for corporate income tax.
On March 15, 2011, this Court rendered a Decision6 granting in part the petition filed by petitioner. Its
fallo reads:
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending
Section 27(c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine
Amusement and Gaming Corporation from the enumeration of government-owned and controlled
corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue
Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary
to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
No costs.
SO ORDERED.7
Both petitioner and respondent filed their respective motions for partial reconsideration, but the
samewere denied by this Court in a Resolution8 dated May 31, 2011.
Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision dated
March 15, 2011 and the Resolution dated May 31, 2011, which clarifies the "Income Tax and Franchise
Tax Due from the Philippine Amusement and Gaming Corporation (PAGCOR), its Contractees and
Licensees." Relevant portions thereof state:
II. INCOME TAX
Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended, PAGCOR is
no longer exempt from corporate income tax as it has been effectively omitted from the list of
government-owned or controlled corporations (GOCCs) that are exempt from income tax. Accordingly,
PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and other
similar recreation or amusement places, gaming pools, and other related operations, are subject to
corporate income tax under the NIRC, as amended. This includes, among others:
a) Income from its casino operations;
b) Income from dollar pit operations;

c) Income from regular bingo operations; and
d) Income from mobile bingo operations operated by it, with agents on commission basis.
Provided, however, that the agents’ commission income shall be subject to regular income tax,
and consequently, to withholding tax under existing regulations.
Income from "other related operations" includes, butis not limited to:
a) Income from licensed private casinos covered by authorities to operate issued to private
operators;
b) Income from traditional bingo, electronic bingo and other bingo variations covered by
authorities to operate issued to private operators;
c) Income from private internet casino gaming, internet sports betting and private mobile
gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and entertainment.
PAGCOR’s other income that is not connected with the foregoing operations are likewise subject to
corporate income tax under the NIRC, as amended.
PAGCOR’s contractees and licensees are entities duly authorized and licensed by PAGCOR to
perform gambling casinos, gaming clubs and other similar recreation or amusement places, and
gaming pools. These contractees and licensees are subject to income tax under the NIRC, as
amended.
III. FRANCHISE TAX
Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise tax of five percent
(5%) of the gross revenue or earnings it derives from its operations and licensing of gambling casinos,
gaming clubs and other similar recreation or amusement places, gaming pools, and other related
operations as described above.
On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of the tax
treatment of its income from gaming operations and other related operations under RMC No. 33-2013.
The request was, however, denied by the BIR Commissioner.
On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was,
accordingly, recorded in the Book of Entries of Judgment.10
Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an erroneous
interpretation and application of the aforesaid Decision, and seeking clarification with respect to the
following:

1. Whether PAGCOR’s tax privilege of paying 5% franchise tax in lieu of all other taxes with
respect toits gaming income, pursuant to its Charter – P.D. 1869, as amended by R.A. 9487,
is deemed repealed or amended by Section 1 (c) of R.A. 9337.
2. If it is deemed repealed or amended, whether PAGCOR’s gaming income is subject to both

5% franchise tax and income tax.
3. Whether PAGCOR’s income from operation of related services is subject to both income
tax and 5% franchise tax.
4. Whether PAGCOR’s tax privilege of paying 5% franchise tax inures to the benefit of third
parties with contractual relationship with PAGCOR in connection with the operation of
casinos.11
In our Decision dated March 15, 2011, we have already declared petitioner’s income tax liability in
view of the withdrawal of its tax privilege under R.A. No. 9337. However, we made no distinction as to
which income is subject to corporate income tax, considering that the issue raised therein was only
the constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner from the enumeration of
GOCCs exempted from corporate income tax.
For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCOR’s income is classified into
two: (1) income from its operations conducted under its Franchise, pursuant to Section 13(2) (b)
thereof (income from gaming operations); and (2) income from its operation of necessary and related
services under Section 14(5) thereof (income from other related services). In RMC No. 33-2013,
respondent further classified the aforesaid income as follows:
1. PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and other
similar recreation or amusement places, gaming pools, includes, among others:
(a) Income from its casino operations;
(b) Income from dollar pit operations;
(c) Income from regular bingo operations; and
(d) Income from mobile bingo operations operated by it, with agents on commission basis.
Provided, however, that the agents’ commission income shall be subject to regular income tax,
and consequently, to withholding tax under existing regulations.
2. Income from "other related operations"includes, but is not limited to:
(a) Income from licensed private casinos covered by authorities to operate issued to private
operators;
(b) Income from traditional bingo, electronic bingo and other bingo variations covered by
authorities to operate issued to private operators;
(c) Income from private internet casino gaming, internet sports betting and private mobile
gaming operations;
(d) Income from private poker operations;

(e) Income from junket operations;
(f) Income from SM demo units; and
(g) Income from other necessary and related services, shows and entertainment.12
After a thorough study of the arguments and points raised by the parties, and in accordance with our
Decision dated March 15, 2011, we sustain petitioner’s contention that its income from gaming
operations is subject only to five percent (5%) franchise tax under P.D. 1869, as amended, while its
income from other related services is subject to corporate income tax pursuant to P.D. 1869, as
amended, as well as R.A. No. 9337. This is demonstrable.
First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its
operation of related services. Accordingly, the income tax exemption ordained under Section 27(c) of
R.A. No. 8424 clearly pertains only to petitioner’sincome from operation of related services. Such
income tax exemption could not have been applicable to petitioner’s income from gaming operations
as it is already exempt therefrom under P.D. 1869, as amended, to wit: SECTION 13. Exemptions. –
xxxx
(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form, income or otherwise,
as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed
and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in
any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross
revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall
be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes,
levies, fees or assessments of any kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.13
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved
is subject to tax. This is the most sound and logical interpretation because petitioner could not have
been exempted from paying taxes which it was not liable to pay in the first place. This is clear from the
wordings of P.D. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue
or earnings derived by petitioner from its operation under the Franchise in lieuof all taxes of any kind
or form, as well as fees, charges or leviesof whatever nature, which necessarily include corporate
income tax.
In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its
income from gaming operations as the same is already exempted from all taxes of any kind or form,
income or otherwise, whether national or local, under its Charter, save only for the five percent (5%)
franchise tax. The exemption attached to the income from gaming operations exists independently
from the enactment of R.A. No. 8424. To adopt an assumption otherwise would be downright
ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption was granted
(then withdrawn) than when it was not granted at all in the first place.
Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of
the Committee on Ways and Means dated October 27, 1997, the exemption of petitioner from the
payment of corporate income tax was due to the acquiescence of the Committee on Ways and Means
to the request of petitioner that it be exempt from such tax. Based on the foregoing, it would be absurd
for petitioner to seek exemption from income tax on its gaming operations when under its Charter, it
is already exempted from paying the same.

Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable
construction is possible, the laws must be reconciled in that manner.14
As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The former lays
down the taxes imposable upon petitioner, as follows: (1) a five percent (5%) franchise tax of the gross
revenues or earnings derived from its operations conducted under the Franchise, which shall be due
and payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial or national government authority;15 (2)
income tax for income realized from other necessary and related services, shows and entertainment
of petitioner.16 With the enactment of R.A. No. 9337, which withdrew the income tax exemption under
R.A. No. 8424, petitioner’s tax liability on income from other related services was merely reinstated.
It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each kind of
activity oroperation. There is no inconsistency between the statutes; and in fact, they complement
each other.
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly provides
the tax treatment of petitioner’s income prevails over R.A. No. 9337, which is a general law. It is a
canon of statutory construction that a special law prevails over a general law — regardless of their
dates of passage — and the special is to be considered as remaining an exception to the general.17 The
rationale is:
Why a special law prevails over a general law has been put by the Court as follows: x x x x
x x x The Legislature consider and make provision for all the circumstances of the particular case. The
Legislature having specially considered all of the facts and circumstances in the particular case in
granting a special charter, it will not be considered that the Legislature, by adopting a general law
containing provisions repugnant to the provisions of the charter, and without making any mention of
its intention to amend or modify the charter, intended to amend, repeal, or modify the special act.
(Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway Co. vs. Nolting 34 Phil., 401.)18
Where a general law is enacted to regulate an industry, it is common for individual franchises
subsequently granted to restate the rights and privileges already mentioned in the general law, or to
amend the later law, as may be needed, to conform to the general law.19 However, if no provision or
amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that
the same is the intent of the lawmakers, for repeal of laws by implication is not favored.20
In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioner’s tax
exemption of its gaming income, then Section 13(2)(a) of P.D. 1869 should have been amended
expressly in R.A. No. 9487, or the same, at the very least, should have been mentioned in the repealing
clause of R.A. No. 9337.21 However, the repealing clause never mentioned petitioner’s Charter as one
of the laws being repealed. On the other hand, the repeal of other special laws, namely, Section 13 of
R.A. No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136, is categorically provided under
Section 24 (a) (b) of R.A. No. 9337, to wit:
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the
persons and/or transactions affected herein are made subject to the value-added tax subject to the
provisions of Title IV of the National Internal Revenue Code of 1997, as amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National Power
Corporation (NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of
generated power by generation companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or
parts thereof which are contrary to and inconsistent with any provisions of this Act are hereby
repealed, amended or modified accordingly.22
When petitioner’s franchise was extended on June 20, 2007 without revoking or withdrawing itstax
exemption, it effectively reinstated and reiterated all of petitioner’s rights, privileges and authority
granted under its Charter. Otherwise, Congress would have painstakingly enumerated the rights and
privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to
a person. Thus, the extension of petitioner’s franchise under the sameterms and conditions means a
continuation of its tax exempt status with respect to its income from gaming operations. Moreover, all
laws, rules and regulations, or parts thereof, which are inconsistent with the provisions ofP.D. 1869,
as amended, a special law, are considered repealed, amended and modified, consistent with Section
2 of R.A. No. 9487, thus:
SECTION 2. Repealing Clause. – All laws, decrees, executive orders, proclamations, rules and
regulations and other issuances, or parts thereof, which are inconsistent with the provisions of this
Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt
such reasonable and beneficial construction which will render the provision thereof operative and
effective, as well as harmonious with each other.23
Given that petitioner’s Charter is notdeemed repealed or amended by R.A. No. 9337, petitioner’s
income derived from gaming operations is subject only to the five percent (5%)franchise tax, in
accordance with P.D. 1869, as amended. With respect to petitioner’s income from operation of other
related services, the same is subject to income tax only. The five percent (5%) franchise tax finds no
application with respect to petitioner’s income from other related services, inview of the express
provision of Section 14(5) of P.D. 1869, as amended, to wit:
Section 14. Other Conditions.
xxxx
(5) Operation of related services. — The Corporation is authorized to operate such necessary and
related services, shows and entertainment. Any income that may be realized from these related
services shall not be included as part of the income of the Corporation for the purpose of applying the
franchise tax, but the same shall be considered as a separate income of the Corporation and shall be
subject to income tax.24
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from
other related services without basis therefor.
For proper guidance, the first classification of PAGCOR’s income under RMC No. 33-2013 (i.e.,
income from its operations and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gambling pools) should be interpreted in relation to Section 13(2) of
P.D. 1869, which pertains to the income derived from issuing and/or granting the license to operate
casinos to PAGCOR’s contractees and licensees, as well as earnings derived by PAGCOR from its
own operations under the Franchise. On the other hand, the second classification of PAGCOR’s
income under RMC No. 33-2013 (i.e., income from other related operations) should be interpreted in

relation to Section 14(5) of P.D. 1869, which pertains to income received by PAGCOR from its
contractees and licensees in the latter’s operation of casinos, as well as PAGCOR’s own income from
operating necessary and related services, shows and entertainment.
As to whether petitioner’s tax privilege of paying five percent (5%) franchise tax inures to the benefit
of third parties with contractual relationship with petitioner in connection with the operation of casinos,
we find no reason to rule upon the same. The resolution of the instant petition is limited to clarifying
the tax treatment of petitioner’s income vis-à-visour Decision dated March 15, 2011. This Decision is
not meant to expand our original Decision by delving into new issues involving petitioner’s contractees
and licensees. For one, the latter are not parties to the instant case, and may not therefore stand to
benefit or bear the consequences of this resolution. For another, to answer the fourth issue raised by
petitioner relative to its contractees and licensees would be downright premature and iniquitous as the
same would effectively countenance sidesteps to judicial process.
In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion
amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting both income from gaming
operations and other related services to corporate income tax and five percent (5%) franchise
tax. This unduly expands our Decision dated March 15, 2011 without due process since the imposition
1âw phi1
creates additional burden upon petitioner. Such act constitutes an overreach on the part of the
respondent, which should be immediately struck down, lest grave injustice results. More, it is settled
that in case of discrepancy between the basic law and a rule or regulation issued to implement said
law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and
provisions of the basic law.
In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of R.A.
No. 8424, by excluding petitioner from the enumeration of GOCCs exempted from corporate income
tax, is valid and constitutional. In addition, we hold that:
1. Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes
with respect to its income from gaming operations, pursuant to P.D. 1869, as amended, is not
repealed or amended by Section l(c) ofR.A. No. 9337;
2. Petitioner's income from gaming operations is subject to the five percent (5%) franchise tax
only; and
3. Petitioner's income from other related services is subject to corporate income tax only.
In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the
implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on petitioner's
income derived from its gaming operations; and (2) franchise tax on petitioner's income from other
related services.
WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to cease and
desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on
petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's income
from other related services.
SO ORDERED.

G.R. No. 212530, August 10, 2016
BLOOMBERRY RESORTS AND HOTELS, INC., Petitioner, v. BUREAU OF INTERNAL
REVENUE, REPRESENTED BY COMMISSIONER KIM S. JACINTO-HENARES, Respondent.
PEREZ, J.:
This is a Petition for Certiorari and Prohibition under Rule 65 of the Rules on Court seeking: (a) to
annul the issuance by the Commissioner of Internal Revenue (CIR) of an alleged unlawful
governmental regulation, specifically the provision of Revenue Memorandum Circular (RMC) No. 33-
20131 dated 17 April 2013 subjectingcontractees and licensees of the Philippine Amusement and
Gaming Corporation (PAGCOR) to income tax under the National Internal Revenue Code (NIRC) of
1997, as amended; and (b) to enjoin respondent CIR from implementing the assailed provision of RMC
No. 33-2013.2chanrobleslaw
The Facts
As narrated in the present petition, the factual antecedents of the case reveal that, on 8 April 2009,
PAGCOR granted to petitioner a provisional license to establish and operate an integrated resort and
casino complex at the Entertainment City project site of PAGCOR. Petitioner and its parent company,
Sureste Properties, Inc., own and operate Solaire Resort & Casino. Thus, being one of its licensees,
petitioner only pays PAGCOR license fees, in lieu of all taxes, as contained in its provisional license
and consistent with the PAGCOR Charter or Presidential Decree (PD) No. 1869,3 which provides the
exemption from taxes of persons or entities contracting with PAGCOR in casino operations.
However, when Republic Act (R.A.) No. 9337 took effect4, it amended Section 27(C) of the NIRC of
1997, which excluded PAGCOR from the enumeration of government-owned or controlled
corporations (GOCCs) exempt from paying corporate income tax. The enactment of the law led to the
case of PAGCOR v. The Bureau of Internal Revenue, et al.,5 where PAGCOR questioned the validity
or constitutionality of R.A. No. 9337 removing its exemption from paying corporate income tax, and
therefore alleging the same to be void for being repugnant to the equal protection and the non-
impairment clauses embodied in the 1987 Philippine Constitution. Subsequently, the Court articulated
that Section 1 of RA No. 9337, amending Section 27(C) of the NIRC of 1997, which removed
PAGCOR's exemption from corporate income tax, was indeed valid and constitutional.
Consequently, in implementing the aforesaid amendments made by R.A. No. 9337, respondent issued
RMC No. 33-2013 dated 17 April 2013 declaring that PAGCOR, in addition to the five percent (5%)
franchise tax of its gross revenue under Section 13(2)(a) of PD No. 1869, is now subject to corporate
income tax under the NIRC of 1997, as amended. In addition, a provision therein states that
PAGCOR's contractees and licensees, being entities duly authorized and licensed by it to perform
gambling casinos, gaming clubs and other similar recreation or amusement places, and gaming pools,
are likewise subject to income tax under the NIRC of 1997, as amended.
Aggrieved, as it is now being considered liable to pay corporate income tax in addition to the 5%
franchise tax, petitioner immediately elevated the matter through a petition for certiorari and prohibition
before this Court asserting the following arguments: (i) PD No. 1869, as amended by R.A. No. 9487,
is an existing valid law, and expressly and clearly exempts the contractees and licensees of PAGCOR
from the payment of all kinds of taxes except the 5% franchise tax on its gross gaming revenue; (ii)
This clear exemption from taxes of PAGCOR's contracting parties under Section 13(2)(b) of PD No.
1869, as amended by R.A. No. 9487, was not repealed by the deletion of PAGCOR in the list of tax-
exempt entities under the NIRC; (iii) Respondent CIR acted without or in excess of its jurisdiction, or

with grave abuse of discretion amounting to lack or excess of jurisdiction when she issued the assailed
provision in RMC No. 33-2013 which, in effect, repealed or amended PD No. 1869; and (iv)
Respondent CIR, in issuing the assailed provision in RMC No. 33-2013, will adversely affect an
industry which seeks to create income for the government, promote tourism and generate jobs for the
Filipino people.
To rationalize its direct recourse before this Court, petitioner submits the following justification:
(a) What is involved is a pure question of law, i.e. whether or not petitioner is exempted from
payment of all taxes, national or local, except the 5% franchise tax by virtue of Section
13(2)(b) of PD No. 1869, as amended;
(b) The rule on exhaustion of administrative remedies is disregarded, among others, when:
(i) the administrative action is patently illegal amounting to lack or excess of jurisdiction;
(ii) to require exhaustion of administrative remedies would be unreasonable; and (iii) it
would amount to nullification of a claim;
(c) The gaming business funded by private investors under license by PAGCOR is a new
industry which involves national interest. Hence, the inclusion of the assailed provision
in RMC No. 33-2013 which implements income taxes on PAGCOR's licensees and
operators when an exemption for such is specifically provided for by PD No. 1869, as
amended, being unlawful and unwarranted legislation by the respondent, seriously
affects national interest as it effectively curtails the basis for the investments in the
industry and resulting tourist interest and jobs generated by the industry; and
(d) The assailed provision of RMC No. 33-2013 affects not only petitioner or other locators
and PAGCOR licensees in Entertainment City, Parañaque City, but also the rest of
private casinos licensed by PAGCOR operating in economic zones. Thus, in order to
prevent multiplicity of suits and to avoid a situation when different local courts issue
differing opinions on one question of law, direct recourse to this Court is likewise sought.7
It is the contention of petitioner that although Section 4 of the NIRC of 1997, as amended, gives
respondent CIR the power to interpret the provisions of tax laws through administrative issuances, she
cannot, in the exercise of such power, issue administrative rulings or circulars not consistent with the
law sought to be applied since administrative issuances must not override, supplant or modify the law,
but must remain consistent with the law they intend to carry out. Since the assailed provision in RMC
No. 33-2013 subjecting the contractees and licensees of PAGCOR to income tax under the NIRC of
1997, as amended, contravenes the provision of the PAGCOR Charter granting tax exemptions to
corporations, associations, agencies, or individuals with whom PAGCOR has any contractual
relationship in connection with the operations of the casinos authorized to be conducted under the

PAGCOR Charter, it is petitioner's position that the assailed provision was issued by respondent CIR
with grave abuse of discretion amounting to lack or excess of jurisdiction.
Respondent, in her Comment filed on 18 December 2014,8 counters that there was no grave abuse of
discretion on her part when she issued the subject revenue memorandum circular since it did not alter,
modify or amend the intent and meaning of Section 13(2)(b) of PD No. 1869, as amended, insofar as
the imposition is concerned, considering that it merely clarified the taxability of PAGCOR and
its contractees and licensees for income tax purposes as well as other franchise grantees similarly
situated under prevailing laws; that prohibition will not lie to restrain a purely administrative act, nor
enjoin acts already done, being a preventive remedy; and that tax exemptions are strictly construed
against the taxpayer.
The Issues
Hence, we are now presented with the following issues for our consideration and resolution: (i) whether
or not the assailed provision of RMC No. 33-2013 subjecting the contractees and licensees of
PAGCOR to income tax under the NIRC of 1997, as amended, was issued by respondent CIR with
grave abuse of discretion amounting to lack or excess of jurisdiction; and (ii) whether or not said
provision is valid or constitutional considering that Section 13(2)(b) of PD No. 1869, as amended
(PAGCOR Charter), grants tax exemptions to such contractees and licensees.
Our Ruling
At the outset, although it is true that direct recourse before this Court is occasionally allowed in
exceptional cases without strict observance of the rules on hierarchy of courts and on exhaustion of
administrative remedies, we find the imperious need to first determine whether or not this case falls
within the said exceptions, before we delve into the merits of the instant petition.
We thus find the need to look back at the dispositions rendered in Asia International Auctioneers, Inc.,
et al. v. Parayno, Jr.,9 wherein we ruled that revenue memorandum circulars10 are considered
administrative rulings issued from time to time by the CIR. It has been explained that these are actually
rulings or opinions of the CIR issued pursuant to her power under Section 411 of the NIRC of 1997, as
amended, to make rulings or opinions in connection with the implementation of the provisions of
internal revenue laws, including ruling on the classification of articles of sales and similar purposes.
Therefore, it was held that under R.A. No. 1125,12 which was thereafter amended by RA No.
9282,13 such rulings of the CIR (including revenue memorandum circulars) are appealable to the Court
of Tax Appeals (CTA), and not to any other courts.
In the same case, we further declared that "failure to ask the CIR for a reconsideration of the assailed
revenue regulations and RMCs is another reason why a case directly filed before us should be
dismissed. 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 to 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."
Then, in The Philippine American Life and General Insurance Company v. Secretary of Finance,15 we

had the occasion to elucidate that the CIR's power to interpret the provisions of the Tax Code and
other tax laws is subject to the review by the Secretary of Finance; and thereafter, the latter's ruling
may be appealed to the CTA, having the technical knowledge over the subject controversies. Also,
the Court held 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 [regional trial
court] 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."16 Stated differently, the CTA "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."17 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. Upon the exercise of this prerogative,
we are ushered into the merits of the case.
The determination of the submissions of petitioner will have to follow the pilot case of PAGCOR v. The
Bureau of Internal Revenue, et al.,18 where this Court clarified its earlier ruling in G.R. No.
17208719 involving the same parties, and expressed that: (i) Section 1 of RA No. 9337, amending
Section 27(C) of the NIRC of 1997, as amended, which excluded PAGCOR from the enumeration of
GOCCs exempted from corporate income tax, is valid and constitutional; (ii) PAGCOR's tax privilege
of paying five percent (5%) franchise tax in lieu of all other taxes with respect to its income from gaming
operations is not repealed or amended by Section l(c) of R.A. No. 9337; (iii) PAGCOR's income from
gaming operations is subject to the 5% franchise tax only; and (iv) PAGCOR's income from other
related services is subject to corporate income tax only.
The Court sitting En Banc expounded on the matter in this wise:

After a thorough study of the arguments and points raised by the parties, and in accordance with our
Decision dated March 15, 2011, we sustain [PAGCOR's] contention that its income from gaming
operations is subject only to five percent (5%) franchise tax under P.D. No. 1869, as
amended, while its income from other related services is subject to corporate income tax pursuant to
P.D. No. 1869, as amended, as well as R.A. No. 9337. This is demonstrable.
First. Under P.D. No. 1869, as amended, [PAGCOR] is subject to income tax only with respect to its
operation of related services. Accordingly, the income tax exemption ordained under Section 27(c) of
R.A. No. 8424 clearly pertains only to [PAGCOR's] income from operation of related services. Such
income tax exemption could not have been applicable to [PAGCOR's] income from gaming
operations as it is already exempt therefrom under P.D. No. 1869, as amended, to wit:
SECTION 13. Exemptions. –

XXXX
(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges or levies of whatever nature, whether National or Local,
shall be assessed and collected under this Franchise from the Corporation; nor shall any form
of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax
of five (5%) percent of the gross revenue or earnings derived by the Corporation from its
operation under this Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature
or description, levied, established or collected by any municipal, provincial, or national government
authority.
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved
is subject to tax. This is the most sound and logical interpretation because [PAGCOR] could not have
been exempted from paying taxes which it was not liable to pay in the first place. This is clear from
the wordings of P.D. No. 1869, as amended, imposing a franchise tax of five percent (5%) on
its gross revenue or earnings derived by [PAGCOR] from its operation under the Franchise in
lieu of all taxes of any kind or form, as well as fees, charges or levies of whatever nature, which
necessarily include corporate income tax.
In other words, there was no need for Congress to grant tax exemption to [PAGCOR] with
respect to its income from gaming operations as the same is already exempted from all taxes
of any kind or form, income or otherwise, whether national or local, under its Charter, save
only for the five percent (5%) franchise tax. The exemption attached to the income from gaming
operations exists independently from the enactment of R.A. No. 8424. To adopt an assumption
otherwise would be downright ridiculous, if not deleterious, since [PAGCOR] would be in a worse
position if the exemption was granted (then withdrawn) than when it was not granted at all in the first
place.20 (Emphasis supplied)
Furthermore,
Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable
construction is possible, the laws must be reconciled in the manner.
As we see it, there is no conflict between P.D. No. 1869, as amended, and R.A. No. 9337. The
former lays down the taxes imposable upon [PAGCOR], as follows: (1) a five percent (5%) franchise
tax of the gross revenues or earnings derived from its operations conducted under the Franchise,
which shall be due and payable in lieu of all kinds of taxes, levies, fees or assessments of any kind,
nature or description, levied, established or collected by any municipal, provincial or national
government authority; and (2) income tax for income realized from other necessary and related
services, shows and entertainment of [PAGCOR]. With the enactment of R.A. No. 9337, which
withdrew the income tax exemption under R.A. No. 8424, [PAGCOR's] tax liability on income
from other related services was merely reinstated.
It cannot be gainsaid, therefore, that the nature of taxes imposable is well defined for each kind of
activity or operation. There is no inconsistency between the statutes; and in fact, they complement
each other.
Third. Even assuming that an inconsistency exists, P.D. No. 1869, as amended, which expressly
provides the tax treatment of [PAGCOR's] income prevails over R.A. No. 9337, which is a general
law. It is a canon of statutory construction that a special law prevails over a general law —

regardless of their dates of passage — and the special is to be considered as remaining an
exception to the general. x x x
x x x x Where a general law is enacted to regulate an industry, it is common for individual franchises
subsequently granted to restate the rights and privileges already mentioned in the general law, or to
amend the later law, as may be needed, to conform to the general law. However, if no provision or
amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that
the same is the intent of the lawmakers, for repeal of laws by implication is not favored.
In this regard, we agree with [PAGCOR] that if the lawmakers had intended to withdraw
[PAGCOR's] tax exemption of its gaming income, then Section 13(2)(a) of P.D. 1869 should
have been amended expressly in R.A. No. 9487, or the same, at the very least, should have
been mentioned in the repealing clause of R.A. No. 9337. However, the repealing clause never
mentioned [PAGCOR's] Charter as one of the laws being repealed. On the other hand, the repeal
of other special laws, namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph of R.A.
No. 9136, is categorically provided under Section 24(a) (b) of R.A. No. 9337, x x x.
xxxx
When [PAGCOR's] franchise was extended on June 20, 2007 without revoking or withdrawing
its tax exemption, it effectively reinstated and reiterated all of [PAGCOR's] rights, privileges
and authority granted under its Charter. Otherwise, Congress would have painstakingly
enumerated the rights and privileges that it wants to withdraw, given that a franchise is a legislative
grant of a special privilege to a person. Thus, the extension of [PAGCOR's] franchise under the
same terms and conditions means a continuation of its tax exempt status with respect to its
income from gaming operations. Moreover, all laws, rules and regulations, or parts thereof, which
are inconsistent with the provisions of P.D. 1869, as amended, a special law, are considered repealed,
amended and modified, consistent with Section 2 of R.A. No. 9487, thus:
SECTION 2. Repealing Clause. – All laws, decrees, executive orders, proclamations, rules and
regulations and other issuances, or parts thereof, which are inconsistent with the provisions of this
Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt
such reasonable and beneficial construction which will render the provision thereof operative and
effective, as well as harmonious with each other.
Given that [PAGCOR's] Charter is not deemed repealed or amended by R.A. No. 9337,
[PAGCOR's] income derived from gaming operations is subject only to the five percent (5%)
franchise tax, in accordance with P.D. 1869, as amended. With respect to [PAGCOR's] income
from operation of other related services, the same is subject to income tax only. The five percent (5%)
franchise tax finds no application with respect to [PAGCOR's] income from other related services, in
view of the express provision of Section 14(5) of P.D. No. 1869, as amended, x x x.21 (Emphasis
supplied)
The Court through Justice Diosdado M. Peralta, categorically followed what was simply provided under
the PAGCOR Charter (PD No. 1869, as amended by RA No. 9487), by proclaiming that despite
amendments to the NIRC of 1997, the said Charter remains in effect. Thus, income derived by
PAGCOR from its gaming operations such as the operation and licensing of gambling casinos, gaming
clubs and other similar recreation or amusement places, gaming pools and related operations is
subject only to 5% franchise tax, in lieu of all other taxes, including corporate income tax. The Court

concluded that the CIR committed grave abuse of discretion amounting to lack or excess of
jurisdiction when it issued RMC No. 33-2013 subjecting both income from gaming operations
and other related services to corporate income tax and 5% franchise tax considering that it
unduly expands the Court's Decision dated 15 March 2011 without due process, which creates
additional burden upon PAGCOR.
Noticeably, however, the High Court in the abovementioned case intentionally did not rule on the issue
of whether or not PAGCOR's tax privilege of paying only the 5% franchise tax in lieu of all other taxes
inures to the benefit of third parties with contractual relationship with it in connection with the operation
of casinos, such as petitioner herein. The Court sitting En Bane simply stated that:
The resolution of the instant petition is limited to clarifying the tax treatment of [PAGCOR's] income vis-
a-vis our Decision dated March 15, 2011. This Decision (dated 10 December 2014) is not meant to
expand our original Decision (dated 15 March 2011) by delving into new issues involving [PAGCOR's]
contractees and licensees. For one, the latter are not parties to the instant case, and may not therefore
stand to benefit or bear the consequences if this resolution. For another, to answer the fourth issue
raised by [PAGCOR] relative to its contractees and licensees would be downright premature and
iniquitous as the same would effectively countenance sidesteps to judicial process.22
Bearing in mind the parties involved and the similarities of the issues submitted in the present case,
we are now presented with the prospect of finally resolving the confusion caused by the amendments
introduced by RA No. 9337 to the NIRC of 1997, and the subsequent issuance of RMC No. 33-2013,
affecting the tax regime not only of PAGCOR but also its contractees and licensees under the existing
laws and prevailing jurisprudence.
Section 13 of PD No. 1869 evidently states that payment of the 5% franchise tax by PAGCOR and
its contractees and licensees exempts them from payment of any other taxes, including corporate
income tax, quoted hereunder for ready reference:
Sec. 13. Exemptions. –
xxxx
(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges or levies of whatever nature, whether National or Local,
shall be assessed and collected under this Franchise from the Corporation; nor shall any form
of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax
of five (5%) percent of the gross revenue or earnings derived by the Corporation from its
operation under this Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature
or description, levied, established or collected by any municipal, provincial, or national government
authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted
under the franchise specifically from the payment of any tax, income or otherwise, as well as
any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation or other remuneration
from the Corporation or operator as a result of essential facilities furnished and/or technical
services rendered to the Corporation or operator. (Emphasis and underlining supplied)

As previously recognized, the above-quoted provision providing for the said exemption was neither
amended nor repealed by any subsequent laws (i.e. Section 1 of R.A. No. 9337 which amended
Section 27(C) of the NIRC of 1997); thus, it is still in effect. Guided by the doctrinal teachings in
resolving the case at bench, it is without a doubt that, like PAGCOR, its contractees and
licensees remain exempted from the payment of corporate income tax and other taxes since the law
is clear that said exemption inures to their benefit.
We adhere to the cardinal rule in statutory construction that when the law is clear and free from any
doubt or ambiguity, there is no room for construction or interpretation. As has been our consistent
ruling, where the law speaks in clear and categorical language, there is no occasion for interpretation;
there is only room for application.
As the PAGCOR Charter states in unequivocal terms that exemptions granted for earnings derived
from the operations conducted under the franchise specifically from the payment of any tax, income
or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend
to corporation(s), association(s), agency(ies), or individual(s) with whom the PAGCOR or operator has
any contractual relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise, so it must be that all contractees and licensees of PAGCOR, upon
payment of the 5% franchise tax, shall likewise be exempted from all other taxes, including corporate
income tax realized from the operation of casinos.
For the same reasons that made us conclude in the 10 December 2014 Decision of the Court sitting
En Banc in G.R. No. 215427 that PAGCOR is subject to corporate income tax for "other related
services", we find it logical that its contractees and licensees shall likewise pay corporate income tax
for income derived from such "related services."
Simply then, in this case, we adhere to the principle that since the statute is clear and free from
ambiguity, it must be given its literal meaning and applied without attempted interpretation. This is the
plain meaning rule or verba legis, as expressed in the maxim index animi sermo or speech is the index
of intention.
Plainly, too, upon payment of the 5% franchise tax, petitioner's income from its gaming operations of
gambling casinos, gaming clubs and other similar recreation or amusement places, and gaming pools,
defined within the purview of the aforesaid section, is not subject to corporate income tax.
WHEREFORE, the petition is GRANTED. Accordingly, respondent Bureau of Internal Revenue,

represented by Commissioner Kim S. Jacinto-Henares is hereby ORDERED to CEASE AND
DESIST from implementing Revenue Memorandum Circular No. 33-2013 insofar as it imposes
corporate income tax on petitioner Bloomberry Resorts and Hotels, Inc.'s income derived from its
gaming operations.
SO ORDERED.

G.R. No. 108067 January 20, 2000
CYANAMID PHILIPPINES, INC., petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondent.
QUISUMBING, J.:
Petitioner disputes the decision1 of the Court of Appeals which affirmed the decision2 of the Court of
Tax Appeals, ordering petitioner to pay respondent Commissioner of Internal Revenue the amount of
three million, seven hundred seventy-four thousand, eight hundred sixty seven pesos and fifty
centavos (P3,774,867.50) as 25% surtax on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985 to January 30, 1987, under Sec. 25 of the
National Internal Revenue Code.1âwphi1.nêt
The Court of Tax Appeals made the following factual findings:

Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly
owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture
of pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an
importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of
deficiency income tax of one hundred nineteen thousand eight hundred seventeen (P119,817.00)
pesos for taxable year 1981, as follows:
Net income disclosed by the return as audited 14,575,210.00
Add: Discrepancies:
Professional fees/yr. 17018 261,877.00
per investigation 110,399.37
Total Adjustment 152,477.00
Net income per Investigation 14,727,687.00
Less: Personal and additional exemptions
Amount subject to tax 14,727,687.00
Income tax due thereon . . . 25% Surtax 2,385,231.50 3,237,495.00
Less: Amount already assessed 5,161,788.00
BALANCE 75,709.00

monthly interest from 1,389,639.00 44,108.00
Compromise penalties
TOTAL AMOUNT DUE 3,774,867.50 119,817.003
On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax Assessment
of P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00; and 1981 Deficiency
Percentage Assessment of P8,846.72.4 Petitioner, through its external accountant, Sycip, Gorres,
Velayo & Co., claimed, among others, that the surtax for the undue accumulation of earnings was not
proper because the said profits were retained to increase petitioner's working capital and it would be
used for reasonable business needs of the company. Petitioner contended that it availed of the tax
amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution
granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the cancellation of
the assessment notices and rendered its resolution, as follows:
It appears that your client availed of Executive Order No. 41 under File No. 32A-F-000455-41B as
certified and confirmed by our Tax Amnesty Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the availment of the tax amnesty under Executive
Order No. 41, as amended is sufficient basis, in appropriate cases, for the cancellation of the
assessment issued after August 21, 1986. (Revenue Memorandum Order No. 4-87) Said availment
does not, therefore, result in cancellation of assessments issued before August 21, 1986. as in the
instant case. In other words, the assessments in this case issued on January 30, 1985 despite your
client's availment of the tax amnesty under Executive Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your client to pay this Office the
aforementioned deficiency income tax and surtax on undue accumulation of surplus in the respective
amounts of P119,817.00 and P3,774,867.50 inclusive of interest thereon for the year 1981, within
thirty (30) days from receipt hereof, otherwise this office will be constrained to enforce collection
thereof thru summary remedies prescribed by law.
This constitutes the final decision of this Office on this matter.5
Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, however, both
parties agreed to compromise the 1981 deficiency income tax assessment of P119,817.00. Petitioner
paid a reduced amount — twenty-six thousand, five hundred seventy-seven pesos (P26,577.00) — as
compromise settlement. However, the surtax on improperly accumulated profits remained unresolved.
Petitioner claimed that CIR's assessment representing the 25% surtax on its accumulated earnings
for the year 1981 had no legal basis for the following reasons: (a) petitioner accumulated its earnings
and profits for reasonable business requirements to meet working capital needs and retirement of
indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid Company, a
corporation organized under the laws of the State of Maine, in the United States of America, whose
shares of stock are listed and traded in New York Stock Exchange. This being the case, no individual

shareholder income taxes by petitioner's accumulation of earnings and profits, instead of distribution
of the same.
In denying the petition, the Court of Tax Appeals made the following pronouncements:
Petitioner contends that it did not declare dividends for the year 1981 in order to use the accumulated
earnings as working capital reserve to meet its "reasonable business needs". The law permits a stock
corporation to set aside a portion of its retained earnings for specified purposes (citing Section 43,
paragraph 2 of the Corporation Code of the Philippines). In the case at bar, however, petitioner's
purpose for accumulating its earnings does not fall within the ambit of any of these specified purposes.
More compelling is the finding that there was no need for petitioner to set aside a portion of its retained
earnings as working capital reserve as it claims since it had considerable liquid funds. A thorough
review of petitioner's financial statement (particularly the Balance Sheet, p. 127, BIR Records) reveals
that the corporation had considerable liquid funds consisting of cash accounts receivable, inventory
and even its sales for the period is adequate to meet the normal needs of the business. This can be
determined by computing the current asset to liability ratio of the company:
current ratio = current assets/ current liabilities
= P 47,052,535.00 / P21,275,544.00
= 2.21: 1
========
The significance of this ratio is to serve as a primary test of a company's solvency to meet current
obligations from current assets as a going concern or a measure of adequacy of working capital.
xxx xxx xxx
We further reject petitioner's argument that "the accumulated earnings tax does not apply to a publicly-
held corporation" citing American jurisprudence to support its position. The reference finds no
application in the case at bar because under Section 25 of the NIRC as amended by Section 5 of P.D.
No. 1379 [1739] (dated September 17, 1980), the exceptions to the accumulated earnings tax are
expressly enumerated, to wit: Bank, non-bank financial intermediaries, corporations organized
primarily, and authorized by the Central Bank of the Philippines to hold shares of stock of banks,
insurance companies, or personal holding companies, whether domestic or foreign. The law on the
matter is clear and specific. Hence, there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as to whether the provision of Section 25 of
the NIRC should apply to petitioner.
Equally clear and specific are the provisions of E.O. 41 particularly with respect to its effectivity and
coverage . . .
. . . Said availment does not result in cancellation of assessments issued before August 21, 1986 as
petitioner seeks to do in the case at bar. Therefore, the assessments in this case, issued on January
30, 1985 despite petitioner's availment of the tax amnesty under E.O. 41 as amended, still subsist.
xxx xxx xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay respondent Commissioner of
Internal Revenue the sum of P3,774,867.50 representing 25% surtax on improper accumulation of
profits for 1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30,
1987.6

Petitioner appealed the Court of Tax Appeal's decision to the Court of Appeals. Affirming the CTA
decision, the appellate court said:
In reviewing the instant petition and the arguments raised herein, We find no compelling reason to
reverse the findings of the respondent Court. The respondent Court's decision is supported by
evidence, such as petitioner corporation's financial statement and balance sheets (p. 127, BIR
Records). On the other hand the petitioner corporation could only come up with an alternative formula
lifted from a decision rendered by a foreign court (Bardahl Mfg. Corp. vs. Commissioner, 24 T.C.M.
[CCH] 1030). Applying said formula to its particular financial position, the petitioner corporation
attempts to justify its accumulated surplus earnings. To Our mind, the petitioner corporation's
alternative formula cannot overturn the persuasive findings and conclusion of the respondent Court
based, as it is, on the applicable laws and jurisprudence, as well as standards in the computation of
taxes and penalties practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the decision of
the Court of Tax Appeals dated August 6, 1992 in C.T.A. Case No. 4250 is AFFIRMED in toto.7
Hence, petitioner now comes before us and assigns as sole issue:
WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER IS LIABLE
FOR THE ACCUMULATED EARNINGS TAX FOR THE YEAR 1981.8
Sec. 259 of the old National Internal Revenue Code of 1977 states:
Sec. 25. Additional tax on corporation improperly accumulating profits or surplus —
(a) Imposition of tax. — If any corporation is formed or availed of for the purpose of preventing the
imposition of the tax upon its shareholders or members or the shareholders or members of another
corporation, through the medium of permitting its gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed against such corporation, for each taxable year, a
tax equal to twenty-five per-centum of the undistributed portion of its accumulated profits or surplus
which shall be in addition to the tax imposed by section twenty-four, and shall be computed, collected
and paid in the same manner and subject to the same provisions of law, including penalties, as that
tax.
(b) Prima facie evidence. — The fact that any corporation is mere holding company shall be prima
facie evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption
will lie in the case of an investment company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned, directly or indirectly, by one person.
(c) Evidence determinative of purpose. — The fact that the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable needs of the business shall be determinative of the
purpose to avoid the tax upon its shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary.
(d) Exception. — The provisions of this sections shall not apply to banks, non-bank financial
intermediaries, corporation organized primarily, and authorized by the Central Bank of the Philippines
to hold shares of stock of banks, insurance companies, whether domestic or foreign.
The provision discouraged tax avoidance through corporate surplus accumulation. When corporations
do not declare dividends, income taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to
compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be
taxed.

Relying on decisions of the American Federal Courts, petitioner stresses that the accumulated
earnings tax does not apply to Cyanamid, a wholly owned subsidiary of a publicly owned
company.10 Specifically, petitioner cites Golconda Mining Corp. vs. Commissioner, 507 F.2d 594,
whereby the U.S. Ninth Circuit Court of Appeals had taken the position that the accumulated earnings
tax could only apply to a closely held corporation.
A review of American taxation history on accumulated earnings tax will show that the application of
the accumulated earnings tax to publicly held corporations has been problematic. Initially, the Tax
Court and the Court of Claims held that the accumulated earnings tax applies to publicly held
corporations. Then, the Ninth Circuit Court of Appeals ruled in Golconda that the accumulated
earnings tax could only apply to closely held corporations. Despite Golconda, the Internal Revenue
Service asserted that the tax could be imposed on widely held corporations including those not
controlled by a few shareholders or groups of shareholders. The Service indicated it would not follow
the Ninth Circuit regarding publicly held corporations.11 In 1984, American legislation nullified the Ninth
Circuit's Golconda ruling and made it clear that the accumulated earnings tax is not limited to closely
held corporations.12 Clearly, Golconda is no longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank
financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and
authorized by the Central Bank of the Philippines to hold shares of stocks of banks. Petitioner does
not fall among those exempt classes. Besides, the rule on enumeration is that the express mention of
one person, thing, act, or consequence is construed to exclude all others.13 Laws granting exemption
from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power.14 Taxation is the rule and exemption is the exception.15 The burden of proof rests upon the
party claiming exemption to prove that it is, in fact, covered by the exemption so claimed,16 a burden
which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment, is that increase of working capital
by a corporation justifies accumulating income. Petitioner asserts that respondent court erred in
concluding that Cyanamid need not infuse additional working capital reserve because it had
considerable liquid funds based on the 2.21:1 ratio of current assets to current liabilities. Petitioner
relies on the so-called "Bardahl" formula, which allowed retention, as working capital reserve, sufficient
amounts of liquid assets to carry the company through one operating cycle. The "Bardahl"17 formula
was developed to measure corporate liquidity. The formula requires an examination of whether the
taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary
expenses reasonably anticipated, plus enough to operate the business during one operating cycle.
Operating cycle is the period of time it takes to convert cash into raw materials, raw materials into
inventory, and inventory into sales, including the time it takes to collect payment for the
sales.18
Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as working
capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts that Cyanamid
had a working capital deficit of P7,986,633.00.19 Therefore, the P9,540,926.00 accumulated income
as of 1981 may be validly accumulated to increase the petitioner's working capital for the succeeding
year.
We note, however, that the companies where the "Bardahl" formula was applied, had operating cycles
much shorter than that of petitioner. In Atlas Tool Co., Inc, vs. CIR,20 the company's operating cycle
was only 3.33 months or 27.75% of the year. In Cataphote Corp. of Mississippi vs. United States,21 the
corporation's operating cycle was only 56.87 days, or 15.58% of the year. In the case of Cyanamid,

the operating cycle was 288.35 days, or 78.55% of a year, reflecting that petitioner will need sufficient
liquid funds, of at least three quarters of the year, to cover the operating costs of the business. There
are variations in the application of the "Bardahl" formula, such as average operating cycle or peak
operating cycle. In times when there is no recurrence of a business cycle, the working capital needs
cannot be predicted with accuracy. As stressed by American authorities, although the "Bardahl"
formula is well-established and routinely applied by the courts, it is not a precise rule. It is used only
for administrative convenience.22 Petitioner's application of the "Bardahl" formula merely creates a
false illusion of exactitude.
Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption of
the industry standard.23 The ratio of current assets to current liabilities is used to determine the
sufficiency of working capital. Ideally, the working capital should equal the current liabilities and there
must be 2 units of current assets for every unit of current liability, hence the so-called "2 to 1" rule.24
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current
liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working capital. Said working
capital was expected to increase further when more funds were generated from the succeeding year's
sales. Available income covered expenses or indebtedness for that year, and there appeared no
reason to expect an impending "working capital deficit" which could have necessitated an increase in
working capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,25 we held that:
. . . [T]here is no need to have such a large amount at the beginning of the following year because
during the year, current assets are converted into cash and with the income realized from the business
as the year goes, these expenses may well be taken care of. [citation omitted]. Thus, it is erroneous
to say that the taxpayer is entitled to retain enough liquid net assets in amounts approximately equal
to current operating needs for the year to cover "cost of goods sold and operating expenses:" for "it
excludes proper consideration of funds generated by the collection of notes receivable as trade
accounts during the course of the year."26
If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or
profits to accumulate, and the taxpayer contested such a determination, the burden of proving the
determination wrong, together with the corresponding burden of first going forward with evidence, is
on the taxpayer. This applies even if the corporation is not a mere holding or investment company and
does not have an unreasonable accumulation of earnings or profits.27
In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax
upon shareholders, it must be shown that the controlling intention of the taxpayer is manifest at the
time of accumulation, not intentions declared subsequently, which are mere
28
afterthoughts. Furthermore, the accumulated profits must be used within a reasonable time after the
close of the taxable year. In the instant case, petitioner did not establish, by clear and convincing
evidence, that such accumulation of profit was for the immediate needs of the business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 we ruled:
To determine the "reasonable needs" of the business in order to justify an accumulation of earnings,
the Courts of the United States have invented the so-called "Immediacy Test" which construed the
words "reasonable needs of the business" to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the business, and the
penalty tax would apply. (Mertens. Law of Federal Income Taxation, Vol. 7, Chapter 39, p, 103).30

In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio
between current assets to current liabilities. The working capital needs of a business depend upon
nature of the business, its credit policies, the amount of inventories, the rate of the turnover, the amount
of accounts receivable, the collection rate, the availability of credit to the business, and similar factors.
Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court with the required
definiteness envisioned by the statute. We agree with the tax court that the burden of proof to establish
that the profits accumulated were not beyond the reasonable needs of the company, remained on the
taxpayer. This Court will not set aside lightly the conclusion reached by the Court of Tax Appeals
which, by the very nature of its function, is dedicated exclusively to the consideration of tax problems
and has necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority.31 Unless rebutted, all presumptions generally are indulged in favor
of the correctness of the CIR's assessment against the taxpayer. With petitioner's failure to prove the
CIR incorrect, clearly and conclusively, this Court is constrained to uphold the correctness of tax court's
ruling as affirmed by the Court of Appeals.
WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals, sustaining
that of the Court of Tax Appeals, is hereby AFFIRMED. Costs against petitioner.1âwphi1.nêt
SO ORDERED.
G.R. No. L-26145. February 20, 1984
THE MANILA WINE MERCHANTS, INC., Petitioner, v. THE COMMISSIONER OF INTERNAL

REVENUE, Respondent.
SYLLABUS
1. TAXATION; NATIONAL INTERNAL REVENUE CODE; CORPORATE INCOME TAX; ADDITIONAL
TAX ON ACCUMULATED EARNINGS; EXEMPTION THEREFROM. — A prerequisite to the
imposition of the tax has been that the corporation be formed or availed of for the purpose of avoiding
the income tax (or surtax) on its shareholders, or on the shareholders of any other corporation by
permitting the earnings and profits of the corporation to accumulate instead of dividing them among or
distributing them to the shareholders. If the earnings and profits were distributed, the shareholders
would be required to pay an income tax thereon whereas, if the distribution were not made to them,
they would incur no tax in respect to the undistributed earnings and profits of the corporation (Mertens,
Law on Federal Income Taxation, Vol. 7, Chapter 39, p. 44). The touchstone of liability is the purpose
behind the accumulation of the income and not the consequences of the accumulation (Ibid., p. 47).
Thus, if the failure to pay dividends is due to some other cause, such as the use of undistributed
earnings and profits for the reasonable needs of the business, such purpose does not fall within the
interdiction of the statute (Ibid., p. 45).
2. ID.; ID.; ID.; ID.; ID.; WHEN ACCUMULATION CONSIDERED UNREASONABLE. — An
accumulation of earnings or profits (including undistributed earnings or profits of prior years) is
unreasonable if it is not required for the purpose of the business, considering all the circumstances of
the case (Sec. 21, Revenue Regulations No. 2).
3. ID.; ID.; ID.; ID.; ID.; "REASONABLE NEEDS OF THE BUSINESS," CONSTRUED. — To determine
the "reasonable needs" of the business in order to justify an accumulation of earnings, the Courts of

the United States have invented the so-called "Immediacy Test" which construed the words
"reasonable needs of the business" to mean the immediate needs of the business, and it was generally
held that if the corporation did not prove an immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would
apply. American cases likewise hold that investment of the earnings and profits of the corporation in
stock or securities of an unrelated business usually indicates an accumulation beyond the reasonable
needs of the business. (Helvering v. Chicago Stockyards Co., 318 US 693; Helvering v. National
Grocery Co., 304 US 282).
4. REMEDIAL LAW; APPEALS; FACTUAL FINDINGS OF THE COURT OF TAX APPEALS,
BINDING. — The finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds
were in no way related to petitioner’s business of importing and selling wines whisky, liquors and
distilled spirits, and thus construed as an investment beyond the reasonable needs of the business is
binding on Us, the same being factual (Renato Raymundo v. Hon. De Jova, 101 SCRA 495).
Furthermore, the wisdom behind thus finding cannot be doubted, The case of J.M. Perry & Co. v.
Commissioner of Internal Revenue supports the same.
5. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX OF CORPORATIONS;
ADDITIONAL TAX ON ACCUMULATED EARNINGS; EXCEPTION THEREFROM; ACCUMULATION
OF EARNINGS, MUST BE USED FOR REASONABLE NEEDS OF BUSINESS WITHIN A
REASONABLE TIME. — The records further reveal that from May 1951 when petitioner purchased
the U.S.A. Treasury shares, until 1962 when it finally liquidated the same, it (petitioner) never had the
occasion to use the said shares in aiding or financing its importation. This militates against the purpose
enunciated earlier by petitioner that the shares were purchased to finance its importation business. To
justify an accumulation of earnings and profits for the reasonably anticipated future needs, such
accumulation must be used within a reasonable time after the close of the taxable year (Mertens, Ibid.,
p. 104).
6. ID.; ID.; ID.; ID.; ID.; ID.; INTENTION AT THE TIME OF ACCUMULATION, BASIS OF THE TAX;
ACCUMULATION OF PROFITS IN CASE AT BAR, UNREASONABLE. — In order to determine
whether profits are accumulated for the reasonable needs of the business as to avoid the surtax upon
shareholders, the controlling intention of the taxpayer is that which is manifested at the time of
accumulation not subsequently declared intentions which are merely the product of afterthought
(Basilan Estates, Inc. v. Comm. of Internal Revenue, 21 SCRA 17 citing Jacob Mertens, Jr., The law
of Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213; Smoot and San & Gravel Corp.
v. Comm., 241 F 2d 197). A speculative and indefinite purpose will not suffice. The mere recognition
of a future problem and the discussion of possible and alternative solutions is not sufficient.
Definiteness of plan coupled with action taken towards its consummation are essential (Fuel Carriers,
Inc. v. US 202 F supp. 497; Smoot Sand & Gravel Corp. v. Comm., supra). Viewed on the foregoing
analysis and tested under the "immediacy doctrine," We are convinced that the Court of Tax Appeals
is correct in finding that the investment made by petitioner in the U.S.A. Treasury shares in 1951 was
an accumulation of profits in excess of the reasonable needs of petitioner’s business.
7. ID.; ID.; ID.; ID.; ACCUMULATIONS OF PRIOR YEARS TAKEN INTO ACCOUNT IN
DETERMINATION OF LIABILITY THEREFOR. — The rule is now settled in Our jurisprudence that
undistributed earnings or profits of prior years are taken into consideration in determining
unreasonable accumulation for purposes of the 25% surtax. The case of Basilan Estates, Inc. v.
Commissioner of Internal Revenue further strengthen this rule in determining unreasonable
accumulation for the year concerned.’In determining whether accumulations of earnings or profits in a
particular year are within the reasonable needs of a corporation, it is necessary to take into account
prior accumulations, since accumulations prior to the year involved may have been sufficient to cover

the business needs and additional accumulations during the year involved would not reasonably be
necessary.
GUERRERO, J.:
In this Petition for Review on Certiorari, Petitioner, the Manila Wine Merchants, Inc., disputes the
decision of the Court of Tax Appeals ordering it (petitioner) to pay respondent, the Commissioner of
Internal Revenue, the amount of P86,804.38 as 25% surtax plus interest which represents the
additional tax due petitioner for improperly accumulating profits or surplus in the taxable year 1957
under Sec. 25 of the National Internal Revenue Code.
The Court of Tax Appeals made the following finding of facts, to wit:
"Petitioner, a domestic corporation organized in 1937, is principally engaged in the importation and
sale of whisky, wines, liquors and distilled spirits. Its original subscribed and paid capital was
P500,000.00. Its capital of P500,000.00 was reduced to P250,000.00 in 1950 with the approval of the
Securities and Exchange Commission but the reduction of the capital was never implemented. On
June 21, 1958, petitioner’s capital was increased to P1,000,000.00 with the approval of the said
Commission.
On December 31, 1957, herein respondent caused the examination of herein petitioner’s book of
account and found the latter of having unreasonably accumulated surplus of P428,934.32 for the
calendar year 1947 to 1957, in excess of the reasonable needs of the business subject to the 25%
surtax imposed by Section 25 of the Tax Code.
On February 26, 1963, the Commissioner of Internal Revenue demanded upon the Manila Wine
Merchants, Inc. payment of P126,536.12 as 25% surtax and interest on the latter’s unreasonable
accumulation of profits and surplus for the year 1957, computed as follows:
Unreasonable accumulation of surtax P428,934.42
—————
25% surtax due thereon P107,234.00
Add: 1/2% monthly interest from June 20,
1959 to June 20, 1962 19,302.12
—————
TOTAL AMOUNT DUE AND COLLECTIBLE P126,536.12
=========
Respondent contends that petitioner has accumulated earnings beyond the reasonable needs of its
business because the average ratio of the cash dividends declared and paid by petitioner from 1947

to 1957 was 40.33% of the total surplus available for distribution at the end of each calendar year. On
the other hand, petitioner contends that in 1957, it distributed 100% of its net earnings after income
tax and part of the surplus for prior years. Respondent further submits that the accumulated earnings
tax should be based on 25% of the total surplus available at the end of each calendar year while
petitioner maintains that the 25% surtax is imposed on the total surplus or net income for the year after
deducting therefrom the income tax due.
The records show the following analysis of petitioner’s net income, cash dividends and earned
surplus for the years 1946 to 1957: 1
Percentage of
Dividends to
Net Income Total Cash Net Income Balance
After Income Dividends After of Earned
Year Tax Paid Income Tax Surplus
1946 P 613,790.00 P 200,000. 32.58% P 234,104.81
1947 425,719.87 360,000. 84.56% 195,167.10
1948 415,591.83 375,000. 90.23% 272,991.38
1949 335,058.06 200,000. 59.69% 893,113.42
1950 399,698.09 600,000. 150.11% 234,987.07
1951 346,257.26 300,000. 86.64% 281,244.33
1952 196,161.97 200,000. 101.96% 277,406.30
1953 169,714.04 200,000. 117.85% 301,138.84
1954 238,124.85 250,000. 104.99% 289,262.69
1955 312,284.74 200,000. 64.04% 401,548.43
1956 374,240.28 300,000. 80.16% 475,788.71
1957 353,145.71 400,000. 113.27% 428,934.42
—————— ————— ———— ——————
P4,179,787.36 P3,585.000. 85.77% P3,785.688.50
========== ========= ======= ==========

Another basis of respondent in assessing petitioner for accumulated earnings tax is its substantial
investment of surplus or profits in unrelated business. These investments are itemized as follows:
1. Acme Commercial Co., Inc. P 27,501.00
2. Union Insurance Society
of Canton 1,145.76
3. U.S.A. Treasury Bond 347,217.50
4. Wack Wack Golf &
Country Club 1.00
—————
375,865.26
=========
As to the investment of P27,501.00 made by petitioner in the Acme Commercial Co., Inc., Mr. N.R.E.
Hawkins, president of the petitioner corporation 2 explained as follows:
‘The first item consists of shares of Acme Commercial Co., Inc. which the Company acquired in 1947
and 1949. In the said years, we thought it prudent to invest in a business which patronizes us. As a
supermarket, Acme Commercial Co., Inc. is one of our best customers. The investment has proven to
be beneficial to the stockholders of this Company. As an example, the Company received cash
dividends in 1961 totalling P16,875.00 which was included in its income tax return for the said year.’
As to the investments of petitioner in Union Insurance Society of Canton and Wack Wack Golf Club in
the sums of P1,145.76 and P1.00, respectively, the same official of the petitioner-corporation stated
that: 3
‘The second and fourth items are small amounts which we believe would not affect this case
substantially. As regards the Union Insurance Society of Canton shares, this was a pre-war
investment, when Wise & Co., Inc., Manila Wine Merchants and the said insurance firm were common
stockholders of the Wise Bldg. Co.,, Inc. and the three companies were all housed in the same building.
Union Insurance invested in Wise Bldg. Co., Inc. but invited Manila Wine Merchants, Inc. to buy a few
of its shares.’
As to the U.S.A. Treasury Bonds amounting to P347,217.50, Mr. Hawkins explained as follows: 4
‘With regards to the U.S.A. Treasury Bills in the amount of P347,217.50, in 1950, our balance sheet
for the said year shows the Company had deposited in current account in various banks P629,403.64
which was not earning any interest. We decided to utilize part of this money as reserve to finance our

importations and to take care of future expansion including acquisition of a lot and the construction of
our own office building and bottling plant.
At that time, we believed that a dollar reserve abroad would be useful to the Company in meeting
immediate urgent orders of its local customers. In order that the money may earn interest, the
Company, on May 31, 1951 purchased US Treasury bills with 90-day maturity and earning
approximately 1% interest with the face value of US$175,000.00. US Treasury Bills are easily
convertible into cash and for the said reason they may be better classified as cash rather than
investments.
The Treasury Bills in question were held as such for many years in view of our expectation that the
Central Bank inspite of the controls would allow no-dollar licenses importations. However, since the
Central Bank did not relax its policy with respect thereto, we decided sometime in 1957 to hold the
bills for a few more years in view of our plan to buy a lot and construct a building of our own. According
to the lease agreement over the building formerly occupied by us in Dasmariñas St., the lease was to
expire sometime in 1957. At that time, the Company was not yet qualified to own real property in the
Philippines. We therefore waited until 60% of the stocks of the Company would be owned by Filipino
citizens before making definite plans. Then in 1959 when the Company was already more than 60%
Filipino owned, we commenced looking for a suitable location and then finally in 1961, we bought the
man lot with an old building on Otis St., Paco, our present site, for P665,000.00. Adjoining smaller lots
were bought later. After the purchase of the main property, we proceeded with the remodelling of the
old building and the construction of additions, which were completed at a cost of P143,896.00 in April,
1962.
In view of the needs of the business of this Company and the purchase of the Otis lots and the
construction of the improvements thereon, most of its available funds including the Treasury Bills had
been utilized, but inspite of the said expenses the Company consistently declared dividends to its
stockholders. The Treasury Bills were liquidated on February 15, 1962.’
Respondent found that the accumulated surplus in question were invested to ‘unrelated business’
which were not considered in the ‘immediate needs’ of the Company such that the 25% surtax be
imposed therefrom.
Petitioner appealed to the Court of Tax Appeals.
On the basis of the tabulated figures, supra, the Court of Tax Appeals found that the average
percentage of cash dividends distributed was 85.77% for a period of 11 years from 1946 to 1957 and
not only 40.33% of the total surplus available for distribution at the end of each calendar year actually
distributed by the petitioner to its stockholders, which is indicative of the view that the Manila Wine
Merchants, Inc. was not formed for the purpose of preventing the imposition of income tax upon its
shareholders. 5
With regards to the alleged substantial investment of surplus or profits in unrelated business, the Court
of Tax Appeals held that the investment of petitioner with Acme Commercial Co., Inc., Union Insurance
Society of Canton and with the Wack Wack Golf and Country Club are harmless accumulation of
surplus and, therefore, not subject to the 25% surtax provided in Section 25 of the Tax Code. 6

As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax Appeals ruled that its
purchase was in no way related to petitioner’s business of importing and selling wines, whisky, liquors
and distilled spirits. Respondent Court was convinced that the surplus of P347,217.50 which was
invested in the U.S.A. Treasury Bonds was availed of by petitioner for the purpose of preventing the
imposition of the surtax upon petitioner’s shareholders by permitting its earnings and profits to
accumulate beyond the reasonable needs of business. Hence, the Court of Tax Appeals modified
respondent’s decision by imposing upon petitioner the 25% surtax for 1957 only in the amount of
P86,804.38 computed as follows:
Unreasonable accumulation
of surplus P347,217.50
—————
25% surtax due thereon P 86,804.38 7
On May 30, 1966, the Court of Tax Appeals denied the motion for reconsideration filed by petitioner
on March 30, 1966. Hence, this petition.
Petition assigns the following errors:

I
The Court of Tax Appeals erred in holding that petitioner was availed of for the purpose of preventing
the imposition of a surtax on its shareholders.
II
The Court of Tax Appeals erred in holding that petitioner’s purchase of U.S.A. Treasury Bills in 1951
was an investment in unrelated business subject to the 25% surtax in 1957 as surplus profits
improperly accumulated in the latter years.
III
The Court of Tax Appeals erred in not finding that petitioner did not accumulate its surplus profits
improperly in 1957, and in not holding that such surplus profits, including the so-called unrelated
investments, were necessary for its reasonable business needs.
IV
The Court of Tax Appeals erred in not holding that petitioner had overcome the prima facie
presumption provided for in Section 25(c) of the Revenue Code.
V
The Court of Tax Appeals erred in finding petition liable for the payment of the surtax of P86,804.38
and in denying petitioner’s Motion for Reconsideration and/or New Trial.
The issues in this case can be summarized as follows: (1) whether the purchase of the U.S.A. Treasury
bonds by petitioner in 1951 can be construed as an investment to an unrelated business and hence,
such was availed of by petitioner for the purpose of preventing the imposition of the surtax upon
petitioner’s shareholders by permitting its earnings and profits to accumulate beyond the reasonable

needs of the business, and if so, (2) whether the penalty tax of twenty-five percent (25%) can be
imposed on such improper accumulation in 1957 despite the fact that the accumulation occurred in
1951.
The pertinent provision of the National Internal Revenue Code reads as follows:
"Sec. 25. Additional tax on corporations improperly accumulating profits or surplus. — (a) Imposition
of Tax. — If any corporation, except banks, insurance companies, or personal holding companies
whether domestic or foreign, is formed or availed of for the purpose of preventing the imposition of the
tax upon its shareholders or members or the shareholders or members of another corporation, through
the medium of permitting its gains and profits to accumulate instead of being divided or distributed,
there is levied and assessed against such corporation, for each taxable year, a tax equal to twenty-
five per centum of the undistributed portion of its accumulated profits or surplus which shall be in
addition to the tax imposed by section twenty-four and shall be computed, collected and paid in the
same manner and subject to the same provisions of law, including penalties, as that tax: Provided,
that no such tax shall be levied upon any accumulated profits or surplus, if they are invested in any
dollar-producing or dollar-saving industry or in the purchase of bonds issued by the Central Bank of
the Philippines.
x x x
(c) Evidence determinative of purpose. — The fact that the earnings of profits of a corporation are
permitted to accumulate beyond the reasonable needs of the business shall be determinative of the
purpose to avoid the tax upon its shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary." (As amended by Republic Act No. 1823).
As correctly pointed out by the Court of Tax Appeals, inasmuch as the provisions of Section 25 of the
National Internal Revenue Code were bodily lifted from Section 102 of the U.S. Internal Revenue Code
of 1939, including the regulations issued in connection therewith, it would be proper to resort to
applicable cases decided by the American Federal Courts for guidance and enlightenment.
A prerequisite to the imposition of the tax has been that the corporation be formed or availed of for the
purpose of avoiding the income tax (or surtax) on its shareholders, or on the shareholders of any other
corporation by permitting the earnings and profits of the corporation to accumulate instead of dividing
them among or distributing them to the shareholders. If the earnings and profits were distributed, the
shareholders would be required to pay an income tax thereon whereas, if the distribution were not
made to them, they would incur no tax in respect to the undistributed earnings and profits of the
corporation. 8 The touchstone of liability is the purpose behind the accumulation of the income and
not the consequences of the accumulation. 9 Thus, if the failure to pay dividends is due to some other
cause, such as the use of undistributed earnings and profits for the reasonable needs of the business,
such purpose does not fall within the interdiction of the statute. 10
An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is

unreasonable if it is not required for the purpose of the business, considering all the circumstances of
the case. 11

In purchasing the U.S.A. Treasury Bonds, in 1951, petitioner argues that these bonds were so
purchased (1) in order to finance their importation; and that a dollar reserve abroad would be useful
to the Company in meeting urgent orders of its local customers and (2) to take care of future expansion
including the acquisition of a lot and the construction of their office building and bottling plant.
We find no merit in the petition.
To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the purchase of the U.S.A.
Treasury Bonds in 1951 with a face value of $175,000.00 was an investment within the reasonable
needs of the Corporation.
To determine the "reasonable needs" of the business in order to justify an accumulation of earnings,
the Courts of the United States have invented the so-called "Immediacy Test" which construed the
words "reasonable needs of the business" to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the business, and the
penalty tax would apply. 12 American cases likewise hold that investment of the earnings and profits
of the corporation in stock or securities of an unrelated business usually indicates an accumulation
beyond the reasonable needs of the business. 13
The finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds were in no
way related to petitioner’s business of importing and selling wines whisky, liquors and distilled spirits,
and thus construed as an investment beyond the reasonable needs of the business 14 is binding on
Us, the same being factual. 15 Furthermore, the wisdom behind thus finding cannot be doubted, The
case of J.M. Perry & Co. v. Commissioner of Internal Revenue 16 supports the same. In that case, the
U.S. Court said the following:
"It appears that the taxpayer corporation was engaged in the business of cold storage and
wareshousing in Yahima, Washington. It maintained a cold storage plant, divided into four units, having
a total capacity of 490,000 boxes of fruits. It presented evidence to the effect that various alterations
and repairs to its plant were contemplated in the tax years, . . .
It also appeared that in spite of the fact that the taxpayer contended that it needed to maintain this
large cash reserve on hand, it proceeded to make various investments which had no relation to its
storage business. In 1934, it purchased mining stock which it sold in 1935 at a profit of US $47,995.29.
...
All these things may reasonably have appealed to the Board as incompatible with a purpose to
strengthen the financial position of the taxpayer and to provide for needed alteration."
The records further reveal that from May 1951 when petitioner purchased the U.S.A. Treasury shares,
until 1962 when it finally liquidated the same, it (petitioner) never had the occasion to use the said
shares in aiding or financing its importation. This militates against the purpose enunciated earlier by
petitioner that the shares were purchased to finance its importation business. To justify an

accumulation of earnings and profits for the reasonably anticipated future needs, such accumulation
must be used within a reasonable time after the close of the taxable year. 17
Petitioner advanced the argument that the U.S.A. Treasury shares were held for a few more years
from 1957, in view of a plan to buy a lot and construct a building of their own; that at that time (1957),
the Company was not yet qualified to own real property in the Philippines, hence it (petitioner) had to
wait until sixty percent (60%) of the stocks of the Company would be owned by Filipino citizens before
making definite plans. 18
These arguments of petitioner indicate that it considers the U.S.A. Treasury shares not only for the
purpose of aiding or financing its importation but likewise for the purpose of buying a lot and
constructing a building thereon in the near future, but conditioned upon the completion of the 60%
citizenship requirement of stock ownership of the Company in order to qualify it to purchase and own
a lot. The time when the company would be able to establish itself to meet the said requirement and
the decision to pursue the same are dependent upon various future contingencies. Whether these
contingencies would unfold favorably to the Company and if so, whether the Company would decide
later to utilize the U.S.A. Treasury shares according to its plan, remains to be seen. From these
assertions of petitioner, We cannot gather anything definite or certain. This, We cannot approve.
In order to determine whether profits are accumulated for the reasonable needs of the business as to
avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested
at the time of accumulation not subsequently declared intentions which are merely the product of
afterthought. 19 A speculative and indefinite purpose will not suffice. The mere recognition of a future
problem and the discussion of possible and alternative solutions is not sufficient. Definiteness of plan
coupled with action taken towards its consummation are essential. 20 The Court of Tax Appeals
correctly made the following ruling: 21
"As to the statement of Mr. Hawkins in Exh. "B" regarding the expansion program of the petitioner by
purchasing a lot and building of its own, we find no justifiable reason for the retention in 1957 or
thereafter of the US Treasury Bonds which were purchased in 1951.
x x x
"Moreover, if there was any thought for the purchase of a lot and building for the needs of petitioner’s
business, the corporation may not with impunity permit its earnings to pile up merely because at some
future time certain outlays would have to be made. Profits may only be accumulated for the reasonable
needs of the business, and implicit in this is further requirement of a reasonable time."
Viewed on the foregoing analysis and tested under the "immediacy doctrine," We are convinced that
the Court of Tax Appeals is correct in finding that the investment made by petitioner in the U.S.A.
Treasury shares in 1951 was an accumulation of profits in excess of the reasonable needs of
petitioner’s business.
Finally, petitioner asserts that the surplus profits allegedly accumulated in the form of U.S.A. Treasury

shares in 1951 by it (petitioner) should not be subject to the surtax in 1957. In other words, petitioner
claims that the surtax of 25% should be based on the surplus accumulated in 1951 and not in 1957.
This is devoid of merit.
The rule is now settled in Our jurisprudence that undistributed earnings or profits of prior years are
taken into consideration in determining unreasonable accumulation for purposes of the 25% surtax.
22 The case of Basilan Estates, Inc. v. Commissioner of Internal Revenue 23 further strengthen this
rule, and We quote:
"Petitioner questions why the examiner covered the period from 1948-1953 when the taxable year on
review was 1953. The surplus of P347,507.01 was taken by the examiner from the balance sheet of
the petitioner for 1953. To check the figure arrived at, the examiner traced the accumulation process
from 1947 until 1953, and petitioner’s figure stood out to be correct. There was no error in the process
applied, for previous accumulations should be considered in determining unreasonable accumulation
for the year concerned.’In determining whether accumulations of earnings or profits in a particular year
are within the reasonable needs of a corporation, it is necessary to take into account prior
accumulations, since accumulations prior to the year involved may have been sufficient to cover the
business needs and additional accumulations during the year involved would not reasonably be
necessary.’"
WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is
AFFIRMED in toto, with costs against petitioner.
SO ORDERED.

INCOME TAXATION: Income Tax on Partnerships, Estates and Trusts
G.R. No. 112675. January 25, 1999
AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER

INSURANCE CO., INC.; CIBELES INSURANCE CORPORATION; COMMONWEALTH
INSURANCE COMPANY; CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT
INSURANCE & SURETY CORPORATION; DOMESTIC INSURANCE COMPANY OF THE
PHILIPPINES; EASTERN ASSURANCE COMPANY & SURETY CORP.; EMPIRE INSURANCE
COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL INSURANCE
CORPORATION INC.; FGU INSURANCE CORPORATION; FIDELITY & SURETY COMPANY OF
THE PHILS., INC.; FILIPINO MERCHANTS INSURANCE CO., INC.; GOVERNMENT SERVICE
INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE
CO., INC.; MERCANTILE INSURANCE CO., INC.; METROPOLITAN INSURANCE COMPANY;
METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO., LTD.; PAN-
MALAYAN INSURANCE CORPORATION; PARAMOUNT INSURANCE CORPORATION;
PEOPLES TRANS-EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA DE
SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST
INSURANCE CO., INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER
INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF
THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE
COMPANY; RIZAL SURETY & INSURANCE COMPANY; SANPIRO INSURANCE
CORPORATION; SEABOARD-EASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.;
SOUTH SEA SURETY & INSURANCE CO., INC.; STATE BONDING & INSURANCE CO., INC.;
SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO., INC.all assessed as
POOL OF MACHINERY INSURERS, petitioners, vs. COURT OF APPEALS, COURT OF TAX
APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents.
PANGANIBAN, J.:
Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a pool in
order to facilitate the handling of business contracted with a nonresident foreign reinsurance company.
May the clearing house or insurance pool so formed be deemed a partnership or an association that
is taxable as a corporation under the National Internal Revenue Code (NIRC)? Should the pools
remittances to the member companies and to the said foreign firm be taxable as dividends? Under the
facts of this case, has the governments right to assess and collect said tax prescribed?
The Case
These are the main questions raised in the Petition for Review on Certiorari before us, assailing the
October 11, 1993 Decision1 of the Court of Appeals2in CA-GR SP 29502, which dismissed petitioners
appeal of the October 19, 1992 Decision3 of the Court of Tax Appeals4 (CTA) which had previously
sustained petitioners liability for deficiency income tax, interest and withholding tax. The Court of
Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against petitioners.5
The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution 6 denying
reconsideration.
The Facts

The antecedent facts,7 as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the
Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and
Contractors All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-
Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance
treaties required petitioners to form a [p]ool. Accordingly, a pool composed of the petitioners was
formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
Information Return of Organization Exempt from Income Tax for the year ending in 1975, on the basis
of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the
amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the petitioners, respectively. These assessments were protested by
the petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the
petitioners, assessed as Pool of Machinery Insurers, to pay deficiency income tax, interest, and
with[h]olding tax, itemized as follows:
Net income per information
return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========
Dividend paid to Munich
Reinsurance Company P3,728,412.00
===========
35% withholding tax at
source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from

1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P 655,636.00
===========
10% withholding tax at
source due thereon P 65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P 89,438.68
COLLECTIBLE ===========8
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal Revenue
(BIR) from collecting the taxes due, because the taxpayer cannot be located at the address given in
the information return filed. Hence, this Petition for Review before us.9
The Issues
Before this Court, petitioners raise the following issues:
1.Whether or not the Clearing House, acting as a mere agent and performing strictly administrative
functions, and which did not insure or assume any risk in its own name, was a partnership or
association subject to tax as a corporation;

2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were
dividends subject to tax; and
3.Whether or not the respondent Commissioners right to assess the Clearing House had already
prescribed.10
The Courts Ruling
The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable
as a corporation, and that the governments right to assess and collect the taxes had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house was an
informal partnership, which was taxable as a corporation under the NIRC. They point out that the
reinsurance policies were written by them individually and separately, and that their liability was limited
to the extent of their allocated share in the original risks thus reinsured.11 Hence, the pool did not act
or earn income as a reinsurer.12 Its role was limited to its principal function of allocating and distributing
the risk(s) arising from the original insurance among the signatories to the treaty or the members of
the pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental
functions, such as records, maintenance, collection and custody of funds, etc.13cräläwvirtualibräry
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not
share the same risk or solidary liability;14 (2) there was no common fund;15 (3) the executive board of
the pool did not exercise control and management of its funds, unlike the board of directors of a
corporation;16 and (4) the pool or clearing house was not and could not possibly have engaged in the
business of reinsurance from which it could have derived income for itself.17cräläwvirtualibräry
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency
tasked with the enforcement of tax laws, is accorded much weight and even finality, when there is no
showing that it is patently wrong,18 particularly in this case where the findings and conclusions of the
internal revenue commissioner were subsequently affirmed by the CTA, a specialized body created
for the exclusive purpose of reviewing tax cases, and the Court of Appeals.19 Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-
judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an expertise
on the subject, unless there has been an abuse or improvident exercise of its authority.20
This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the
internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, as worded in
the year ending 1975, provides:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized, but
not including duly registered general co-partnership (compaias colectivas), general professional
partnerships, private educational institutions, and building and loan associations xxx.

Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Parenthetically, the NLRCs
inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of
1997,21 which amended the Tax Code. Pertinent provisions of the new law read as follows:
SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent (35%)
is hereby imposed upon the taxable income derived during each taxable year from all sources within
and without the Philippines by every corporation, as defined in Section 22 (B) of this Code, and taxable
under this Title as a corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does
not include general professional partnerships [or] a joint venture or consortium formed for the purpose
of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract without the
Government. General professional partnerships are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived from
engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue22 held that Section 24 covered these
unregistered partnerships and even associations or joint accounts, which had no legal personalities
apart from their individual members.23 The Court of Appeals astutely
24
applied Evangelista: cräläwvirtualibräry
xxx Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v. Collector
of Internal Revenue, supra. The Supreme Court said:
The term partnership includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on.
* * * (8 Mertens Law of Federal Income Taxation, p. 562 Note 63)
Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or more
persons bind themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.25 Its requisites are: (1) mutual contribution to a
common stock, and (2) a joint interest in the profits.26 In other words, a partnership is formed when
persons contract to devote to a common purpose either money, property, or labor with the intention of
dividing the profits between themselves.27 Meanwhile, an association implies associates who enter
into a joint enterprise x x x for the transaction of business.28cräläwvirtualibräry
In the case before us, the ceding companies entered into a Pool Agreement29 or an association30 that
would handle all the insurance businesses covered under their quota-share reinsurance treaty31 and

surplus reinsurance treaty32with Munich. The following unmistakably indicates a partnership or an
association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in the
name and credit of the pool.33 This common fund pays for the administration and operation expenses
of the pool.34cräläwvirtualibräry
(2) The pool functions through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding companies.35cräläwvirtualibräry
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work
is indispensable, beneficial and economically useful to the business of the ceding companies and
Munich, because without it they would not have received their premiums. The ceding companies share
in the business ceded to the pool and in the expenses according to a Rules of Distribution annexed to
the Pool Agreement.36 Profit motive or business is, therefore, the primordial reason for the pools
formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an antecedent fact,
that of the pool being used in the transaction of business for profit. It is apparent, and petitioners admit,
that their association or coaction was indispensable [to] the transaction of the business. x x x If together
they have conducted business, profit must have been the object as, indeed, profit was earned. Though
the profit was apportioned among the members, this is only a matter of consequence, as it implies that
profit actually resulted.37
The petitioners reliance on Pascual v. Commissioner38 is misplaced, because the facts obtaining
therein are not on all fours with the present case. In Pascual, there was no unregistered partnership,
but merely a co-ownership which took up only two isolated transactions.39 The Court of Appeals did
not err in applying Evangelista, which involved a partnership that engaged in a series of transactions
spanning more than ten years, as in the case before us.
Second Issue:
Pools Remittances Are Taxable
Petitioners further contend that the remittances of the pool to the ceding companies and Munich are
not dividends subject to tax. They insist that taxing such remittances contravene Sections 24 (b) (I)
and 263 of the 1977 NIRC and would be tantamount to an illegal double taxation, as it would result in
taxing the same premium income twice in the hands of the same taxpayer.40 Moreover, petitioners
argue that since Munich was not a signatory to the Pool Agreement, the remittances it received from
the pool cannot be deemed dividends.41 They add that even if such remittances were treated as
dividends, they would have been exempt under the previously mentioned sections of the 1977
NIRC,42 as well as Article 7 of paragraph 143 and Article 5 of paragraph 544 of the RP-West German
Tax Treaty.45cräläwvirtualibräry
Petitioners are clutching at straws. Double taxation means taxing the same property twice when it
should be taxed only once. That is, xxx taxing the same person twice by the same jurisdiction for the
same thing.46 In the instant case, the pool is a taxable entity distinct from the individual corporate
entities of the ceding companies. The tax on its income is obviously different from the tax on
the dividends received by the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains
unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the

nation. Hence, exemptions therefrom are highly disfavored in law and he who claims tax exemption
must be able to justify his claim or right.47 Petitioners have failed to discharge this burden of proof. The
sections of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when
the income was earned and when the subject information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the
exemptions claimed. Section 255 provides that no tax shall xxx be paid upon reinsurance by any
company that has already paid the tax xxx. This cannot be applied to the present case because, as
previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the
latter cannot individually claim the income tax paid by the former as their own.
On the other hand, Section 24 (b) (1)48 pertains to tax on foreign corporations; hence, it cannot be
claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign
corporation, be granted exemption based solely on this provision of the Tax Code, because the same
subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. Although
not a signatory to the Pool Agreement, Munich is patently an associate of the ceding companies in the
entity formed, pursuant to their reinsurance treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This
is manifest from a reading of Articles 349 and 1050 of the Quota Share Reinsurance Treaty and Articles
351 and 1052 of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in
line with the doctrine that a tax exemption must be construed strictissimi juris, and the statutory
exemption claimed must be expressed in a language too plain to be mistaken.53cräläwvirtualibräry
Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax Treaty is
likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate
taxes on the basis of the information return it had submitted for the year ending 1975, a taxable year
when said treaty was not yet in effect.54 Although petitioners omitted in their pleadings the date of
effectivity of the treaty, the Court takes judicial notice that it took effect only later, on December 14,
1984.55
Third Issue: Prescription
Petitioners also argue that the governments right to assess and collect the subject tax had prescribed.
They claim that the subject information return was filed by the pool on April 14, 1976. On the basis of
this return, the BIR telephoned petitioners on November 11, 1981, to give them notice of its letter of
assessment dated March 27, 1981. Thus, the petitioners contend that the five-year statute of
limitations then provided in the NIRC had already lapsed, and that the internal revenue commissioner
was already barred by prescription from making an assessment.56cräläwvirtualibräry
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period
was tolled under then Section 333 of the NIRC,57 because the taxpayer cannot be located at the
address given in the information return filed and for which reason there was delay in sending the
assessment.58 Indeed, whether the governments right to collect and assess the tax has prescribed
involves facts which have been ruled upon by the lower courts. It is axiomatic that in the absence of a
clear showing of palpable error or grave abuse of discretion, as in this case, this Court must not
overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that
the pool changed its address, for they stated that the pools information return filed in 1980 indicated
therein its present address. The Court finds that this falls short of the requirement of Section 333 of
the NIRC for the suspension of the prescriptive period. The law clearly states that the said period will

be suspended only if the taxpayer informs the Commissioner of Internal Revenue of any change in the
address.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated October 11,
1993 and November 15, 1993 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
G.R. No. L-9996 October 15, 1957
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA,

petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for
review of a decision of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real
estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance
with the respondent's assessment for the same in the total amount of P6,878.34, which is
hereby affirmed and the petition for review filed by petitioner is hereby dismissed with costs
against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount
together with their personal monies was used by them for the purpose of buying real
properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of
3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this property
has an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq.
m. including improvements thereon for P108,825.00. This property has an assessed value of
P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has an assessed value of P59,140.00
as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista
to 'manage their properties with full power to lease; to collect and receive rents; to issue
receipts therefor; in default of such payment, to bring suits against the defaulting tenants; to
sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and
checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the same
rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the expenses amounted to
P3,650.00 thereby leaving them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which
amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental
income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount
was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income
of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded
the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence
tax for the years 1945-1949, computed, according to assessment made by said officer, as follows:
INCOME TAXES
1945 14.84
1946 1,144.71
1947 10.34
1948 1,912.30
1949 1,575.90
Total including surcharge and P6,157.09
compromise
REAL ESTATE DEALER'S FIXED TAX
1946 P37.50
1947 150.00
1948 150.00
1949 150.00
Total including penalty P527.00
RESIDENCE TAXES OF CORPORATION
1945 P38.75
1946 38.75

1947 38.75
1948 38.75
1949 38.75
Total including surcharge P193.75
TOTAL TAXES DUE P6,878.34.
Said letter of demand and corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the
decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed,
and that they be absolved from the payment of the taxes in question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied, the
case is now before Us for review at the instance of the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for in section
24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well
as to the residence tax for corporations and the real estate dealers fixed tax. With respect to the tax
on corporations, the issue hinges on the meaning of the terms "corporation" and "partnership," as used
in section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (compañias
colectivas), a tax upon such income equal to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations or insurance
companies, but does not include duly registered general copartnerships. (compañias
colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money,
properly, or industry to a common fund, with the intention of dividing the profits among
themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the
issue narrows down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they
purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the acquisition
of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth
lot for P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as
the brief interregnum between each, particularly the last three purchases, is strongly indicative
of a pattern or common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioners in February,
1943. In other words, one cannot but perceive a character of habitually peculiar to business
transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945
to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are
still being so let, for petitioners do not even suggest that there has been any change in the
utilization thereof.
4. Since August, 1945, the properties have been under the management of one person,
namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring
suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the
affairs relative to said properties have been handled as if the same belonged to a corporation
or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even
try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the
acts performed by them, a legal entity, with a personality independent of that of its members, did not
come into existence, and some of the characteristics of partnerships are lacking in the case at bar.
This pretense was correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships which constitute precisely one of the most typical forms of partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no

matter how created or organized." This qualifying expression clearly indicates that a joint venture need
not be undertaken in any of the standard forms, or in conformity with the usual requirements of the
law on partnerships, in order that one could be deemed constituted for purposes of the tax on
corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among other, joint
accounts, (cuentas en participation)" and "associations," none of which has a legal personality of its
own, independent of that of its members. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the partnerships therein referred to. In fact, as
above stated, "duly registered general copartnerships" — which are possessed of the aforementioned
personality — have been expressly excluded by law (sections 24 and 84 [b] from the connotation of
the term "corporation" It may not be amiss to add that petitioners' allegation to the effect that their
liability in connection with the leasing of the lots above referred to, under the management of one
person — even if true, on which we express no opinion — tends to increase the similarity between the
nature of their venture and that corporations, and is, therefore, an additional argument in favor of the
imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-
stock companies and insurance companies." However, the term "association" is not used in the
aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the transaction
of designed affairs, or the attainment of some object, which like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like
corporate affairs, are conducted by a single individual, a committee, a board, or some other
group, acting in a representative capacity. It is immaterial whether such organization is created
by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntary
association, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust,
a 'common law' trust, and 'investment' trust (whether of the fixed or the management type), an
interinsuarance exchange operating through an attorney in fact, a partnership association, and
any other type of organization (by whatever name known) which is not, within the meaning of
the Code, a trust or an estate, or a partnership. (7A Mertens Law of Federal Income Taxation,
p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only
a partnership as known at common law but, as well, a syndicate, group, pool, joint venture or
other unincorporated organizations which carries on any business financial operation, or
venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . .
(7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is
carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis
supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships — with the exception only of duly registered general copartnerships — within the purview
of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in
part:
Entities liable to residence tax.-Every corporation, no matter how created or organized,

whether domestic or resident foreign, engaged in or doing business in the Philippines shall
pay an annual residence tax of five pesos and an annual additional tax which in no case, shall
exceed one thousand pesos, in accordance with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint
account (cuentas en participacion), association or insurance company, no matter how created
or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our
National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved on
June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14,
1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from
June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in
section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant
to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding himself
out as a full or part time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year. . .
(emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against
the petitioners herein. It is so ordered.
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax
purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on
May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of
land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels of
land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners

realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net
profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners
were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed
of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968
and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership
or joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes
prescribed under Section 24, both of the National Internal Revenue Code 1 that the unregistered
partnership was subject to corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the availment of tax amnesy
under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax
liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case
No. 3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the
decision and action taken by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was
in fact formed by petitioners which like a corporation was subject to corporate income tax distinct from
that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners,
there was no adequate basis for the conclusion that they thereby formed an unregistered partnership
which made "hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE

RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED
AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX,
AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO
RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE

TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT
THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA

CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA
CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS
FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH
AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage
their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net profits from the rental income.
Thus, the Collector of Internal Revenue demanded the payment of income tax on a corporation, among
others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations and
the real estate dealers' fixed tax. With respect to the tax on corporations, the issue
hinges on the meaning of the terms corporation and partnership as used in sections
24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year
from all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered
general co-partnerships (companies collectives), a tax upon such income equal to the
sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participation),
associations or insurance companies, but does not include duly registered general co-
partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent
to divide the profits among the contracting parties. The first element is undoubtedly
present in the case at bar, for, admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund. Hence, the issue narrows down to
their intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves,
because:

1. Said common fund was not something they found already in existence. It was not a
property inherited by them pro indiviso. They created it purposely. What is more they
jointly borrowed a substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944,
they purchased 21 lots for P18,000.00. This was soon followed, on April 23, 1944, by
the acquisition of another real estate for P108,825.00. Five (5) days later (April 28,
1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and
transcations undertaken, as well as the brief interregnum between each, particularly
the last three purchases, is strongly indicative of a pattern or common design that was
not limited to the conservation and preservation of the aforementioned common fund
or even of the property acquired by petitioners in February, 1943. In other words, one
cannot but perceive a character of habituality peculiar to business transactions
engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal
uses, of petitioners herein. The properties were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners do not even suggest that there
has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely, Simeon Evangelists, with full power to lease, to collect rents, to issue
receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes
and checks. Thus, the affairs relative to said properties have been handled as if the
same belonged to a corporation or business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact,
over fifteen (15) years, since the first property was acquired, and over twelve (12)
years, since Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence.
They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to leave
no room for doubt on the existence of said intent in petitioners herein. Only one or two
of the aforementioned circumstances were present in the cases cited by petitioners
herein, and, hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent commissioner and/ or his representative just assumed these conditions to
be present on the basis of the fact that petitioners purchased certain parcels of land and became co-
owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common fund
or even the properties acquired by them. The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor
make any improvements thereon. In 1966, they bought another three (3) parcels of land from one
seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any
additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The
transactions were isolated. The character of habituality peculiar to business transactions for the
purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under
the management of one of the partners. Such condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in
1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code
lays down the rule for determining when a transaction should be deemed a partnership
or a co-ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether

such co-owners or co-possessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived;
From the above it appears that the fact that those who agree to form a co- ownership
share or do not share any profits made by the use of the property held in common
does not convert their venture into a partnership. Or the sharing of the gross returns
does not of itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. This only means that, aside
from the circumstance of profit, the presence of other elements constituting partnership
is necessary, such as the clear intent to form a partnership, the existence of a juridical
personality different from that of the individual partners, and the freedom to transfer or
assign any interest in the property by one with the consent of the others (Padilla, Civil
Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute funds
to buy certain real estate for profit in the absence of other circumstances showing a
contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share
the gross returns of that enterprise in proportion to their contribution, but who severally
retain the title to their respective contribution, are not thereby rendered partners. They
have no common stock or capital, and no community of interest as principal proprietors
in the business itself which the proceeds derived. (Elements of the Law of Partnership
by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect thereto;
nor does an agreement to share the profits and losses on the sale of land create a
partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S.
682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of
realty, holding as tenants in common, and to divide the profits of disposing of it, the
brother and the other not being entitled to share in plaintiffs commission, no
partnership existed as between the three parties, whatever their relation may have
been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the
same; (b) generally participating in both profits and losses; (c) and such a community
of interest, as far as third persons are concerned as enables each party to make
contract, manage the business, and dispose of the whole property.-Municipal Paving
Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between the
owners, though they may use it for the purpose of making gains; and they may, without
becoming partners, agree among themselves as to the management, and use of such
property and the application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W.
363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership. The
two isolated transactions whereby they purchased properties and sold the same a few years thereafter
did not thereby make them partners. They shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been
formed, since there is no such existing unregistered partnership with a distinct personality nor with
assets that can be held liable for said deficiency corporate income tax, then petitioners can be held
individually liable as partners for this unpaid obligation of the partnership p. 7 However, as petitioners
have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are
thereby relieved of any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax
Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby
rendered relieving petitioners of the corporate income tax liability in this case, without pronouncement
as to costs.
SO ORDERED.

G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.

OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land
which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas
of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred
his rights to his four children, the petitioners, to enable them to build their residences. The company
sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably,
the Torrens titles issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled
City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They
derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit
as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner
of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as
corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest,
or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a "
taxable in full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency
income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated
interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector
of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge
Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767
of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple.
To consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that isolated
transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible
to build their residences on the lots because of the high cost of construction, then they had no choice
but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to
the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be
terminated sooner or later. Castan Tobeñas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la

sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen,

en que la sociedad presupone necesariamente la convencion, mentras que la
comunidad puede existir y existe ordinariamente sin ela; y por razon del fin objecto,
en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es
solo mantener en su integridad la cosa comun y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice

que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la
linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica señala como nota fundamental de diferenciacion
aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad
perseguida por los interesados: lucro comun partible en la sociedad, y mera
conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2,
Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish
a partnership, whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived". There must be an unmistakable intention to form a
partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to purchase
a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The 15 persons
were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for
profit. Thus, in Oña vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.—We find that the case at bar is

fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the Longa
heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents;
they did not contribute or invest additional ' capital to increase or expand the inherited
properties; they merely continued dedicating the property to the use to which it had
been put by their forebears; they individually reported in their tax returns their
corresponding shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order, as conceded by
respondent, 'to preserve its (the 'hacienda') value and to continue the existing

contractual relations with the Central Azucarera de Bais for milling purposes. Longa
vs. Aranas, CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own

properties which produce income should not automatically be considered partners of
an unregistered partnership, or a corporation, within the purview of the income tax law.
To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a
property does not produce an income at all, it is not subject to any kind of income tax,
whether the income tax on individuals or the income tax on corporation. (De Leon vs.
CI R, CTA Case No. 738, September 11, 1961, cited in Arañas, 1977 Tax Code
Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial
settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to
produce profits for themselves, it was held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father
and son purchased a lot and building, entrusted the administration of the building to an administrator
and divided equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil.
140, where the three Evangelista sisters bought four pieces of real property which they leased to
various tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed
an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated
the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are
not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.
SO ORDERED.

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INCOME TAXATION: Definition, Nature and General Principles

G.R. No. L-12287 August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,

STATEMENT OF THE CASE.

Taxation 1 Full Text Cases C.a.- C.g. | 1

Taxation 1 Full Text Cases C.a.- C.g. | 2

TREASURY DEPARTMENT, Washington.

Taxation 1 Full Text Cases C.a.- C.g. | 3

Taxation 1 Full Text Cases C.a.- C.g. | 4

Taxation 1 Full Text Cases C.a.- C.g. | 5

COMMISSIONER OF INTERNAL REVENUE, petitioner,

xxx xxx xxx

Taxation 1 Full Text Cases C.a.- C.g. | 6

The Commissioner also imposed a 50% fraud penalty against Javier.

Taxation 1 Full Text Cases C.a.- C.g. | 7

xxx xxx xxx

In reply, the private respondent argues:

xxx xxx xxx

Taxation 1 Full Text Cases C.a.- C.g. | 8

xxx xxx xxx

Taxation 1 Full Text Cases C.a.- C.g. | 9

Taxation 1 Full Text Cases C.a.- C.g. | 10

Particulars Basic Tax( ) Surcharge( ) Interest( ) Total( )

Deficiency Income Tax

1996 (ST-INC-96-0174-99) 20,916,785.03 11,346,639.55 32,263,424.58

1997 (ST-INC-97-0185-99) 133,533,114.54 45,730,518.68 179,263,633.22

Taxation 1 Full Text Cases C.a.- C.g. | 11

1996 (ST-WC-96-0175-99) 1,027,267.20 602,288.17 1,629,555.37

1997 (ST-WC-97-0184-99) 2,505,925.25 968,042.36 3,473,967.61

Deficiency Onshore Tax

1996 (ST-OT-96-0176-99) 8,267,437.54 4,847,209.95 13,114,647.49

Deficiency Branch Profit

1996 (ST-RT-96-0177-99) 39,215,700.00 22,992,218[.]63 62,207,918.63

1997 (ST-RT-97-0181-99) 92,587,381.60 6,729,180.18 40,799,690.39 140,116,252.17

1996 (ST-DST-96-0178-99 3,838,753.06 959,688.27 4,798,441.33

1997 (ST-DST-97-0181- 1,569,990.18 392,497.55 1,962,487.73

1997 (ST-DST-97-0180- 186,997,288.84 46,749,322.21 233,746,611.05

1996 (ST-CP-96-0179-99) 1,000.00 1,000.00

1997 (ST-CP-97-0186-99) 1,000.00 1,000.00

Deficiency Final Tax

1997 (ST-FT-97-0183-99) 53,200.89 20,551.58 73,752.47

Taxation 1 Full Text Cases C.a.- C.g. | 12

Particulars Basic Tax Surcharge Interest Total

Deficiency Withholding Tax

1996 (ST-WC-96-0175-99) P 105,939.86 P 61,445.11 P 167,384.97

1997 (ST-WC-97-0184-99) 287,795.44 109,362.26 397,157.70

Deficiency Onshore Tax

1996 (ST-OT-96-0176-99) 544,991.20 P 136,247.80 316,094.89 997,333.89

1996 (ST-DST-96-0178-99) 3,838,753.06 959,688.27 4,798,441.33

1997 (ST-DST-97-0180-99) 186,997,288.84 46,749,322.21 233,746,611.05

TOTALS ₱191,774,768.40 ₱47,845,258.28 P 486,902.26 ₱240,106,928.94

Taxation 1 Full Text Cases C.a.- C.g. | 13

SO ORDERED.20 (Emphasis in the original)

Originally, ING Bank raised the following issues in its pleadings:

Taxation 1 Full Text Cases C.a.- C.g. | 14

Consequently, the issues now for resolution are:

Tax amnesty availment

Taxation 1 Full Text Cases C.a.- C.g. | 15

Withholding tax on compensation

Taxation 1 Full Text Cases C.a.- C.g. | 16

Taxation 1 Full Text Cases C.a.- C.g. | 17

Taxation 1 Full Text Cases C.a.- C.g. | 18

Findings and Observations 1997 1996