FERRER v.

BAUTISTA
FACTS:

Respondent Quezon City Council enacted an Ordinance or the

Socialized Housing Tax of Quezon City which levies a special
assessment equivalent to one-half percent (0.5%) on the assessed
value of land in excess of One Hundred Thousand Pesos
(Php100,000.00) which shall be collected by the City Treasurer which
shall accrue to the Socialized Housing Programs of the Quezon City
Government.

Another Ordinance was enacted on December 16, 2013 and took effect
ten days after when it was approved by respondent City Mayor. Section
1 of the Ordinance set forth the schedule and manner for the collection
of garbage fees.

The proceeds collected from the garbage fees on residential properties

shall be deposited solely and exclusively in an earmarked special
account under the general fund to be utilized for garbage collections.

ISSUES:

1. Is the Socialized Housing Tax a tax?

2. If it is a tax is it violative of the equal protection clause?
3. Is the garbage fee a tax?
4. Does it violate the rule on double taxation?

LEGAL PRINCIPLES

1. In this jurisdiction, it is well-entrenched that taxation may be

made the implement of the state’s police power

2. IF THE GENERATING OF REVENUE IS THE PRIMARY PURPOSE

AND REGULATION IS MERELY INCIDENTAL, THE IMPOSITION IS
A TAX; BUT IF REGULATION IS THE PRIMARY PURPOSE, THE
FACT THAT INCIDENTALLY REVENUE IS ALSO OBTAINED DOES
NOT MAKE THE IMPOSITION A TAX
RULING:

1. The SHT is a tax.

In this jurisdiction, it is well-entrenched that taxation may be

made the implement of the state’s police power.

If the generating of revenue is the primary purpose and regulation

is merely incidental, the imposition is a tax; but if regulation is the
primary purpose, the fact that incidentally revenue is also
obtained does not make the imposition a tax.

The tax is not a pure exercise of taxing power or merely to raise

revenue; it is levied with a regulatory purpose.

The levy is primarily in the exercise of the police power for the
general welfare of the entire city. It is greatly imbued with public
interest.

Police power is the plenary power vested in the legislature to

make statutes and ordinances to promote the health, morals,
peace, education, good order or safety and general welfare of the
people.

The SHT is one of the sources of funds for urban development

and housing program. Removing slum areas in Quezon City is not
only beneficial to the underprivileged and homeless constituents
but advantageous to the real property owners as well.

2. NO. It does not violate the equal protection clause.

An ordinance based on reasonable classification does not violate

the constitutional guaranty of the equal protection of the law. The
requirements for a valid and reasonable classification are:

(1) it must rest on substantial distinctions;

(2) it must be germane to the purpose of the law;
(3) it must not be limited to existing conditions only; and
(4) it must apply equally to all members of the same class.
 For the purpose of undertaking a comprehensive and continuing
urban development and housing program, the disparities between a
real property owner and an informal settler as two distinct classes
are too obvious and need not be discussed at length. The
differentiation conforms to the practical dictates of justice and
equity and is not discriminatory within the meaning of the
Constitution.

3. NO, the garbage fee is not a tax.

"Charges" refer to pecuniary liability, as rents or fees against

persons or property, while "Fee" means a charge fixed by law or
ordinance for the regulation or inspection of a business or
activity.

IF THE GENERATING OF REVENUE IS THE PRIMARY PURPOSE

AND REGULATION IS MERELY INCIDENTAL, THE IMPOSITION IS
A TAX; BUT IF REGULATION IS THE PRIMARY PURPOSE, THE
FACT THAT INCIDENTALLY REVENUE IS ALSO OBTAINED DOES
NOT MAKE THE IMPOSITION A TAX

The authority of a municipality to regulate garbage falls within its

police power to protect public health, safety, and welfare. The fee
imposed for garbage collections under Ordinance No. SP-2235 is
a charge fixed for the regulation of an activity.

4. Hence, not being a tax, the contention that the garbage fee under
Ordinance No. SP-2235 violates the rule on double taxation must
necessarily fail.

Nonetheless, although a special charge, tax, or assessment may be

imposed by a municipal corporation, it must be reasonably
commensurate to the cost of providing the garbage service.

To pass judicial scrutiny, a regulatory fee must not produce revenue in

excess of the cost of the regulation because such fee will be construed
as an illegal tax when the revenue generated by the regulation exceeds
the cost of the regulation.
 5. Garbage fee is violative of the equal protection clause

It violates the equal protection clause of the Constitution and the

provisions of the LGC that an ordinance must be equitable and
based as far as practicable on the taxpayer’s ability to pay, and not
unjust, excessive, oppressive, confiscatory.

In the subject ordinance, the rates of the imposable fee depend on land
or floor area and whether the payee is an occupant of a lot,
condominium, social housing project or apartment. For the purpose of
garbage collection, there is, in fact, no substantial distinction between
an occupant of a lot, on one hand, and an occupant of a unit in a
condominium, socialized housing project or apartment, on the other
hand. Most likely, garbage output produced by these types of
occupants is uniform and does not vary to a large degree; thus, a
similar schedule of fee is both just and equitable.
 DIAZ v. SECRETARY OF FINANCE

FACTS:

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief assailing the validity of the impending imposition
of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the
collections of tollway operators.

Petitioners hold the view that Congress did not, when it enacted the
NIRC, intend to include toll fees within the meaning of "sale of
services" that are subject to VAT; that a toll fee is a "user’s tax," not a
sale of services; that to impose VAT on toll fees would amount to a tax
on public service.

ISSUE:

May toll fees collected by tollway operators be subjected to value-

added tax?

It is not a tax on tax but a tax on services.

RULING:

YES, toll fees collected by tollway operators be subjected to value-

added tax. It is not a tax on tax but a tax on services.

Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on
toll fees is tantamount to taxing a tax.

Tollway fees are not taxes. Indeed, they are not assessed and collected
by the BIR and do not go to the general coffers of the government.
When a tollway operator takes a toll fee from a motorist, the fee is in
effect for the latter’s use of the tollway facilities over which the operator
enjoys private proprietary rights that its contract and the law
recognize.

In sum, fees paid by the public to tollway operators for use of the
tollways, are not taxes in any sense.

TOLL v. TAX
 1. A tax is imposed under the taxing power of the government
principally for the purpose of raising revenues to fund public
expenditures. Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and
expenses incurred in the construction, maintenance and
operation of the tollways, as well as to assure them a reasonable
margin of income. Although toll fees are charged for the use of
public facilities, therefore, they are not government exactions that
can be properly treated as a tax.
2. Taxes may be imposed only by the government under its
sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership.

VAT on tollway operations cannot be deemed a tax on tax due to the

nature of VAT as an indirect tax.

In indirect taxation, a distinction is made between the liability for the

tax and burden of the tax. The seller who is liable for the VAT may shift
or pass on the amount of VAT it paid on goods, properties or services
to the buyer. In such a case, what is transferred is not the seller’s
liability but merely the burden of the VAT.

Thus, the seller remains directly and legally liable for payment of the
VAT, but the buyer bears its burden since the amount of VAT paid by
the former is added to the selling price. Once shifted, the VAT ceases
to be a tax and simply becomes part of the cost that the buyer must pay
in order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the

tollway user, but on the tollway operator. Under Section 105 of the
Code, VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller
of services, who in this case is the tollway operator, is the person liable
for VAT. The latter merely shifts the burden of VAT to the tollway user
as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even
if toll fees were deemed as a "user’s tax." VAT is assessed against the
tollway operator’s gross receipts and not necessarily on the toll fees.
Although the tollway operator may shift the VAT burden to the tollway
user, it will not make the latter directly liable for the VAT. The shifted
VAT burden simply becomes part of the toll fees that one has to pay in
order to use the tollways.
MANILA MEMORIAL vs. SECRETARY OF DSWD

FACTS:

Petitioners assail the constitutionality of Section 4 of Republic Act (RA)

No. 7432, as amended by RA 9257, and the implementing rules and
regulations issued by the DSWD and DOF insofar as these allow
business establishments to claim the 20% discount given to senior
citizens as a tax deduction.

Feeling aggrieved by the tax deduction scheme, petitioners filed the

present recourse, praying that Section 4 of RA 7432, as amended by
RA 9257, and the implementing rules and regulations issued by the
DSWD and the DOF be declared unconstitutional insofar as these allow
business establishments to claim the 20% discount given to senior
citizens as a tax deduction; that the DSWD and the DOF be prohibited
from enforcing the same; and that the tax credit treatment of the 20%
discount under the former Section 4 (a) of RA 7432 be reinstated.

Petitioners’ Arguments

Petitioners emphasize that they are not questioning the 20% discount
granted to senior citizens but are only assailing the constitutionality of
the tax deduction scheme prescribed under RA 9257 and the
implementing rules and regulations issued by the DSWD and the DOF.

Petitioners posit that the tax deduction scheme contravenes Article III,
Section 9 of the Constitution, which provides that: "[p]rivate property
shall not be taken for public use without just compensation."

In support of their position, petitioners cite Central Luzon Drug

Corporation, where it was ruled that the 20% discount privilege
constitutes taking of private property for public use which requires the
payment of just compensation, and Carlos Superdrug Corporation v.
Department of Social Welfare and Development, where it was
acknowledged that the tax deduction scheme does not meet the
definition of just compensation.

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug

Corporation that the tax deduction scheme adopted by the government
is justified by police power.
They assert that "[a]lthough both police power and the power of
eminent domain have the general welfare for their object, there are still
traditional distinctions between the two" and that "eminent domain
cannot be made less supreme than police power."

Under the tax deduction scheme, the private sector shoulders 65% of
the discount because only 35% of it is actually returned by the
government. Consequently, the implementation of the tax deduction
scheme prescribed under Section 4 of RA 9257 affects the businesses
of petitioners.

SOUTHERN LUZON DRUG CORPORATION vs DSWD

The petitioner is a domestic corporation engaged in the business of:

drugstore operation in the Philippines. Petitioner filed a petition for prohibition
filed by Southern Luzon Drug Corporation (petitioner) against the
Department of1 Social Welfare and Development (DSWD), the National
Council for the Welfare of Disabled Persons (NCWDP) (now National
Council on Disability Affairs or NCDA), the Department of Finance (DOF)
and the Bureau of: Internal Revenue (collectively, the respondents), which
sought to prohibit the implementation of Section 4(a) of Republic Act
(R.A.) No. 9257, otherwise known as the "Expanded Senior Citizens Act
of 2003" and Section 32 of R.A. No. 9442, which amends the "Magna
Carta for Disabled Persons," particularly the granting of 20% discount
on the purchase of medicines by senior citizens and persons with
disability (PWD), respectively, and treating them as tax deduction.

ISSUE:

NATURE OF THE SENIOR CITIZEN’S DISCOUNT

Whether the 20%, sales discount for senior citizens and PWD’s is a
valid exercise of police power or an invalid exercise of the power of
eminent domain because it fails to provide just compensation
RULING:

The validity of the 20% senior citizen discount and tax deduction
scheme under RA 9257, as an exercise of police power of the State, has
already been settled in Carlos Superdrug Corporation.

A tax deduction does not offer full reimbursement of the senior citizen
discount. As such, it would not meet the definition of just compensation.

Having said that, this raises the question of whether the State, in
promoting the health and welfare of a special group of citizens, can
impose upon private establishments the burden of partly subsidizing a
government program.

The Court believes so.

WHY POLICE POWER?

[P]olice power is the power of the state to promote public welfare by

restraining and regulating the use of liberty and property.

The priority given to senior citizens finds its basis in the Constitution as set
forth in the law itself. Section 10 in the Declaration of Principles and State
Policies provides: "The State shall provide social justice in all phases of
national development.". As to the State, the duty emanates from its role
as parens patriae which holds it under obligation to provide protection
and look after the welfare of its people especially those who cannot
tend to themselves.

It is the bounden duty of the State to care for the elderly as they reach
the point in their lives when the vigor of their youth has diminished and
resources have become scarce. In the same way, providing aid for the
disabled persons is an equally important State responsibility.

It is in the exercise of its police power that the Congress enacted R.A.
Nos. 9257 and 9442, the laws mandating a 20% discount on purchases
of medicines made by senior citizens and PWDs. It is also in further
exercise of this power that the legislature opted that the said discount
be claimed as tax deduction, rather than tax credit, by covered
establishments.
NOT EXERCISE OF POWER OF EMINENT DOMAIN

The petitioner, however, claims that the change in the tax treatment of
the discount is illegal as it constitutes taking without just
compensation.

The issue of just compensation finds no relevance in the instant case

as it had already been made clear in Carlos Superdrug that the power
being exercised by the State in the imposition of senior citizen discount
was its police power.

In order to qualify "taking" as an exercise of eminent domain. First, the

expropriator must enter a private property. Second, the entrance into
private property must be for more than a momentary period. Third, the
entry into the property should be under warrant or color of legal
authority. Fourth, the property must be devoted to a public use or
otherwise informally appropriated or injuriously affected. Fifth, the
utilization of the property for public use must be in such a way as to
oust the owner and deprive him of all beneficial enjoyment of the
property.

The first requirement speaks of entry into a private property which

clearly does not obtain in this case. There is no private property that
is; invaded or appropriated by the State. As it is, the petitioner
precipitately deemed future profits as private property and then
proceeded to argue that the State took it away without full
compensation. This seemed preposterous considering that the subject
of what the petitioner supposed as taking was not even earned profits
but merely an expectation of profits, which may not even occur.

The supposed taking also lacked the characteristics of

permanence and consistency. The impact on the establishments varies
depending on their response to the changes brought about by the
subject provisions. To be clear, establishments, are not prevented from
adjusting their prices to accommodate the effects of the granting of the
discount and retain their profitability while being fully compliant to the
laws. It follows that losses are not inevitable because establishments
are free to take business measures to accommodate the contingency.

There is also no ousting of the owner or deprivation of ownership.

Establishments are neither divested of ownership of any of their
properties nor is anything forcibly taken from them. They remain the
owner of their goods and their profit or loss still depends on the
performance of their sales.

Still, the petitioner argues that the law is confiscatory in the sense that
the State takes away a portion of its supposed profits which could have
gone into its coffers and utilizes it for public purpose. The petitioner
claims that the action of the State amounts to taking for which it should
be compensated.

To reiterate, the subject provisions only affect the petitioner's right to

profit, and not earned profits. Unfortunately for the petitioner, the right
to profit is not a vested right or an entitlement that has accrued on the
person or entity such that its invasion or deprivation warrants
compensation.

R.A. Nos. 9257 and 9442 are akin to regulatory laws, the issuance of
which is within the ambit of police power. Indeed, regulatory laws are
within the category of police power measures from which affected
persons or entities cannot claim exclusion or compensation.

It was ruled that it is within the bounds of the police power of the state
to impose burden on private entities, even if it may affect their profits,
such as in the imposition of price control measures. There is no
compensable taking but only a recognition of the fact that they are
subject to the regulation of the State and that all personal or private
interests must bow down to the more paramount interest of the State.

NOT VIOLATIVE OF THE EQUAL PROTECTION CLAUSE

The Constitution itself considered the elderly as a class of their own

and deemed it a priority to address their needs.
NURSERY CASE v. ACEVEDO

FACTS:

The City of Manila assessed and collected taxes from the individual
petitioners pursuant to Section 15 (Tax on Wholesalers, Distributors,
or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of
Manila. At the same time, the City of Manila imposed additional taxes
upon the petitioners pursuant to Section 21 of the Revenue Code of
Manila, as amended, as a condition for the renewal of their respective
business licenses for the year 1999. Section 21 of the Revenue Code of
Manila stated:

Section 21. Tax on Business Subject to the Excise, Value-Added or

Percentage Taxes under the NIRC - On any of the following businesses
and articles of commerce subject to the excise, value-added or percentage
taxes under the National Internal Revenue Code, hereinafter referred to as
NIRC, as amended, a tax of FIFTY PERCENT (50%) OF ONE PERCENT
(1%) per annum on the gross sales or receipts of the preceding calendar
year is hereby imposed:

A) On person who sells goods and services in the course of trade or

businesses; x x x PROVIDED, that all registered businesses in the City of
Manila already paying the aforementioned tax shall be exempted from
payment thereof.

To comply with the City of Manila’s assessmentof taxes under Section 21,
supra, the petitioners paid under protest.

The petitioners point out that although Section 21 of the Revenue Code
of Manila was not itself unconstitutional or invalid, its enforcement
against the petitioners constituted double taxation because the local
business taxes under Section 15 and Section 17 of the Revenue Code
of Manila were already being paid by them.

The respondents counter, however, that double taxation did not occur
from the imposition and collection of the tax pursuant to Section 21 of
the Revenue Code of Manila; that the taxes imposed pursuant to
Section 21 were in the concept of indirect taxes upon the consumers
of the goods and services sold by a business establishment
Double taxation means taxing the same property twice when it should
be taxed only once; that is, "taxing the same person twice by the same
jurisdiction for the same thing." It is obnoxious when the taxpayer is
taxed twice, when it should be but once.

Otherwise described as "direct duplicate taxation,"

the two taxes must be imposed

on the same subject matter,

for the same purpose,

by the same taxing authority,

within the same jurisdiction,

during the same taxing period;

and the taxes must be of the same kind or character.

Using the aforementioned test, the Court finds that there is indeed double
taxation if respondent is subjected to the taxes under both Sections 14 and
21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the
same subject matter – the privilege of doing business in the City of
Manila; (2) for the same purpose – to make persons conducting
business within the City of Manila contribute to city revenues; (3) by
the same taxing authority – petitioner City of Manila; (4) within the same
taxing jurisdiction – within the territorial jurisdiction of the City of
Manila; (5) for the same taxing periods – per calendar year; and (6) of
the same kind or character – a local business tax imposed on gross
sales or receipts of the business.

Respondent’s assessment under both Sections 14 and 21 had no basis.

Petitioner is indeed liable to pay business taxes to the City of Manila;
nevertheless, considering that the former has already paid these taxes
under Section 14 of the Manila Revenue Code, it is exempt from the
same payments under Section 21 of the same code. Hence, payments
made under Section 21 must be refunded in favor of petitioner.
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and
Swedish Match Philippines, Inc., the Court now holds that all the elements
of double taxation concurred upon the Cityof Manila’s assessment on and
collection from the petitioners of taxes for the first quarter of 1999 pursuant
to Section 21 of the Revenue Code of Manila.

Firstly, because Section 21 of the Revenue Code of Manila imposed the tax
on a person who sold goods and services in the course of trade or business
based on a certain percentage ofhis gross sales or receipts in the preceding
calendar year, while Section 15 and Section 17 likewise imposed the tax on
a person who sold goods and services in the course of trade or business but
only identified such person with particularity, namely, the wholesaler,
distributor or dealer (Section 15), and the retailer (Section 17), all the taxes
– being imposed on the privilege of doing business in the City of Manila in
order to make the taxpayers contribute to the city’s revenues – were imposed
on the same subject matter and for the same purpose.

Secondly, the taxes were imposed by the same taxing authority (the City of
Manila) and within the same jurisdiction in the same taxing period (i.e., per
calendar year).

Thirdly, the taxes were all in the nature of local business taxes.

We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish

Match Philippines, Inc. involved Section 21 vis-à-vis Section 14 (Tax on
Manufacturers, Assemblers and Other Processors) of the Revenue Code of
Manila, the legal principles enunciated therein should similarly apply
because Section 15 (Tax on Wholesalers, Distributors, or Dealers)and
Section 17 (Tax on Retailers) of the Revenue Code of Manila imposed the
same nature of tax as that imposed under Section 14, i.e., local business tax,
albeit on a different subject matter or group of taxpayers.

In fine, the imposition of the tax under Section 21 of the Revenue Code of
Manila constituted double taxation, and the taxes collected pursuant thereto
must be refunded.
REPUBLIC v. CITY OF PARANAQUE

FACTS:

Parañaque City Treasurer Liberato M. Carabeo (Carabeo) issued

Warrants of Levy on PRA’s reclaimed properties (Central Business
Park and Barangay San Dionisio) located in Parañaque City based on
the assessment for delinquent real property taxes made by then
Parañaque City Assessor Soledad Medina Cue for tax years 2001 and
2002.

Paranaque City (RTC) ruled that petitioner Philippine Reclamation

Authority (PRA) is a government-owned and controlled corporation
(GOCC), a taxable entity, and, therefore, not exempt from payment of
real property taxes.

PRA asserts that it is not a GOCC. Thus, PRA insists that, as an

incorporated instrumentality of the National Government, it is exempt
from payment of real property tax except when the beneficial use of the
real property is granted to a taxable person. PRA claims that based on
Section 133(o) of the LGC, local governments cannot tax the national
government which delegate to local governments the power to tax.

The City of Parañaque (respondent) argues that PRA since its creation
consistently represented itself to be a GOCC. PRA’s very own charter
(P.D. No. 1084) declared it to be a GOCC and that it has entered into
several thousands of contracts where it represented itself to be a
GOCC. Respondent further argues that PRA is a stock corporation with an
authorized capital stock divided into 3 million no par value shares, out of
which 2 million shares have been subscribed and fully paid up. Section 193
of the LGC of 1991 has withdrawn tax exemption privileges granted to or
presently enjoyed by all persons, whether natural or juridical, including
GOCCs.

Hence, since PRA is a GOCC, it is not exempt from the payment of real
property tax.

ISSUE:

WON PRA is a GOCC

RULING:

While an instrumentality is vested by law with corporate powers. It

defines an instrumentality refers to any agency of the National Government,
not integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy,
usually through a charter. Likewise, when the law makes a government
instrumentality operationally autonomous, the instrumentality remains
part of the National Government machinery although not integrated
with the department framework.NO.

When the law vests in a government instrumentality corporate powers,

the instrumentality does not necessarily become a corporation. Unless
the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not
only governmental but also corporate powers.

Under the Administrative Code of 1987 a GOCC must be "organized as

a stock or non-stock corporation"

Examples are the Mactan International Airport Authority, the Philippine

Ports Authority, the University of the Philippines, and Bangko Sentral
ng Pilipinas. All these government instrumentalities exercise corporate
powers but they are not organized as stock or non-stock corporations.

Two requisites must concur before one may be classified as a stock

corporation, namely: (1) that it has capital stock divided into shares;
and (2) that it is authorized to distribute dividends and allotments of
surplus and profits to its stockholders. If only one requisite is present,
it cannot be properly classified as a stock corporation. As for non-stock
corporations, they must have members and must not distribute any
part of their income to said members.

In the case at bench, PRA is not a GOCC because it is neither a stock

nor a non-stock corporation.

It cannot be considered as a stock corporation because it is not

authorized to distribute dividends, surplus allotments or profits to
stockholders.
PRA cannot be considered a non-stock corporation either because it
does not have members.

Furthermore, there is another reason why the PRA cannot be classified

as a GOCC. Section 16, Article XII of the 1987 Constitution which
authorizes Congress to create GOCCs through special charters on two
conditions:

1) the GOCC must be established for the common good; and

2) the GOCC must meet the test of economic viability.

In this case, PRA may have passed the first condition of common good
but failed the second one - economic viability.

Undoubtedly, the purpose behind the creation of PRA was not for
economic or commercial activities. Neither was it created to compete
in the market place considering that there were no other competing
reclamation companies being operated by the private sector.

As mentioned earlier, PRA was created essentially to perform a public

service considering that it was primarily responsible for a coordinated,
economical and efficient reclamation, administration and operation of
lands belonging to the government with the object of maximizing their
utilization and hastening their development consistent with the public
interest.

Government-owned or controlled corporations with special charters,

organized essentially for economic or commercial objectives, must meet the
test of economic viability. These are the government-owned or controlled
corporations that are usually organized under their special charters as stock
corporations, like the Land Bank of the Philippines and the Development
Bank of the Philippines. These are the government-owned or controlled
corporations, along with government-owned or controlled corporations
organized under the Corporation Code, that fall under the definition of
"government-owned or controlled corporations" in Section 2(10) of the
Administrative Code.

PRA is not a GOCC either under Section 2(3) of the Introductory

Provisions of the Administrative Code or under Section 16, Article XII
of the 1987 Constitution.
The facts, the evidence on record and jurisprudence on the issue support
the position that PRA was not organized either as a stock or a non-stock
corporation. Neither was it created by Congress to operate commercially
and compete in the private market.

Instead, PRA is a government instrumentality vested with corporate

powers and performing an essential public service pursuant to Section
2(10) of the Introductory Provisions of the Administrative Code. Being an
incorporated government instrumentality, it is exempt from payment of
real property tax.

Clearly, respondent has no valid or legal basis in taxing the subject

reclaimed lands managed by PRA.

On the other hand, Section 234(a) of the LGC, in relation to its Section
133(o), exempts PRA from paying realty taxes and protects it from the
taxing powers of local government units.

It is clear from Section 234 that real property owned by the Republic of
the Philippines (the Republic) is exempt from real property tax unless
the beneficial use thereof has been granted to a taxable person. In this
case, there is no proof that PRA granted the beneficial use of the
subject reclaimed lands to a taxable entity. There is no showing on
record either that PRA leased the subject reclaimed properties to a
private taxable entity.

Section 133(o) recognizes the basic principle that local governments

cannot tax the national government, which historically merely
delegated to local governments the power to tax.

When local governments invoke the power to tax on national

government instrumentalities, such power is construed strictly against
local governments. The rule is that a tax is never presumed and there
must be clear language in the law imposing the tax. Any doubt whether
a person, article or activity is taxable is resolved against taxation. This
rule applies with greater force when local governments seek to tax
national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the

taxpayer claiming the exemption. However, when Congress grants an
exemption to a national government instrumentality from local
taxation, such exemption is construed liberally in favor of the national
government instrumentality.

There is also no reason for local governments to tax national

government instrumentalities for rendering essential public services to
inhabitants of local governments. The only exception is when the
legislature clearly intended to tax government instrumentalities for the
delivery of essential public services for sound and compelling policy
considerations. There must be express language in the law
empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved
against local governments.

Thus, Section 133 of the Local Government Code states that "unless
otherwise provided" in the Code, local governments cannot tax
national government instrumentalities.

This doctrine emanates from the "supremacy" of the National

Government over local governments.

The Court agrees with PRA that the subject reclaimed lands are still
part of the public domain, owned by the State and, therefore, exempt
from payment of real estate taxes.
LA SUERTE CIGAR v. CA

FACTS:

These cases involve the taxability of stemmed leaf tobacco imported and
locally purchased by cigarette manufacturers for use as raw material
in the manufacture of their cigarettes.

Petitioner La Suerte Cigar & Cigarette Factory (La Suerte) was held
liable for deficiency specific tax on its purchase of imported and locally
produced stemmed leaf tobacco and sale of stemmed leaf tobacco.

ISSUE:

WON the stemmed leaf tobacco imported and locally purchased by

cigarette manufacturers for use as raw material in the manufacture of
their cigarettes

COURT’S RULING

YES.

Nature of excise tax

Excise tax is a tax on the production, sale, or consumption of a specific

commodity in a country. Section 110 of the 1986 Tax Code explicitly
provides that the "excise taxes on domestic products shall be paid by
the manufacturer or producer before [the] removal [of those products]
from the place of production." "It does not matter to what use the
article[s] subject to tax is put; the excise taxes are still due, even
though the articles are removed merely for storage in some other place
and are not actually sold or consumed."

The excise tax based on weight, volume capacity or any other physical
unit of measurement is referred to as "specific tax." If based on selling
price or other specified value, itis referred to as "ad valorem" tax.

No estoppel against government

The cigarette manufacturers contend that for a long time prior to the
transactions herein involved, the Collector of Internal Revenue had never
subjected their purchases and importations of stemmed leaf tobacco to
excise taxes. This prolonged practice allegedly represents the official and
authoritative interpretation of the law by the Bureau of Internal Revenue
which must be respected.

We are not persuaded.

In Philippine Long Distance Telephone Co. v. Collector of Internal

Revenue, this court has held that this principle is not absolute, and an
erroneous implementation by an officer based on a misapprehension
of law may be corrected when the true construction is ascertained.

Erroneous application and enforcement of the law by public officers do not

block subsequent correct application of the statute, and that the
Government is never estopped by mistake or error on the part of its
agents.

Prolonged practice of the Bureau of Internal Revenue in not collecting

the specific tax on stemmed leaf tobacco cannot validate what is
otherwise an erroneous application and enforcement of the law. The
government is never estopped from collecting legitimate taxes
because of the error committed by its agents.

In La Suerte Cigar and Cigarette Factory v. Court of Tax Appeals, this court
upheld the validity of a revenue memorandum circular issued by the
Commissioner of Internal Revenue to correct an error in a previous circular
that resulted in the non-collection of tobacco inspection fees for a long time
and declared that estoppel cannot work against the government.

Tobacco Inspection fees are undoubtedly National Internal Revenue taxes,

they being one of the miscellaneous taxes provided for under the Tax Code.
Section 228 (formerly Section 302) of Chapter VII of the Code
specificallyprovides for the collection and manner of payment of the said
inspection fees. It is within the power and duty of the Commissioner to collect
the same, even without inspection, should tobacco products be removed
clandestinely or surreptitiously from the establishment of the wholesaler,
manufacturer or redrying plant and from the customs custody in case of
imported leaf tobacco. Errors, omissions or flaws committed by BIR
inspectors and representatives while in the performance of their duties
cannot beset up as estoppel nor estop the Government from collecting
a tax legally due.
 Double taxation

The contention that the cigarette manufacturers are doubly taxed

because they are paying the specific tax on the raw material and on the
finished product in which the raw material was a part is also devoid of
merit.

For double taxation in the objectionable or prohibited sense to exist,

"the same property must be taxed twice, when it should be taxed but
once." "[B]oth taxes must be imposed on the same property or subject-
matter, for the same purpose, by the same. . . taxing authority, within
the same jurisdiction or taxing district, during the same taxing period,
and they must be the same kind or character of tax."

At all events, there is no constitutional prohibition against double

taxation in the Philippines. This court has explained in Pepsi-Cola Bottling
Company of the Philippines, Inc. v. Municipality of Tanauan, Leyte:

There is no validity to the assertion that the delegated authority can be

declared unconstitutional on the theory of double taxation.

It must be observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised. The
reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by
our fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United
States and some states of the Union. Double taxation becomes obnoxious
only where the taxpayer is taxed twice for the benefit of the same
governmental entity or by the same jurisdiction for the same purpose,
but not in a case where one tax is imposed by the State and the other
by the city or municipality.

"It is something not favored, but is permissible, provided some other

constitutional requirement is not thereby violated, such as the requirement
that taxes must be uniform."

Excise taxes are essentially taxes on property because they are levied
on certain specified goods or articles manufactured or produced in the
Philippines for domestic sale or consumption or for any other
disposition, and on goods imported.
In this case, there is no double taxation in the prohibited sense because
the specific tax is imposed by explicit provisions of the Tax Code on
two different articles or products: (1) on the stemmed leaf tobacco; and
(2) on cigar or cigarette.
 CIR v. ST. LUKE’S

FACTS:

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a

non-stock and non-profit corporation.

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.

St. Luke's filed an administrative protest with the BIR against the deficiency
tax assessments.

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.

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.

ISSUE:

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.

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

RULING:
DISCUSSION

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 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)(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. 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."

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.

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.

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.

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

Notwithstanding the provisions in the preceding paragraphs, the income of

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

In short, the last paragraph of Section 30 provides that if a tax exempt

charitable institution conducts "any" activity for profit, such activity is
not tax exempt even as its not-for-profit activities remain tax exempt.

This paragraph qualifies the requirements in Section 30(E) that the

"[n]on-stock corporation or association [must be] organized and
operated exclusively for x x x charitable x x x purposes x x x."

It likewise qualifies the requirement in Section 30(G) that the civic

organization must be "operated exclusively" for the promotion of
social welfare.

Thus, even if the charitable institution must be "organized and operated

exclusively" for charitable purposes, it is nevertheless allowed to
engage in "activities conducted for profit" without losing its tax exempt
status for its not-for-profit activities.

The only consequence is that the "income of whatever kind and

character" of a charitable institution "from any of its activities
conducted for profit, regardless of the disposition made of such
income, shall be subject to tax."

Prior to the introduction of Section 27(B), 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%.

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.
RULING:

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.

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." 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 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.
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 ₱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."

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."

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).

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.
CIR vs DE LA SALLE

FACTS:

BIR through a Formal Letter of Demand assessed DLSU the following

deficiency taxes: (1) income tax on rental earnings from
restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and (3) documentary
stamp tax (DSI) on loans and lease contracts. The BIR demanded the
payment of ₱17,303,001.12, inclusive of surcharge, interest and penalty for
taxable years 2001, 2002 and 2003.

DLSU protested the assessment. DLSU, a non-stock, non-profit

educational institution, principally anchored its petition on Article XIV,
Section 4 (3) of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. xxx.

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income

is derived, used or disposed of. DLSU's operations of canteens and
bookstores within its campus even though exclusively serving the university
community do not negate income tax liability.

The Commissioner contends that Article XIV, Section 4 (3) of the

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

The Commissioner posits that a tax-exempt organization like DLSU is

exempt only from property tax but not from income tax on the rentals earned
from property. Thus, DLSU's income from the leases of its real properties
is not exempt from taxation even if the income would be used for
educational purposes.
DLSU thus invokes the doctrine of constitutional supremacy, which renders
any subsequent law that is contrary to the Constitution void and without any
force and effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects
to tax the income of whatever kind and character of a non-stock and non-
profit educational institution from any of its properties, real or personal, or
from any of its activities conducted for profit regardless of the disposition
made of such income, should be declared without force and effect in view of
the constitutionally granted tax exemption on "all revenues and assets of
non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes."

DLSU further submits that it complies with the requirements enunciated in

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

ISSUE:

Whether DLSU' s income and revenues are exempt from taxation

RULING:

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution,
which reads:

(3) All revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the dissolution or
cessation of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively

owned, may likewise be entitled to such exemptions subject to
the limitations provided by law including restrictions on dividends and
provisions for reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational

institutions:

(1) non-stock, non-profit educational institutions and

(2) proprietary educational institutions.

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

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

Fourth, there is a marked distinction between the treatment of non-

stock, non-profit educational institutions and proprietary educational
institutions.

The tax exemption granted to non-stock, non-profit educational

institutions is conditioned only on the actual, direct and exclusive use
of their revenues and assets for educational purposes.

While tax exemptions may also be granted to proprietary educational

institutions, these exemptions may be subject to limitations imposed
by Congress.

As we explain below, the marked distinction between a non-stock, non-profit

and a proprietary educational institution is crucial in determining the nature
and extent of the tax exemption granted to non-stock, non-profit educational
institutions.
The Commissioner opposes DLSU's claim for tax exemption on the basis of
Section 30 (H) of the Tax Code. The relevant text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

xxxx

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

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such
income shall be subject to tax imposed under this Code. [underscoring
and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax
exemption granted to non-stock, non-profit educational institutions
such that the revenues and income they derived from their assets, or
from any of their activities conducted for profit, are taxable even
if these revenues and income are used for educational purposes.

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

We answer in the negative.

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

The issue in YMCA was whether the income derived from rentals of real
property owned by the YMCA, established as a "welfare, educational and
charitable non-profit corporation," was subject to income tax under the Tax
Code and the Constitution.
The Court denied YMCA's claim for exemption on the ground that as
a charitable institution falling under Article VI, Section 28 (3) of the
Constitution,73 the YMCA is not tax-exempt per se; " what is exempted is
not the institution itself... those exempted from real estate taxes are
lands, buildings and improvements actually, directly and exclusively
used for religious, charitable or educational purposes."

The Court held that the exemption claimed by the YMCA is expressly
disallowed by the last paragraph of then Section 27 (now Section 30) of the
Tax Code, which mandates that the income of exempt organizations from
any of their properties, real or personal, are subject to the same tax imposed
by the Tax Code, regardless of how that income is used. The Court ruled
that the last paragraph of Section 27 unequivocally subjects to tax the rent
income of the YMCA from its property.75

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

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

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

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

We now adopt YMCA as precedent and hold that:

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

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

educational institutions, is not subject to limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income for
educational purposes.

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

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

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

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

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

Revenues consist of the amounts earned by a person or entity from the

conduct of business operations. It may refer to the sale of goods, rendition
of services, or the return of an investment. Revenue is a component of the
tax base in income tax, VAT, and local business tax (LBT).

Assets, on the other hand, are the tangible and intangible properties
owned by a person or entity. It may refer to real estate, cash deposit in a
bank, investment in the stocks of a corporation, inventory of goods, or any
property from which the person or entity may derive income or use to
generate the same.

Thus, when a non-stock, non-profit educational institution proves that

it uses its revenues actually, directly, and exclusively for educational
purposes, it shall be exempted from income tax, VAT, and LBT.

On the other hand, when it also shows that it uses its assets in the form
of real property for educational purposes, it shall be exempted from
RPT.

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

To illustrate, if a university leases a portion of its school building to a

bookstore or cafeteria, the leased portion is not actually, directly and
exclusively used for educational purposes, even if the bookstore or canteen
caters only to university students, faculty and staff.

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

In concrete terms, the lease of a portion of a school building for

commercial purposes, removes such asset from the property
tax exemption granted under the Constitution.

There is no exemption because the asset is not used actually, directly

and exclusively for educational purposes. The commercial use of the
property is also not incidental to and reasonably necessary for the
accomplishment of the main purpose of a university, which is to
educate its students.

However, if the university actually, directly and exclusively uses for

educational purposes the revenues earned from the lease of its school
building, such revenues shall be exempt from taxes and duties. The tax
exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of
the revenues for educational purposes.

Parenthetically, income and revenues of non-stock, non-profit

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

The crucial point of inquiry then is on the use of the assets or on

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

The tax exemption granted by the

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

We spell out below the difference in treatment if only to highlight the

privileged status of non-stock, non-profit educational institutions compared
with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a

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

To be specific, Section 30 provides that exempt organizations like non-

stock, non-profit educational institutions shall not be taxed on income
received by them as such.

Section 27 (B), on the other hand, states that "[p]roprietary educational

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

By the Tax Code's clear terms, a proprietary educational institution is

entitled only to the reduced rate of 10% corporate income tax. The
reduced rate is applicable only if: (1) the proprietary educational
institution is nonprofit and (2) its gross income from unrelated trade,
business or activity does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these

limitations do not apply to non-stock, non-profit educational
institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code

without force and effect for being contrary to the Constitution insofar
as it subjects to tax the income and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for
educational purpose.

CONCLUSION

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

FACTS:

LG received a formal assessment notice and demand letter from the Bureau
of Internal Revenue. LG was assessed deficiency income tax of
267,365,067.41 for the taxable year of 1994.

LG, through its external auditor, Sycip Gorres Velayo & Company (SGV), filed
on April 17, 1998 an administrative protest with the Bureau of Internal
Revenue against the tax assessment. In its Decision dated May 11, 2004, the
Court of Tax Appeals ruled that LG was liable for the payment of
₱27,181,887.82, representing deficiency income tax for taxable year 1994,
including 20% delinquency interest computed from March 18, 1998. LG filed
a Motion for Partial Reconsideration on June 4, 2004. On September 22, 2004,
the Court of Tax Appeals partially granted the Motion. It reduced LG’s
liability to ₱27,054,879.11.

On November 18, 2004, LG filed the present Petition for Review on Certiorari
before SC.

Petitioner filed a Manifestation dated January 29, 2008 stating that it availed
itself of the tax amnesty provided under Republic Act No. 9480 by paying the
total amount of ₱8,647,565.50. In addition, the Bureau of Internal Revenue,
through Assistant Commissioner James Roldan, issued a ruling on January
25, 2008, which held that petitioner complied with the provisions of Republic
Act No. 9480.

Petitioner is, thus, entitled to the immunities and privileges provided for
under the law including "civil, criminal or administrative penalties under the
National Internal Revenue Code of 1997 . . . arising from the failure to pay
any and all internal revenue taxes for taxable year 2005 and prior years."

According to respondent, petitioner cannot claim the tax amnesty provided

under Republic Act No. 9480 for the following reasons: (1) accounts
receivable by the Bureau of Internal Revenue as of the date of amnesty are
not covered since these constitute government property; (2) cases that have
already been favorably ruled upon by the trial court or appellate courts prior
to the availment of tax amnesty are not covered; and (3) petitioner’s case
involves withholding taxes that are not covered by the Tax Amnesty Act.
ISSUE:

However, in view of petitioner’s Manifestation stating that it availed of the

tax amnesty provided under Republic Act No. 9480, the only issue for
disposition is whether petitioner is entitled to the immunities and privileges
under the Tax Amnesty Law or Republic Act No. 9480.

RULING:

NATURE OF TAX AMNESTY

A tax amnesty is a general pardon or the intentional overlooking by the State

of its authority to impose penalties on persons otherwise guilty of violation
of a tax law. It partakes of an absolute waiver by the government of its right
to collect what is due it and to give tax evaders who wish to relent a chance
to start with a clean slate.

A tax amnesty, much like a tax exemption, is never favored or presumed in

law. The grant of a tax amnesty, similar to a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing
authority.

Tax amnesty is a general pardon to taxpayers who want to start a clean tax
slate. It also gives the government a chance to collect uncollected tax from
tax evaders without having to go through the tedious process of a tax case.

A. Under Republic Act No. 9480 and BIR Revenue Memorandum Circular
No. 55-2007, the qualified taxpayer may immediately avail of the
immunities and privileges upon submission of the required
documents. This is clear from Section 2 of Republic Act No. 9480.

The completion of the requirements and compliance with the procedure laid
down in the law and the implementing rules entitle the taxpayer to the
privileges and immunities under the tax amnesty program.

In this case, petitioner showed that it complied with the requirements laid
down in Republic Act No. 9480. Pertinent documents were submitted to the
Bureau of Internal Revenue and attached to the records of this case.
Petitioner’s compliance was also affirmed by the Bureau of Internal Revenue
in its ruling dated January 25, 2008. Petitioner is, therefore, entitled to the
immunities and privileges granted under Section 6 of Republic Act No. 9480.
Considering that LGE has paid the amnesty tax due for corporation and has
submitted its tax amnesty forms to Revenue District Office No. 47 of the BIR
of Pasig City, there is deemed full compliance with the provisions of the Act.

As such, LGE is entitled to the immunities and privileges provided for under
Section 6 of the Act and Section 10 of RMC No. 55-2007 which provides,
among others, immunity from payment of tax liabilities, as well as additions
thereto, and the appurtenant civil, criminal or administrative penalties under
the National Internal Revenue Code of 1997, as amended, arising from its
failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years. This includes immunity from payment of any internal revenue
tax liability except those provided for under Section 5 of the Act.

B. The law is clear. Only final and executory judgments are excluded
from the coverage of the tax amnesty program, hence:

SEC. 8. Exceptions. – The tax amnesty provided in Section 5 hereof shall

not extend to the following persons or cases existing as of the effectivity of
this Act:

(f) Tax cases subject of final and executory judgment by the courts.

We hold that only cases that involve final and executory judgments are
excluded from the tax amnesty program.

While tax amnesty, similar to a tax exemption, must be construed strictly

against the taxpayer and liberally in favor of the taxing authority, it is also a
well-settled doctrine that the rule-making power of administrative agencies
cannot be extended to amend or expand statutory requirements or to
embrace matters not originally encompassed by the law.

C. Furthermore, contrary to respondent’s argument, the case does not

involve withholding taxes.

This is readily seen in Republic Act No. 9480 and BIR Revenue Memorandum
Circular No. 55-2007. Section 8 of Republic Act No. 9480 provides:

SEC. 8. Exceptions. – The tax amnesty provided in Section 5 hereof shall not
extend to the following persons or cases existing as of the effectivity of this Act:
(a) Withholding agents with respect to their withholding tax liabilities[.] (Emphasis
supplied) Similarly, BIR Revenue Memorandum Circular No. 55-2007 states:

SEC. 5. Exceptions.– The tax amnesty shall not extend to the following persons
or cases existing as of the effectivity of RA 9480:

1. Withholding agents with respect to their withholding tax liabilities[.]

INCOME TAX v. WITHHOLDING TAX

Income tax is different from withholding tax, with both operating in distinct
systems.

In the seminal case of Fisher v. Trinidad, this court defined income tax as "a
tax on the yearly profits arising from property, professions, trades, and
offices." Otherwise stated, income tax is the "tax on all yearly profits arising
from property, professions, trades or offices, or as a tax on a person’s
income, emoluments, profits and the like."

On the other hand, withholding tax is a method of collecting income tax in

advance. "In the operation of the withholding tax system, the payee is the
taxpayer, the person on whom the tax is imposed, while the payor, a separate
entity, acts no more than an agent of the government for the collection of the
tax in order to ensure its payment. Obviously, the amount thereby used to
settle the tax liability is deemed sourced from the proceeds constitutive of
the tax base."

There are three reasons for the utilization of the withholding tax system:
"first, to provide the taxpayer a convenient manner to meet his probable
income tax liability; second, to ensure the collection of income tax which can
otherwise be lost or substantially reduced through failure to file the
corresponding returns[;] and third, to improve the government’s cash flow."

In Rizal Commercial Banking Corporation v. Commissioner of Internal

Revenue, this court ruled that "the liability of the withholding agent is
independent from that of the taxpayer."

Further:

The [withholding agent] cannot be made liable for the tax due because it is
the [taxpayer] who earned the income subject to withholding tax. The
withholding agent is liable only insofar as he failed to perform his duty to
withhold the tax and remit the same to the government. The liability for the
tax, however, remains with the taxpayer because the gain was realized and
received by him.

The cause of action for failure to withhold taxes is different from the cause
of action arising from non-payment of income taxes. "Indeed, the revenue
officers generally disallow the expenses claimed as deductions from gross
income, if no withholding of tax as required by law or he regulations was
withheld and remitted to the BIR within the prescribed dates."

In Asia International Auctioneers, Inc. v. Commissioner of Internal

Revenue, respondent therein argued that petitioner was not entitled to the
grant of tax amnesty under Republic Act No. 9480 as petitioner was deemed
a withholding agent of the assessed deficiency value added tax and
deficiency excise tax. Petitioner was, thus, disqualified under Section 8 of
the law. This court rejected such contention:

The CIR did not assess AIA as a withholding agent that failed to withhold or
remit the deficiency VAT and excise tax to the BIR under relevant provisions
of the Tax Code. Hence, the argument that AIA is "deemed" a withholding
agent for these deficiency taxes is fallacious.

Indirect taxes, like VAT and excise tax, are different from withholding taxes.

To distinguish, in indirect taxes, the incidence of taxation falls on one person

but the burden thereof can be shifted or passed on to another person, such
as when the tax is imposed upon goods before reaching the consumer who
ultimately pays for it.

On the other hand, in case of withholding taxes, the incidence and burden of
taxation fall on the same entity, the statutory taxpayer. The burden of
taxation is not shifted to the withholding agent who merely collects, by
withholding, the tax due from income payments to entities arising from
certain transactions and remits the same to the government.

Due to this difference, the deficiency VAT and excise tax cannot be
"deemed" as withholding taxes merely because they constitute indirect
taxes.

Moreover, records support the conclusion that AIA was assessed not as a
withholding agent but, as the one directly liable for the said deficiency taxes.

In this case, petitioner was assessed for its deficiency income taxes due to
the disallowance of several items for deduction. Petitioner was not assessed
for its liability as withholding agent. The two liabilities are distinct from and
must not be confused with each other. The main reason for the disallowance
hi

of the deductions was that petitioner was not able to fully substantiate its
claim of remittance through receipts or relevant documents.
CHINA BANKING vs. CIR

FACTS:

On 19 April 1989, petitioner CBC received an assessment from the

Bureau of Internal Revenue (BIR) finding CBC liable for deficiency DST
on the sales of foreign bills of exchange to the Central Bank.

On 8 May 1989, petitioner CBC, through its vice-president, sent a letter

of protest to the BIR.

On 6 December 2001, more than 12 years after the filing of the protest,
the Commissioner of Internal Revenue (CIR) rendered a decision
reiterating the deficiency DST assessment and ordered the payment
thereof plus increments within 30 days from receipt of the Decision.

On 18 January 2002, CBC filed a Petition for Review with the CTA.

On 5 August 2005, petitioner appealed to the CTA En Banc.

The taxpayer now comes to this Court with a Rule 45 Petition,

reiterating the arguments it raised at the CTA level and invoking for the
first time the argument of prescription.

Petitioner CBC states that the government has three years from 19 April
1989, the date the former received the assessment of the CIR, to collect
the tax. Within that time frame, however, neither a warrant of distraint
or levy was issued, nor a collection case filed in court.

ISSUE:

Given the facts and the arguments raised in this case, the resolution of
this case hinges on this issue: whether the right of the BIR to collect
the assessed DST from CBC is barred by prescription.

RULING:

We grant the Petition on the ground that he right of the BIR to collect
the assessed DST is barred by the statute of limitations.

Prescription Has Set In.

In this case, the records do not show when the assessment notice was
mailed, released or sent to CBC. Nevertheless, the latest possible date
that the BIR could have released, mailed or sent the assessment notice
was on the same date that CBC received it, 19 April 1989. Assuming
therefore that 19 April 1989 is the reckoning date, the BIR had three
years to collect the assessed DST. However, the records of this case
show that there was neither a warrant of distraint or levy served on
CBC's properties nor a collection case filed in court by the BIR within
the three-year period.

The attempt of the BIR to collect the tax through its Answer with a
demand for CBC to pay the assessed DST in the CTA on 11 March 2002
did not comply with Section 319(c) ofthe 1977 Tax Code, as amended.
The demand was made almost thirteen years from the date from which
the prescriptive period is to be reckoned. Thus, the attempt to collect
the tax was made way beyond the three-year prescriptive period.

Consequently, the claim of the CIR for deficiency DST from petitioner
is forever lost, as it is now barred by time. This Court has no other
option but to dismiss the present case.

Failure to raise prescription at the administrative level/lower court as a

defense is of no moment.

As a rule, the failure to raise the defense of prescription at the

administrative level prevents the taxpayer from raising it at the appeal
stage.

This rule, however, is not absolute. The exception arises when the
pleadings or the evidence on record show that the claim is barred by
prescription.

In this case, the fact that the claim of the government is time-barred is
a matter of record. As can be seen from the previous discussion on the
determination of the prescription of the right of the government to
claim deficiency DST, the conclusion that prescription has set in was
arrived at using the evidence on record.

The date of receipt of the assessment notice was not disputed, and the
date of the attempt to collect was determined by merely checking the
records as to when the Answer of the CIR containing the demand to
pay the tax was filed.

Estoppel or waiver prevents the government from invoking

the rule against raising the issue of prescription for the first
time on appeal.
In this case, petitioner may have raised the question of prescription
only on appeal to this Court. The BIR could have crushed the defense
by the mere invocation of the rule against setting up the defense of
prescription only at the appeal stage. The government, however, failed
to do so.

On the contrary, the BIR was silent despite having the opportunity to
invoke the bar against the issue of prescription. It is worthy of note that
the Court ordered the BIR to file a Comment. The government, however,
did not offer any argument in its Comment about the issue of
prescription, even if petitioner raised it in the latter’s Petition. It merely
fell silent on the issue. It was given another opportunity to meet the
challenge when this Court ordered both parties to file their respective
memoranda. The CIR, however, merely filed a Manifestation that it
would no longer be filing a Memorandum and, in lieu thereof, it would
be merely adopting the arguments raised in its Comment.

Its silence spoke loudly of its intent to waive its right to object to the
argument of prescription.

We are mindful of the rule in taxation that estoppel does not prevent
the government from collecting taxes; it is not bound by the mistake or
negligence of its agents.

The rule is based on the political law concept "the king can do no
wrong," which likens a state to a king: it does not commit mistakes,
and it does not sleep on its rights. The analogy fosters inequality
between the taxpayer and the government, with the balance tilting in
favor of the latter.

This concept finds justification in the theory and reality that

government is necessary, and it must therefore collect taxes if it is to
survive.
Thus, the mistake or negligence of government officials should not
bind the state, lest it bring harm to the government and ultimately the
people, in whom sovereignty resides.

Republic v. Ker & Co. Ltd. involved a collection case for a final and
executory assessment. The taxpayer nevertheless raised the
prescription of the right to assess the tax as a defense before the Court
of First Instance. The Republic, instead of objecting to the invocation
of prescription as a defense by the taxpayer, litigated on the issue and
thereafter submitted it for resolution. The Supreme Court ruled for the
taxpayer, treating the actuations of the government as a waiver of the
right to invoke the defense of prescription. Ker effectively applied to
the government the rule of estoppel. Indeed, the no-estoppel rule is not
absolute.

The same ingredients in Ker - procedural matter and injustice -obtain

in this case.

The procedural matter consists in the failure to raise the issue of

prescription at the trial court/administrative level, and injustice in the
fact that the BIR has unduly delayed the assessment and collection of
the DST in this case. The fact is that it took more than 12 years for it to
take steps to collect the assessed tax. The BIR definitely caused untold
prejudice to petitioner, keeping the latter in the dark for so long, as to
whether it is liable for DST and, if so, for how much.
AIR CANADA vs. COMMISSIONER OF INTERNAL REVENUE

FACTS:

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)(l), 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 ½% of its
gross revenues earned from the sale of its tickets in the Philippines.

This is a Petition for Review appealing the August 26, 2005 Decision of
the Court of Tax Appeals En Banc, which in turn affirmed the December
22, 2004 Decision and April 8, 2005 Resolution 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[.]" "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. Aerotel "sells [Air
Canada’s] passage documents in the Philippines."

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 ₱5,185,676.77.

On November 28, 2002, Air Canada filed a written claim for refund of
alleged erroneously paid income taxes amounting to ₱5,185,676.77
before the Bureau of Internal Revenue, Revenue District Office No. 47-
East Makati. It found basis from the revised definition 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 onehalf 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. 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%.

Further, according to the Court of Tax Appeals First Division, Air

Canada was deemed to have established a "permanent
establishment" in the Philippines under Article V(2)(i) of the Republic
of the Philippines-Canada Tax Treaty 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[.]"

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," which are especially classified and taxed under Section 28(A)(3). 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."

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 1½% 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[.]"

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.

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" in the Philippines pursuant to Article V(6) of the Republic of
the Philippines-Canada Tax Treaty.

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." 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.
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) (1)"45 since it has not been assessed at
all by the Bureau of Internal Revenue for any income tax liability.46

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 ₱5,185,676.77 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."50

Respondent further contends that petitioner is not entitled to its claim for
refund because the amount of ₱5,185,676.77 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

ISSUES:

1. Whether petitioner Air Canada is subject to the 2½% 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%30 on taxable income pursuant to Section 28(A)(1);

2. 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;

3. 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

4. Whether petitioner Air Canada is entitled to the refund of

₱5,185,676.77 pertaining allegedly to erroneously paid tax on Gross
Philippine Billings from the third quarter of 2000 to the second quarter
of 2002.

RULING:

I. 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.

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% tax on its taxable income:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(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

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."

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. 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. 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.
 III. TAX TREATY

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 this case, there is a tax treaty that must be taken into consideration to
determine the proper tax rate.

WHAT IS A TAX TREATY?

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."

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.

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.

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[.]" Pacta 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, 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. 1-2000 will deprive persons or
corporations of the benefit of a tax treaty."

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.

"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 RPGermany 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.

The representatives 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 V 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 1868 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 XV 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.

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

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[.]"Second, in
carrying out the services, Aerotel cannot enter into any contract on
behalf of petitioner without the express written consent of the latter; it
must act according to the standards required by petitioner; "follow the
terms and provisions of the [petitioner Air Canada] GSA Manual [and
all] written instructions of [petitioner Air Canada;]"107 and "[i]n the
absence of an applicable provision in the Manual or instructions, [Aerotel
must] carry out its functions in accordance with [its own] standard practices
and procedures[.]"

Third, Aerotel must only "issue traffic documents approved by

[petitioner Air Canada] for all transportation over [its] services[.]" 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.

Fourth, all claims, liabilities, fines, and expenses arising from or in

connection with the transportation sold by Aerotel are for the account
of petitioner, except in the case of negligence of Aerotel.

Aerotel 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 Aerotel is to petitioner as the principal, and not
to Aerotel, and liability to such third party is enforceable against
petitioner. While Aerotel 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. Aerotel is required to submit
its annual sales plan for petitioner’s approval.

In essence, Aerotel 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[.]"

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 paragraph of Article VII in relation to
Article VIII (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 1½% 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 income from sale of airline tickets in the
Philippines, it could only be taxed at a maximum of 1½% 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, 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 provisions 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. Ordinarily, the later provision governs over the earlier one.

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:

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[.]" 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 1½% on business profits derived from sale of
international air transportation.
 V. NO. AIR CANADA IS NOT ENTITLED TO REFUND

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; and

(b) internal revenue taxes cannot be the subject of set-off or

compensation, citing Republic v. Mambulao Lumber Co., et
al. and Francia v. Intermediate Appellate Court.

In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal

Revenue, 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."

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.

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 2½% 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 2½% 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, 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. 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, cannot 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.

In Francia, this court did not allow legal compensation since not all requisites
of legal compensation provided under Article 1279 were present.

In that case, a portion of Francia’s property in Pasay was expropriated by

the national government, 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.

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 ₱4,116.00 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 ₱4,116.00 deposited with
the bank but he did not withdraw it. It would have been an easy matter to
withdraw ₱2,400.00 from the deposit so that he could pay the tax obligation
thus aborting the sale at public auction.

The ruling in Francia was applied to the subsequent cases of Caltex

Philippines, Inc. v. Commission on Auditand Philex Mining Corporation v.
Commissioner of Internal Revenue.

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 be set-off. (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." 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. (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)(l), the correctness of the return filed by
petitioner is now put in doubt. As such, we cannot grant the prayer for
a refund. (Emphasis supplied, citation omitted)

In the subsequent case of United Airlines, Inc. v. Commissioner of

Internal Revenue, 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.

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

petitioner was computed at the rate of 1 ½%of its gross revenues
amounting to P345,711,806.08 from the third quarter of 2000 to the
second quarter of 2002. It is quite apparent that the tax imposable
under Section 28(A)(l) of the 1997 National Internal Revenue Code [32%
of taxable income, that is, gross income less deductions] will exceed
the maximum ceiling of 1 ½% of gross revenues as decreed in Article
VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no
refund is forthcoming.
COMMISSIONER OF INTERNAL REVENUE v. TOLEDO POWER
COMPANY

The burden of proving entitlement to a tax refund rests on the

taxpayer.

FACTS:

Toledo Power Corporation (TPC) is a general partnership

principally engaged in the business of power generation and
sale of electricity to the National Power Corporation (NPC),
Cebu Electric Cooperative III (CEBECO), Atlas Consolidated
Mining and Development Corporation (ACMDC), and Atlas
Fertilizer Corporation (AFC).

TPC filed with the Bureau of Internal Revenue (BIR)

Regional District Office (RDO) No. 83 an administrative
claim for refund or credit of its unutilized input Value Added
Tax (VAT) for the taxable year 2002 in the total amount of
P14,254,013.27 under Republic Act No. 9136 or the Electric
Power Industry Reform Act of 2001 (EPIRA) and the
National Internal Revenue Code of 1997 (NIRC).

On April 22, 2004, due to the inaction of the Commissioner of

Internal Revenue (OR), TPC filed with the CTA a Petition for
Review, docketed as CTA Case No. 6961 and raffled to the CTA
First Division (CTA Division).

In response to the Petition for Review, the CIR argued that TPC
failed to prove its entitlement to a tax refund or credit.

The CTA Division rendered a Decision partially granting

TPC's claim in the reduced amount of P7,598,279.29. Since
NPC is exempt from the payment of all taxes, including VAT,
the CTA Division allowed TPC to claim a refund or credit of
its unutilized input VAT attributable to its zero-rated sales
of electricity to NPC for the taxable year 2002.
The CTA Division, however, denied the claim attributable to
TPC's sales of electricity to CEBECO, ACMDC and AFC due to
the failure of TPC to prove that it is a generation company
under the EPIRA. The CTA Division did not consider the said
sales as valid zero-rated sales because TPC did not submit
a Certificate of Compliance (COC) from the Energy
Regulatory Commission (ERC).

On November 22, 2010, the CTA En Banc rendered a Decision

dismissing both Petitions. It sustained the findings of the CTA
Division that both the administrative and the judicial claims were
timely filed and that TPC's non-compliance with RMO No. 53-98
was not fatal to its claim. Also, since TPC was not yet issued a COC
in 2002, the CTA En Banc agreed with the CTA Division that TPC's
sales of electricity to CEBECO, ACMDC, and AFC for the taxable
year 2002 could not qualify for a VAT zero-rating under the
EPIRA. The CTA En Banc likewise noted that contrary to the claim
of TPC, there is no stipulation in the Joint Stipulation of Facts and
Issues (JSFI) that TPC is a generation company under the EPIRA.

RULING:

TPC is not entitled to a refund or credit of unutilized input

VAT attributable to its sales of electricity to CEBECO,
ACMDC, and AFC.

All told, we find no error on the part of the CTA En Banc, in

considering TPC's sales of electricity to CEBECO, ACMDC, and AFC
for taxable year 2002 as invalid zero-rated sales, and in
consequently denying TPC's claim for refund or credit of unutilized
input VAT attributable to the said sales of electricity.

TPC is not liable for deficiency VAT.

But while TPC's sales of electricity to CEBECO, ACMDC, and

AFC are not zero-rated, we cannot hold it liable for
deficiency VAT by imposing 10% VAT on said sales of
electricity as what the CIR wants us to do.

As a rule, taxes cannot be subject to compensation because

the government and the taxpayer are not creditors and
debtors of each other.

However, we are aware that in several cases, we have

allowed the determination of a taxpayer's liability in a
refund case, thereby allowing the offsetting of taxes.

In Commissioner of Internal Revenue v. Court of Tax

Appeals, we allowed offsetting of taxes in a tax refund case
because there was an existing deficiency income and
business tax assessment against the taxpayer.

We said that "[t]o award such refund despite the existence

of that deficiency assessment is an absurdity and a polarity
in conceptual effects" and that "to grant the refund without
determination of the proper assessment and the tax due
would inevitably result in multiplicity of proceedings or
suits."

Similarly, in South African Airways v. Commissioner of

Internal Revenue, we permitted offsetting of taxes because
the correctness of the return filed by the taxpayer was put
in issue.

In the recent case of SMI-ED Philippines Technology, Inc. v.

Commissioner of Internal Revenue, we also allowed
offsetting because there was a need for the court to
determine if a taxpayer claiming refund of erroneously paid
taxes is more properly liable for taxes other than that paid.

We explained that the determination of the proper category

of tax that should have been paid is not an assessment but
is an incidental issue that must be resolved in order to
determine whether there should be a refund.
However, we clarified that while offsetting may be allowed,
the BIR can no longer assess the taxpayer for deficiency
taxes in excess of the amount claimed for refund if
prescription has already set in.

But in all these cases, we allowed offsetting of taxes only

because the determination of the taxpayer's liability is
intertwined with the resolution of the claim for tax refund
of erroneously or illegally collected taxes under Section
229 of the NIRC.

A situation that is not present in the instant case.

In this case, TPC filed a claim for tax refund or credit under
Section 112 of the NIRC, where the issue to be resolved is
whether TPC is entitled to a refund or credit of its unutilized
input VAT for the taxable year 2002. And since it is not a
claim for refund under Section 229 of the NIRC, the
correctness of TPC’s VAT returns is not an issue.

Thus, there is no need for the court to determine whether

TPC is liable for deficiency VAT.

Besides, it would be unfair to allow the CIR to use a claim

for refund under Section 112 of the NIRC as a means to
assess a taxpayer for any deficiency VAT, especially if the
period to assess had already prescribed. As we have said,
the courts have no assessment powers, and therefore,
cannot issue assessments against taxpayers.

The courts can only review the assessments issued by the

CIR, who under the law is vested with the powers to assess
and collect taxes and the duty to issue tax assessments
within the prescribed period.
WHEREFORE, the Petitions are hereby DENIED. The November
22, 2010 Decision and the April 6, 2011 Resolution of the Court of
Tax Appeals in CTA EB Nos. 623 and 629 are hereby AFFIRMED.