G.R. No.
L-3869 January 31, 1952 In its answer, the defendant Philippine trust Company
S. DAVIS WINSHIP, plaintiff-appellant,
vs.
PHILIPPINE TRUST COMPANY, defendant-appellee.
Francisco R. Capistrano for appellant.
Lao and Feria for appellee.
PARAS, J.:
Prior to December, 1941, the Eastern Isles Import
corporation organized under and existing by virtue of the
laws of the Philippines, all of the capital stock of which
was and has been owned by American citizens, except
one share with a par value of P100 in the name of
Antonia Sevilla and one share with a par value of P100
in the name of Edmund A. Schwesinger, had a current
account deposit with the Philippine Trust Company, and
as of December 29, 1941, the balance in favor of said
depositor was P51,410.91. Prior to December, 1941, the
Eastern Isles, Inc., a corporation organized under and
existing by virtue of the laws of the Philippines, all of the
capital stock of which was and has been owned by
American citizens, except one share with a par value of
P100 in the name of F. Capistrano, had a current
account deposit with the Philippine Trust Company, and
as of December 29, 1941, the balance in favor of said
depositor was P34,827.74. The Eastern Isles,
Incorporated made a withdrawal of P204.37 which was
debited to said account on June 10, 1942.
On October 4, 1943, the Japanese Military
Administration in the Philippines issued an order
requiring all deposit accounts of the hostile people
(including corporations) to be transferred to the Bank of
Taiwan, as the depository of the Japanese Military
Administration, which order the Philippine Trust
Company was specifically directed to comply with. On
September 29, 1944, in compliance with said order, the
Philippine Trust Company transferred and paid the credit
balances of the current account deposits of the Eastern
Isles Import Corporation and of the Eastern Isles, Inc. to
the Bank of Taiwan.
The pre-war current deposit accounts of the Eastern
Isles Import Corporation and of the Eastern Isles, Inc.
were subsequently transferred to S. Davis Winship who,
on August 12, 1947, presented to the Philippine Trust
Company checks Nos. A-79212 and H-579401 covering
the aforesaid deposits. The Philippine Trust Company,
however, refused to pay said checks, whereupon, on
September 6, 1947, S. Davis Winship instituted the
present action against the Philippine Trust Company in
the Court of First Instance of Manila, to recover upon
the first cause of action the sum of P51,410.91 and
under the second cause of action the sum of
P34,827.74.
invoked the order of the Japanese Military
Administration by virtue of which it transferred the
current deposit accounts in question to the Bank of
Taiwan as the depository of the Bureau of Enemy
Property Custody of the Japanese Military
Administration. After trial, the Court of First Instance of
Manila rendered a decision upholding the contention of
the defendant and accordingly dismissing the complaint.
From this decision plaintiff appealed. In the case of
Everett Steamship Corporation vs. Bank of the Philippine
Islands, 84 Phil., 202; 47 O.G., No. 1 p. 165, we made
the following pronouncement: This Court having ruled in
the Haw Pia case that the collection by the Bank of
Taiwan of the China Banking Corporation's credit from
the latter's debtor, by order of the Japanese Military
Administration, was not a confiscation but a mere
sequestration of enemy's private personal property, and
therefore the payment by the plaintiff to the Bank of
Taiwan was valid and released his obligation to the
defendant bank, it follows that the Bank of Taiwan of
plaintiff's deposit, and by order of the Japanese Military
Administration, was valid and released the defendant's
obligation to the plaintiff.'
In view of this pronouncement, we have to affirm the
appealed judgment. As it has been stipulated by the
parties that the defendant transferred the deposits in
question to the Bank of Taiwan in compliance with the
order of the Japanese Military Administration, the
defendant was released from any obligation to the
depositors or their transferee. Appellant's contention
that there is no positive showing that the transfer was
made by the Philippine Trust Company in compliance
with the order of the Japanese Military Administration,
and its logical effect is to make such act binding on said
company. At any rate, the defendant corporation has not
impugned its validity.
In the case of Filipinas Compañia de Seguros vs.
Christern Henefeld and Co., Inc., Phil., 54, we held that
the nationality of a private corporation is determined by
the character or citizenship of its controlling
stockholders; and this pronouncement is of course
decisive as to the hostile character of the Eastern Isles,
Inc., as far as the Japanese Military Administration was
concerned, it being conceded that the controlling
stockholders of said corporations were American
citizens.
Wherefore, the appealed judgment is affirmed, with
costs against the appellant. So ordered.
Pablo, Bengzon, Montemayor, Reyes, Jugo and Bautista
Angelo, JJ., concur.
G.R. No. 76573 September 14, 1989
MARUBENI CORPORATION (formerly Marubeni —
Iida, Co., Ltd.), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE AND
COURT OF TAX APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.
FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a
foreign corporation duly organized and existing under
the laws of Japan and duly licensed to engage in
business under Philippine laws with branch office at the
4th Floor, FEEMI Building, Aduana Street, Intramuros,
Manila seeks the reversal of the decision of the Court of
Tax Appeals 1 dated February 12, 1986 denying its claim
for refund or tax credit in the amount of P229,424.40
representing alleged overpayment of branch profit
remittance tax withheld from dividends by Atlantic Gulf
and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni
Corporation of Japan has equity investments in AG&P of
Manila. For the first quarter of 1981 ending March 31,
AG&P declared and paid cash dividends to petitioner in
the amount of P849,720 and withheld the corresponding
10% final dividend tax thereon. Similarly, for the third
quarter of 1981 ending September 30, AG&P declared
and paid P849,720 as cash dividends to petitioner and
withheld the corresponding 10% final dividend tax
thereon. 2
AG&P directly remitted the cash dividends to petitioner's
head office in Tokyo, Japan, net not only of the 10%
final dividend tax in the amounts of P764,748 for the
first and third quarters of 1981, but also of the withheld
15% profit remittance tax based on the remittable
amount after deducting the final withholding tax of 10%.
A schedule of dividends declared and paid by AG&P to
its stockholder Marubeni Corporation of Japan, the 10%
final intercorporate dividend tax and the 15% branch
profit remittance tax paid thereon, is shown below:
1981 FIRST THIRD TOTAL OF
QUARTER QUARTER FIRST and
(three (three THIRD
months months quarters
ended ended
3.31.81) 9.30.81)
(In Pesos)
Cash 849,720.44 849,720.00 1,699,440.00
Dividends
Paid
10% Dividend 84,972.00 84,972.00 169,944.00
Tax Withheld
Cash Dividend 764,748.00 764,748.00 1,529,496.00
net of 10%
Dividend Tax
Withheld
15% Branch 114,712.20 114,712.20 229,424.40 3
Profit
Remittance
Tax Withheld
Net Amount 650,035.80 650,035.80 1,300,071.60
Remitted to
Petitioner
The 10% final dividend tax of P84,972 and the 15%
branch profit remittance tax of P114,712.20 for the first
quarter of 1981 were paid to the Bureau of Internal
Revenue by AG&P on April 20, 1981 under Central Bank
Receipt No. 6757880. Likewise, the 10% final dividend
tax of P84,972 and the 15% branch profit remittance tax
of P114,712 for the third quarter of 1981 were paid to
the Bureau of Internal Revenue by AG&P on August 4,
1981 under Central Bank Confirmation Receipt No.
7905930. 4
Thus, for the first and third quarters of 1981, AG&P as
withholding agent paid 15% branch profit remittance on
cash dividends declared and remitted to petitioner at its
head office in Tokyo in the total amount of P229,424.40
on April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through
the accounting firm Sycip, Gorres, Velayo and Company,
sought a ruling from the Bureau of Internal Revenue on
whether or not the dividends petitioner received from
AG&P are effectively connected with its conduct or
business in the Philippines as to be considered branch
profits subject to the 15% profit remittance tax imposed
under Section 24 (b) (2) of the National Internal
Revenue Code as amended by Presidential Decrees Nos.
1705 and 1773.
In reply to petitioner's query, Acting Commissioner
Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as
amended, only profits remitted abroad by a branch
office to its head office which are effectively connected
with its trade or business in the Philippines are subject
to the 15% profit remittance tax. To be effectively
connected it is not necessary that the income be derived
from the actual operation of taxpayer-corporation's trade
or business; it is sufficient that the income arises from
the business activity in which the corporation is
engaged. For example, if a resident foreign corporation
is engaged in the buying and selling of machineries in
the Philippines and invests in some shares of stock on
which dividends are subsequently received, the
dividends thus earned are not considered 'effectively
connected' with its trade or business in this country.
(Revenue Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni
from AG&P are not income arising from the business
activity in which Marubeni is engaged. Accordingly, said
dividends if remitted abroad are not considered branch
profits for purposes of the 15% profit remittance tax
imposed by Section 24 (b) (2) of the Tax Code, as
amended . . . 6
Consequently, in a letter dated September 21, 1981 and
filed with the Commissioner of Internal Revenue on
September 24, 1981, petitioner claimed for the refund or
issuance of a tax credit of P229,424.40 "representing
profit tax remittance erroneously paid on the dividends
remitted by Atlantic Gulf and Pacific Co. of Manila
(AG&P) on April 20 and August 4, 1981 to ... head office
in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal
Revenue denied petitioner's claim for refund/credit of
P229,424.40 on the following grounds:
While it is true that said dividends remitted were not
subject to the 15% profit remittance tax as the same
were not income earned by a Philippine Branch of
Marubeni Corporation of Japan; and neither is it subject
to the 10% intercorporate dividend tax, the recipient of
the dividends, being a non-resident stockholder,
nevertheless, said dividend income is subject to the 25
% tax pursuant to Article 10 (2) (b) of the Tax Treaty
dated February 13, 1980 between the Philippines and
Japan.
Inasmuch as the cash dividends remitted by AG&P to
Marubeni Corporation, Japan is subject to 25 % tax, and
that the taxes withheld of 10 % as intercorporate
dividend tax and 15 % as profit remittance tax totals
(sic) 25 %, the amount refundable offsets the liability,
hence, nothing is left to be refunded. 8
Petitioner appealed to the Court of Tax Appeals which
affirmed the denial of the refund by the Commissioner of
Internal Revenue in its assailed judgment of February
12, 1986. 9
In support of its rejection of petitioner's claimed refund,
respondent Tax Court explained:
Whatever the dialectics employed, no amount of
sophistry can ignore the fact that the dividends in
question are income taxable to the Marubeni
Corporation of Tokyo, Japan. The said dividends were
distributions made by the Atlantic, Gulf and Pacific
Company of Manila to its shareholder out of its profits on
the investments of the Marubeni Corporation of Japan, a
non-resident foreign corporation. The investments in the
Atlantic Gulf & Pacific Company of the Marubeni
Corporation of Japan were directly made by it and the
dividends on the investments were likewise directly
remitted to and received by the Marubeni Corporation of
Japan. Petitioner Marubeni Corporation Philippine Branch
has no participation or intervention, directly or indirectly,
in the investments and in the receipt of the dividends.
And it appears that the funds invested in the Atlantic
Gulf & Pacific Company did not come out of the funds
infused by the Marubeni Corporation of Japan to the
Marubeni Corporation Philippine Branch. As a matter of
fact, the Central Bank of the Philippines, in authorizing
the remittance of the foreign exchange equivalent of
(sic) the dividends in question, treated the Marubeni
Corporation of Japan as a non-resident stockholder of
the Atlantic Gulf & Pacific Company based on the
supporting documents submitted to it.
Subject to certain exceptions not pertinent hereto,
income is taxable to the person who earned it.
Admittedly, the dividends under consideration were
earned by the Marubeni Corporation of Japan, and
hence, taxable to the said corporation. While it is true
that the Marubeni Corporation Philippine Branch is duly
licensed to engage in business under Philippine laws,
such dividends are not the income of the Philippine
Branch and are not taxable to the said Philippine branch.
We see no significance thereto in the identity concept or
principal-agent relationship theory of petitioner because
such dividends are the income of and taxable to the
Japanese corporation in Japan and not to the Philippine
branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that
following the principal-agent relationship theory,
Marubeni Japan is likewise a resident foreign corporation
subject only to the 10 % intercorporate final tax on
dividends received from a domestic corporation in
accordance with Section 24(c) (1) of the Tax Code of
1977 which states:
Dividends received by a domestic or resident foreign
corporation liable to tax under this Code — (1) Shall be
subject to a final tax of 10% on the total amount
thereof, which shall be collected and paid as provided in
Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view
that Marubeni, Japan, being a non-resident foreign
corporation and not engaged in trade or business in the
Philippines, is subject to tax on income earned from
Philippine sources at the rate of 35 % of its gross
income under Section 24 (b) (1) of the same Code which
reads:
(b) Tax on foreign corporations — (1) Non-resident
corporations. — A foreign corporation not engaged in
trade or business in the Philippines shall pay a tax equal
to thirty-five per cent of the gross income received
during each taxable year from all sources within the
Philippines as ... dividends ....
but expressly made subject to the special rate of 25%
under Article 10(2) (b) of the Tax Treaty of 1980
concluded between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a
resident of a Contracting State to a resident of the other
Contracting State may be taxed in that other Contracting
State.
(2) However, such dividends may also be taxed in the
Contracting State of which the company paying the
dividends is a resident, and according to the laws of that
Contracting State, but if the recipient is the beneficial
owner of the dividends the tax so charged shall not
exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in
all other cases.
Central to the issue of Marubeni Japan's tax liability on
its dividend income from Philippine sources is therefore
the determination of whether it is a resident or a non-
resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is
one that is "engaged in trade or business" within the
Philippines. Petitioner contends that precisely because it
is engaged in business in the Philippines through its
Philippine branch that it must be considered as a
resident foreign corporation. Petitioner reasons that
since the Philippine branch and the Tokyo head office
are one and the same entity, whoever made the
investment in AG&P, Manila does not matter at all. A
single corporate entity cannot be both a resident and a
non-resident corporation depending on the nature of the
particular transaction involved. Accordingly, whether the
dividends are paid directly to the head office or coursed
through its local branch is of no moment for after all, the
head office and the office branch constitute but one
corporate entity, the Marubeni Corporation, which,
under both Philippine tax and corporate laws, is a
resident foreign corporation because it is transacting
business in the Philippines.
The Solicitor General has adequately refuted petitioner's
arguments in this wise:
The general rule that a foreign corporation is the same
juridical entity as its branch office in the Philippines
cannot apply here. This rule is based on the premise
that the business of the foreign corporation is conducted
through its branch office, following the principal agent
relationship theory. It is understood that the branch
becomes its agent here. So that when the foreign
corporation transacts business in the Philippines
independently of its branch, the principal-agent
relationship is set aside. The transaction becomes one of
the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation,
not the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted
through the branch office, the latter becomes the
taxpayer, and not the foreign corporation. 12
In other words, the alleged overpaid taxes were incurred
for the remittance of dividend income to the head office
in Japan which is a separate and distinct income
taxpayer from the branch in the Philippines. There can
be no other logical conclusion considering the
undisputed fact that the investment (totalling 283.260
shares including that of nominee) was made for
purposes peculiarly germane to the conduct of the
corporate affairs of Marubeni Japan, but certainly not of
the branch in the Philippines. It is thus clear that
petitioner, having made this independent investment
attributable only to the head office, cannot now claim
the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower
tax rate of 10 %.
But while public respondents correctly concluded that
the dividends in dispute were neither subject to the 15
% profit remittance tax nor to the 10 % intercorporate
dividend tax, the recipient being a non-resident
stockholder, they grossly erred in holding that no refund
was forthcoming to the petitioner because the taxes
thus withheld totalled the 25 % rate imposed by the
Philippine-Japan Tax Convention pursuant to Article 10
(2) (b).
To simply add the two taxes to arrive at the 25 % tax
rate is to disregard a basic rule in taxation that each tax
has a different tax basis. While the tax on dividends is
directly levied on the dividends received, "the tax base
upon which the 15 % branch profit remittance tax is
imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically
imposing the 25 % rate under Article 10 (2) (b) of the
Tax Treaty as if this were a flat rate. A closer look at the
Treaty reveals that the tax rates fixed by Article 10 are
the maximum rates as reflected in the phrase "shall not
exceed." This means that any tax imposable by the
contracting state concerned should not exceed the 25 %
limitation and that said rate would apply only if the tax
imposed by our laws exceeds the same. In other words,
by reason of our bilateral negotiations with Japan, we
have agreed to have our right to tax limited to a certain
extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with
respect to the transaction in question, the applicable
provision of the Tax Code is Section 24 (b) (1) (iii) in
conjunction with the Philippine-Japan Treaty of 1980.
Said section provides:
(b) Tax on foreign corporations. — (1) Non-resident
corporations — ... (iii) On dividends received from a
domestic corporation liable to tax under this Chapter,
the tax shall be 15% of the dividends received, which
shall be collected and paid as provided in Section 53 (d)
of this Code, subject to the condition that the country in
which the non-resident foreign corporation is domiciled
shall allow a credit against the tax due from the non-
resident foreign corporation, taxes deemed to have been
paid in the Philippines equivalent to 20 % which
represents the difference between the regular tax (35
%) on corporations and the tax (15 %) on dividends as
provided in this Section; ....
Proceeding to apply the above section to the case at
bar, petitioner, being a non-resident foreign corporation,
as a general rule, is taxed 35 % of its gross income from
all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner
on dividends received from a domestic corporation
(AG&P) on the condition that its domicile state (Japan)
extends in favor of petitioner, a tax credit of not less
than 20 % of the dividends received. This 20 %
represents the difference between the regular tax of 35
% on non-resident foreign corporations which petitioner
would have ordinarily paid, and the 15 % special rate on
dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the
transaction in question to be computed as follows:
Total cash dividend paid ................P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------
Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------
Amount to be refunded to petitioner
representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on
the dividends received by a foreign non-resident
stockholder from a domestic corporation under Section
24 (b) (1) (iii) is easily within the maximum ceiling of 25
% of the gross amount of the dividends as decreed in
Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled.
Respondent Commissioner of Internal Revenue is
laboring under the impression that the Court of Tax
Appeals is covered by Batas Pambansa Blg. 129,
otherwise known as the Judiciary Reorganization Act of
1980. He alleges that the instant petition for review was
not perfected in accordance with Batas Pambansa Blg.
129 which provides that "the period of appeal from final
orders, resolutions, awards, judgments, or decisions of
any court in all cases shall be fifteen (15) days counted
from the notice of the final order, resolution, award,
judgment or decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does
not include the Court of Tax Appeals which has been
created by virtue of a special law, Republic Act No.
1125. Respondent court is not among those courts
specifically mentioned in Section 2 of BP Blg. 129 as
falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a
party adversely affected by an order, ruling or decision
of the Court of Tax Appeals is given thirty (30) days
from notice to appeal therefrom. Otherwise, said order,
ruling, or decision shall become final.
Records show that petitioner received notice of the
Court of Tax Appeals's decision denying its claim for
refund on April 15, 1986. On the 30th day, or on May
15, 1986 (the last day for appeal), petitioner filed a
motion for reconsideration which respondent court
subsequently denied on November 17, 1986, and notice
of which was received by petitioner on November 26,
1986. Two days later, or on November 28, 1986,
petitioner simultaneously filed a notice of appeal with
the Court of Tax Appeals and a petition for review with
the Supreme Court. 14 From the foregoing, it is evident
that the instant appeal was perfected well within the 30-
day period provided under R.A. No. 1125, the whole 30-
day period to appeal having begun to run again from
notice of the denial of petitioner's motion for
reconsideration.
WHEREFORE, the questioned decision of respondent
Court of Tax Appeals dated February 12, 1986 which
affirmed the denial by respondent Commissioner of
Internal Revenue of petitioner Marubeni Corporation's
claim for refund is hereby REVERSED. The Commissioner
of Internal Revenue is ordered to refund or grant as tax
credit in favor of petitioner the amount of P144,452.40
representing overpayment of taxes on dividends
received. No costs.

So ordered.
G.R. No. L-22611 May 27, 1968
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
VISAYAN ELECTRIC COMPANY and THE COURT OF
TAX APPEALS, respondents.
Office of the Solicitor General for petitioner.
Jesus P. Garcia for respondents.
SANCHEZ, J.:
The problems cast in legal setting in this petition for
review1 of the judgment of the Court of Tax Appeals are:
Is Visayan Electric Company liable for deficiency income
tax on dividends from the stock investment of its
employees' reserve fund for pensions?
Is it also liable for 25% surcharge on alleged late
payment of franchise tax?
Respondent company is the holder of a legislative
franchise, Act 3499 of the Philippine Legislature, to
operate and maintain an electric light, heat, and power
system in the City of Cebu, certain municipalities in the
Province of Cebu, and other surrounding places.
In a board of directors' meeting held on March 14, 1949,
respondent company established a pension fund, known
as the "Employees' Reserve for Pensions." Said fund is
for the benefit of its "present and future" employees, in
the event of retirement, accident or disability. Every
month thereafter an amount has been set aside for this
purpose. It is taken from the gross operating receipts of
the company. This reserve fund was later invested by
the company in stocks of San Miguel Brewery, Inc., for
which dividends have been regularly received. But these
dividends were not declared for tax purposes.
It was in a letter dated August 9, 1957 that the Auditor
General gave notice that as the company has retained
full control of the fund, therefore, the dividends are not
tax exempt; but that such dividends may be excluded
from gross receipts for franchise tax purposes, provided
the same are declared for income tax purposes.
In pursuance of the above letter, the Provincial Auditor
of Cebu allowed the company the option to declare the
dividends either as part of the company's income for
income tax purposes or as part of its income for
franchise tax purposes. The company elected the latter.2
The Revenue Examiner of Cebu, however, conducted a
separate investigation for the Bureau of Internal
Revenue. His report dated September 17, 1959 likewise
revealed that the "company itself is the custodian or has
the complete control of the fund." That report disagreed
with the action of the Provincial Auditor, instead
considered the dividends as subject to corporate income
tax under Section 24 of the National Internal Revenue
Code.
Said report further disclosed that: (a) during the years
1957, 1958 and 1959, some payments of the franchise
tax were made after fifteen days — although within
twenty days — of the month following the end of each
calendar quarter, allegedly contrary to Section 259 of
the Tax Code, which imposes a 25% surcharge if the
franchise faxes "remain unpaid for fifteen days from and
after the date on which they must be paid"; and (b)
from 1954 to 1959, the company had not paid additional
residence tax imposed by Section 2 of Act 465.
With the foregoing report as basis, the Commissioner of
Internal Revenue, in two letters of demand dated
September 7 and 15, 1960, assessed the following
amounts against the company: (a) P2,443.30
representing deficiency income tax for the years 1953 to
1958, plus interest and 50% surcharge; (b) P3,850.00
as additional residence tax from 1954 to 1959; and (c)
P35,419.05 as 25% surcharge for late payment of
franchise taxes for the years 1957, 1958 and 1959.
Reconsideration having been denied, the company went
to the Court of Tax Appeals on petition for review.
On January 31, 1964, the Court of Tax Appeals
sustained the correctness of the additional residence tax
assessments3 but freed the company from liability for
deficiency income tax and the 25% surcharge for late
payment of franchise taxes.
It is now the turn of the Commissioner of Internal
Revenue to appeal to this Court.
1. Admittedly, the investment of the fund in shares of
stocks of the San Miguel Brewery, Inc. is not a part of
respondent company's business. Neither is it necessary
or incidental to its operation under its franchise. And yet
those dividends were assessed by petitioner as part of
the income of respondent company. The tax court joins
petitioner in this, but applied the following provision in
Section 8, Act 3499 — the company's legislative
franchise — in holding that the dividends are not subject
to income tax, viz.:
SEC. 8. The grantee shall pay the same taxes as are
now or may hereafter be required by law from other
persons, on its real estate, buildings, plant, machinery,
and other personal property, except property declared
exempt in this section. In consideration of the franchise
and rights hereby granted, the grantee shall pay into the
municipal treasury of each municipality in which it is
supplying electricity to the public under this franchise, a
tax equal to two per centum of the gross earnings for
electric current sold under this franchise in each of the
respective municipalities. Said percentage shall be due
and payable quarterly and shall be in lieu of all taxes of
any kind levied, established or collected by any authority
whatsoever, now or in the future, on its poles, wires,
insulators, switches, transformers and other structures,
installations, conductors and accessories, placed in and
over the public streets, avenues, roads, thoroughfares,
squares, bridges, and other places and on its franchises,
rights, privileges, receipts, revenues and profits, from
which taxes the grantee is hereby expressly exempted .4
We perceive incorrectness of this approach by the Tax
Court. What is envisioned in the statute granting
exemption, so far as is pertinent to this case, is the last
underscored portion thereof which speaks of its receipts,
revenues and profits, "from which taxes the grantee is
hereby expressly exempted." The heavy accent is on the
word its. Plain import of this word, taken in context, is
that the receipts, revenues and profits, which could be
tax-exempt under the statute, must be the company's —
not somebody else's. No doubt this provision should not
be broadened so as to include situations which by fail
intendment are excluded therefrom. To do so is to take
too loose a view of the statute.
The disputed income are not receipts, revenues or
profits of the company. They do not go to the general
fund of the company. They are dividends from the San
Miguel Brewery, Inc. investment which form part of and
are added to the reserve pension fund which is solely for
the benefit of the employees,5 "to be distributed among
the employees."6
Not escaping notice is that by the resolution of
respondent company's board and the setting aside of
monthly amounts from its gross operating receipts for
that fund, said company was merely acting, with respect
to such fund, as trustee for its employees. For, indeed,
the intention to establish a trust in favor of the
employees is clear. A valid express trust has thus been
created.7 And, for tax purposes, the employees' reserve
fund is a separate taxable entity.8 Respondent company
then, while retaining legal title and custody 9 over the
property, holds it in trust for the beneficiaries mentioned
in the resolution creating the trust, in the absence of any
condition therein which would, in effect, destroy the
intention to create a trust.10
Given the fact that the dividends are returns of the trust
estate and not of the grantor company, we must say
that petitioner misconceived the import of the law when
he assessed said dividends as part of the income of the
company. Similarly, the tax court should not have
considered them at all as the company's "receipts,
revenues and profits" which are exempt from income
tax.
2. As we look back at the resolution creating the
employees' reserve fund and having in mind the
company's admission that it is "solely for the benefit of
the employees" and that the company is holding said
fund "merely as trustee of its employees,"11 we reach
the conclusion that the fund may not be diverted for
other purposes, and that the trust so created is
irrevocable. For, really nothing in respondent company's
acts suggests that it reserved the power to revoke that
fund or for that matter appropriate it for itself. The trust
binds the company to its employees. The trust created is
not therefore a revocable trust a provided in Section 59
of the Tax Code.12 Nor is it a trust contemplated in
Section 60, the income from which is for the benefit of
the grantor.13
This state of facts calls for inquiry into the applicability
of Section 56 of the Tax Code, which in part reads:
SEC. 56. Imposition of tax — (a) Application of tax. —
The taxes imposed by this Title upon individuals shall
apply to the income of estate or of any kind of property
held in trust, including —
(1) Income accumulated in trust for the benefit of
unborn or unascertained person or persons with
contingent interests and income accumulated or held for
future distribution under the terms of the will or trust;
xxx xxx xxx
(c) Computation and payment —
(1) In general. — The tax shall be computed upon the
net income of the estate or trust and shall be paid by
the fiduciary, except as provided in Section fifty-nine
(relating to revocable trust) and section sixty (relating to
income for the benefit of the grantor);
xxx xxx x x x14
Of interest here is that an amendment to Section 56 —
Republic Act 1983,15 approved on June 22, 1957 —
singles out employees' trust for tax exemption in the
following language:
(b) Exception. — The tax imposed by this Title shall not
apply to employees' trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his employees (1) if
contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to
such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan,
and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with
respect to employees under the trust, for any part of the
corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other then
for the exclusive benefit of his employees: Provided,
That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which
so distributed to the extent that it exceeds the amount
contributed by such employee or distributee.16
A dig into the legislative history unearths the fact that
this exemption in Republic Act 1983 was conceived in
order to encourage the formation of pension trust
systems for the benefit of laborers and employees
outside the Social Security Act.17
Understandably, the second requirement in paragraph
(b) of Section 56 of the Tax Code as it was inserted by
Republic Act 1983 — non-diversion of fund — was
written into the statute the better to insure that the trust
fund and its income will be used "for the exclusive
benefit" of the employees.
Of importance is the employment of the word plan as it
is applied to pension set forth in the first part of
paragraph (b) aforesaid. Worth mentioning is that a
sizeable portion of our Tax Code has been lifted from
the United States Internal Revenue Code. To be sure,
Republic Act 1983 which amends Section 56 of our Tax
Code is substantially similar in terms to Section 165 of
the United States Internal Revenue Code of 1939. 18 It is
thus permissible for this Court to look into the
interpretations of the American counterpart in an effort
to determine the congressional scheme in exempting
employees' trust from taxation.
In the American jurisdiction, the word plan is
emphasized. To qualify for exemption, the employees'
trust must refer to a definite program, scheme or plan.
It must be set up in good faith. It must be acturially
sound. Under such plan, employees generally are to be
extended retirement and pension benefits. But why? The
fund is not thereafter to be controlled or used for the
benefit of the company in any way. 19 A trust device used
to disguise added compensation to the shareholders and
officers of a company — and thereby avoid present
payment of income tax thereon — instead of providing
for future security of the employees in general will not
qualify under the exemption.20 Hubbell vs. Commissioner
of Internal Revenue, 150 F. 2d 516, 161 A.L.R. 764,
773, which was decided under the 1939 version,
confirms this view. There, the United States Circuit Court
of Appeals took into account the direction of the
amendments in construing congressional purpose, and
held that the 1942 amendment which added the
requirement of non-discrimination in favor of
shareholders, officials, or highly-compensated
employees presents no apparent change in
congressional purpose: "to insure that ... pension ...
plans are operated for the welfare of employees in
general, and to prevent the trust device from being used
for the benefit of shareholders, officials, or highly paid
employees...."
This is not to say, of course, that the employees' trust
fund established by private respondent is a device
calculated to unserve its purpose and serve tax evasion.
Unquestionably, the trust fund was created in good
faith. It is meant as it was intended to mean — for the
employees' welfare.
But wanting are sufficient data which would justify this
Court to make a conclusive statement that the trust
qualifies under Section 56 (b) as it was inserted into the
Tax Code by Republic Act 1963. The only written
evidence of record of the creation of the pension trust is
the minutes of the board of directors' meeting of March
14, 1949, the pertinent portion of which reads:
3. Upon motion duly seconded, the following resolution
was unanimously passed:
RESOLVED, that the sum of FOUR HUNDRED FIFTEEN
THOUSAND PESOS (P415,000.00) be appropriated from
the surplus of the company arising from prewar
operations in order to cover the payments of backpay
and payment of reasonable compensations to those
persons who have materially aided the Company in its
Organization and Rehabilitation and in the preparation
and prosecution of the Company's claims. This
appropriation shall cover a reserve fund for pensions for
all the present and future employees of the firm in the
amount of SIXTY THOUSAND PESOS (P60,000.00),
Reserve Fund for Employees' Welfare to the amount of
FIFTY THOUSAND PESOS (P50,000.00). Reserve Funds
for Medical Hospitalization, etc. to the amount of
THIRTY THOUSAND PESOS (P30,000.00). Reserve Fund
for Insurance and Accident to the amount of TWENTY
FOUR THOUSAND PESOS (P24,000.00) and a Reserve
Fund for Bonuses Payable to the amount of FIFTY
THOUSAND PESOS (P50,000.00).
4. Upon motion by Mr. Jesus Moraza, duly seconded by
Mr. Juan Coromina, it was resolved further that the
committee consisting of Dr. Mamerto Escano, as
Chairman and Messrs. Gil Garcia and Salvador E. Sala as
members be constituted, as it is hereby constituted, to
study the details of all the above resolutions and give
effect thereto. The said committee is hereby empowered
to immediately put into effect the above resolutions.
We have the admitted fact also that every month
thereafter an amount has been set aside for the fund
and the investment thereof in stocks of San Miguel
Brewery, Inc.
And yet, something is amiss. For one, there is the
admission made on page 3 of respondents' brief that:
... It is, of course, admitted by the respondent Company proceeding in court for the collection of such tax may be
that the strict requirements of Section 56 (b) of the Tax begun without assessment, at any time within ten years
Code on the formation of employees' trust funds for after the discovery of the falsity, fraud, or omission.
pension had not been strictly complied with, although
said funds and their returns are exclusively for the Assessment should have as starting point the known
benefit of respondent Company's employees. figures. From 1953 to 1958, the following amounts were
dividends received on the San Miguel Brewery, Inc.
And then, nothing extant in the record will show a investment:
pension plan actuarially sound. Correctly did the Court of
Tax Appeals find that "[i]t does not appear, however,
1953 ................................... P4,430.00
that said pension trust was created in accordance with
the provision of Section 56 (b) of the Revenue Code."21 1954 ................................... 4,384.00
1955 ................................... 6,240.00
The absence of such plan prevents us from taking a
view which fits the purpose of the statute. Coming into 1956 ................................... 8,000.00
play then is the specific provision in paragraph (a),
1957 ................................... 8,009.60
Section 56, heretofore transcribed, which directs that
the "taxes imposed by this Title upon individuals shall 1958 ................................... 7,999.20
apply to the income ... of any kind of property held in
trust." For which reason, the income received by the
As far as we could read from the record, on the 1953 to
employees' trust fund from January 1, 1957 is subject to
1956 dividends, payments under protest were made as
the income tax prescribed for individuals under Section
follows:
21 of the Tax Code.

To follow a different construction would run "smack 1. Deficiency franchise tax

P468.14
against the familiar rules that exemption from taxation is ..................................
not favored,22 and that exemptions in tax statutes are 2. 25% surcharge
never presumed,"23 and these "are but statements in 117.04
..................................................
adherence to the ancient rule that exemptions from
taxation are construed in strictissimi juris against the 3. Compromise penalty
50.00
taxpayer and liberally in favor of the taxing authority."24 ........................................

3. Having reached the conclusion that the assessment

made by petitioner and the ruling of the Court of Tax
Total ............................................ P635.18
Appeals on lack of income tax liability were on a
mistaken premise, but that the trust established by
respondent should pay the taxes imposed upon On the 1957 dividends, the following were paid under
individuals, we are now faced with the mechanics of tax protest:
collection.
1. Deficiency franchise tax
The problem of prescription comes in. By Section 331 of P166.85
..................................
the Tax Code, internal revenue taxes shall be assessed
within five years after the return is filed. Here, no return 2. 25% surcharge
41.71
was filed upon a belief in good faith that no tax liability ..................................................
attaches. Add to this the fact that the Commissioner of 3. Compromise
Internal Revenue made an assessment of income tax 10.00
......................................................
but upon the mistaken assumption that the tax payable
was upon the basis of a corporate tax and not individual
tax, and the picture is complete. Good faith in one, and
honest mistake in the other. Both petitioner and Total ............................................ P218.56
respondent company are on the same footing. It is
because of this that we rule that Section 332 (a) of the
The 1958 dividends were included in the franchise tax
Tax Code finds application. It reads:
return for the first quarter of 1959, the tax for which
was paid on April 16, 1959.
SEC. 332. Exceptions as to period of limitation of
assessment and collection of taxes. — (a) In the case of
In the determination of the taxes due, the 50%
a false or fraudulent return with intent to evade tax or of
surcharge sought by petitioner should not be included.
a failure to file a return, the tax may be assessed, or a
To subject a taxpayer to the payment of 50% surcharge
provided for in Section 72 of the National Internal
Revenue Code, the State must show either that there
was a wilful neglect to file a return or that a case of a
false or fraudulent return wilfully made exists. There is
total absence of proof, and petitioner does not allege,
that respondent company wilfully neglected to file a
return or that it made a false or fraudulent return. In
fact, this Court's pronouncement was necessary to
determine whether such dividends are taxable at all, and
if so, under what law. In Yutivo Sons Hardware
Company vs. Commissioner,25 our ruling is that where a
man "honestly believes" that the method employed by
him in computing his tax liability is correct, he does not
incur any fraud; in which case, no fraud penalty attaches
under Section 72 of the Tax Code, which in part reads:
SEC. 72. Surcharges for failure to render return and for
rendering false and fraudulent returns. —
... In case of wilful neglect to file the return or list within
the time prescribed by law, or in case a false or
fraudulent return or list is wilfully made, the
Commissioner of Internal Revenue shall add to the tax
or to the deficiency tax, in case any payment has been
made on the basis of such return before the discovery of
the falsity or fraud, a surcharge of fifty per centum of
the amount of such tax or deficiency tax....
Absent the specifics exacted in Section 72, no 50%
surcharge is collectible.
4. Was respondent company late in the payment of its
franchise taxes?
We first go to the controlling statutes. Section 259,
paragraph (2) of the National Internal Revenue Code
reads:
SEC. 259. Tax on corporate franchises. — ....
The taxes, charges, and percentages on corporate
franchises, shall be due and payable as specified in the
particular franchise, or in case no time limit is specified
therein, the provisions of section one hundred and
eighty-three shall apply; and if such taxes, charges, and
percentages remain unpaid for fifteen days from and
after the date on which they must be paid, twenty-
five per centum shall be added to the amount of such
taxes, charges, and percentages, which increase shall
form part of the tax.26
Section 183 (a) mentioned in Section 259 of the same
Code in turn partly reads:
SEC. 183. Payment of percentage taxes. — (a) In
general. — It shall be the duty of every person
conducting a business on which a percentage tax is
imposed under this Title, to make a true and complete
return of the amount of his, her or its gross monthly
sales, receipts or earnings, or gross value of output
actually removed from the factory or mill warehouses
and within twenty days after the end of each month, pay
the tax due thereon:....
Upon the other hand, the company's franchise provides:
... Said percentage shall be due and payable quarterly.
The quintessence of petitioner's argument is that the
phrase "due and payable quarterly" in the franchise of
the company means that the tax
is immediately demandable at the end of each calendar
quarter; and that since the franchise itself sets the time
limit for the payment of the franchise tax, Section 183
just quoted finds no application. In which case, so
petitioner avers, the 25% surcharge would be collectible
if the percentage taxes remain unpaid after fifteen days
from the end of each calendar quarter.
Decisive of the question is the meaning of the term "due
and payable quarterly." Resort to the following
definitions may help in clearing up the issue:
(1) The word "due" is only equivalent to or synonymous
with "payable."27
(2) The word "due" with reference to taxes, implies that
such taxes are then "owing, collectible or matured." 28
(3) "The word 'due' in one sense means that the debt or
obligation to which it is applied has by contract of
operation of law become immediately payable, but in
another sense it denotes the existence of a simple
indebtedness, without reference to the time of payment ,
in which it is synonymous with 'owing' and includes all
debts whether payable in praesenti or in futuro."29
(4) "Unless context clearly indicates a contrary meaning,
the phrase 'due and payable' on a specified date means
the debt or obligation to which it is applicable is then
immediately payable."30
In line with the foregoing definitions, the term "due and
payable on the first day of each month" was interpreted
to mean that payment on any day during the month
other than the first day would constitute non-
compliance.31
In our opinion, the term "due and payable quarterly" in
this case merely indicates the frequency of payment of
the franchise tax, viz., very three months. It does not
refer to the time limit or, in the precise language of
Section 259, "the date on which they (the taxes) must
be paid."
Under Section 183(a) in relation to Section 259, second
paragraph, the law has opted to collect the tax within
twenty days after it becomes due and payable, namely,
the last day of each quarter. The time limit or
the date on which the percentage tax must be paid by
the company is the twentieth day after the last day of
each quarter. Section 259 grants another grace period of
fifteen days from the termination of this time limit
before imposing the 25% surcharge.
To say that Section 183(a) is not applicable simply
because, as amended, it provides for monthly payment
while the company's charter speaks of quarterly
payment, is to hang so heavy a meaning on too slender
a frame. Prior to its amendment by R.A. 1612 on August
24, 1956, said Section 183(a) prescribed quarterly
payment of percentage taxes.32 Accurately read, the
amendment merely changed the manner or frequency of
payment of the tax, whereas Section 259 makes
reference to Section 183(a) with respect to the time
limit for payment of percentage taxes. The amendment
does not nullify the applicability of Section 183(a) to
franchises which do not set any time limit for payment
although providing for a different manner or frequency
of payment. Common sense dictates that it be so. For, if
the law has chosen to allow a fifteen-day grace period to
taxpayers paying every month, no cogent reason exists
why the same period — if not longer — should be
denied taxpayers paying every three months. The latter
require more time for preparation — their return covers
a longer period. The tax court is correct.33
For the reasons given —
The judgment under review is hereby AFFIRMED insofar
as it reverses petitioner's assessment of surcharge for
late payment of respondent company's franchise
tax;34 and
Said judgment is hereby REVERSED insofar as it
exempts respondent company from the payment of
deficiency income tax, in the sense that respondent
company, in its capacity as fiduciary of its employees'
reserve fund, is hereby declared liable for the payment
of individual income tax set forth in Section 56(a) in
connection with Section 21 of the National Internal
Revenue Code; and
Conformably to the opinion expressed herein, let the
record of this case be returned to the Court of Tax
Appeals with instructions to hear and determine the tax
liability of the trust known as "Employees' Reserve for
Pensions" and/or tax refund, if any, to respondent
Visayan Electric Company, upon the dividends received
during the years 1953 to 1958 on the investment of its
employees' reserve fund for pensions, and tax payments
made by reason thereof, said tax to be computed in
accordance with Section 56(a) and (c) of the National
Internal Revenue Code in relation to Section 21 of the
same Code.
No costs. So ordered.

Really, the tax cannot be immediately demandable at

the end of each calendar quarter. Reason for this is that
transactions on the last day of the quarter must have to
be included in the computation of the taxpayer's return
for each particular quarter. It is well-nigh impossible for
the taxpayer to add up his income, write down the
deductions, and compute the net amount taxable as of
the last working hour of the last day of the quarter, and
at the same time go to the nearest revenue office,
submit the quarterly return and pay the tax. This
accounts for the fact that Section 183(a) of the National
Internal Revenue Code gives the taxpayer a leeway of
twenty days after the end of each quarter to do all of
these. And by Section 259, it is only upon failure to pay
for fifteen days "from and after the date on which they
must be paid" that the twenty-five per centum shall be
added to the amount of "taxes, charges, and
percentages," on corporate franchises. Statutes are not
to be so narrowly read as to beget unreasonableness.

We accordingly rule that the franchise tax "must be

paid" within "twenty days after the end" of each quarter
and that if such tax remains unpaid for 15 days "from
and after the date on which they must be paid," then
twenty-five per centum shall be added to the amount
due. No surcharge for late payment of respondent
company's franchise taxes accrues.
G.R. No. 95022 March 23, 1992
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, THE COURT OF
TAX APPEALS, GCL RETIREMENT PLAN,
represented by its Trustee-Director, respondents.
MELENCIO-HERRERA, J.:
This case is said to be precedent setting. While the
amount involved is insignificant, the Solicitor General
avers that there are about 85 claims of the same nature
pending in the Court of Tax Appeals and Bureau of
Internal Revenue totalling approximately P120M.
Petitioner, the Commissioner of Internal Revenue, seeks
a reversal of the Decision of respondent Court of
Appeals, dated August 27, 1990, in CA-G.R. SP No.
20426, entitled "Commissioner of Internal Revenue vs.
GCL Retirement Plan, represented by its Trustee-Director
and the Court of Tax Appeals," which affirmed the
Decision of the latter Court, dated 15 December 1986, in
Case No. 3888, ordering a refund, in the sum of
P11,302.19, to the GCL Retirement Plan representing the
withholding tax on income from money market
placements and purchase of treasury bills, imposed
pursuant to Presidential Decree No. 1959.
There is no dispute with respect to the facts. Private
Respondent, GCL Retirement Plan (GCL, for brevity) is
an employees' trust maintained by the employer, GCL
Inc., to provide retirement, pension, disability and death
benefits to its employees. The Plan as submitted was
approved and qualified as exempt from income tax by
Petitioner Commissioner of Internal Revenue in
accordance with Rep. Act No. 4917.1
In 1984, Respondent GCL made investsments and
earned therefrom interest income from which was
witheld the fifteen per centum (15%) final witholding tax
imposed by Pres. Decree No. 1959,2 which took effect
on 15 October 1984, to wit:
Date Kind of Investment Principal Income Earned 15%
Tax
ACIC
12/05/84 Market Placement P236,515.32 P8,751.96
P1,312.66
10/22/84 — 234,632.75 9,815.89 1,472.38
11/19/84 — 225,886.51 10,629.22 1,594.38
11/23/84 — 344,448.64 17,313.33 2,597.00
12/05/84 — 324,633.81 15,077.44 2,261.52
COMBANK Treasury Bills 2,064.15
——————
P11,302.19
On 15 January 1985, Respondent GCL filed with
Petitioner a claim for refund in the amounts of
P1,312.66 withheld by Anscor Capital and Investment
Corp., and P2,064.15 by Commercial Bank of Manila. On
12 February 1985, it filed a second claim for refund of
the amount of P7,925.00 withheld by Anscor, stating in
both letters that it disagreed with the collection of the
15% final withholding tax from the interest income as it
is an entity fully exempt from income tax
as provided under Rep. Act No. 4917 in relation to
Section 56 (b) 3 of the Tax Code.
The refund requested having been denied, Respondent
GCL elevated the matter to respondent Court of Tax
Appeals (CTA). The latter ruled in favor of GCL, holding
that employees' trusts are exempt from the 15% final
withholding tax on interest income and ordering a
refund of the tax withheld. Upon appeal, originally to
this Court, but referred to respondent Court of Appeals,
the latter upheld the CTA Decision. Before us now,
Petitioner assails that disposition.
It appears that under Rep. Act No. 1983, which took
effect on 22 June 1957, amending Sec. 56 (b) of the
National Internal Revenue Code (Tax Code, for brevity),
employees' trusts were exempt from income tax. That
law provided:
Sec. 56 Imposition of tax. —(a) Application of tax. —
The taxes imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property
held in trust, including —
xxx xxx xxx
(b) Exception. — The tax imposed by this Title shall not
apply to employees' trust which forms a part of a
pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees
(1) if contributions are made to trust by such employer,
or employees, or both, for the purpose of distributing to
such employees the earnings and principal of the fund
accumulated by the trust in accordance with such
plan, . . .
On 3 June 1977, Pres. Decree No. 1156 provided, for
the first time, for the withholding from the interest on
bank deposits at the source of a tax of fifteen per cent
(15%) of said interest. However, it also allowed a
specific exemption in its Section 53, as follows:
Sec. 53. Withholding of tax at source. —
xxx xxx xxx
(c) Withholding tax on interest on bank deposits. —
(1) Rate of withholding tax. — Every bank or banking
institution shall deduct and withhold from the interest on
bank deposits (except interest paid or credited to non-
resident alien individuals and foreign corporations), a tax
equal to fifteen per cent of the said interest: Provided,
however, That no withholding of tax shall be made if the
aggregate amount of the interest on all deposit accounts
maintained by a depositor alone or together with
another in any one bank at any time during the taxable
period does not exceed three hundred fifty pesos a year
or eighty-seven pesos and fifty centavos per quarter. For
this purpose, interest on a deposit account maintained
by two persons shall be deemed to be equally owned by
them.
(2) Treatment of bank deposit interest. — The interest
income shall be included in the gross income in
computing the depositor's income tax liability in
according with existing law.
(3) Depositors enjoying tax exemption privileges or
preferential tax treatment. — In all cases where the
depositor is tax-exempt or is enjoying preferential
income tax treatment under existing laws, the
withholding tax imposed in this paragraph shall be
refunded or credited as the case may be upon
submission to the Commissioner of Internal Revenue of
proof that the said depositor is a tax-exempt entity or
enjoys a preferential income tax treatment.
xxx xxx xxx
This exemption and preferential tax treatment were
carried over in Pres. Decree No. 1739, effective on 17
September 1980, which law also subjected interest from
bank deposits and yield from deposit substitutes to a
final tax of twenty per cent (20%). The pertinent
provisions read:
Sec. 2. Section 21 of the same Code is hereby amended
by adding a new paragraph to read as follows:
Sec. 21. Rates of tax on citizens or residents. —
xxx xxx xxx
Interest from Philippine Currency bank deposits and
yield from deposit substitutes whether received by
citizens of the Philippines or by resident alien individuals,
shall be subject to the final tax as follows: (a) 15% of
the interest on savings deposits, and (b) 20% of the
interest on time deposits and yield from deposit
substitutes, which shall be collected and paid as
provided in Sections 53 and 54 of this Code. Provided,
That no tax shall be imposed if the aggregate amount of
the interest on all Philippine Currency deposit accounts
maintained by a depositor alone or together with
another in any one bank at any time during the taxable
period does not exceed Eight Hundred Pesos (P800.00)
a year or Two Hundred Pesos (P200.00) per
quarter. Provided, further, That if the recipient of such
interest is exempt from income taxation, no tax shall be
imposed and that, if the recipient is enjoying preferential
income tax treatment, then the preferential tax rates so
provided shall be imposed (Emphasis supplied).
Sec. 3. Section 24 of the same Code is hereby amended
by adding a new subsection (cc) between subsections
(c) and (d) to read as follows:
(cc) Rates of tax on interest from deposits and yield
from deposit substitutes. — Interest on Philippine
Currency bank deposits and yield from deposit
substitutes received by domestic or resident foreign
corporations shall be subject to a final tax on the total
amount thereof as follows: (a) 15% of the interest on
savings deposits; and (b) 20% of the interest on time
deposits and yield from deposit substitutes which shall
be collected and paid as provided in Sections 53 and 54
of this Code. Provided, That if the recipient of such
interest is exempt from income taxation, no tax shall be
imposed and that, if the recipient is enjoying preferential
income tax treatment, then the preferential tax rates so
provided shall be imposed (Emphasis supplied).
Sec. 9. Section 53(e) of the same Code is hereby
amended to read as follows:
Se. 53(e) Withholding of final tax on interest on bank
deposits and yield from deposit substitutes. —
(1) Withholding of final tax. — Every bank or non-bank
financial intermediary shall deduct and withhold from the
interest on bank deposits or yield from deposit
substitutes a final tax equal to fifteen (15%) per cent of
the interest on savings deposits and twenty (20%) per
cent of the interest on time deposits or yield from
deposit substitutes: Provided, however, That no
withholding tax shall be made if the aggregate amount
of the interest on all deposit accounts maintained by a
depositor alone or together with another in any one
bank at any time during the taxable period does not
exceed Eight Hundred Pesos a year or Two Hundred
Pesos per quarter. For this purpose, interest on a
deposit account maintained by two persons shall be
deemed to be equally owned by them.
(2) Depositors or placers/investors enjoying tax
exemption privileges or preferential tax treatment. — In
all cases where the depositor or placer/investor is tax
exempt or is enjoying preferential income tax treatment
under existing laws, the withholding tax imposed in this
paragraph shall be refunded or credited as the case may
be upon submission to the Commissioner of Internal
Revenue of proof that the said depositor, or
placer/investor is a tax exempt entity or enjoys a
preferential income tax treatment.
Subsequently, however, on 15 October 1984, Pres.
Decree No. 1959 was issued, amending the aforestated
provisions to read:
Sec. 2. Section 21(d) of this Code, as amended, is
hereby further amended to read as follows:
(d) On interest from bank deposits and yield or any
other monetary benefit from deposit substitutes and
from trust fund and similar arrangements. — Interest
from Philippine Currency Bank deposits and yield or any
other monetary benefit from deposit substitutes and
from trust fund and similar arrangements whether
received by citizens of the Philippines, or by
resident alien individuals, shall be subject to a 15% final
tax to be collected and paid as provided in Sections 53
and 54 of this Code.
Sec. 3. Section 24(cc) of this Code, as amended, is
hereby further amended to read as follows:
(cc) Rates of tax on interest from deposits and yield or
any other monetary benefit from deposit substitutes and
from trust fund and similar arrangements. — Interest on
Philippine Currency Bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust
fund and similar arrangements received by domestic or
resident foreign corporations shall be subject to a 15%
final tax to be collected and paid as provided in Section
53 and 54 of this Code.
Sec. 4. Section 53 (d) (1) of this code is hereby
amended to read as follows:
Sec. 53 (d) (1). Withholding of Final Tax. — Every bank
or non-bank financial intermediary or commercial.
industrial, finance companies, and other non-financial
companies authorized by the Securities and Exchange
Commission to issue deposit substitutes shall deduct and
withhold from the interest on bank deposits or yield or
any other monetary benefit from deposit substitutes a
final tax equal to fifteen per centum (15%) of the
interest on deposits or yield or any other monetary
benefit from deposit substitutes and from trust fund and
similar arrangements.
It is to be noted that the exemption from withholding
tax on interest on bank deposits previously extended by
Pres. Decree No. 1739 if the recipient (individual or
corporation) of the interest income is exempt from
income taxation, and the imposition of the preferential
tax rates if the recipient of the income is enjoying
preferential income tax treatment, were both abolished
by Pres. Decree No. 1959. Petitioner thus submits that
the deletion of the exempting and preferential tax
treatment provisions under the old law is a clear
manifestation that the single 15% (now 20%) rate is
impossible on all interest incomes from deposits, deposit
substitutes, trust funds and similar arrangements,
regardless of the tax status or character of the recipients
thereof. In short, petitioner's position is that from 15
October 1984 when Pres. Decree No. 1959 was
promulgated, employees' trusts ceased to be exempt
and thereafter became subject to the final withholding
tax.
Upon the other hand, GCL contends that the tax exempt
status of the employees' trusts applies to all kinds of
taxes, including the final withholding tax on interest
income. That exemption, according to GCL, is derived
from Section 56(b) and not from Section 21 (d) or 24
(cc) of the Tax Code, as argued by Petitioner.
The sole issue for determination is whether or not the
GCL Plan is exempt from the final withholding tax on
interest income from money placements and purchase of
treasury bills required by Pres. Decree No. 1959.
We uphold the exemption.
To begin with, it is significant to note that the GCL Plan
was qualified as exempt from income tax by the
Commissioner of Internal Revenue in accordance with
Rep. Act No. 4917 approved on 17 June 1967. This law
specifically provided:
Sec. 1. Any provision of law to the contrary
notwithstanding, the retirement benefits received by
officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable
private benefit plan maintained by the employer shall
be exempt from all taxes and shall not be liable to
attachment, levy or seizure by or under any legal or
equitable process whatsoever except to pay a debt of
the official or employee concerned to the private benefit
plan or that arising from liability imposed in a criminal
action; . . . (emphasis ours).
In so far as employees' trusts are concerned, the
foregoing provision should be taken in relation to then
Section 56(b) (now 53[b]) of the Tax Code, as amended
by Rep. Act No. 1983, supra, which took effect on 22
June 1957. This provision specifically exempted
employee's trusts from income tax and is repeated
hereunder for emphasis:
Sec. 56. Imposition of Tax. — (a) Application of tax. —
The taxes imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property
held in trust.
xxx xxx xxx
(b) Exception. — The tax imposed by this Title shall not
apply to employee's trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his
employees . . .
The tax-exemption privilege of employees' trusts, as
distinguished from any other kind of property held in
trust, springs from the foregoing provision. It is
unambiguous. Manifest therefrom is that the tax law has
singled out employees' trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the
creation of employees' trusts. Employees' trusts or
benefit plans normally provide economic assistance to
employees upon the occurrence of certain contingencies,
particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to
which members of the Plan may be exposed. It is an
independent and additional source of protection for the
working group. What is more, it is established for their
exclusive benefit and for no other purpose.
The tax advantage in Rep. Act No. 1983, Section 56(b),
was conceived in order to encourage the formation and
establishment of such private Plans for the benefit of
laborers and employees outside of the Social Security
Act. Enlightening is a portion of the explanatory note to
H.B. No. 6503, now R.A. 1983, reading:
Considering that under Section 17 of the social Security
Act, all contributions collected and payments of sickness,
unemployment, retirement, disability and death benefits
made thereunder together with the income of the
pension trust are exempt from any tax, assessment, fee,
or charge, it is proposed that a similar system providing
for retirement, etc. benefits for employees outside the
Social Security Act be exempted from income taxes.
(Congressional Record, House of Representatives, Vol.
IV, Part. 2, No. 57, p. 1859, May 3, 1957; cited in
Commissioner of Internal Revenue v. Visayan Electric
Co., et al., G.R. No. L-22611, 27 May 1968, 23 SCRA
715); emphasis supplied.
It is evident that tax-exemption is likewise to be enjoyed
by the income of the pension trust. Otherwise, taxation
of those earnings would result in a diminution
accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund. This
would run afoul of the very intendment of the law.
The deletion in Pres. Decree No. 1959 of the provisos
regarding tax exemption and preferential tax rates under
the old law, therefore, can not be deemed to extent to
employees' trusts. Said Decree, being a general law, can
not repeal by implication a specific provision, Section
56(b) now 53 [b]) in relation to Rep. Act No. 4917
granting exemption from income tax to employees'
trusts. Rep. Act 1983, which excepted employees' trusts
in its Section 56 (b) was effective on 22 June 1957 while
Rep. Act No. 4917 was enacted on 17 June 1967, long
before the issuance of Pres. Decree No. 1959 on 15
October 1984. A subsequent statute, general in
character as to its terms and application, is not to be
construed as repealing a special or specific enactment,
unless the legislative purpose to do so is manifested.
This is so even if the provisions of the latter are
sufficiently comprehensive to include what was set forth
in the special act (Villegas v. Subido, G.R. No. L-31711,
30 September 1971, 41 SCRA 190).
Notably, too, all the tax provisions herein treated of
come under Title II of the Tax Code on "Income Tax."
Section 21 (d), as amended by Rep. Act No. 1959, refers
to the final tax on individuals and falls under Chapter II;
Section 24 (cc) to the final tax on corporations under
Chapter III; Section 53 on withholding of final tax to
Returns and Payment of Tax under Chapter VI; and
Section 56 (b) to tax on Estates and Trusts covered by
Chapter VII, Section 56 (b), taken in conjunction with
Section 56 (a), supra, explicitly excepts employees'
trusts from "the taxes imposed by this Title." Since the
final tax and the withholding thereof are embraced
within the title on "Income Tax," it follows that said trust
must be deemed exempt therefrom. Otherwise, the
exception becomes meaningless.
There can be no denying either that the final
withholding tax is collected from income in respect of
which employees' trusts are declared exempt (Sec. 56
[b], now 53 [b], Tax Code). The application of the
withholdings system to interest on bank deposits or yield
from deposit substitutes is essentially to maximize and
expedite the collection of income taxes by requiring its
payment at the source. If an employees' trust like the
GCL enjoys a tax-exempt status from income, we see no
logic in withholding a certain percentage of that income
which it is not supposed to pay in the first place.
Petitioner also relies on Revenue Memorandum Circular
31-84, dated 30 October 1984, and Bureau of Internal
Revenue Ruling No. 027-e-000-00-005-85, dated 14
January 1985, as authorities for the argument that Pres.
Decree No. 1959 withdrew the exemption of employees'
trusts from the withholding of the final tax on interest
income. Said Circular and Ruling pronounced that the
deletion of the exempting and preferential tax treatment
provisions by Pres. Decree No. 1959 is a clear
manifestation that the single 15% tax rate is imposable
on all interest income regardless of the tax status or
character of the recipient thereof. But since we herein
rule that Pres. Decree No. 1959 did not have the effect
of revoking the tax exemption enjoyed by employees'
trusts, reliance on those authorities is now misplaced.
WHEREFORE, the Writ of Certiorari prayed for is
DENIED. The judgment of respondent Court of Appeals,
affirming that of the Court of Tax Appeals is UPHELD. No
costs.

SO ORDERED.

Narvasa, C.J., Gutierrez, Jr., Cruz, Paras, Feliciano,

Padilla, Bidin, Griño-Aquino, Medialdea, Regalado,
Davide, Jr., Romero and Nocon, JJ., concur.
G.R. No. L-26379 December 27, 1969
WILLIAM C. REAGAN, ETC., petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE, respondent.
Quasha, Asperilla, Blanco, Zafra and Tayag for
petitioner.
Office of the Solicitor General Antonio P. Barredo,
Assistant Solicitor General Felicisimo R. Rosete, Solicitor
Lolita O. Gal-lang and Special Attorney Gamaliel H.
Mantolino for respondent.
FERNANDO, J.:
A question novel in character, the answer to which has
far-reaching implications, is raised by petitioner William
C. Reagan, at one time a civilian employee of an
American corporation providing technical assistance to
the United States Air Force in the Philippines. He would
dispute the payment of the income tax assessed on him
by respondent Commissioner of Internal Revenue on an
amount realized by him on a sale of his automobile to a
member of the United States Marine Corps, the
transaction having taken place at the Clark Field Air Base
at Pampanga. It is his contention, seriously and
earnestly expressed, that in legal contemplation the sale
was made outside Philippine territory and therefore
beyond our jurisdictional power to tax.
Such a plea, far-fetched and implausible, on its face
betraying no kinship with reality, he would justify by
invoking, mistakenly as will hereafter be more fully
shown an observation to that effect in a 1951
opinion, 1 petitioner ignoring that such utterance was
made purely as a flourish of rhetoric and by way of
emphasizing the decision reached, that the trading firm
as purchaser of army goods must respond for the sales
taxes due from an importer, as the American armed
forces being exempt could not be taxed as such under
the National Internal Revenue Code. 2 Such an
assumption, inspired by the commendable aim to render
unavailing any attempt at tax evasion on the part of
such vendee, found expression anew in a 1962
decision,3 coupled with the reminder however, to render
the truth unmistakable, that "the areas covered by the
United States Military Bases are not foreign territories
both in the political and geographical sense."
As thus clarified, it is manifest that such a view amounts
at most to a legal fiction and is moreover obiter. It
certainly cannot control the resolution of the specific
question that confronts us. We declare our stand in an
unequivocal manner. The sale having taken place on
what indisputably is Philippine territory, petitioner's
liability for the income tax due as a result thereof was
unavoidable. As the Court of Tax Appeals reached a
similar conclusion, we sustain its decision now before us
on appeal.
In the decision appealed from, the Court of Tax Appeals,
after stating the nature of the case, started the recital of
facts thus: "It appears that petitioner, a citizen of the
United States and an employee of Bendix Radio, Division
of Bendix Aviation Corporation, which provides technical
assistance to the United States Air Force, was assigned
at Clark Air Base, Philippines, on or about July 7, 1959
... . Nine (9) months thereafter and before his tour of
duty expired, petitioner imported on April 22, 1960 a
tax-free 1960 Cadillac car with accessories valued at
$6,443.83, including freight, insurance and other
charges."4 Then came the following: "On July 11, 1960,
more than two (2) months after the 1960 Cadillac car
was imported into the Philippines, petitioner requested
the Base Commander, Clark Air Base, for a permit to sell
the car, which was granted provided that the sale was
made to a member of the United States Armed Forces or
a citizen of the United States employed in the U.S.
military bases in the Philippines. On the same date, July
11, 1960, petitioner sold his car for $6,600.00 to a
certain Willie Johnson, Jr. (Private first class), United
States Marine Corps, Sangley Point, Cavite, Philippines,
as shown by a Bill of Sale . . . executed at Clark Air
Base. On the same date, Pfc. Willie (William) Johnson,
Jr. sold the car to Fred Meneses for P32,000.00 as
evidenced by a deed of sale executed in Manila."5
As a result of the transaction thus made, respondent
Commissioner of Internal Revenue, after deducting the
landed cost of the car as well as the personal exemption
to which petitioner was entitled, fixed as his net taxable
income arising from such transaction the amount of
P17,912.34, rendering him liable for income tax in the
sum of P2,979.00. After paying the sum, he sought a
refund from respondent claiming that he was exempt,
but pending action on his request for refund, he filed the
case with the Court of Tax Appeals seeking recovery of
the sum of P2,979.00 plus the legal rate of interest.
As noted in the appealed decision: "The only issue
submitted for our resolution is whether or not the said
income tax of P2,979.00 was legally collected by
respondent for petitioner."6 After discussing the legal
issues raised, primarily the contention that the Clark Air
Base "in legal contemplation, is a base outside the
Philippines" the sale therefore having taken place on
"foreign soil", the Court of Tax Appeals found nothing
objectionable in the assessment and thereafter the
payment of P2,979.00 as income tax and denied the
refund on the same. Hence, this appeal predicated on a
legal theory we cannot accept. Petitioner cannot make
out a case for reversal.
1. Resort to fundamentals is unavoidable to place things
in their proper perspective, petitioner apparently feeling
justified in his refusal to defer to basic postulates of
constitutional and international law, induced no doubt by
the weight he would accord to the observation made by
this Court in the two opinions earlier referred to. To
repeat, scant comfort, if at all is to be derived from such
an obiter dictum, one which is likewise far from
reflecting the fact as it is.
Nothing is better settled than that the Philippines being
independent and sovereign, its authority may be
exercised over its entire domain. There is no portion
thereof that is beyond its power. Within its limits, its
decrees are supreme, its commands paramount. Its laws
govern therein, and everyone to whom it applies must
submit to its terms. That is the extent of its jurisdiction,
both territorial and personal. Necessarily, likewise, it has
to be exclusive. If it were not thus, there is a diminution
of its sovereignty.
It is to be admitted that any state may, by its consent,
express or implied, submit to a restriction of its
sovereign rights. There may thus be a curtailment of
what otherwise is a power plenary in character. That is
the concept of sovereignty as auto-limitation, which, in
the succinct language of Jellinek, "is the property of a
state-force due to which it has the exclusive capacity of
legal self-determination and self-restriction."7 A state
then, if it chooses to, may refrain from the exercise of
what otherwise is illimitable competence.
Its laws may as to some persons found within its
territory no longer control. Nor does the matter end
there. It is not precluded from allowing another power
to participate in the exercise of jurisdictional right over
certain portions of its territory. If it does so, it by no
means follows that such areas become impressed with
an alien character. They retain their status as native soil.
They are still subject to its authority. Its jurisdiction may
be diminished, but it does not disappear. So it is with
the bases under lease to the American armed forces by
virtue of the military bases agreement of 1947. They are
not and cannot be foreign territory.
Decisions coming from petitioner's native land, penned
by jurists of repute, speak to that effect with impressive
unanimity. We start with the citation from Chief Justice
Marshall, announced in the leading case of Schooner
Exchange v. M'Faddon,8 an 1812 decision: "The
jurisdiction of the nation within its own territory is
necessarily exclusive and absolute. It is susceptible of no
limitation not imposed by itself. Any restriction upon it,
deriving validity from an external source, would imply a
diminution of its sovereignty to the extent of the
restriction, and an investment of that sovereignty to the
same extent in that power which could impose such
restriction." After which came this paragraph: "All
exceptions, therefore, to the full and complete power of
a nation within its own territories, must be traced up to
the consent of the nation itself. They can flow from no
other legitimate source."
Chief Justice Taney, in an 1857 decision, 9 affirmed the
fundamental principle of everyone within the territorial
domain of a state being subject to its commands: "For
undoubtedly every person who is found within the limits
of a government, whether the temporary purposes or as
a resident, is bound by its laws." It is no exaggeration
then for Justice Brewer to stress that the United States
government "is one having jurisdiction over every foot of
soil within its territory, and acting directly upon each
[individual found therein]; . . ."10
Not too long ago, there was a reiteration of such a view,
this time from the pen of Justice Van Devanter. Thus: "It
now is settled in the United States and recognized
elsewhere that the territory subject to its jurisdiction
includes the land areas under its dominion and control
the ports, harbors, bays, and other in closed arms of the
sea along its coast, and a marginal belt of the sea
extending from the coast line outward a marine league,
or 3 geographic miles."11 He could cite moreover, in
addition to many American decisions, such eminent
treatise-writers as Kent, Moore, Hyde, Wilson, Westlake,
Wheaton and Oppenheim.
As a matter of fact, the eminent commentator Hyde in
his three-volume work on International Law, as
interpreted and applied by the United States, made clear
that not even the embassy premises of a foreign power
are to be considered outside the territorial domain of the
host state. Thus: "The ground occupied by an embassy
is not in fact the territory of the foreign State to which
the premises belong through possession or ownership.
The lawfulness or unlawfulness of acts there committed
is determined by the territorial sovereign. If an attache
commits an offense within the precincts of an embassy,
his immunity from prosecution is not because he has not
violated the local law, but rather for the reason that the
individual is exempt from prosecution. If a person not so
exempt, or whose immunity is waived, similarly commits
a crime therein, the territorial sovereign, if it secures
custody of the offender, may subject him to prosecution,
even though its criminal code normally does not
contemplate the punishment of one who commits an
offense outside of the national domain. It is not
believed, therefore, that an ambassador himself
possesses the right to exercise jurisdiction, contrary to
the will of the State of his sojourn, even within his
embassy with respect to acts there committed. Nor is
there apparent at the present time any tendency on the
part of States to acquiesce in his exercise of it."12
2. In the light of the above, the first and crucial error
imputed to the Court of Tax Appeals to the effect that it
should have held that the Clark Air Force is foreign soil
or territory for purposes of income tax legislation is
clearly without support in law. As thus correctly viewed,
petitioner's hope for the reversal of the decision
completely fades away. There is nothing in the Military
Bases Agreement that lends support to such an
assertion. It has not become foreign soil or territory.
This country's jurisdictional rights therein, certainly not
excluding the power to tax, have been preserved. As to
certain tax matters, an appropriate exemption was
provided for.
Petitioner could not have been unaware that to maintain
the contrary would be to defy reality and would be an
affront to the law. While his first assigned error is thus
worded, he would seek to impart plausibility to his claim
by the ostensible invocation of the exemption clause in
the Agreement by virtue of which a "national of the
United States serving in or employed in the Philippines in
connection with the construction, maintenance,
operation or defense of the bases and residing in the
Philippines only by reason of such employment" is not to
be taxed on his income unless "derived from Philippine
source or sources other than the United States
sources."13 The reliance, to repeat, is more apparent
than real for as noted at the outset of this opinion,
petitioner places more faith not on the language of the
provision on exemption but on a sentiment given
expression in a 1951 opinion of this Court, which would
be made to yield such an unwarranted interpretation at
war with the controlling constitutional and international
law principles. At any rate, even if such a contention
were more adequately pressed and insisted upon, it is
on its face devoid of merit as the source clearly was
Philippine.
In Saura Import and Export Co. v. Meer,14 the case
above referred to, this Court affirmed a decision
rendered about seven months previously,15 holding liable
as an importer, within the contemplation of the National
Internal Revenue Code provision, the trading firm that
purchased army goods from a United States government
agency in the Philippines. It is easily understandable
why. If it were not thus, tax evasion would have been
facilitated. The United States forces that brought in such
equipment later disposed of as surplus, when no longer
needed for military purposes, was beyond the reach of
our tax statutes.
Justice Tuason, who spoke for the Court, adhered to
such a rationale, quoting extensively from the earlier
opinion. He could have stopped there. He chose not to
do so. The transaction having occurred in 1946, not so
long after the liberation of the Philippines, he proceeded
to discuss the role of the American military contingent in
the Philippines as a belligerent occupant. In the course
of such a dissertion, drawing on his well-known gift for
rhetoric and cognizant that he was making an as
if statement, he did say: "While in army bases or
installations within the Philippines those goods were in
contemplation of law on foreign soil."
It is thus evident that the first, and thereafter the
controlling, decision as to the liability for sales taxes as
an importer by the purchaser, could have been reached
without any need for such expression as that given
utterance by Justice Tuason. Its value then as an
authoritative doctrine cannot be as much as petitioner
would mistakenly attach to it. It was clearly obiter not
being necessary for the resolution of the issue before
this Court.16 It was an opinion "uttered by the way." 17 It
could not then be controlling on the question before us
now, the liability of the petitioner for income tax which,
as announced at the opening of this opinion, is squarely
raised for the first time.18
On this point, Chief Justice Marshall could again be
listened to with profit. Thus: "It is a maxim, not to be
disregarded, that general expressions, in every opinion,
are to be taken in connection with the case in which
those expressions are used. If they go beyond the case,
they may be respected, but ought not to control the
judgment in a subsequent suit when the very point is
presented for decision."19
Nor did the fact that such utterance of Justice Tuason
was cited in Co Po v. Collector of Internal Revenue,20 a
1962 decision relied upon by petitioner, put a different
complexion on the matter. Again, it was by way of pure
embellishment, there being no need to repeat it, to
reach the conclusion that it was the purchaser of army
goods, this time from military bases, that must respond
for the advance sales taxes as importer. Again, the
purpose that animated the reiteration of such a view
was clearly to emphasize that through the employment
of such a fiction, tax evasion is precluded. What is more,
how far divorced from the truth was such statement was
emphasized by Justice Barrera, who penned the Co Po
opinion, thus: "It is true that the areas covered by the
United States Military Bases are not foreign territories
both in the political and geographical sense."21
Justice Tuason moreover made explicit that rather than
corresponding with reality, what was said by him was in
the way of a legal fiction. Note his stress on "in
contemplation of law." To lend further support to a
conclusion already announced, being at that a
confirmation of what had been arrived at in the earlier
case, distinguished by its sound appreciation of the issue
then before this Court and to preclude any tax evasion,
an observation certainly not to be taken literally was
thus given utterance.
This is not to say that it should have been ignored
altogether afterwards. It could be utilized again, as it
undoubtedly was, especially so for the purpose intended,
namely to stigmatize as without support in law any
attempt on the part of a taxpayer to escape an
obligation incumbent upon him. So it was quoted with
that end in view in the Co Po case. It certainly does not
justify any effort to render futile the collection of a tax
legally due, as here. That was farthest from the thought
of Justice Tuason.
What is more, the statement on its face is, to repeat, a
legal fiction. This is not to discount the uses of a fictio
juris in the science of the law. It was Cardozo who
pointed out its value as a device "to advance the ends of
justice" although at times it could be "clumsy" and even
"offensive".22 Certainly, then, while far from
objectionable as thus enunciated, this observation of
Justice Tuason could be misused or misconstrued in a
clumsy manner to reach an offensive result. To repeat,
properly used, a legal fiction could be relied upon by the
law, as Frankfurter noted, in the pursuit of legitimate
ends.23 Petitioner then would be well-advised to take to
heart such counsel of care and circumspection before
invoking not a legal fiction that would avoid a mockery
of the law by avoiding tax evasion but what clearly is a
misinterpretation thereof, leading to results that would
have shocked its originator.
The conclusion is thus irresistible that the crucial error
assigned, the only one that calls for discussion to the
effect that for income tax purposes the Clark Air Force
Base is outside Philippine territory, is utterly without
merit. So we have said earlier.
3. To impute then to the statement of Justice Tuason
the meaning that petitioner would fasten on it is, to
paraphrase Frankfurter, to be guilty of succumbing to
the vice of literalness. To so conclude is, whether by
design or inadvertence, to misread it. It certainly is not
susceptible of the mischievous consequences now
sought to be fastened on it by petitioner.
That it would be fraught with such peril to the
enforcement of our tax statutes on the military bases
under lease to the American armed forces could not
have been within the contemplation of Justice Tuason.
To so attribute such a bizarre consequence is to be
guilty of a grave disservice to the memory of a great
jurist. For his real and genuine sentiment on the matter
in consonance with the imperative mandate of
controlling constitutional and international law concepts
was categorically set forth by him, not as an obiter but
as the rationale of the decision, in People v.
Acierto24 thus: "By the [Military Bases] Agreement, it
should be noted, the Philippine Government merely
consents that the United States exercise jurisdiction in
certain cases. The consent was given purely as a matter
of comity, courtesy, or expediency over the bases as
part of the Philippine territory or divested itself
completely of jurisdiction over offenses committed
therein."
Nor did he stop there. He did stress further the full
extent of our territorial jurisdiction in words that do not
admit of doubt. Thus: "This provision is not and can not
on principle or authority be construed as a limitation
upon the rights of the Philippine Government. If
anything, it is an emphatic recognition and reaffirmation
of Philippine sovereignty over the bases and of the truth
that all jurisdictional rights granted to the United States
and not exercised by the latter are reserved by the
Philippines for itself."25
It is in the same spirit that we approach the specific
question confronting us in this litigation. We hold, as
announced at the outset, that petitioner was liable for
the income tax arising from a sale of his automobile in
the Clark Field Air Base, which clearly is and cannot
otherwise be other than, within our territorial jurisdiction
to tax.
4. With the mist thus lifted from the situation as it truly
presents itself, there is nothing that stands in the way of
an affirmance of the Court of Tax Appeals decision. No
useful purpose would be served by discussing the other
assigned errors, petitioner himself being fully aware that
if the Clark Air Force Base is to be considered, as it
ought to be and as it is, Philippine soil or territory, his
claim for exemption from the income tax due was
distinguished only by its futility.
There is further satisfaction in finding ourselves unable
to indulge petitioner in his plea for reversal. We thus
manifest fealty to a pronouncement made time and time
again that the law does not look with favor on tax
exemptions and that he who would seek to be thus
privileged must justify it by words too plain to be
mistaken and too categorical to be
misinterpreted.26 Petitioner had not done so. Petitioner
cannot do so.
WHEREFORE, the decision of the Court of Tax Appeals
of May 12, 1966 denying the refund of P2,979.00 as the
income tax paid by petitioner is affirmed. With costs
against petitioner.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez,
Castro and Teehankee, JJ., concur.
Reyes, J.B.L., J., concurs in the result.
Barredo, J., took no part.
G.R. Nos. 70116-19 August 12, 1986
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
FRANK ROBERTSON, JAMES W. ROBERTSON,
ROBERT H. CATHEY, JOHN L. GARRISON AND THE
COURT OF TAX APPEALS, respondents.
PARAS, J.:
This is a Petition for Review of the consolidated decision
dated 14 December 1984 of the Court of Tax Appeals
(C.T.A.) in C.T.A. Case No. 2735, entitled "Frank
Robertson vs. Coconut commissioner of Internal
Revenue," C.T.A. Case No. 2736, entitled "James W.
Robertson vs. Commissioner of Internal
Revenue;" C.T.A. Case No. 2738, entitled "Robert H.
Cathey vs. Commissioner of Internal Revenue" and
C.T.A. Case No. 2739, entitled "John L. Garrison vs.
Commissioner of Internal Revenue," cancelling the
assessments for deficiency income tax for taxable years
1969-1972, inclusive of interests and penalties against:
Frank Robertson (CTA Case No. 2735)-P l32,750.65
James W. Robertson (CTA Case No. 2736)-190,433.17
Robert H. Cathey (CTA Case No. 2738)-92,013.17
John L. Garrison (CTA Case No. 2739)-196,754.32
The above-entitled cases are consolidated as these
involve similar or Identical fact situations on a question
involving the scope of the tax exemption provision in
Article XII, Par. 2, of the RP-US Military Bases
Agreement of 1947, quoted as follows:
2. No national of the United States serving in or
employed in the Philippines in connection with the
construction, maintenance, operation or defense of the
bases and residing in the Philippines by reason only of
such employment, or his spouse and minor children and
dependent parents of either spouse, shall be liable to
pay income tax in the Philippines except in respect of
income derived from Philippine sources or sources other
than the United States sources.
The Court of Tax Appeals found the following
undisputed antecedent facts:
Petitioner Frank Robertson (CTA Case No. 2735) is an
American citizen born in the Philippines on July 8, 1924.
He resided in the Philippines until repatriated to the
United States in 1945 and took residence at Long Beach,
California. Soon after he was employed by the U.S.
Federal Government with a job at the U.S. Navy. His
work brought him to the U.S. Navy's various installations
overseas with eventual assignment at the U.S. Naval
Ship Repair Facility at Subic Bay, Olongapo, Philippines,
in 1962.
Like his brother Frank Robertson, petitioner James
Robertson (CTA Case No. 2736) was born in the
Philippines on December 22, 1918 and had since resided
in this country until repatriated to the United States in
1945 and there, established his domicile. He landed a
job with the U.S. Navy Shipyard at Long Beach,
California as a U.S. Federal Civil Service employee. He
returned to the Philippines in 1958 with assignment at
the U.S. Naval Base at Subic Bay, Olongapo, and has
since remained thru 1972.
In CTA Case No. 2738, petitioner Robert H. Cathey is a
United States born citizen who first came to the
Philippines with the U.S. liberation force in 1944, and
upon discharge from the military service in 1946 turned
a U.S. Navy's civilian employee with station at Makati,
Metro Manila.
Petitioner John Garrison (CTA Case No. 2739) is a
Philippine born American citizen also repatriated to the
United States in 1945 establishing his domicile at San
Francisco, California. Soon after he was employed by the
U.S. Federal Government in its military installations. He
returned to the Philippines in 1952 assigned at the U.S.
Naval Base, Subic Bay, Philippines.
All told, the petitioners are citizens of the United States;
holders of American passports and admitted as Special
Temporary Visitors under Section 9 (a) visa of the
Philippine Immigration Act of 1940, as amended; civilian
employees in the U.S. Military Base in the Philippines in
connection with its construction, maintenance,
operation, and defense; and incomes are solely derived
from salaries from the U.S. government by reason of
their employment in the U.S. Bases in the Philippines."
(pp. 76-78, Record)
The Court a quo after due hearing, rendered its
judgment in favor of respondents cancelling and setting
aside the assessments for deficiency income taxes of
respondents for the taxable years 1969-1972, inclusive
of interests and penalties.
Petitioner Commissioner of Internal Revenue now comes
before Us assigning one alleged error, to wit:
The Court of Tax Appeals erred in holding that private
respondents are, by virtue of Article XII, Par 2 of the RP-
US Military Bases Agreement of 1947, exempt from
Philippine income tax.
Petitioner, to support his contentions, argues that the
laws granting tax exemptions must be construed
in strictissimi juris against the taxpayer, and that the
burden of proof is on private respondents, Frank
Robertson, James W. Robertson, Robert J. Cathey and
John L. Garrison to establish that their residence in the
country is by reason only of their employment in
connection with the construction, maintenance,
operation or defense of the U.S. Bases in the Philippines
as provided for under Article XII, Par. 2 of the RP-US
Military Bases Agreement of 1947 (supra). Petitioner
avers in his Brief, dated February 4, 1986, filed before
this Court, that private respondents have failed to
discharge this burden, alleging, among other things, (1)
that both respondents Frank Robertson and James
Robertson, who are brothers, own residential properties
respectively declared in the name of James Robertson
and in the name of Frank Robertson's wife for taxation
purposes; (2) that James Robertson is now a retired
Federal Civil Service employee and presently living with
his family in Olongapo City, which circumstance indicate
that respondents' residence in this country is not by
reason only of his employment in the U.S. naval base;
(4) that respondent Robert H. Cathey owns the house at
Quezon City where he presently resides; (5) that the
stay of respondent John Garrison who returned to the
Philippines in the year 1948 is uninterrupted except for a
two-year stint in Okinawa in the years 1950 to 1952; (6)
that the issuance in San Francisco, California of a Voter's
Certificate to respondent John Garrison in 1945 does not
in any way indicate that he was a U.S. resident, in the
years 1969 to 1972.
The aforegoing facts were the main argument of
petitioner in support of his contentions against
respondents. Such contentions do not impress Us as
meritorious.
The law and the facts of the case are so clear that there
is no room left for Us to doubt the validity of private
respondents' defense. In order to avail oneself of the tax
exemption under the RP-US Military Bases Agreement:
he must be a national of the United States employed in
connection with the construction, maintenance,
operation or defense, of the bases, residing in the
Philippines by reason of such employment, and the
income derived is from the U.S. Government (Art. XII
par. 2 of PI-US Military Bases Agreement of 1947). Said
circumstances are all present in the case at bar.
Likewise, We find no justifiable reason to disturb the
findings and rulings of the lower court in its decision
reading as follows:
We find nothing in the said treaty provision that justified
the lifting of the tax exemption privilege of the
petitioners (private respondents herein). Respondent
(petitioner herein) has grafted a meaning other than
that conveyed by the plain and clear tenor of the
Agreement. An examination of the words used and the
circumstances in which they were used, shows the basic
intendment "to exempt all U.S. citizens working in the
Military Bases from the burden of paying Philippine
Income Tax without distinction as to whether born
locally or born in their country of origin." Ubi lex non
distinguit nec nos distinguere debemos (one must not
distinguish where the law does not distinguish)
(Emphasis supplied). Moreover, the ruling has altered a
satisfactorily settled application of the exemption clause
and has fallen short of measuring up to the familiar
principle of International Law that, "The obligation to
fulfill in good faith a treaty engagement requires that the
stipulations be observed in their spirit as well as
according to their letter and that what has been
promised be performed without evasion, or subterfuge,
honestly and to the best of the ability of the party which
made the promise." (Kunz, The Meaning and Range of
the Norm (Pacta Sunt Servanda, 29 A.J.I.L. 180 (1945);
cited in Freidmann, Lisstzyn, Pugh, International Law
(1969) 329). Somehow, the ruling becomes an
anacoluthon and a persiflage.
It bears repeating as so disclosed in the records that the
petitioners together with families upon repatriation in
1945 had since acquired domicile and residency in the
United States. And, obtained employment with the
United States Federal Service. Not until after several
years of a hiatus, petitioners did return to the Philippines
not so much of honoring a pledge nor of sentimental
journey but by reason of taking up assigned duties with
the United States military bases in the Philippines where
they were gainfully employed by the U.S. Federal
Government. The situation of the petitioners is of no
different mold as of the rest of the U.S. civilian
employees who continued to enjoy the benefits of tax
exemption under the Agreement, Petitioners'
circumstances before the questioned ruling remained
obtaining thru the taxable years 1969-1972. It appears
too much of a stretch to hold petitioners straight-
jacketed to an irreversible situs of birth constraint and
by reason thereof deny altogether any opportunity to a
serendipitous enjoyment of a tax relief accorded in the
Agreement. Such a random quirk of pirouette in the tax
treatment fags sharply at odds with the shared
expectations of the high contracting parties. This Court
will not deem itself authorized to depart from the plain
meaning of the tax exemption provision so explicit in
terms and so searching in extent. (Emphasis supplied)
This does not however foreclose the possibility of
petitioners' coming to roost in the country contingent
upon the termination of their tour of duty, but only then
may the bridge be crossed for tax purposes. (pp. 82-84,
Record)
The circumstances in the case of Reagan vs.
Commissioner of Internal Revenue (30 SCRA 968) relied
upon by petitioner in support of the government's claim
are different from the circumstances of the case herein
and the ruling obtained in the former case cannot be
invoked or applied in support of petitioner's contention.
A cursory reading of said case shows that William
Reagan was at one time a civilian employee of an
American corporation providing technical assistance to
the U.S. Air Force in the Philippines. He questioned the
payment of the income tax assessed on him by
respondent Commissioner of Internal Revenue on an
amount realized by him on a sale of his automobile to a
member of the US Marine Corps., the transaction having
taken place at the Clark Field Air Base in Pampanga. It
was his contention that in legal contemplation the sale
was made outside Philippine territory and therefore
beyond our jurisdictional power to tax. Clearly, the facts
in said case are different from those obtaining in the
present suit.

WHEREFORE, premises considered, the appealed

decision of the Court of Tax Appeals is AFFIRMED and
the petition for review is hereby DISMISSED. No costs.

SO ORDERED.
G.R. No. L-9276, October 23, 1956THE
COLLECTOR QF INTERNAL REVENUE, PETITIONER
VS. V. G. SINCO EDUCATIONAL CORPORATION,
RESPONDENT.
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of Tax
Appeals which orders the Collector of Internal Revenue
to refund to respondent-appellee the sum of P5,364.77
representing income tax paid by said appellee for the
years 1950 and 1951.
In June, 1949, Vicente G. Sinco established and
operated an educational institution known as Foundation
College of Dumaguete. Sinco would have continued
operating said college were it it not for the requirement
of the Department of Education that as far as practicable
schools and colleges recognized by the government
should be incorporated, and so on September 21, 1951,
the V. G. Sinco Educational Institution was organized.
This corporation was non-stock and was capitalized by
V. G. Sinco and members of his immediate family. This
corporation continued the operations of Foundation
College of Dumaguete. Since its operation, this college
derived, by way of tuition fees, the following yearly
gross profits:
college an income tax for the years 1950 and 1951 in
the aggregate sum of P5,364.77, which was paid by the
college. Two years thereafter, the corporation
commenced an action in the Court of First Instance of
Negros Oriental for the refund of this amount alleging
that it is exempt from income tax under section 27 ( e) of
the National Internal Revenue Code. Pursuant to the
provisions of Republic Act 1125, the case was remanded
to the Court' of Tax Appeals which, after due trial,
decided the case in favor of the corporation.
Invoking section 27 (e) of the National Internal Revenue
Code, the appellee claims that it is exempt from the
payment of the income tax because it is organized and
maintained exclusively for the educational purposes and
no part of its net income inures to the benefit of any
private individual. On the other hand, the appellant
maintains that part of the net income accumulated by
the appellee inured to the benefit of V. Q. Sinco,
president and founder of the corporation, and therefore
the appellee is not entitled to the exemption prescribed
by the law.
In support of his stand, appellant invokes the yearly
statements of operation or balance sheets submitted by
the corporation. Thus, in the balance sheets for the
years 1951, 1952 and 1953, there appear the following
entries:

Year Gross 1951

Receipt LIABILITIES
1949 ACCOUNTS PAYABLE:
P32,684 Community Publishers,
......................................................................
.70 Inc................. P20,751.95
...
I960 Vicente G. Sinco,
88,341. Personal................ 7,435.83
......................................................................
80 TOTAL LIABILITIES
... P28,187.78
1951 ............................................
114,499
......................................................................
.35 1952
..
1952 LIABILITIES
83,259. ACCOUNTS PAYABLE:
......................................................................
04 Vicente G. Sinco, Personal
..
1953 ................. P12,669.07
97,907. Community Publishers,
......................................................................
18 Inc......................32,135.50
.
TOTAL LIABILITIES
P44,804.57
The investigation conducted by an income tax examiner ............................................
of the Bureau of Internal Revenue revealed that the
college realized a taxable net income for the year 1949 1953
in the sum of P3,098.06 and for the year 1950 in the LIABILITIES
sum of P17,038.59. For the years 1951 to 1953, ACCOUNTS PAYABLE:
inclusive, the income tax returns of the college have not Vicente G. Sinco, Personal
as yet been verified but it reported a taxable net profit Cash
of P26,868.60 for the year 1951; a loss of P9,129.80 for Advanced...................................
the year 1952 and a profit of P223.56 for the year 1953. P9,716.36
The Collector of Internal Revenue assessed against the Accrued Salaries
............................... 7,599.71
 P17,316.07
Community Publishers, Inc.
Cash
Advanced.....................................
P18,762.68
Printing Account
................................... 13,262.72
P32,025.40
TOTAL LIABILITIES
. P49,341.47
..........................................
Considering the above quoted entries, appellant claims
that a great portion of the net profits realized by the
corporation was channeled and redounded to the
personal benefit of V. G. Sinco, who was its founder and
president. Another benefit that accrued to Sinco
according to appellant is represented by the several
amounts which appear payable to the Community
Publishers, Inc. because, being the biggest stockholder
of this entity, the money to be paid by the appellee to
that entity as appearing in the above quoted entries
would redound to the personal benefit of Sinco.
Is it really correct to say that the appellee is an
educational institution in which part of its income inures
to the benefit of one of its stockholders as maintained
by appellant? Considering that this claim is mainly
predicated on certain entries appearing in the balance
sheets of the corporation for the years 1950 and 1951,
there is need to clarify the purposes for which said
entries were made, particularly those referring to the
accounts payable to V. G. Sinco and the Community
Publishers Inc.
With regard to this accounts, Dean Sinco made the
following clarification: He acted as president of the
Foundation College and as chairman of its Board of
Directors; in 1949 he served as its teacher for a time;
the accountant of the college suggested that a certain
amount be set aside as his salary for purposes of orderly
and practical accounting; but notwithstanding this
suggestion, he never collected his salary for which
reason it was carried in the books as accrued expenses.
With regard to the account of the Community Publishers,
Inc., Sinco said that this is a distinct and separate
corporation although he is one of its stockholders. The
account represents payment for services rendered by
this entity to the college. These are two different entities
and whatever relation there is between the two is that
the former merely extends help to the latter to enable it
to comply with the requirements of the law and to fill its
needs for educational purposes. This clarification made
by Sinco stand undisputed.
Considering this explanation, it is indeed too sweeping if
not unfair to conclude that part of the income of the
appellee as an institution inured to the benefit of one of
its stockholders simply because part of the income was
carried in its books as accumulated salaries of its
president and teacher. Much less can it be said that the
payments made by the college to the Community
Publishers, Inc. redounded to the personal benefit of
Sinco simply because he is one of its stockholders. The
fact is that, as it has been established, the appellee is a
non-profit institution and since its organization it has
never distributed any dividend or profit to its
stockholders. Of course, part of its income went to the
payment of its teachers or professors and to the other
expenses of the college incident to an educational
institution but none of the income has ever been
channeled to the benefit of any individual stockholder.
The authorities are clear to the effect that whatever
payment is made to those who work for a school or
college as a remuneration for their services is not
considered as distribution of profit as would make the
school one conducted for profit. Thus, in the case of
Mayor and Common Council of Borough of Princeton vs.
State Board of Taxes & Assesements, et al., 115 Atl.,
342, wherein the principal officer of the school was
formerly its owner and principal and such principal lie
was given a salary for his services, the court held that
that school is not conducted for profit merely because
moderate salaries were paid to the principal and to the
teachers.
Of course, it is not denied that the appellee charges
tuition fees and other fees for the different services it
renders to the students and in fact it is its only source of
income, but such fact does not in itself make the school
a profit-making enterprise that would place it beyond
the purview of the law. In this connection, this Court
made the following comment:
"Needless to say, every responsible organization must be
so run as to, at least, insure its existence, by operating
within the limits of its own resources, especially its
regular income. In other words, it should always strive,
whenever possible, to have a surplus. Upon the other
hand, appellant's pretense would limit the benefits of the
exemption, under said section 27 (e), to institutions
which do not hope, or propose, to have such surplus.
Under this view, the exemption would apply only to
schools which are on the verge of bankruptcy, for unlike
the United States, where a substantial number of
institutions of learning are dependent upon voluntary
contributions and still enjoy economic stability, such as
Harvard, the trusted fund of which, has been steadily
increasing with the years there are, and there have
always been, very few educational enterprises in the
Philippines which are supported by donations, and these
organizations usually have a very precarious existence.
The final result of appellant's contention, if adopted,
would be to discourage the establishment of colleges in
the Philippines, which is precisely the opposite of the
objective consistently sought by our laws.
"Again, the amount of fees charged by a school, college
or university depends, ultimately, upon the policy and a
given administration, at a particular time. It is not Wherefore, the decision appealed from is affirmed,
conclusive of the purposes of the institution. Otherwise, without pronouncement as to costs.
such purpose would vary with the particular persons in
charge of the administration of the organization." (Jesus
Sacred Heart College ps. Collector of Internal Revenue,
95 Phil., 16).

Another point raised by appellant to show that appellee

is not entitled to the exemption of the law refers to the
use made by it of part of its income in acquiring
additional buildings and equipment which, it is claimed
would in the end redound to the benefit of its
stockholders. Appellant claims that "By capitalizing its
earnings in the aforementioned manners, the value of
the properties of the corporation was enhanced anq!,
therefore, such profits inured to the benefit of the
stockholders or members. The property of the
corporation may be sold at any time and the profits
thereof divided among the stockholders or members."

This claim is too speculative. While the acquisition of

additional facilities, may redound to ths benefit of the
institution itself, it cannot be positively asserted that the
same will redound to the benefit of its stockholders, for
no-one can predict the financial condition of the
institution upon its dissolution. At any rate, it has been
held by several authorities that the mere provision for
the distribution of its assets to the stockholders upon
dissolution does not remove the right of an educational
institution from tax exemption. Thus, in the case of U.
S. vs Picwick Electric Membership Corp., 158 F. 2d 272,
277, it was held "The fact that the members may receive
some benefit on dissolution upon distribution of the
assets is a contingency too remote to have any material
bearing upon the question where the association is
admittedly not a scheme to avoid taxation and its good
faith and honesty or purpose is not challenged."

With regard to the claim of appellant that appellee is not

entitled to exemption because it has not complied with
the requirement of section 24, Regulation No. 2 of the
Department of Finance, we find correct the following
observation of the Court of Tax Appeals:

"And regarding the proof of exemption required by

section 24, Regulation No. 2, Department of Finance
which, according to the ' defendant, is a condition
precedent before an educational institution can avail
itself of the exemption under consideration, we
understand that it was probably promulgated for the
effective enforcement of the provisions of the Tax Code
pursuant to Section 338 of the National Internal
Revenue Code. Intended to relieve the taxpayer of the
duty of filing returns and paying the tax, it cannot be
said that the failure to observe the requirement called
for therein constitutes a waiver of the right to enjoy the
exemption. To hold otherwise would be tantamount to
incorporating into our tax laws some legislative matter
by administrative regulation."
G.R. No. L-6807 May 24, 1954 1% monthly 39.87
interest from
JESUS SACRED HEART COLLEGE, plaintiff-appellee, 1/10/51 to 8/13/51
vs.
COLLECTOR OF INTERNAL REVENUE, defendant- Total P649.53
appellant. 1949 tax due as per P428.732
return
La O and Feria and Manglapus and Gopengco for
appellee. 25% surcharge 107.18
First Assistant Solicitor General Ruperto Kapunan, Jr. 5% surcharge 26.08
and Solicitor Jose P. Alejandro for appellant.
1% monthly 38.05
CONCEPCION, J.: interest from
1/10/51 to 1/13/51
This is an appeal taken by defendant, Collector of Compromise for 20.00
Internal Revenue, from a decision of the Court of First late filing of return
Instance of Manila sentencing him to refund to plaintiff,
Jesus Sacred Heart College, the sum of P2,241.86, Total P620.76
assessed by the former, and paid by the latter, by way
of income tax for the years 1947, 1948 and 1949. The 4. That a claim for refund of said amount of P2,241.86
parties have stipulated: was duly filed on August 16, 1951 by the plaintiff with
the defendant but the claim was denied on August 24,
1. That the Jesus Sacred Heart College is an educational 1951;
organization authorized to operate and existing in
Lucena, Quezon, and offering to the public elementary, 5. The assessment notices for the deficiency income tax
secondary and collegiate courses; for the years 1947, 1948 and 1949 were forwarded by
the defendant to the plaintiff on or about December 15,
2. That according to its income tax returns, plaintiff 1950, the letter enclosing the said notices was dated
realized net incomes from tuition and other fees in December 12, 1950, and the notices were dated
carrying on its educational activity in the amounts of December 6, 1950: "6. That the only question to be
P5,659.07; P3,743.82; and P3,572.74 for the years resolved in this case is whether the net income from
1947, 1948 and 1949 respectively; tuition and other fees collected and received by the
plaintiff as an educational institution from its students in
3. That the amount of P2,241.86, computed below, was carrying on its educational activity under the conditions
paid by the plaintiff to the defendant on August 13, specified in paragraphs 1, 2, and 3 hereof is subject to
1951 as its income tax and penalties for the net incomes income tax under the provisions of section 24 of the
stated in paragraph 2 hereof, and compromise for late National Internal Revenue Code, notwithstanding the
filing of its income tax returns for said years. provisions of section 27(e) thereof, as amended by
Republic Act No. 82, quoted hereunder:
1947 tax due as per P679.09
"Sec. 27. Exemption from tax on corporation. — The
return
following organizations shall not be taxed under this
25% surcharge 169.77 Title in respect to income received by them as such —
5% surcharge 42.44
xxx xxx xxx
1% monthly 60.27
interest form (e) Corporation or association organized and operated
1/10/51 to 8/13/51 exclusively for religious, charitable, scientific, athletic,
cultural, or educational purposes, or for the
Compromise for 20.00
rehabilitation of veterans no part of the net income of
late filing of return
which inures to the benefit of any private stockholder or
Total P971.57 individual: Provided, however, That the income of
whatever kind and character from any of its properties,
1948 tax due as per P449.26 real or personal, or from any activity conducted for profit
return regardless of the disposition made of such income, shall
25% surcharge 112.32 be liable to the tax imposed under this Code." (Record)
on Appeal, pp. 6-9.)
5% surcharge 28.08
Plaintiff appellee maintains, and the lower court held,
that it is exempt from taxation under the first part of
said paragraph (e), whereas defendant-appellant asserts
that the income in question was derived form an
"activity conducted for profit," and that, accordingly, it is
taxable under the proviso of the same paragraph. In
support of this contention, defendant says in his brief:
An interpretation which would place income from
educational activities within the term income from any
conducted for profit would not render the provision
exempting educational institutions from the taxation
nugatory. "As there are not a few schools which are not
conducted for profit, the exemption would not be
rendered useless with respect thereto. Only those
schools conducted for profit would be subject to tax and
it stands to reason that being profit-making institutions,
they should really be taxed. If non-sectarian schools and
colleges which realize profits are not exempted from
levy, there would be no plausible reason for exempting
from tax sectarian schools and colleges which are run
for profit. And the argument that, because the profits
realized by Catholic Schools and Colleges are invested in
the expansion and improvement of said schools and not
distributed among the stockholders, they should be free
from income tax falls to the ground in view of the last
clause in the proviso: "regardless of the disposition
made of such income". (Excerpt from Op. No. 78).
The fact that the Congress of the Philippines found it
necessary to add the phrase "any activity conducted for
profit" unmistakably points to the intention to tax
income from activities conducted for profit which
possibly might not be embraced by the proviso in the old
law which taxes only income from properties, real or
personal.
It is clear from the foregoing that if the educational
activity is conducted for profit, it is subject to tax. A
study of pertinent cases(Institute of Holy
Angels vs. Bonder, 74 A, 251; Borough vs. State, 115 A.
344) in the United States shows that the underlying
criterion upon which the courts appear to rely most
heavily is whether the institution in question gives to the
public at large substantially more than it received "as a
public work or service to the state, without expectation
of remuneration." A subsidiary consideration is whether
tuition charges are fixed so as to evince a purpose to
make a profit over and above the cost of tuition.
Institute of Holy Angels, vs. Bender, N. J. Sup. Ct., 1909,
79 N. J. L. 34, 74 A. 251; Mayor of Princeton,
etc. vs. State Board, N. J. Sup. Ct. 1921, 96 N. J. L. 334,
115 A. 342. Another point of view was that of inquiring
as to whether the objects of the school were
fundamentally charitable or philantrophic. Dwights
School of Englewood vs. State Board, etc. N. J. Sup. Ct.
1935, 114 N. J. L. 594, 177 A. 875, 876 and cases cited
(Excerpt from Op. No. 78).
In the following illustrative cases are applied the above
criterion:
(1) "(1) In a case where a school claimed exemption
from taxation on the ground that it was not realizing
profits over and above the cost of operation the court
held that said school was nevertheless conducted for
profit, it being shown that the fees charged were very
considerable. `The fact that it may not from time to time
result in profitable operation is beside the question. It
has a commercial aspect. The amount of the fees
charged indicates that it is commercial." (Bancroft
Schort vs. State Board of Taxes and Assessment, 160 A
.390).
(2) "(2) The fact that a private school was organized
under a statute providing for the organization of non-
profit organizations and that it had no income but tuition
fees was held not to be indicative of whether the school
is, in fact, a corporation or not for profit. The fact of
whether it made a profit or showed a deficit is
immaterial. (Miami Beach vs. Tomlinson, 196 So. 608.).
(3) "(3) And a private academy charging tuition was held
no tax exempt from taxation as fundamentally
philantrophic or charitable in purpose, notwithstanding a
declaration and provisions thereof in its by-laws.
(Carteret Academy vs. State, 133 A. 886).
One idea stands out from the array of authorities
examined. Actual realization of profits is immaterial;
what is important is the presence of the purpose to
make a profit over and above the cost of instruction
(Rider vs. Trenton, 19 A. 24; Institute of Holy
Angels vs. Bender, 74 A. 251; Princeton vs. State, 115 A.
342). (Appellant's brief, pp. 11-14.)
At the outset, we note that appellant has not even tried
to demonstrate either "that the fees charged are very
considerable" or that "the amount of the fees charged
indicates that it is commercial." Neither has he shown
"the presence of the purpose to make a profit over and
above the cost of instruction." At any rate, this standard
can not be applied in the interpretation of the legal
provision under consideration, for the following reasons,
namely:
1. Section 27(e) of the National Internal Revenue Code,
as amended by Republic Act No. 82 (section 5), exempts
from taxation the "net income" of corporations
"organized and operated exclusively for ... educational
purposes ... no part of the net income of which inures to
the benefit of any private stockholder or individual," and
it is conceded that plaintiff corporation belongs to this
class. To hold that an educational Institution is subject
to income tax whenever it is so administered as to
reasonably assure that it will not incur in deficit, is to
nullify and defeat the aforementioned exemption.
Indeed, the effect, in general, of the interpretation
advocate by appellant would be to deny the exemption
whenever there is net income, contrary to the tenor of
said section 27(e) which positively exempts from
taxation those corporations or associations which,
otherwise, would be subject thereto, because of the
existence of said net income.
Needless to say, every responsible organization must be
so run to, at least insure its existence, by operating
within the limits of its own resources, especially its
regular income. In other words, it should always strive,
whenever possible, to have a surplus. Upon the other
hand, appellant's pretense would limit the benefits of the
exemption, under said section 27(e), to institutions
which do not hope, or propose, to have such surplus.
Under this view, the exemption would apply only to
schools which are on the verge of bankruptcy, for —
unlike the United States, where a substantial number of
institutions of learning are dependent upon voluntary
contributions and still enjoy economic stability, such as
Harvard, the trust fund of which has been steadily
increasing with the years — there are, and there have
always been, very few educational enterprises in the
Philippines which are supported by donations, and these
organizations usually have a very precarious existence.
The final result of the appellant's contention, if adopted,
would be discourage the establishment of colleges in the
Philippines, which is precisely the opposite of the
objective consistently sought by our laws.
Again, the amount of fees charged by a school, college
or university depends, ultimately, upon the policy of a
given administration, at a particular time. It is not
conclusive of the purpose of the institution. Otherwise,
such purpose would vary with the particular in charge of
the administration of the organization.
At any rate, the main evidence of the purpose of a
corporation should be its articles of incorporation and
by-laws, for such purpose is required by statute to be
stated in the articles of incorporation (Sec. 6, Act No.
1459), and the by-laws outline the administrative
organization of the corporation (Sec. 20 and 21 of Act
No. 1459, as amended), which, in turn, is supposed to
insure or facilitate the accomplishment of said purpose.
In the case of plaintiff herein, its amended articles of
incorporation provide:
That the purposes for which said corporation is formed
are the instruction and education of young girls. (Record
of Exhibits, p. 26.)
Moreover, article 21 of its by-laws states:
This corporation is a non-profit corporation. All income
shall be devoted to the maintenance, improvement and
expenses of the College. No part of its net income shall
inure to the benefit of private individuals. (Record of
Exhibits, p. 35.)
Considering, furthermore, that pursuant to article 8 of
said by-laws, only religious members of the corporation
denominated "Hijas de la Caridad de San Vicente de
Paulen Filipinas" are qualified for admission as members
of the plaintiff corporation and that there is not even the
slightest intimation that it does not adhere to the
provisions of its articles of incorporation and by-laws, it
is apparent that said plaintiff is neither organized nor
operated "for profit."
2. The cases cited by appellant are not in point. None of
those cases involved income tax. Except the case of
Miami Beach College Corp. vs Tomlinson, 196 So. 608
(seepage 21 appellee's brief), which referred to a license
tax, all of the other cases dealt with assessment taxes
on lands and buildings. The latter cases, however, are
particularly inapplicable to the Philippines, in view of the
constitutional mandate to the effect that "all lands,
building and improvements used exclusively for religious,
charitable or educational purposes shall be exempt from
taxation. (Art. VI, sec. 22, par. 3, of the Constitution.)
More important still, the law applied in the case relied
upon by appellant exempted from taxation only such
educational institutions as were established for
charitable or philantrophic purposes. Consequently, the
amount of fees charged or the intent to collect more
than the cost of operation or instruction was material to
the determination of such purpose. Upon the other
hand, under section 27(e) of our National Internal
Revenue Code, as amended, an institution operated
exclusively for educational purposes need not have, in
addition thereto, a charitable or philantrophic character,
to be exempt from taxation, provided only that no part
of its net income "inures to the benefit of any private
stockholder or individual."
Lastly, the history of the legal provision under
consideration does not bear out the theory of appellant
herein. Section II, subdivision G (a), of the Act of
Congress of the United States of 1913, contained the
following exemption from taxation:
. . . That nothing in this section shall apply to labor,
agricultural or horticultural organizations, or to mutual
savings banks not having a capital stock represented by
shares, or to fraternal beneficiary societies, orders, or
associations operating under the lodge system or for the
exclusive benefit of the members of a fraternity itself
operating under the lodge system, and providing for the
payment of life, sick, accident, and other benefits to the
members of such societies, orders, or associations and
dependents of such members, nor to domestic building
and loan associations, nor to cemetery companies,
organized and operated exclusively for the mutual
benefit of their members, nor to any corporation or
association organized and operated exclusively for
religious, charitable, scientific, or education purposes, no
part of the net income of which inures to the benefit of
any private stockholder or individual, nor to business
leagues, nor to chambers of commerce or boards of
trade, not organized for profit or no part of the net
income of which inures to the benefit of the private
stockholder or individual; nor to any civil league or
organization not organized for profit, but operated
exclusively for the promotion of social welfare. (9 Public
Laws, p. 516; emphasis supplied.)
Later on (March 7, 1919), Act No. 2833 of the Philippine
Legislature, in reproducing the exemption in favor of
corporations or associations organized and operated
exclusively for religious, charitable, scientific or
educational purposes (section 11 [a], Sixth paragraph)
added thereto a proviso reading:
. . . Provided, however, That the income of whatever
kind and character from any of its properties, real or
personal, except income expressly exempted by this
Law, shall be liable to the tax imposed under this
chapter. (14 Public Laws, p. 232.)
It should be noted that in dealing with institutions
organized and operated exclusively for education
purposes, the profit motive was disregarded, on
condition that the net income does not inure to the
benefit of any private stockholder or individual, whereas,
chambers of commerce or boards of trade, as well as
civic leagues, were exempted only if "not organized for
profit."
Subsequently (June 15, 1939), Commonwealth Act No.
466 amended the clause "no part of the net income of
which inures to the benefit of any private stockholder or
individual," so as to read: "no part of the net income of
which is distributed to any private stockholder or
individual."
As thus amended, section 27(f) of said Act provided:
SEC. 27. Exemptions from tax on corporations. — The
following organizations shall not be taxed under this
Title in respect to income received by them as such —
xxx xxx xxx
(f) Corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic,
cultural, or educational purposes, no part of the net
income of which is distributed to any private stockholder
or individual: Provided, however, That the income of
whatever kind and character from any of its properties,
real or personal, except income expressly exempted by
this title, shall be liable to the tax imposed under this
Code.
On October 29, 1946, this provision was amended by
Republic Act No. 82 (section 5), so as to become
paragraph (e) of said section 27 of the National Internal
Revenue Code, which we quote:
(e) Corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic,
cultural, or educational purposes, or for the
rehabilitation of veterans no part of the net income of
which inures to the benefit of any private stockholder or
individual: Provided, however, That the income of
whatever kind and character from any of its properties,
real or personal, or from any activity conducted for
profit, regardless of the disposition made of such
income, shall be liable to the tax imposed under this
Code.
It will be noted that four (4) changes were introduced
by this act of Congress of the Philippines namely:
(1) It increased the exempt class, by including therein
corporations or associations organized and operated
exclusively "for the rehabilitation of veterans";
(2) It reverted to the phraseologoy of the original act of
Congress of 1913, by providing that the corporations or
associations therein enumerated shall be exempt if no
part of the net income thereof "inures to the benefit of"-
instead of "is distributed to" — any private stockholder
or individual;
(3) It clarified the meaning of the proviso, by declaring
that the income therein mentioned shall be taxable
"regardless of the disposition made of such income";
and
(4) It inserted in the proviso an additional limitation to
the exemption established in the first part of paragraph
(e), by excluding from said exemption the income of the
aforementioned corporations or associations derived
"from any activity conducted for profit."
This fourth amendment was not, however, a part of the
bill (H. No. 729) introduced in the House of
Representatives. Referring to the first three
amendments, the explanatory note of said bill said:
Amendment of provisions granting exemption in favor of
religious, charitable, scientific, athletic, cultural, or
educational organizations or institutions. — The present
law (section 27 [f], National Internal Revenue Code)
exempts the organizations if no part of their net income
"is distributed to any private stockholder or individual."
This provision has been authoritatively construed as
exempting such organization or association from the
payment of the income tax for any year in which no
dividends are distributed to stockholders. The present
law as so construed, therefore, makes it possible for a
corporation to avoid the payment of income tax by
simply desisting from declaring a dividend during any
given year, notwithstanding the fact that it may have
earned a very substantial amount of income in that year.
Furthermore, if the corporation desires to distribute
dividends, it could effect the distribution during a
taxable year in which it expects to suffer a loss, or
derive only a small income, thus making it possible for
such corporation to entirely avoid the payment of the
income tax availing of the loophole in the law to suit its
advantage. Under the proposed amendment, the above-
mentioned corporations and associations will pay income
tax on their profits in any year although no dividends are
declared for such year.
It is also proposed to clarify the provisions of this
paragraph by inserting the words "regardless of the
disposition made of such income" in order to make it
clear that the income of whatever kind and character of
said organizations from any of their properties, real or
personal, will be subject to income tax. It is obvious that
an organization which derives income from rentals or
investments of its properties should be made to pay the
income tax in the same manner as to other corporations
or individuals. The government affords protection to the
owner of property and it is proper that the said owner
should be made to contribute to the cost of government
by paying a tax on the income from such property.
It is proposed to include among the exempt
organizations any association organized for the
rehabilitation of war veterans. The formation of such
associations should be encouraged, considering that a
great number of our war veterans are in dire need of
relief and rehabilitation.
The fourth amendment was mentioned for the first time
in the report of the conference committee, which is
couched in the following language:
The Committee of Conference on the disagreeing votes
of the two Houses on the amendment of the Senate to
H. No. 729, entitled:
"An Act to amend sections twenty-one, twenty-two,
twenty-four, twenty-seven, twenty-nine, thirty, thirty-
four, fifty-three, fifty-four, and to repeal subsection (u)
of section eighty-four of Commonwealth Act Numbered
Four hundred and sixty-six, as amended,"
having met, after full and free conference have agreed
to recommend and do recommend to their respective
Houses, as follows:
The Committee of Conference on the Part of the House
of Representatives regrets to state that it cannot accept
the amendments of the Senate to sections 1, 2, and 9 of
H. Bill 729. However, it is willing to accept the following
amendments of the Senate:
1. In section 5, page 7, line 6, before the word
"REGARDLESS "insert the words "OR FROM ANY
ACTIVITY CONDUCTED FOR PROFIT,"
2. In section 7, page 8, line 20, strike out the word "or";
same page, same section, line 30, strike the words "or
the."
Respectfully submitted:
Conferees on the Part of the Senate
(Sgd.) MELECIO ARRANZ (Sgd.) M. JESUS CUENCO
(Sgd.) CARLOS P. GARCIA
Conferees on the Part of the House of Representatives
(Sgd.) MODESTO (Sgd.) TORIBIO P. PEREZ
FORMILLEZA
(Sgd.) CIPRIANO PRIMICIAS
(Appellees brief, pp. 11-12.)
There is no other official record concerning the
amendment in question. However, we find in the record
a deposition — which was introduced in evidence as
Exhibit A-1 — of Senator M. Cuenco, a member of said
conference committee, for the Senate, and sponsor of
the bill on the floor thereof. The pertinent parts of said
deposition are quoted hereunder:
Las palabras "or from any activity conducted for profit"
fueron insertadas durante las deliberaciones que hubo
en el comite de conferencia. Era general y unanime la
opinion tanto de los representates que formaban parte
del comite de conferencia, como por parte de los
senadores miembros del COMITE DE CONFERENCIA DE
PARTE del senado, de examir del pago de "income tax"
los ingresos, si losmismos no fueran repartidos entre los
socios o accionistas; perotodos convenieron de que los
ingresos de centros docentes organizados por
accionistas que recibieran dividendos y utilidades de los
colegios deberian pagar "income tax". Se hablo de que
las matriculas, los ingressos de laboratorio, juegos
atleticos, etcetera, debian ser exentos de `income tax';
pero los ingresos provinientes de actividades
completamente ajenas o no esencialmente relacionadas
con los fines educacionles de cada colegio, tales
ingresos deberian estar sujetos a "income tax".
P. Al hablar de la exencion de "income tax" para los
colegios que cobran matriculas, derechos de laboratorio,
derechos "for athletic purposes" usted empleo la palabra
"etcetera", quiere Vd. decir que estan incluidos en esa
palabra "etcetera" los derechos por la expedicion de
titulos o no?
R. Todo lo que se pagase por titulos deberia ser exento
tambien, lo cual tenniamos en nuestra mente cuando
hemos aprobado la insercionde las palabras "or from any
activity conducted for profits"; no estaban incluidos
dentro de esta frase que acabo de leer las matriculas,
los ingresos de laboratorio, los ingresos por altetismo,
porque si las matriculas, los ingresos de laboratorio, lo
que se paga por la expedicion de titulos estuviesen
sujetos a "income tax", entonces se cometerai un
absurdo de no eximir de cualquier impuesto de `income
tax' todos los centros docentes privados aunque no
fuerano perados en beneficio de los socios o accionistas.
Los Senadores y Representantes que companian el
comitede conferencia no podian jamas atentar contra el
progreso del pais sujetando a impuestos de "income tax"
los ingresos por matricula, porque entonces ningun
colegio podria mantenerse, equivaldrai sancionar el
cobro de impuestos de todos los centros docentes
privados, lo cual es absurdo y completamente contrario
no solamente al precedente establecido en este pais sino
a toda la practicas generales, continuas en Estados
Unidos, de proteger la propagacion de la cultura,
civilization y progreso. Se hace mas patente esa
necesidad si se considera que en Filipinas la ensenñanza
superior, principalment la academica, se ha dado no
solamente en la Universidad de Filipinas, sino sobre las
universidades y colegios donde se educan cuando
menos, 80 o 90%, los que buscan instruccion academica
o superior.
Esta frase "or from any activity conducted for profit" se
inserto porque un colegio o una universidad pordria
tener ingresos no absolutamente esenciales para la
enseñanza: tales, por ejemplo, en el caso de la
Universidad de Santos Tomas. La Universidad tiene un
hospital, este hospital recibe enfermos de pago; si esta
frase "or from any activity conducted for profit" no se
hubiera insertado, seria discutible si los ingresos que
reciba el hospital provenientes de enfermos de pago
podrian sujetarse a impuestos de `income tax' o no.
Pero con la insercion de la frase `or from any activity
conducted for profit' se hizo evidente que dichos
ingresos estan sujetos a "income tax". Podria darse el
caso que el colegio o la universidad tuviera departmento
de artes y oficios en el cual se fabrican muebles, y
estosmuebles se vendian al publico, naturalmente si
dicha frase na se hubiera insertado, las ganancias por la
venta de esos muebles no estarian sujetos a "income
tax"; pero con la insercion que hemos hechono cabe
duda ninguna de que tales ganancias deberian pagar
"income tax".
xxx xxx xxx
P. Cuando ha hablado de la Universidad de Santo Tomas
quetiene un hospital, no cree Vd. que es una actividad
esencial dicho hospital para el funcion amiento del
colegio de medicina de dicha universidad?
xxx xxx xxx
R. Si el hospital se limita a recibir enformos pobres, mi
contestacion seria afirmativa; pero considerando que el
hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posicion social
economica, lo que se paga por estos enfermos debe
estar sujeto a `income tax', y es una de las razones que
hemos tenido para insertar las palabras o frase "or from
any activity conducted for profit".
P. Cree Vd. que en la palabra "etcetera" que Vd. empleo
antes estan incluidos los derechos que se cobran por el
uso de la biblioteca (library)?
R. Deberan de estar exentos.
P. Cree Vd. que en dicha palabra "etcetera" estan
includos tambien los derechos que se cobran por
internos en un dormitorio de la universidad o por la
escuela?
R. Si lo que se paga por estos internos representa
unicamente los gastos necesarios, si, estan incluidos.
P. Si los colegios tuvieran ingresos solo de matricula y
derechso de laboratorio y derecho de `athletics' o
juegos atleticos, y por todo lo que Vd. incluye en la
palabra "etcetera" tuvieran que pagarimpuestos de
"income tax" por dichos ingresos como pretende el
Gobierno, ademas de estar incluidos por Vd. en la frase
"or from any activity conducted for profits, podria Vd.
decir que otros ingresos de tales colegios quedarian
exentos de "income tax", no obstantelo qu dice la ley en
terminos generales en la seccion 27(e) de quo quedan
exentos de pago de "income tax" toda corporacion on
asociacion organizada y operada exclusivamente por
motivos de religion , caridad, ciencia o educacion?
xxx xxx xxx
R. No. quedaria ningun ingreso libre de impuestos.
Entonces la exencion prevista por la ley seria una letra
muerta, seria una redundancia. Por otro lado yo no
puedo concebir que haya otros ingresos que podrian
quedar exentos de impuesto de "income tax" (Pages 4-
7, Record of Exhibits; emphasis supplied.)
xxx xxx xxx
P. Cuando se fijo Vd. por primera vez de la inclusion de
dicha frase "or from any activity conducted for profit"?
R. Como yo habia dicho antes de conferencia
nombrados, uno por parte del Senado, y otro por parte
de la Camara.
P. Recuerda Vd. el miembro del Comite de Conferencia
que era responsable de dicha frase?
Q. Como y habia dicho antes, los senadores y
representantes que eran miembros de laos comites de
conferencia eran un animesen su sentir de que las
matriculas, los ingresos de laboratorio, juegos atleticos,
etc, fueran exentos de "income tax" si el coligio no fuera
organizado para beneficio de los sicios o accionistas;
pero como podria darse el caso de que ademas de las
matriculas, ingresos de laboratorio, ingresos por titulos,
un centro docente pordra tener algunas actividades que
pudieran rendir ganancias, asi es que se inserto la frase
"or from any activity conducted for profit".
xxx xxx xxx
P. No cree Vd. que la insercion de dicha frase es
superflua, teniendo en cuenta que antes de la enmienda
de la seccion 27(e) (antes f) del Codigo de Impuestos ,
los ingresos de las corporaciones o asociaciones
mencionadas en la ley provenientes del ejercicio de las
actividades que eran eran estrictamente religiosas,
caritativas, educacionales,etc. no estaban sujetos a
"income tax"?
xxx xxx xxx
Sr. Cuenco: A simple vista parece casi superflua; pero
considerando que una institucion educacional podria
tener ingresos provenientes de cualquiera activities "for
profit", la frase tien razonde ser. En el caso, por
ejemplo, de la Universidad de Santos Tomas, esta
universidad tiene una imprenta, al menos,
anteriormente, no solamente imprimia todo lo que fuese
de uso exclusivo para la universidad y relacionado con
sus fines educacionales, sino tambien recibia trabajos de
imprentea del publico. Si la frase en controversia no se
hubiera insertado no cabria duda alguna de que los
trabajosde impresion recibidos por la imprenta de la
universidad de cualquiera persona, trabajos que
devengan ganancias, no podrian estar sujetos a
impuesto.
xxx xxx xxx
P. Recuerda Vd. si al tiempo cuando se inserto esta frase
en el proyecto en discusion algun miembro de dichos
comites haya considerado que alguna cantidad despues
de deducidos todos los gastos de la cantidad cobrada
por matricula, etc., deberian considerarse sujeta a
impuesto?
R. Los miembros de los comites tanto por parte del
Senado como por parte de la Camara eran contestes en
su sentir de que toda matricula debe estar exenta del
pago de "income tax". El exceso que Vd. cree que puede
haber entre los ingresos y los gastos necesarios, no
podria ser considerados por el comite, porque si los
ingresos y los gastos se equiparan, no habria necesidad
de consignar ninguna exencion porque entonces no
habria ninguna ganancia quetasar.
P. Pero ha tenido en cuenta el comite la posibilidad de
que hubiera un ingreso neto despues del cobrode
matricula, despues de pagados los gastos?
R. Deseo advertir que todos los miembros del comite
tenianuna actitud liberal hacia los centros docentes
privados, y nunca paso por nuestra mente crear
cualqueir impuesto que tendiera obstaculizarsus
actividades culturales y educativas. Asi es que tratar de
imponer `income tax' sobre las matriculas bajo el
pretexto de que los ingresos ascienden a una cantidad
mayor que los gastos,seria establecer una legislacion no
de proteccion sino de persecucion;considerando que las
leyes que tenenmos en cuanto a impuestos,
principalmente el impuesto que estamos considerando,
tiene su fuente en las legislaciones sobre impuestos
vigentes en Estados Unidos: no creo yo que haya alguna
legislacion en Estados Unidos que grave impuestos sobre
matriculas, si estas representan una cantidad mayor que
los gastos de la institucion.
P. Usted ha mencionado de que estos impuestos de
"income tax" sobre matricula vendria a constituir una
persecucion contra los colegios, no es verdad que si se
hiciera otra cosa vendria a favore certales instituciones,
teniendo en cuenta el ingreso neto que deberia estar
sujeto a "income tax" de acuerdo con la provision de la
Constitucionde que todo impuesto debe ser uniforme?
En realidad bajola Constitucion las propiedades de estas
instituciones estan yaexentas del pago de impuesto?
R. Siento tener que disentir. Creo que uno de los fines
del Esetado es propulsar la cultura. El Gobierno no tiene
derecho a colocar un centro docente bajo el mismo nivel
que una empresa absolutamente utilitaria. La obligacion
del esetado de propulsar la cultura, la propagacion del a
ciencia y arte le obliga a colocar los centros docentes
privados bajo un plano mas elevado. Esta obligaciondel
Gobierno en Filipinas es tanto mas imperativo si se
considera que sin estas instituciones privadas el 90% de
los filipinosno podrian tener ninguna cultura academica:
asi es que nosotrosjamas hemos tenido la intencion de
discutir se el total de los ingresos provenientes de
matriculas representan una cantidad mayoro menor que
los gastos necesarios de un colegio.

P. No es verdad que cuando el comite estaba

delibernando la frase en cuestion el comite habia que
algunas instituciones privadastenian ganancias enormes
que despues se habian dedicado a comprar mas equipos
y a la construccion de nuevos edificios asi es que el
comite considero propio imponer impuestos sobre sus
ingresos?

R. Antes de la aprobacion de bill en cuestion, llamo la

atenciondel Congreso de Filipinas de que instituciones
privadas organizadas como "stock corporations" rendian
ganacias, y que estas gananciasiban en beneficio de los
socios o accionistas: de ahi la enmienda consistente en
suprimir las palabras "is distributed" y sustituirlas con las
palabras `inures to the benefit of any stockholders' o
individuos. No hay nada escandaloso si la Universidad de
Santo Tomas por tener muchos alumnos, y por obtener
grandes ingresos procedentes de matriculas levantara
otros colegios, como el colegio deingenieria; que mal
habria si una institucion puramente cultural y educativa
se ensanchara y pudiera prestar un servicio mayor al
pais?

No veo nada malo que un centro docente privado

dedicado a fines puramente educacionales y cientificos y
no en beneficio de cualquier individuo particular,
construyera mas edificios para poder cumplir mejor los
fines por los cuales la institucion se ha establecido.

P. No es verdad que el intento de la ley era imponer

impuestos sobre aquellas instituciones que tienen
grandes granancias o ingresos,y que por eso se
enmendo la ley añadiendose: regardless of the
disposition made by said institution?

R. El caso es distinto, porque antiguanmente estaban

exentosde impuestos no solamente los ingresos de los
centros docentes relacionados estrictamente con la
enseñanza, sino tambien se eximianlos ingresos de esas
instituciones que provienen de actos completamente
mercantiles o economicos. (Pages 7-11, idem.)

It is clear from the foregoing not only that Congress had

no intention of taxing matriculation, laboratory, library,
athletic and graduation fees and other fees of similar
nature, essential to, or necessarily connected with, the
educational purposes of an institution of learning, but,
also, that the legislative department positively intended
such fees to be exempt from taxation. Hence, viewed
from any angle, the contention of appellant herein
cannot be sustained.

Wherefore, the decision appealed from is hereby

affirmed, without special pronouncement as to costs.
G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and
YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
PHILIPPINES, INC., respondents.
PANGANIBAN, J.:
Is the income derived from rentals of real property
owned by the Young Men's Christian Association of the
Philippines, Inc. (YMCA) — established as "a welfare,
educational and charitable non-profit corporation" —
subject to income tax under the National Internal
Revenue Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition
for review on certiorari challenging two Resolutions
issued by the Court of Appeals1 on September 28,
19952 and February 29, 19963 in CA-GR SP No. 32007.
Both Resolutions affirmed the Decision of the Court of
Tax Appeals (CTA) allowing the YMCA to claim tax
exemption on the latter's income from the lease of its
real property.
The Facts
The facts are undisputed.4 Private Respondent YMCA is a
non-stock, non-profit institution, which conducts various
programs and activities that are beneficial to the public,
especially the young people, pursuant to its religious,
educational and charitable objectives.
In 1980, private respondent earned, among others, an
income of P676,829.80 from leasing out a portion of its
premises to small shop owners, like restaurants and
canteen operators, and P44,259.00 from parking fees
collected from non-members. On July 2, 1984, the
commissioner of internal revenue (CIR) issued an
assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for
deficiency income tax, deficiency expanded withholding
taxes on rentals and professional fees and deficiency
withholding tax on wages. Private respondent formally
protested the assessment and, as a supplement to its
basic protest, filed a letter dated October 8, 1985. In
reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a
petition for review at the Court of Tax Appeals (CTA) on
March 14, 1989. In due course, the CTA issued this
ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to
small shop owners, to restaurant and canteen operators
and the operation of the parking lot are reasonably
incidental to and reasonably necessary for the
accomplishment of the objectives of the [private
respondents]. It appears from the testimonies of the
witnesses for the [private respondent] particularly Mr.
James C. Delote, former accountant of YMCA, that these
facilities were leased to members and that they have to
service the needs of its members and their guests. The
rentals were minimal as for example, the barbershop
was only charged P300 per month. He also testified that
there was actually no lot devoted for parking space but
the parking was done at the sides of the building. The
parking was primarily for members with stickers on the
windshields of their cars and they charged P.50 for non-
members. The rentals and parking fees were just
enough to cover the costs of operation and maintenance
only. The earning[s] from these rentals and parking
charges including those from lodging and other charges
for the use of the recreational facilities constitute [the]
bulk of its income which [is] channeled to support its
many activities and attainment of its objectives. As
pointed out earlier, the membership dues are very
insufficient to support its program. We find it reasonably
necessary therefore for [private respondent] to make
[the] most out [of] its existing facilities to earn some
income. It would have been different if under the
circumstances, [private respondent] will purchase a lot
and convert it to a parking lot to cater to the needs of
the general public for a fee, or construct a building and
lease it out to the highest bidder or at the market rate
for commercial purposes, or should it invest its funds in
the buy and sell of properties, real or personal. Under
these circumstances, we could conclude that the
activities are already profit oriented, not incidental and
reasonably necessary to the pursuit of the objectives of
the association and therefore, will fall under the last
paragraph of Section 27 of the Tax Code and any
income derived therefrom shall be taxable.
Considering our findings that [private respondent] was
not engaged in the business of operating or contracting
[a] parking lot, we find no legal basis also for the
imposition of [a] deficiency fixed tax and [a] contractor's
tax in the amount[s] of P353.15 and P3,129.73,
respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following
assessments are hereby dismissed for lack of merit:
1980 Deficiency Fixed Tax — P353,15;
1980 Deficiency Contractor's Tax — P3,129.23;
1980 Deficiency Income Tax — P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax
P1,798.93;
1980 Deficiency Withholding Tax on Wages
P33,058.82
plus 10% surcharge and 20% interest per annum from
July 2, 1984 until fully paid but not to exceed three (3)
years pursuant to Section 51(e)(2) & (3) of the National
Internal Revenue Code effective as of 1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the
case to the Court of Appeals (CA). In its Decision of
February 16, 1994, the CA6 initially decided in favor of
the CIR and disposed of the appeal in the following
manner:
Following the ruling in the afore-cited cases of Province
of Abra vs. Hernando and Abra Valley College Inc. vs.
Aquino, the ruling of the respondent Court of Tax
Appeals that "the leasing of petitioner's (herein
respondent's) facilities to small shop owners, to
restaurant and canteen operators and the operation of
the parking lot are reasonably incidental to and
reasonably necessary for the accomplishment of the
objectives of the petitioners, and the income derived
therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby
REVERSED in so far as it dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect. 7
Aggrieved, the YMCA asked for reconsideration based on
the following grounds:
I Decision dated February 16, 1994; and
The findings of facts of the Public Respondent Court of
Tax Appeals being supported by substantial evidence
[are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent
exempting [p]rivate [r]espondent from the income on
rentals of small shops and parking fees [are] in accord
with the applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by
the YMCA, the CA reversed itself and promulgated on
— September 28, 1995 its first assailed Resolution which,
in part, reads:
— The Court cannot depart from the CTA's findings of fact,
as they are supported by evidence beyond what is
considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA
did not err in saying that the rental from small shops
and parking fees do not result in the loss of the
exemption. Not even the petitioner would hazard the
suggestion that YMCA is designed for profit.
Consequently, the little income from small shops and
parking fees help[s] to keep its head above the water,
so to speak, and allow it to continue with its laudable
work.
The Court, therefore, finds the second ground of the
motion to be meritorious and in accord with law and
jurisprudence.
WHEREFORE, the motion for reconsideration is
GRANTED; the respondent CTA's decision is
AFFIRMED in toto.9
The internal revenue commissioner's own Motion for
Reconsideration was denied by Respondent Court in its
second assailed Resolution of February 29, 1996. Hence,
this petition for review under Rule 45 of the Rules of
Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the
following errors:
I
In holding that it had departed from the findings of fact
of Respondent Court of Tax Appeals when it rendered its
II
In affirming the conclusion of Respondent Court of Tax
Appeals that the income of private respondent from
rentals of small shops and parking fees [is] exempt from
taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994
CA Decision reversed the factual findings of the CTA. On
the other hand, petitioner argues that the CA merely
reversed the "ruling of the CTA that the leasing of
private respondent's facilities to small shop owners, to
restaurant and canteen operators and the operation of
parking lots are reasonably incidental to and reasonably
necessary for the accomplishment of the objectives of
the private respondent and that the income derived
therefrom are tax exempt." 12 Petitioner insists that what
the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA. 13 The
commissioner has a point.
Indeed, it is a basic rule in taxation that the factual
findings of the CTA, when supported by substantial
evidence, will be disturbed on appeal unless it is shown
that the said court committed gross error in the
appreciation of facts. 14 In the present case, this Court
finds that the February 16, 1994 Decision of the CA did
not deviate from this rule. The latter merely applied the
law to the facts as found by the CTA and ruled on the
issue raised by the CIR: "Whether or not the collection
or earnings of rental income from the lease of certain
premises and income earned from parking fees shall fall
under the last paragraph of Section 27 of the National
Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It
merely resolved the aforementioned issue, as indeed it
was expected to. That it did so in a manner different
from that of the CTA did not necessarily imply a reversal
of factual findings.
The distinction between a question of law and a
question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the
doubt or difference arises as to what the law is on a
certain state of facts; there is a question of fact when
the doubt or difference arises as to the truth or
falsehood of alleged facts." 16 In the present case, the
CA did not doubt, much less change, the facts narrated
by the CTA. It merely applied the law to the facts. That
its interpretation or conclusion is different from that of
the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income
of the YMCA from its real estate subject to tax? At the
outset, we set forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations. — The
following organizations shall not be taxed under this
Title in respect to income received by them as such —
xxx xxx xxx
(g) Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
(h) Club organized and operated exclusively for
pleasure, recreation, and other non-profitable purposes,
no part of the net income of which inures to the benefit
of any private stockholder or member;
xxx xxx xxx
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 the
tax imposed under this Code. (as amended by Pres.
Decree No. 1457)
Petitioner argues that while the income received by the
organizations enumerated in Section 27 (now Section
26) of the NIRC is, as a rule, exempted from the
payment of tax "in respect to income received by them
as such," the exemption does not apply to income
derived ". . . 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
. . . ."
Petitioner adds that "rental income derived by a tax-
exempt organization from the lease of its properties, real
or personal, [is] not, therefore, exempt from income
taxation, even if such income [is] exclusively used for
the accomplishment of its objectives." 17 We agree with
the commissioner.
Because taxes are the lifeblood of the nation, the Court
has always applied the doctrine of strict in interpretation
in construing tax exemptions. 18 Furthermore, a claim of
statutory exemption from taxation should be manifest.
and unmistakable from the language of the law on which
it is based. Thus, the claimed exemption "must expressly
be granted in a statute stated in a language too clear to
be mistaken." 19
In the instant case, the exemption claimed by the YMCA
is expressly disallowed by the very wording of the last
paragraph of then Section 27 of the NIRC which
mandates that the income of exempt organizations
(such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same
Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income of the
YMCA from its real property, 20 the Court is duty-bound
to abide strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is
clear and unambiguous, its express terms must be
applied. 21 Parenthetically, a consideration of the
question of construction must not even begin,
particularly when such question is on whether to apply a
strict construction or a liberal one on statutes that grant
tax exemptions to "religious, charitable and educational
propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues,
should be "subject to the qualification that the income
from the properties must arise from activities 'conducted
for profit' before it may be considered taxable." 23 This
argument is erroneous. As previously stated, a reading
of said paragraph ineludibly shows that the income from
any property of exempt organizations, as well as that
arising from any activity it conducts for profit, is taxable.
The phrase "any of their activities conducted for profit"
does not qualify the word "properties." This makes from
the property of the organization taxable, regardless of
how that income is used — whether for profit or for lofty
non-profit purposes.
Verba legis non est recedendum. Hence, Respondent
Court of Appeals committed reversible error when it
allowed, on reconsideration, the tax exemption claimed
by YMCA on income it derived from renting out its real
property, on the solitary but unconvincing ground that
the said income is not collected for profit but is merely
incidental to its operation. The law does not make a
distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or
disposed of. Where the law does not distinguish, neither
should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental
law, private respondent submits that Article VI, Section
28 of par. 3 of the 1987 Constitution, 24 exempts
"charitable institutions" from the payment not only of
property taxes but also of income tax from any
source. 25 In support of its novel theory, it compares the
use of the words "charitable institutions," "actually" and
"directly" in the 1973 and the 1987 Constitutions, on the
one hand; and in Article VI, Section 22, par. 3 of the
1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the
present provision is divisible into two categories: (1)
"[c]haritable institutions, churches and parsonages or
convents appurtenant thereto, mosques and non-profit
cemeteries," the incomes of which are, from whatever
source, all tax-exempt; 27 and (2) "[a]ll lands, buildings
and improvements actually and directly used for
religious, charitable or educational purposes," which are
exempt only from property taxes. 28 Second, Lladoc v.
Commissioner of Internal Revenue, 29 which limited the
exemption only to the payment of property taxes,
referred to the provision of the 1935 Constitution and
not to its counterparts in the 1973 and the 1987
Constitutions. 30 Third, the phrase "actually, directly and
exclusively used for religious, charitable or educational
purposes" refers not only to "all lands, buildings and
improvements," but also to the above-quoted first
category which includes charitable institutions like the
private respondent. 31
The Court is not persuaded. The debates, interpellations
and expressions of opinion of the framers of the
Constitution reveal their intent which, in turn, may have
guided the people in ratifying the Charter. 32 Such intent
must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former
constitutional commissioner, who is now a member of
this Court, stressed during the Concom debates that ". .
. 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." 33 Father Joaquin G. Bernas, an eminent
authority on the Constitution and also a member of the
Concom, adhered to the same view that the exemption
created by said provision pertained only to property
taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug
concurs, stating that "[t]he tax exemption
covers property taxes only." 35 Indeed, the income tax
exemption claimed by private respondent finds no basis
in Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4,
par. 3 of the Character, 36 claiming that the YMCA "is a
non-stock, non-profit educational institution whose
revenues and assets are used actually, directly and
exclusively for educational purposes so it is exempt from
taxes on its properties and income." 37 We reiterate that
private respondent is exempt from the payment of
property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-
stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are
construed strictissimi juris. Hence, for the YMCA to be
granted the exemption it claims under the aforecited
provision, it must prove with substantial evidence 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. However, the Court
notes that not a scintilla of evidence was submitted by
private respondent to prove that it met the said
requisites.
Is the YMCA an educational institution within the
purview of Article XIV, Section 4, par. 3 of the
Constitution? We rule that it is not. The term
"educational institution" or "institution of learning" has
acquired a well-known technical meaning, of which the
members of the Constitutional Commission are deemed
cognizant. 38 Under the Education Act of 1982, such
term refers to schools. 39 The school system is
synonymous with formal education, 40 which "refers to
the hierarchically structured and chronologically graded
learnings organized and provided by the formal school
system and for which certification is required in order for
the learner to progress through the grades or move to
the higher levels." 41 The Court has examined the
"Amended Articles of Incorporation" and "By-Laws"43 of
the YMCA, but found nothing in them that even hints
that it is a school or an educational institution. 44
Furthermore, under the Education Act of 1982, even
non-formal education is understood to be school-based
and "private auspices such as foundations and civic-
spirited organizations" are ruled out. 45 It is settled that
the term "educational institution," when used in laws
granting tax exemptions, refers to a ". . . school
seminary, college or educational establishment . . .
." 46 Therefore, the private respondent cannot be
deemed one of the educational institutions covered by
the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken in
their ordinary acceptation. While in its broadest and best
sense education embraces all forms and phases of
instruction, improvement and development of mind and
body, and as well of religious and moral sentiments, yet
in the common understanding and application it means a
place where systematic instruction in any or all of the
useful branches of learning is given by methods common
to schools and institutions of learning. That we conceive
to be the true intent and scope of the term [educational
institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent
YMCA is an educational institution, the Court also notes
that the former did not submit proof of the
proportionate amount of the subject income that was
actually, directly and exclusively used for educational
purposes. Article XIII, Section 5 of the YMCA by-laws,
which formed part of the evidence submitted, is patently
insufficient, since the same merely signified that "[t]he
net income derived from the rentals of the commercial
buildings shall be apportioned to the Federation and
Member Associations as the National Board may
decide." 48 In sum, we find no basis for granting the
YMCA exemption from income tax under the
constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not
support its cause. YMCA of Manila v. Collector of Internal
Revenue 50 and Abra Valley College, Inc. v. Aquino 51 are
not applicable, because the controversy in both cases
involved exemption from the payment of property tax,
not income tax. Hospital de San Juan de Dios, Inc. v.
Pasay City 52 is not in point either, because it involves a
claim for exemption from the payment of regulatory
fees, specifically electrical inspection fees, imposed by
an ordinance of Pasay City — an issue not at all related
to that involved in a claimed exemption from the
payment of income taxes imposed on property leases.
In Jesus Sacred Heart College v. Com. of Internal
Revenue, 53 the party therein, which claimed an
exemption from the payment of income tax, was an
educational institution which submitted substantial
evidence that the income subject of the controversy had
been devoted or used solely for educational purposes.
On the other hand, the private respondent in the
present case has not given any proof that it is an
educational institution, or that part of its rent income is
actually, directly and exclusively used for educational
purposes.
Epilogue
In deliberating on this petition, the Court expresses its
sympathy with private respondent. It appreciates the
nobility of its cause. However, the Court's power and
function are limited merely to applying the law fairly and
objectively. It cannot change the law or bend it to suit
its sympathies and appreciations. Otherwise, it would be
overspilling its role and invading the realm of legislation.
We concede that private respondent deserves the help
and the encouragement of the government. It needs
laws that can facilitate, and not frustrate, its
humanitarian tasks. But the Court regrets that, given its
limited constitutional authority, it cannot rule on the
wisdom or propriety of legislation. That prerogative
belongs to the political departments of government.
Indeed, some of the members of the Court may even
believe in the wisdom and prudence of granting more
tax exemptions to private respondent. But such belief,
however well-meaning and sincere, cannot bestow upon
the Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions
of the Court of Appeals dated September 28, 1995 and
February 29, 1996 are hereby REVERSED and SET
ASIDE. The Decision of the Court of Appeals dated
February 16, 1995 is REINSTATED, insofar as it ruled
that the income derived by petitioner from rentals of its
real property is subject to income tax. No
pronouncement as to costs.

SO ORDERED.
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX
APPEALS and ATENEO DE MANILA
UNIVERSITY, respondents.
PANGANIBAN, J.:
In conducting researches and studies of social
organizations and cultural values thru its Institute of
Philippine Culture, is the Ateneo de Manila University
performing the work of an independent contractor and
thus taxable within the purview of then Section 205 of
the National Internal Revenue Code levying a three
percent contractor's tax? This question is answer by the
Court in the negative as it resolves this petition assailing
the Decision 1 of the Respondent Court of Appeals 2 in
CA-G.R. SP No. 31790 promulgated on April 27, 1994
affirming that of the Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are
reproduced hereinbelow, the same being largely
undisputed by the parties.
Private respondent is a non-stock, non-profit educational
institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of
Philippine Culture (IPC), which has no legal personality
separate and distinct from that of private respondent.
The IPC is a Philippine unit engaged in social science
studies of Philippine society and culture. Occasionally, it
accepts sponsorships for its research activities from
international organizations, private foundations and
government agencies.
On July 8, 1983, private respondent received from
petitioner Commissioner of Internal Revenue a demand
letter dated June 3, 1983, assessing private respondent
the sum of P174,043.97 for alleged deficiency
contractor's tax, and an assessment dated June 27,
1983 in the sum of P1,141,837 for alleged deficiency
income tax, both for the fiscal year ended March 31,
1978. Denying said tax liabilities, private respondent
sent petitioner a letter-protest and subsequently filed
with the latter a memorandum contesting the validity of
the assessments.
On March 17, 1988, petitioner rendered a letter-decision
canceling the assessment for deficiency income tax but
modifying the assessment for deficiency contractor's tax
by increasing the amount due to P193,475.55.
Unsatisfied, private respondent requested for a
reconsideration or reinvestigation of the modified
assessment. At the same time, it filed in the respondent
court a petition for review of the said letter-decision of
the petitioner. While the petition was pending before the
respondent court, petitioner issued a final decision dated
August 3, 1988 reducing the assessment for deficiency
contractor's tax from P193,475.55 to P46,516.41,
exclusive of surcharge and interest.
On July 12, 1993, the respondent court rendered the
questioned decision which dispositively reads:
WHEREFORE, in view of the foregoing, respondent's
decision is SET ASIDE. The deficiency contractor's tax
assessment in the amount of P46,516.41 exclusive of
surcharge and interest for the fiscal year ended March
31, 1978 is hereby CANCELED. No pronouncement as to
cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to
this Court via the present petition for review raising the
following issues:
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS
UNDER THE PURVIEW OF INDEPENDENT CONTRACTOR
PURSUANT TO SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS
SUBJECT TO 3% CONTRACTOR'S TAX UNDER SECTION
205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National
Internal Revenue Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of
dockyards, and others. — A contractor's tax of three per
centum of the gross receipts is hereby imposed on the
following:
xxx xxx xxx
(16) Business agents and other independent contractors
except persons, associations and corporations under
contract for embroidery and apparel for export, as well
as their agents and contractors and except gross
receipts of or from a pioneer industry registered with the
Board of Investments under Republic Act No. 5186:
xxx xxx xxx
The term "independent contractors" include persons
(juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax under
Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for
a fee regardless of whether or not the performance of
the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in
holding that private respondent is not an "independent
contractor" within the purview of Section 205 of the Tax
Code. To petitioner, the term "independent contractor",
as defined by the Code, encompasses all kinds of
services rendered for a fee and that the only exceptions
are the following:
a. Persons, association and corporations under contract
for embroidery and apparel for export and gross receipts
of or from pioneer industry registered with the Board of
Investment under R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the
Local Tax Code (under the old Section 182 [b] of the
Tax Code); and
c. Regional or area headquarters established in the
Philippines by multinational corporations, including their
alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communication and coordinating centers for
their affiliates, subsidiaries or branches in the Asia
Pacific Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent
falls under the definition of an "independent contractor"
and is not among the aforementioned exceptions,
private respondent is therefore subject to the 3%
contractor's tax imposed under the same Code. 4
The Court of Appeals disagreed with the Petitioner
Commissioner of Internal Revenue and affirmed the
assailed decision of the Court of Tax Appeals. Unfazed,
petitioner now asks us to reverse the CA through this
petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the
purview of independent contractor pursuant to Section
205 of the Tax Code.
2) Whether or not private respondent is subject to 3%
contractor's tax under Section 205 of the Tax Code. 5
In fine, these may be reduced to a single issue: Is
Ateneo de Manila University, through its auxiliary unit or
branch — the Institute of Philippine Culture —
performing the work of an independent contractor and,
thus, subject to the three percent contractor's tax levied
by then Section 205 of the National Internal Revenue
Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal
Revenue Code germane to the case before us read:
Sec. 205. Contractors, proprietors or operators of
dockyards, and others. — A contractor's tax of three per
centum of the gross receipts is hereby imposed on the
following:
xxx xxx xxx
(16) Business agents and other independent contractors,
except persons, associations and corporations under
contract for embroidery and apparel for export, as well
as their agents and contractors, and except gross
receipts of or from a pioneer industry registered with the
Board of Investments under the provisions of Republic
Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons
(juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax under
Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for
a fee regardless of whether or not the performance of
the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.
The term "independent contractor" shall not include
regional or area headquarters established in the
Philippines by multinational corporations, including their
alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communications and coordinating centers
for their affiliates, subsidiaries or branches in the Asia-
Pacific Region.
The term "gross receipts" means all amounts received
by the prime or principal contractor as the total contract
price, undiminished by amount paid to the
subcontractor, shall be excluded from the taxable gross
receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends
that Private Respondent Ateneo de Manila University
"falls within the definition" of an independent contractor
and "is not one of those mentioned as excepted"; hence,
it is properly a subject of the three percent contractor's
tax levied by the foregoing provision of law. 6 Petitioner
states that the "term 'independent contractor' is not
specifically defined so as to delimit the scope thereof, so
much so that any person who . . . renders physical and
mental service for a fee, is now indubitably considered
an independent contractor liable to 3% contractor's
tax." 7 According to petitioner, Ateneo has the burden of
proof to show its exemption from the coverage of the
law.
We disagree. Petitioner Commissioner of Internal
Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine
of strict interpretation in the imposition of taxes. It is
obviously both illogical and impractical to determine who
are exempted without first determining who are covered
by the aforesaid provision. The Commissioner should
have determined first if private respondent was covered
by Section 205, applying the rule of strict interpretation
of laws imposing taxes and other burdens on the
populace, before asking Ateneo to prove its exemption
therefrom. The Court takes this occasion to reiterate the
hornbook doctrine in the interpretation of tax laws that
"(a) statute will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously .
. . (A) tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by
implication." 8 Parenthetically, in answering the question
of who is subject to tax statutes, it is basic that "in case
of doubt, such statutes are to be construed most
strongly against the government and in favor of the
subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what
statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National
Internal Revenue Code requires that the independent
contractor be engaged in the business of selling its
services. Hence, to impose the three percent
contractor's tax on Ateneo's Institute of Philippine
Culture, it should be sufficiently proven that the private
respondent is indeed selling its services for a fee in
pursuit of an independent business. And it is only after
private respondent has been found clearly to be subject
to the provisions of Sec. 205 that the question of
exemption therefrom would arise. Only after such
coverage is shown does the rule of construction — that
tax exemptions are to be strictly construed against the
taxpayer — come into play, contrary to petitioner's
position. This is the main line of reasoning of the Court
of Tax Appeals in its decision, 10
which was affirmed by
the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine
Culture
After reviewing the records of this case, we find no
evidence that Ateneo's Institute of Philippine Culture
ever sold its services for a fee to anyone or was ever
engaged in a business apart from and independently of
the academic purposes of the university.
Stressing that "it is not the Ateneo de Manila
University per se which is being taxed," Petitioner
Commissioner of Internal Revenue contends that "the
tax is due on its activity of conducting researches for a
fee. The tax is due on the gross receipts made in favor
of IPC pursuant to the contracts the latter entered to
conduct researches for the benefit primarily of its clients.
The tax is imposed on the exercise of a taxable activity.
. . . [T]he sale of services of private respondent is made
under a contract and the various contracts entered into
between private respondent and its clients are almost of
the same terms, showing, among others, the
compensation and terms of payment." 11 (Emphasis
supplied.)
In theory, the Commissioner of Internal Revenue may
be correct. However, the records do not show that
Ateneo's IPC in fact contracted to sell its research
services for a fee. Clearly then, as found by the Court of
Appeals and the Court of Tax Appeals, petitioner's
theory is inapplicable to the established factual milieu
obtaining in the instant case.
In the first place, the petitioner has presented no
evidence to prove its bare contention that, indeed,
contracts for sale of services were ever entered into by
the private respondent. As appropriately pointed out by
the latter:
An examination of the Commissioner's Written Formal
Offer of Evidence in the Court of Tax Appeals shows that
only the following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner's Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner Bienvenido A.
Tan Jr.
None of the foregoing evidence even comes close to
purport to be contracts between private respondent and
third parties. 12
Moreover, the Court of Tax Appeals accurately and
correctly declared that the " funds received by the
Ateneo de Manila University are technically not a fee .
They may however fall as gifts or donations which are
tax-exempt" as shown by private respondent's
compliance with the requirement of Section 123 of the
National Internal Revenue Code providing for the
exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of
the Court of Tax Appeals:
To our mind, private respondent hardly fits into the
definition of an "independent contractor".
For one, the established facts show that IPC, as a unit of
the private respondent, is not engaged in business.
Undisputedly, private respondent is mandated by law to
undertake research activities to maintain its university
status. In fact, the research activities being carried out
by the IPC is focused not on business or profit but on
social sciences studies of Philippine society and
culture. Since it can only finance a limited number of
IPC's research projects, private respondent occasionally
accepts sponsorship for unfunded IPC research projects
from international organizations, private foundations and
governmental agencies. However, such sponsorships are
subject to private respondent's terms and conditions,
among which are, that the research is confined to topics
consistent with the private respondent's academic
agenda; that no proprietary or commercial purpose
research is done; and that private respondent retains
not only the absolute right to publish but also the
ownership of the results of the research conducted by
the IPC. Quite clearly, the aforementioned terms and
conditions belie the allegation that private respondent is
a contractor or is engaged in business.
For another, it bears stressing that private respondent is
a non-stock, non-profit educational corporation. The fact
that it accepted sponsorship for IPC's unfunded projects
is merely incidental. For, the main function of the IPC is
to undertake research projects under the academic
agenda of the private respondent. Moreover the records
do not show that in accepting sponsorship of research
work, IPC realized profits from such work. On the
contrary, the evidence shows that for about 30 years,
IPC had continuously operated at a loss, which means
that sponsored funds are less than actual expenses for
its research projects. That IPC has been operating at a
loss loudly bespeaks of the fact that education and not
profit is the motive for undertaking the research
projects.
Then, too, granting arguendo that IPC made profits from
the sponsored research projects, the fact still remains
that there is no proof that part of such earnings or
profits was ever distributed as dividends to any
stockholder, as in fact none was so distributed because
they accrued to the benefit of the private respondent
which is a non-profit educational institution. 14
Therefore, it is clear that the funds received by Ateneo's
Institute of Philippine Culture are not given in the
concept of a fee or price in exchange for the
performance of a service or delivery of an object.
Rather, the amounts are in the nature of an endowment
or donation given by IPC's benefactors solely for the
purpose of sponsoring or funding the research with no
strings attached. As found by the two courts below, such
sponsorships are subject to IPC's terms and conditions.
No proprietary or commercial research is done, and IPC
retains the ownership of the results of the research,
including the absolute right to publish the same. The
copyrights over the results of the research are owned by
Ateneo and, consequently, no portion thereof may be
reproduced without its permission. 15 The amounts given
to IPC, therefore, may not be deemed, it bears stressing
as fees or gross receipts that can be subjected to the
three percent contractor's tax.
It is also well to stress that the questioned transactions
of Ateneo's Institute of Philippine Culture cannot be
deemed either as a contract of sale or a contract of a
piece of work. "By the contract of sale, one of the
contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the
other to pay therefor a price certain in money or its
equivalent." 16 By its very nature, a contract of sale
requires a transfer of ownership. Thus, Article 1458 of
the Civil Code "expressly makes the obligation to
transfer ownership as an essential element of the
contract of sale, following modern codes, such as the
German and the Swiss. Even in the absence of this
express requirement, however, most writers, including
Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and
Capitant, have considered such transfer of ownership as
the primary purpose of sale. Perez and Alguer follow the
same view, stating that the delivery of the thing does
not mean a mere physical transfer, but is a means of
transmitting ownership. Transfer of title or an
agreement to transfer it for a price paid or promised to
be paid is the essence of sale." 17 In the case of a
contract for a piece of work, "the contractor binds
himself to execute a piece of work for the employer, in
consideration of a certain price or compensation. . . . If
the contractor agrees to produce the work from
materials furnished by him, he shall deliver the thing
produced to the employer and transfer dominion over
the thing, . . ." 18 Ineludably, whether the contract be
one of sale or one for a piece of work, a transfer of
ownership is involved and a party necessarily walks
away with an object. 19 In the case at bench, it is clear
from the evidence on record that there was no sale
either of objects or services because, as adverted to
earlier, there was no transfer of ownership over the
research data obtained or the results of research
projects undertaken by the Institute of Philippine
Culture.
Furthermore, it is clear that the research activity of the
Institute of Philippine Culture is done in pursuance of
maintaining Ateneo's university status and not in the
course of an independent business of selling such
research with profit in mind. This is clear from a reading
of the regulations governing universities:
31. In addition to the legal requisites an institution must
meet, among others, the following requirements before
an application for university status shall be considered :
xxx xxx xxx
(e) The institution must undertake research and operate
with a competent qualified staff at least three graduate
departments in accordance with the rules and standards
for graduate education. One of the departments shall be
science and technology. The competence of the staff
shall be judged by their effective teaching, scholarly
publications and research activities published in its
school journal as well as their leadership activities in the
profession.
(f) The institution must show evidence of adequate and
stable financial resources and support, a reasonable
portion of which should be devoted to institutional
development and research. (emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due notice
and hearing, for failure to maintain satisfactorily the
standards and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine
Culture that is being taxed and not the Ateneo is
patently erroneous because the former is not an
independent juridical entity that is separate and distinct
form the latter.
Factual Findings and Conclusions of the Court of Tax
Appeals Affirmed by the Court of Appeals Generally
Conclusive
In addition, we reiterate that the "Court of Tax Appeals
is a highly specialized body specifically created for the
purpose of reviewing tax cases. Through its expertise, it
is undeniably competent to determine the issue of
whether" 21 Ateneo de Manila University may be deemed
a subject of the three percent contractor's tax "through
the evidence presented before it." Consequently, "as a
matter of principle, this Court will not set aside the
conclusion reached by . . . the Court of Tax Appeals
which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on
the subject unless there has been an abuse or
improvident exercise of authority . . ." 22 This point
becomes more evident in the case before us where the
findings and conclusions of both the Court of Tax
Appeals and the Court of Appeals appear untainted by
any abuse of authority, much less grave abuse of
discretion. Thus, we find the decision of the latter
affirming that of the former free from any palpable
error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture
conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and
disbursements for the period 1972 to 1985. 23 In fact, it
was Ateneo de Manila University itself that had funded
the research projects of the institute, and it was only
when Ateneo could no longer produce the needed funds
that the institute sought funding from outside. The
testimony of Ateneo's Director for Accounting Services,
Ms. Leonor Wijangco, provides significant insight on the
academic and nonprofit nature of the institute's research
activities done in furtherance of the university's
purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero
(Office Manager of the Institute of Philippine Culture)
that as far as grants from sponsored research it is
possible that the grant sometimes is less than the actual
cost. Will you please tell us in this case when the actual
cost is a lot less than the grant who shoulders the
additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a
university, because a university has to have its own
research institute. 24
So, why is it that Ateneo continues to operate and
conduct researches through its Institute of Philippine
Culture when it undisputedly loses not an insignificant
amount in the process? The plain and simple answer is
that private respondent is not a contractor selling its
services for a fee but an academic institution conducting
these researches pursuant to its commitments to
education and, ultimately, to public service. For the
institute to have tenaciously continued operating for so
long despite its accumulation of significant losses, we
can only agree with both the Court of Tax Appeals and
the Court of Appeals that "education and not profit is
[IPC's] motive for undertaking the research
projects." 25

WHEREFORE, premises considered, the petition is

DENIED and the assailed Decision of the Court of
Appeals is hereby AFFIRMED in full.

SO ORDERED.
G.R. No. L-66838 December 2, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.PROCTER & GAMBLE PHILIPPINE MANUFACTURING
CORPORATION and THE COURT OF TAX APPEALS,
respondents
FELICIANO, J.:
(P&G-USA) may be subject to the preferential tax rate of
15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion
for Re-consideration and we will deal with them seriatim
in this Resolution resolving that Motion.

For the taxable year 1974 ending on 30 June 1974, and

the taxable year 1975 ending 30 June 1975, private
respondent Procter and Gamble Philippine Manufacturing
Corporation ("P&G-Phil.") declared dividends payable to
its parent company and sole stockholder, Procter and
Gamble Co., Inc. (USA) ("P&G-USA"), amounting to
P24,164,946.30, from which dividends the amount of
P8,457,731.21 representing the thirty-five percent
(35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed
with petitioner Commissioner of Internal Revenue a
claim for refund or tax credit in the amount of
P4,832,989.26 claiming, among other things, that
pursuant to Section 24 (b) (1) of the National Internal
Revenue Code ("NITC"), 1 as amended by Presidential
Decree No. 369, the applicable rate of withholding tax
on the dividends remitted was only fifteen percent
(15%) (and not thirty-five percent [35%]) of the
dividends.
There being no responsive action on the part of the
Commissioner, P&G-Phil., on 13 July 1977, filed a
petition for review with public respondent Court of Tax
Appeals ("CTA") docketed as CTA Case No. 2883. On 31
January 1984, the CTA rendered a decision ordering
petitioner Commissioner to refund or grant the tax credit
in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its
Second Division reversed the decision of the CTA and
held that:
(a) P&G-USA, and not private respondent P&G-Phil., was
the proper party to claim the refund or tax credit here
involved;(b) there is nothing in Section 902 or other
provisions of the US Tax Code that allows a credit
against the US tax due from P&G-USA of taxes deemed
to have been paid in the Philippines equivalent to twenty
percent (20%) which represents the difference between
the regular tax of thirty-five percent (35%) on
corporations and the tax of fifteen percent (15%) on
dividends; and
(c) private respondent P&G-Phil. failed to meet certain
conditions necessary in order that "the dividends
received by its non-resident parent company in the US
I
1. There are certain preliminary aspects of the question
of the capacity of P&G-Phil. to bring the present claim
for refund or tax credit, which need to be examined.
This question was raised for the first time on appeal,
i.e., in the proceedings before this Court on the Petition
for Review filed by the Commissioner of Internal
Revenue. The question was not raised by the
Commissioner on the administrative level, and neither
was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR")
should not be allowed to defeat an otherwise valid claim
for refund by raising this question of alleged incapacity
for the first time on appeal before this Court. This is
clearly a matter of procedure. Petitioner does not
pretend that P&G-Phil., should it succeed in the claim for
refund, is likely to run away, as it were, with the refund
instead of transmitting such refund or tax credit to its
parent and sole stockholder. It is commonplace that in
the absence of explicit statutory provisions to the
contrary, the government must follow the same rules of
procedure which bind private parties. It is, for instance,
clear that the government is held to compliance with the
provisions of Circular No. 1-88 of this Court in exactly
the same way that private litigants are held to such
compliance, save only in respect of the matter of filing
fees from which the Republic of the Philippines is
exempt by the Rules of Court.
More importantly, there arises here a question of
fairness should the BIR, unlike any other litigant, be
allowed to raise for the first time on appeal questions
which had not been litigated either in the lower court or
on the administrative level. For, if petitioner had at the
earliest possible opportunity, i.e., at the administrative
level, demanded that P&G-Phil. produce an express
authorization from its parent corporation to bring the
claim for refund, then P&G-Phil. would have been able
forthwith to secure and produce such authorization
before filing the action in the instant case. The action
here was commenced just before expiration of the two
(2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the
claim for refund has substantive dimensions as well
which, as will be seen below, also ultimately relate to
fairness.
Under Section 306 of the NIRC, a claim for refund or tax
credit filed with the Commissioner of Internal Revenue is
essential for maintenance of a suit for recovery of taxes
allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally
collected. — No suit or proceeding shall be maintained in
any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner of
Internal Revenue; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum
has been paid under protest or duress. In any case, no
such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the
tax or penalty regardless of any supervening cause that
may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take
Compromises and to Refund Taxes.—The Commissioner
may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally
received, . . . No credit or refund of taxes or penalties
shall be allowed unless the taxpayer files in writing with
the Commissioner a claim for credit or refund within two
(2) years after the payment of the tax or penalty. (As
amended by P.D. No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the
question which arises is: is P&G-Phil. a "taxpayer" under
Section 309 (3) of the NIRC? The term "taxpayer" is
defined in our NIRC as referring to "any person subject
to tax imposed by the Title [on Tax on Income]." 2 It
thus becomes important to note that under Section 53
(c) of the NIRC, the withholding agent who is "required
to deduct and withhold any tax" is made " personally
liable for such tax" and indeed is indemnified against
any claims and demands which the stockholder might
wish to make in questioning the amount of payments
effected by the withholding agent in accordance with the
provisions of the NIRC. The withholding agent, P&G-
Phil., is directly and independently liable 3 for the
correct amount of the tax that should be withheld from
the dividend remittances. The withholding agent is,
moreover, subject to and liable for deficiency
assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less
than the amount that should have been withheld under
law.
A "person liable for tax" has been held to be a "person
subject to tax" and properly considered a "taxpayer." 4
The terms liable for tax" and "subject to tax" both
connote legal obligation or duty to pay a tax. It is very
difficult, indeed conceptually impossible, to consider a
person who is statutorily made "liable for tax" as not
"subject to tax." By any reasonable standard, such a
person should be regarded as a party in interest, or as a
person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from
him.
In Philippine Guaranty Company, Inc. v. Commissioner
of Internal Revenue, 5 this Court pointed out that a
withholding agent is in fact the agent both of the
government and of the taxpayer, and that the
withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the
withholding agent to attach. The reason is to compel the
withholding agent to withhold the tax under all
circumstances. In effect, the responsibility for the
collection of the tax as well as the payment thereof is
concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding
agent is constituted the agent of both the Government
and the taxpayer. With respect to the collection and/or
withholding of the tax, he is the Government's agent. In
regard to the filing of the necessary income tax return
and the payment of the tax to the Government, he is the
agent of the taxpayer. The withholding agent, therefore,
is no ordinary government agent especially because
under Section 53 (c) he is held personally liable for the
tax he is duty bound to withhold; whereas the
Commissioner and his deputies are not made liable by
law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding
agent is also an agent of the beneficial owner of the
dividends with respect to the filing of the necessary
income tax return and with respect to actual payment of
the tax to the government, such authority may
reasonably be held to include the authority to file a claim
for refund and to bring an action for recovery of such
claim. This implied authority is especially warranted
where, is in the instant case, the withholding agent is
the wholly owned subsidiary of the parent-stockholder
and therefore, at all times, under the effective control of
such parent-stockholder. In the circumstances of this
case, it seems particularly unreal to deny the implied
authority of P&G-Phil. to claim a refund and to
commence an action for such refund.
We believe that, even now, there is nothing to preclude
the BIR from requiring P&G-Phil. to show some written
or telexed confirmation by P&G-USA of the subsidiary's
authority to claim the refund or tax credit and to remit
the proceeds of the refund., or to apply the tax credit to
some Philippine tax obligation of, P&G-USA, before
actual payment of the refund or issuance of a tax credit
certificate. What appears to be vitiated by basic
unfairness is petitioner's position that, although P&G-
Phil. is directly and personally liable to the Government
for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a
refund simply because it did not demand a written
confirmation of P&G-Phil.'s implied authority from the
very beginning. A sovereign government should act
honorably and fairly at all times, even vis-a-vis
taxpayers.
We believe and so hold that, under the circumstances of
this case, P&G-Phil. is properly regarded as a "taxpayer"
within the meaning of Section 309, NIRC, and as
impliedly authorized to file the claim for refund and the
suit to recover such claim.
II
1. We turn to the principal substantive question before
us: the applicability to the dividend remittances by P&G-
Phil. to P&G-USA of the fifteen percent (15%) tax rate
provided for in the following portion of Section 24 (b)
(1) of the NIRC:
(b) Tax on foreign corporations.—
(1) Non-resident corporation. — A foreign corporation
not engaged in trade and business in the Philippines, . .
., shall pay a tax equal to 35% of the gross income
receipt during its taxable year from all sources within the
Philippines, as . . . dividends . . . Provided, still further,
that on dividends received from a domestic corporation
liable to tax under this Chapter, the tax shall be 15% of
the dividends, which shall be collected and paid as
provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident
foreign corporation, is domiciled shall allow a credit
against the tax due from the non-resident foreign
corporation, taxes deemed to have been paid in the
Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as
provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate
applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes
down to fifteen percent (15%) if the country of domicile
of the foreign stockholder corporation "shall allow" such
foreign corporation a tax credit for "taxes deemed paid
in the Philippines," applicable against the tax payable to
the domiciliary country by the foreign stockholder
corporation. In other words, in the instant case, the
reduced fifteen percent (15%) dividend tax rate is
applicable if the USA "shall allow" to P&G-USA a tax
credit for "taxes deemed paid in the Philippines"
applicable against the US taxes of P&G-USA. The NIRC
specifies that such tax credit for "taxes deemed paid in
the Philippines" must, as a minimum, reach an amount
equivalent to twenty (20) percentage points which
represents the difference between the regular thirty-five
percent (35%) dividend tax rate and the preferred
fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC,
does not require that the US must give a "deemed paid"
tax credit for the dividend tax (20 percentage points)
waived by the Philippines in making applicable the
preferred divided tax rate of fifteen percent (15%). In
other words, our NIRC does not require that the US tax
law deem the parent-corporation to have paid the
twenty (20) percentage points of dividend tax waived by
the Philippines. The NIRC only requires that the US
"shall allow" P&G-USA a "deemed paid" tax credit in an
amount equivalent to the twenty (20) percentage points
waived by the Philippines.
2. The question arises: Did the US law comply with the
above requirement? The relevant provisions of the US
Intemal Revenue Code ("Tax Code") are the following:
Sec. 901 — Taxes of foreign countries and possessions
of United States.
(a) Allowance of credit. — If the taxpayer chooses to
have the benefits of this subpart, the tax imposed by
this chapter shall, subject to the applicable limitation of
section 904, be credited with the amounts provided in
the applicable paragraph of subsection (b) plus, in the
case of a corporation, the taxes deemed to have been
paid under sections 902 and 960. Such choice for any
taxable year may be made or changed at any time
before the expiration of the period prescribed for making
a claim for credit or refund of the tax imposed by this
chapter for such taxable year. The credit shall not be
allowed against the tax imposed by section 531 (relating
to the tax on accumulated earnings), against the
additional tax imposed for the taxable year under
section 1333 (relating to war loss recoveries) or under
section 1351 (relating to recoveries of foreign
expropriation losses), or against the personal holding
company tax imposed by section 541.
(b) Amount allowed. — Subject to the applicable
limitation of section 904, the following amounts shall be
allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. — In the case of
a citizen of the United States and of a domestic
corporation, the amount of any income, war profits, and
excess profits taxes paid or accrued during the taxable
year to any foreign country or to any possession of the
United States; and
xxx xxx xxx
Sec. 902. — Credit for corporate stockholders in foreign
corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. —
For purposes of this subject, a domestic corporation
which owns at least 10 percent of the voting stock of a
foreign corporation from which it receives dividends in
any taxable year shall —
xxx xxx xxx
(2) to the extent such dividends are paid by such foreign
corporation out of accumulated profits [as defined in
subsection (c) (1) (b)] of a year for which such foreign
corporation is a less developed country corporation, be
deemed to have paid the same proportion of any
income, war profits, or excess profits taxes paid or
deemed to be paid by such foreign corporation to any
foreign country or to any possession of the United States
on or with respect to such accumulated profits, which
the amount of such dividends bears to the amount of
such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. — For purposes of this
section, the term "accumulated profits" means with
respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the
amount of its gains, profits, or income computed without
reduction by the amount of the income, war profits, and
excess profits taxes imposed on or with respect to such
profits or income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the
amount of its gains, profits, or income in excess of the
income, war profits, and excess profits taxes imposed on
or with respect to such profits or income.
The Secretary or his delegate shall have full power to
determine from the accumulated profits of what year or
years such dividends were paid, treating dividends paid
in the first 20 days of any year as having been paid from
the accumulated profits of the preceding year or years
(unless to his satisfaction shows otherwise), and in other
respects treating dividends as having been paid from the
most recently accumulated gains, profits, or earning. . . .
(Emphasis supplied)
Close examination of the above quoted provisions of the
US Tax Code 7 shows the following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax
credit for the amount of the dividend tax actually paid
(i.e., withheld) from the dividend remittances to P&G- b. to determine the amount of the "deemed paid" tax
USA; credit which US tax law must allow to P&G-USA; and

b. US law (Section 902, US Tax Code) grants to P&G- c. to ascertain that the amount of the "deemed paid" tax
USA a "deemed paid' tax credit 8 for a proportionate credit allowed by US law is at least equal to the amount
part of the corporate income tax actually paid to the of the dividend tax waived by the Philippine
Philippines by P&G-Phil. Government.

The parent-corporation P&G-USA is "deemed to have Amount (a), i.e., the amount of the dividend tax waived
paid" a portion of the Philippine corporate income tax by the Philippine government is arithmetically
although that tax was actually paid by its Philippine determined in the following manner:
subsidiary, P&G-Phil., not by P&G-USA. This "deemed
paid" concept merely reflects economic reality, since the
Philippine corporate income tax was in fact paid and
deducted from revenues earned in the Philippines, thus
P100.00 — Pretax net corporate income earned by P&G-
reducing the amount remittable as dividends to P&G-
Phil.
USA. In other words, US tax law treats the Philippine
corporate income tax as if it came out of the pocket, as
it were, of P&G-USA as a part of the economic cost of x 35% — Regular Philippine corporate income tax rate
carrying on business operations in the Philippines
through the medium of P&G-Phil. and here earning ———
profits. What is, under US law, deemed paid by P&G-
USA are not "phantom taxes" but instead Philippine P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income taxes actually paid here by P&G-Phil.,
which are very real indeed. corporate income tax.

It is also useful to note that both (i) the tax credit for P100.00
the Philippine dividend tax actually withheld, and (ii) the
tax credit for the Philippine corporate income tax -35.00
actually paid by P&G Phil. but "deemed paid" by P&G-
USA, are tax credits available or applicable against the
———
US corporate income tax of P&G-USA. These tax credits
are allowed because of the US congressional desire to
avoid or reduce double taxation of the same income P65.00 — Available for remittance as dividends to P&G-
stream. 9 USA

In order to determine whether US tax law complies with P65.00 — Dividends remittable to P&G-USA
the requirements for applicability of the reduced or
preferential fifteen percent (15%) dividend tax rate x 35% — Regular Philippine dividend tax rate under
under Section 24 (b) (1), NIRC, it is necessary: Section 24

——— (b) (1), NIRC

a. to determine the amount of the 20 percentage points P22.75 — Regular dividend tax
dividend tax waived by the Philippine government under
Section 24 (b) (1), NIRC, and which hence goes to P&G-
USA;
P65.00 — Dividends remittable to P&G-USA
x 15% — Reduced dividend tax rate under Section 24
(b) (1), NIRC
———
P9.75 — Reduced dividend tax
P22.75 — Regular dividend tax under Section 24 (b) (1),
NIRC
-9.75 — Reduced dividend tax under Section 24 (b) (1),
NIRC
———
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of
pre-tax net income earned by P&G-Phil. Amount (a) is
also the minimum amount of the "deemed paid" tax
credit that US tax law shall allow if P&G-USA is to qualify
for the reduced or preferential dividend tax rate under
Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed
paid" tax credit which US tax law allows under Section
902, Tax Code, may be computed arithmetically as
follows:
P65.00 — Dividends remittable to P&G-USA
- 9.75 — Dividend tax withheld at the reduced (15%)
rate
———
P55.25 — Dividends actually remitted to P&G-USA
P35.00 — Philippine corporate income tax paid by P&G-
Phil.
to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, for every P55.25 of dividends actually remitted
(after withholding at the rate of 15%) by P&G-Phil. to its
US parent P&G-USA, a tax credit of P29.75 is allowed by
Section 902 US Tax Code for Philippine corporate income
tax "deemed paid" by the parent but actually paid by the
wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of
dividend tax waived by the Philippine government),
Section 902, US Tax Code, specifically and clearly
complies with the requirements of Section 24 (b) (1),
NIRC.
3. It is important to note also that the foregoing reading
of Sections 901 and 902 of the US Tax Code is identical
with the reading of the BIR of Sections 901 and 902 of
the US Tax Code is identical with the reading of the BIR
of Sections 901 and 902 as shown by administrative
rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No.
76004, rendered by then Acting Commissioner of
Intemal Revenue Efren I. Plana, later Associate Justice
of this Court, the relevant portion of which stated:
However, after a restudy of the decision in the American
Chicle Company case and the provisions of Section 901
and 902 of the U.S. Internal Revenue Code, we find
merit in your contention that our computation of the
credit which the U.S. tax law allows in such cases is
erroneous as the amount of tax "deemed paid" to the
Philippine government for purposes of credit against the
U.S. tax by the recipient of dividends includes a portion
of the amount of income tax paid by the corporation
declaring the dividend in addition to the tax withheld
from the dividend remitted. In other words, the U.S.
government will allow a credit to the U.S. corporation or
recipient of the dividend, in addition to the amount of
tax actually withheld, a portion of the income tax paid
by the corporation declaring the dividend. Thus, if a
Philippine corporation wholly owned by a U.S.
corporation has a net income of P100,000, it will pay
P25,000 Philippine income tax thereon in accordance
with Section 24(a) of the Tax Code. The net income,
after income tax, which is P75,000, will then be declared
as dividend to the U.S. corporation at 15% tax, or
P11,250, will be withheld therefrom. Under the
aforementioned sections of the U.S. Internal Revenue
Code, U.S. corporation receiving the dividend can utilize
as credit against its U.S. tax payable on said dividends
the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the
dividend arrived at as follows:
P75,000 x P25,000 = P18,750
———
100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250
———
P30,000
The amount of P18,750 deemed paid and to be credited
against the U.S. tax on the dividends received by the
U.S. corporation from a Philippine subsidiary is clearly
more than 20% requirement of Presidential Decree No.
369 as 20% of P75,000.00 the dividends to be remitted
under the above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005
dated September 10, 1975 is hereby amended in the
sense that the dividends to be remitted by your client to
its parent company shall be subject to the withholding
tax at the rate of 15% only.
This ruling shall have force and effect only for as long as
the present pertinent provisions of the U.S. Federal Tax
Code, which are the bases of the ruling, are not
revoked, amended and modified, the effect of which will
reduce the percentage of tax deemed paid and
creditable against the U.S. tax on dividends remitted by
a foreign corporation to a U.S. corporation. (Emphasis
supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling
dated 22 July 1981 addressed to Basic Foods
Corporation and BIR Ruling dated 20 October 1987
addressed to Castillo, Laman, Tan and Associates. In
other words, the 1976 Ruling of Hon. Efren I. Plana was
reiterated by the BIR even as the case at bar was
pending before the CTA and this Court.
4. We should not overlook the fact that the concept of
"deemed paid" tax credit, which is embodied in Section
902, US Tax Code, is exactly the same "deemed paid"
tax credit found in our NIRC and which Philippine tax
law allows to Philippine corporations which have
operations abroad (say, in the United States) and which,
therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.—In
computing net income, there shall be allowed as
deductions — . . .
(c) Taxes. — . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. —
If the taxpayer signifies in his return his desire to have
the benefits of this paragraphs, the tax imposed by this
Title shall be credited with . . .
(a) Citizen and Domestic Corporation. — In the case of a
citizen of the Philippines and of domestic corporation,
the amount of net income, war profits or excess profits,
taxes paid or accrued during the taxable year to any
foreign country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must
give a tax credit to a Philippine corporation for taxes
actually paid by it to the US government—e.g., for taxes
collected by the US government on dividend remittances
to the Philippine corporation. This Section of the NIRC is
the equivalent of Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with
Section 902 of the US Tax Code, and provides as
follows:
(8) Taxes of foreign subsidiary. — For the purposes of
this subsection a domestic corporation which owns a
majority of the voting stock of a foreign corporation
from which it receives dividends in any taxable year shall
be deemed to have paid the same proportion of any
income, war-profits, or excess-profits taxes paid by such
foreign corporation to any foreign country, upon or with
respect to the accumulated profits of such foreign
corporation from which such dividends were paid, which
the amount of such dividends bears to the amount of
such accumulated profits: Provided, That the amount of
tax deemed to have been paid under this subsection
shall in no case exceed the same proportion of the tax
against which credit is taken which the amount of such
dividends bears to the amount of the entire net income
of the domestic corporation in which such dividends are
included. The term "accumulated profits" when used in
this subsection reference to a foreign corporation,
means the amount of its gains, profits, or income in
excess of the income, war-profits, and excess-profits
taxes imposed upon or with respect to such profits or
income; and the Commissioner of Internal Revenue shall
have full power to determine from the accumulated
profits of what year or years such dividends were paid;
treating dividends paid in the first sixty days of any year
as having been paid from the accumulated profits of the
preceding year or years (unless to his satisfaction shown
otherwise), and in other respects treating dividends as
having been paid from the most recently accumulated
gains, profits, or earnings. In the case of a foreign
corporation, the income, war-profits, and excess-profits
taxes of which are determined on the basis of an
accounting period of less than one year, the word "year"
as used in this subsection shall be construed to mean
such accounting period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the
BIR must give a tax credit to a Philippine parent
corporation for taxes "deemed paid" by it, that is, e.g.,
for taxes paid to the US by the US subsidiary of a
Philippine-parent corporation. The Philippine parent or
corporate stockholder is "deemed" under our NIRC to
have paid a proportionate part of the US corporate
income tax paid by its US subsidiary, although such US
tax was actually paid by the subsidiary and not by the
Philippine parent.
Clearly, the "deemed paid" tax credit which, under
Section 24 (b) (1), NIRC, must be allowed by US law to
P&G-USA, is the same "deemed paid" tax credit that
Philippine law allows to a Philippine corporation with a
wholly- or majority-owned subsidiary in (for instance)
the US. The "deemed paid" tax credit allowed in Section
902, US Tax Code, is no more a credit for "phantom
taxes" than is the "deemed paid" tax credit granted in
Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the
applicable dividend tax rate in the instant case was the
regular thirty-five percent (35%) rate rather than the
reduced rate of fifteen percent (15%), held that P&G-
Phil. had failed to prove that its parent, P&G-USA, had in
fact been given by the US tax authorities a "deemed
paid" tax credit in the amount required by Section 24 (b)
(1), NIRC.
We believe, in the first place, that we must distinguish
between the legal question before this Court from
questions of administrative implementation arising after
the legal question has been answered. The basic legal
issue is of course, this: which is the applicable dividend
tax rate in the instant case: the regular thirty-five
percent (35%) rate or the reduced fifteen percent
(15%) rate? The question of whether or not P&G-USA is
in fact given by the US tax authorities a "deemed paid"
tax credit in the required amount, relates to the
administrative implementation of the applicable reduced
tax rate.
In the second place, Section 24 (b) (1), NIRC, does not
in fact require that the "deemed paid" tax credit shall
have actually been granted before the applicable
dividend tax rate goes down from thirty-five percent
(35%) to fifteen percent (15%). As noted several times
earlier, Section 24 (b) (1), NIRC, merely requires, in the
case at bar, that the USA "shall allow a credit against
the tax due from [P&G-USA for] taxes deemed to have
been paid in the Philippines . . ." There is neither
statutory provision nor revenue regulation issued by the
Secretary of Finance requiring the actual grant of the
"deemed paid" tax credit by the US Internal Revenue
Service to P&G-USA before the preferential fifteen
percent (15%) dividend rate becomes applicable.
Section 24 (b) (1), NIRC, does not create a tax
exemption nor does it provide a tax credit; it is a
provision which specifies when a particular (reduced) tax
rate is legally applicable.
In the third place, the position originally taken by the
Second Division results in a severe practical problem of
administrative circularity. The Second Division in effect
held that the reduced dividend tax rate is not applicable
until the US tax credit for "deemed paid" taxes is
actually given in the required minimum amount by the
US Internal Revenue Service to P&G-USA. But, the US
"deemed paid" tax credit cannot be given by the US tax
authorities unless dividends have actually been remitted
to the US, which means that the Philippine dividend tax,
at the rate here applicable, was actually imposed and
collected. 11 It is this practical or operating circularity
that is in fact avoided by our BIR when it issues rulings
that the tax laws of particular foreign jurisdictions (e.g.,
Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.)
comply with the requirements set out in Section 24 (b)
(1), NIRC, for applicability of the fifteen percent (15%)
tax rate. Once such a ruling is rendered, the Philippine
subsidiary begins to withhold at the reduced dividend
tax rate.
A requirement relating to administrative implementation
is not properly imposed as a condition for the
applicability, as a matter of law, of a particular tax rate.
Upon the other hand, upon the determination or
recognition of the applicability of the reduced tax rate,
there is nothing to prevent the BIR from issuing
implementing regulations that would require P&G Phil.,
or any Philippine corporation similarly situated, to certify
to the BIR the amount of the "deemed paid" tax credit
actually subsequently granted by the US tax authorities
to P&G-USA or a US parent corporation for the taxable
year involved. Since the US tax laws can and do change,
such implementing regulations could also provide that
failure of P&G-Phil. to submit such certification within a
certain period of time, would result in the imposition of a
deficiency assessment for the twenty (20) percentage
points differential. The task of this Court is to settle
which tax rate is applicable, considering the state of US
law at a given time. We should leave details relating to
administrative implementation where they properly
belong — with the BIR.
2. An interpretation of a tax statute that produces a
revenue flow for the government is not, for that reason
alone, necessarily the correct reading of the statute.
There are many tax statutes or provisions which are
designed, not to trigger off an instant surge of revenues,
but rather to achieve longer-term and broader-gauge
fiscal and economic objectives. The task of our Court is
to give effect to the legislative design and objectives as
they are written into the statute even if, as in the case
at bar, some revenues have to be foregone in that
process.
The economic objectives sought to be achieved by the
Philippine Government by reducing the thirty-five
percent (35%) dividend rate to fifteen percent (15%)
are set out in the preambular clauses of P.D. No. 369
which amended Section 24 (b) (1), NIRC, into its
present form:
WHEREAS, it is imperative to adopt measures responsive
to the requirements of a developing economy foremost
of which is the financing of economic development
programs;
WHEREAS, nonresident foreign corporations with
investments in the Philippines are taxed on their
earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital
investment for large projects an appropriate tax need be
imposed on dividends received by non-resident foreign
corporations in the same manner as the tax imposed on
interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
 - 9.75 — US tax credit for RP dividend tax withheld by
P&G-Phil.
More simply put, Section 24 (b) (1), NIRC, seeks to
promote the in-flow of foreign equity investment in the at 15% (Section 901, US Tax Code)
Philippines by reducing the tax cost of earning profits
here and thereby increasing the net dividends remittable ———
to the investor. The foreign investor, however, would
not benefit from the reduction of the Philippine dividend P15.66 — US corporate income tax payable after Section
tax rate unless its home country gives it some relief from 901
double taxation (i.e., second-tier taxation) (the home
country would simply have more "post-R.P. tax" income
——— tax credit.
to subject to its own taxing power) by allowing the
investor additional tax credits which would be applicable
against the tax payable to such home country.
Accordingly, Section 24 (b) (1), NIRC, requires the home
or domiciliary country to give the investor corporation a P55.25
"deemed paid" tax credit at least equal in amount to the
twenty (20) percentage points of dividend tax foregone - 15.66
by the Philippines, in the assumption that a positive
incentive effect would thereby be felt by the investor. ———

P39.59 — Amount received by P&G-USA net of R.P. and

U.S.
The net effect upon the foreign investor may be shown
arithmetically in the following manner: ===== taxes without "deemed paid" tax credit.

P65.00 — Dividends remittable to P&G-USA (please P25.415

see page 392 above - 29.75 — "Deemed paid" tax credit under Section 902
US
- 9.75 — Reduced R.P. dividend tax withheld by P&G-
Phil. ——— Tax Code (please see page 18 above)

———

P55.25 — Dividends actually remitted to P&G-USA - 0 - — US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after

P55.25 Section 902 tax credit.

x 46% — Maximum US corporate income tax rate

——— P55.25 — Amount received by P&G-USA net of RP and

US
P25.415—US corporate tax payable by P&G-USA
====== taxes after Section 902 tax credit.
without tax credits

It will be seen that the "deemed paid" tax credit allowed

P25.415 by Section 902, US Tax Code, could offset the US
corporate income tax payable on the dividends remitted
by P&G-Phil. The result, in fine, could be that P&G-USA
would after US tax credits, still wind up with P55.25, the
full amount of the dividends remitted to P&G-USA net of
Philippine taxes. In the calculation of the Philippine
Government, this should encourage additional
investment or re-investment in the Philippines by P&G-
USA.
3. It remains only to note that under the Philippines-
United States Convention "With Respect to Taxes on
Income," 15 the Philippines, by a treaty commitment,
reduced the regular rate of dividend tax to a maximum
of twenty percent (20%) of the gross amount of
dividends paid to US parent corporations:
"shall allow" to a US parent corporation receiving
dividends from its Philippine subsidiary "a [tax] credit for
the appropriate amount of taxes paid or accrued to the
Philippines by the Philippine [subsidiary] —. 16 This is,
of course, precisely the "deemed paid" tax credit
provided for in Section 902, US Tax Code, discussed
above. Clearly, there is here on the part of the
Philippines a deliberate undertaking to reduce the
regular dividend tax rate of twenty percent (20%) is a
maximum rate, there is still a differential or additional
reduction of five (5) percentage points which compliance
of US law (Section 902) with the requirements of Section
24 (b) (1), NIRC, makes available in respect of dividends
from a Philippine subsidiary.

Art 11. — Dividends

We conclude that private respondent P&G-Phil, is
entitled to the tax refund or tax credit which it seeks.

xxx xxx xxx

WHEREFORE, for all the foregoing, the Court Resolved

to GRANT private respondent's Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the
(2) The rate of tax imposed by one of the Contracting
Decision of the and Division of the Court promulgated on
States on dividends derived from sources within that
15 April 1988, and in lieu thereof, to REINSTATE and
Contracting State by a resident of the other Contracting
AFFIRM the Decision of the Court of Tax Appeals in CTA
State shall not exceed —
Case No. 2883 dated 31 January 1984 and to DENY the
Petition for Review for lack of merit. No pronouncement
as to costs.

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of

the gross amount of the dividend if during the part of
the paying corporation's taxable year which precedes
the date of payment of the dividend and during the
whole of its prior taxable year (if any), at least 10
percent of the outstanding shares of the voting stock of
the paying corporation was owned by the recipient
corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a

treaty obligation on the part of the United States that it