4.

) Lielet Matutino

(i) Income Derived by Foreign Government

‣ CIR v. MITSUBISHI METAL CORPORATION; G.R. No. L-54908; 22 January 1990

(j) Income Derived by the Philippine Government or its Political Subdivisions

(k) Prizes and Awards in Recognition of Achievements

(l) Prizes and Awards in Sports Competition

Income Derived by Foreign Government

In relation to the observance of international comity, the Tax Code excluded
from gross income those earnings derived by Foreign Government in the Philippines.
Illustration.
China invested in the Philippines with earnings within as follows:
Interest income from bonds P 5, 000, 0000
Interest on time-deposits in the Philippines bank P 2, 000, 000
Dividend income received from SMC stocks P 1, 000,000
Gain on sale of domestic securities P 800, 000
The entire income within of Chinese Government is exempt from income tax.

What are the conditions in order for the income derived by foreign government from
investments in the Philippines be exempted from tax?
1. It must be an income derived from investments in the Philippines;
2. It must be derived from bonds, or other domestic securities, stocks or interests on
deposits in banks;
3. The recipient of such income from investment in the Philippines must be a:
a. foreign government;
b. financing institutions owned, controlled or financed by foreign government;
c. regional or international financing institutions' established by foreign government.
Illustration:
China invested in the Philippines
What is the rationale for the exclusion?
The exclusion may be premised either on the principle of comity or upon the principle
of reciprocity.

CIR v. MITSUBISHI METAL CORPORATION; G.R. No. L-54908; 22 January

1990 CIR v. MITSUBISHI METAL CORPORATION; G.R. No. L-54908; 22
January 1990

On June 11, 1987, the governments of Japan and the Philippines executed an
Exchange of Notes, whereby the former agreed to extend a loan amounting to
Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000) to the
latter through the then Overseas Economic Cooperation Fund (OECF, now Japan
Bank for International Cooperation) for the implementation of the Calaca II Coal-
Fired Thermal Power Plant Project (Project). In Paragraph 5 (2) of the Exchange
of Notes, the PHIL GOV, by itself or through its executing agency, undertook to
assume all taxes imposed by the Philippines on Japanese contractors engaged in
the Project.

Consequently, the OECF and the PHIL GOV entered into Loan No. PH-P76 for
said amount. Due to need for more funds for the Project, they later on executed
Loan No. PH-P141 for 5.5 billion yen.

Meanwhile, the National Power Corporation (NPC), as the executing government

agency, entered into a contract (Contract) with Mitsubishi Corporation (MC; i.e.,
head office in Japan) for the engineering, supply, construction, installation,
testing, and commissioning of a steam generator, auxiliaries, and associated civil
works for the Project. The Contract's foreign currency portion was funded by the
OECF loans. In line with the Exchange of Notes, Article VIII (B) (1) of the
Contract indicated NPC's undertaking to pay any and all forms of taxes that are
directly imposable under the Contract.

MC completed the project on December 2, 1995, but it was only accepted by NPC
on January 31, 1998 through a Certificate of Completion and Final Acceptance.

6 months later, MC MC filed with the BIR its ITR for the fiscal year that ended on
March 31, 1998. It included in its tax due the amount of 44.28 million
pesos representing income from the OECF-funded portion of the Project. On the
same day, petitioner also filed its Monthly Remittance Return of Income Taxes
Withheld and remitted ₱8,324,100.00 as branch profit remittance tax (BPRT) to
its head office in Japan out of its income for the fiscal year that ended on March
31, 1998.

On June 30, 2000, MC filed with the CIR an administrative claim for refund of
52.6 million pesos, representing the erroneously paid amounts of ₱44,28M as
income tax and ₱8,32M as BPRT. To suspend the running of the 2-year period to
file a judicial claim for refund, MC filed on July 13, 2000 a petition for review
before the CTA. MC anchored its claim for refund on BIR Ruling No. DA-407-98
dated September 7, 1998, 21 which says that the PHIL GOV assumed all taxes.
Hence, there is no tax exemption to speak of. So, there is no violation of the
constitutional mandate against the grants of tax exemption without the
concurrence of the majority of the members of Congress.

MC won in the CTA Div. However, the CTA EB reversed the CTA Div's decision
saying that MC is not entitled to a refund of the taxes it paid to the CIR for three
reasons. First, there is no law exempting MC. There is no "error" in the payment;
hence, there can be no tax refund. Second, the Exchange of Notes is invalid as a
treaty because it grants tax exemption without the concurrence of Congress.
Third and finally, RMC No. 42-99 mandates that the remedy of MC is not refund
but a claim against NPC.

MC motioned for reconsideration. Denied. 

ISSUE:
Is MC entitled to tax refund despite the fact that there is no tax
exemption granted by law and despite the further fact that the
Exchange of Notes may be interpreted as granting tax exemption,
thereby making it unconstitutional to such extent?

RULING
Yes, MC is entitled to tax refund.

Sections 204 (C) of the NIRC grants the CIR the authority to credit or refund
taxes which are erroneously collected by the government.

In this case, it is fairly apparent that the subject taxes in the amount of
₱52,612,812.00 was erroneously collected from petitioner, considering that the
obligation to pay the same had already been assumed by the Philippine
Government by virtue of its Exchange of Notes with the Japanese Government.
Case law explains that an exchange of notes is considered as an executive
agreement, which is binding on the State even without Senate concurrence.
To "assume" means "[t]o take on, become bound as another is bound, or put
oneself in place of another as to an obligation or liability." This means that the
obligation or liability remains, although the same is merely passed on to a
different person. In this light, the concept of an assumption is therefore different
from an exemption, the latter being the "[f]reedom from a duty, liability or other
requirement" or "[a] privilege given to a judgment debtor by law, allowing the
debtor to retain [a] certain property without liability." Thus, contrary to the CTA
En Bane's opinion, the constitutional provisions on tax exemptions would not
apply.

Moreover, the CIR has already recognized the tax assumption under the
Exchance of Notes through RMC No. 42-99.

ISSUE: If MC is entitled to refund, should it claim from the BIR or

from NPC?

MC should claim refund from BIR.

Sections 204 and 229 of the NIRC provide that claims for refund of erroneously
collected taxes must be filed with the CIR. Even if RMC No. 42-99 has interpreted
the Contract so that it directs MC to claim the refund from NPC, this cannot
prevail over provisions of tax laws.

SUMMARY: MC correctly filed its claim for tax refund under Sections 204 and
229 of the NIRC to recover the erroneously paid taxes amounting to
₱44,288,712.00 as income tax and ₱8,324,100.00 as BPRT from the BIR. To
reiterate, MC's entitlement to the refund is based on the tax assumption
provision in the Exchange of Notes. Given that this is a case of tax assumption
and not an exemption, the BIR is, therefore, not without recourse; it can properly
collect the subject taxes from the NPC as the proper party that assumed
petitioner's tax liability.

Income Derived by the Philippine Government or its Political Subdivisions

Is the income derived by the Government or its political subdivision exempt from gross income?

Yes, if the source of the income is from any public utility or from the exercise of any essential
governmental functions.

Are government owned and controlled . corporations (GOCCs) exempt from tax?
 As a rule, government agencies .performing governmental functions are tax exempt unless
expressly taxed while government agencies performing proprietary functions are taxable unless
expressly exempted. Government owned and controlled corporations which are performing proprietary
functions hence, are subject to taxation.

Under Sec. 27 (c) of R.A. 8442 the following corporations have been granted exemptions:

1. Government Insurance Service System;

2. Social Security System;

3. Philippine Health Insurance Corporation;

4. Philippines Charity Sweepstakes Office.

Prizes and Awards in Recognition of Achievements

What are the requisites in order for prizes and awards made be exempted from tax?

1. Primarily in recognition of religious , charitable, scientific, educational, artistic, literary, or

achievement. (C 2 ARELS)

2. The recipient was selected without any action. on his part to join; and

3. He is not' required to render substantial future services as condition to receiving the prize or award.

Jose Miranda, a young artist . and designer, received a prize of P100,OOOfor winning in the on-the-spot
peace poster contest sponsored by a local Lions Club, Shall the award be included in the gross income of
the recipient for tax purposes? Explain

No. It is not includible in the gross income of the recipient because the same is subject to a final
tax of 20%, the amount thereof being in excess of P10,000. (Sec. 24 [B][1J, NIRC). The prize constitutes a
taxable income because it was made primarily in recognition of artistic achievement which he won due
to an action on his part to enter the contest. (Sec. 32 (BJ[7][cJ, NIRC). Since it is an on-the-spot contest, it
is evident that he must have joined the contest in order to earn the prize or award.(2000 Bar Question)

Evelyn is a graduate student of U.P. In January 1991, she won the Palanca Award for an
outstanding short. story she wrote. The award was P25,000 in cash. In February 1991, she was also
named Most Valuable Player of the Varsity volleyball team and she was given a trophy plus
P10,OOO.Fihally, in March 1991, she received a Fellowship Award from the University of .California to
pursue a master's degree in American literature. The fellowship is for $10,000 plus free board and
lodging for two (2) semesters. Should Evelyn include these awards and fellowship ill her gross income?
Reasons.
 The first award granted to Evelyn, a Palanca award, requires submission of literary works.
Hence, this is included in the gross income because it fails to meet the legal requirement that the
recipient was selected without any action on his part to enter the contest or proceeding. In the second
kind of award, Evelyn did not file any application to enter into any contest. award was given to her in
recognition for her outstanding performance in the field of sports. However, the recognition in the field
of sports is not among those stated under Sec. 28 (8)(8)(e), to wit: " Prizes and awards made primarily in
recognition of religious charitable, scientific, educational, artistic, literary, or civic achievement ..." The
fellowship award of $10,000 is however, excluded from her income as she was selected therefore
without any action on her part and the same was given to her in recognition of literary and educational
achievement, presumably without her being required to render future services for the grantor. (1993
Bar Question)

Prizes and Awards in Sports Competition

All prizes and awards granted to athletes in local and international sports competitions
and tournaments, whether held in the Philippines or abroad and sanctioned by their
respective national sports associations, shall not be included in gross income and shall
be tax-exempt.
Prizes and awards granted by association not accredited by Philippine Olympic
Sport Committee (POSC) are subject to income tax and consequently to 20%
withholding tax.

What are the requisites for the exclusion of prizes and awards in competition from gross income?

1.all prizes and awards;

2.granted to athletes; in local and international sports tournaments and competitions;

3. and sanctioned by their national sports associations.

A won P100,OOO in a competition sanctioned by the national sports association. Give the tax
implication/s as to the recipient as well as to the donor/contributor

As to the recipient of the award, it is exempt from income tax. As to the contributor/donor of
the award, it is exempt from donor's tax not cased on the Tax Code but R.A. 7549. contributor/donor is
allowed to claim the same as a deduction from gross income based on ~A 7549.

Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing
Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the
amount of P500,OOO.OOas his prize which was donated by Ayala Land Corporation. The BIR tried to
collect income tax on the amount received by Onyoc who refuses to pay. Decide.

The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct n imposing
the income tax. RA 7549 explicitly provides that "All prizes and awards granted to athletes in local and
international sports tournaments and competitions in the Philippines or abroad and sanctioned by their
respective national sports association shall be exempt from income tax."

Neither is the BIR correct in collecting the donor's tax from Ayala Land corporation. The law is
clear when it categorically stated "That the donors of said prizes and awards shall be exempt from the
payment of the donor's tax." (1996 Bar Question)