China Bank vs.

CA | GR 140687

It must be remembered that under the whereas clause of Presidential Decree No. 1246
which amended Sec. 8 of Republic Act No. 6426, the Foreign Currency Deposit System
including the Offshore Banking System under Presidential Decree 1034 were intended to
draw deposits from foreign lenders and investors, and we quote:

Whereas, in order to assure the development and speedy growth of the Foreign Currency
Deposit System and the Offshore Banking System in the Philippines, certain incentives
were provided for under the two Systems such as confidentiality of deposits subject to
certain exceptions and tax exemptions on the interest income of depositors who are
nonresidents and are not engaged in trade or business in the Philippines;

Whereas, making absolute the protective cloak of confidentiality over such foreign
currency deposits, exempting such deposits from tax, and guaranteeing the vested rights of
depositors would better encourage the inflow of foreign currency deposits into the banking
institutions authorized to accept such deposits in the Philippines thereby placing such
institutions more in a position to properly channel the same to loans and investments in
the Philippines, thus directly contributing to the economic development of the country.

CREBA vs. Executive Secretary Romulo

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT)
on corporations and creditable withholding tax (CWT) on sales of real properties classified
as ordinary assets.

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income when such MCIT is greater than the normal
corporate income tax imposed under Section 27(A).4 If the regular income tax is higher
than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the
normal tax shall be carried forward and credited against the normal income tax for the
three immediately succeeding taxable years. Section 27(E) of RA 8424.

xxxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise,

these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of
sale do not exceed 25% of the selling price), the tax shall be deducted and withheld by the
buyer on every installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on
the installment plan" (that is, payments in the year of sale exceed 25% of the selling price),
the buyer shall withhold the tax based on the gross selling price or fair market value of the
property, whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or exchange of real property other than capital
asset has been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale,
barter or exchange subject to the CWT will not be recorded by the Registry of Deeds until
the CIR has certified that such transfers and conveyances have been reported and the taxes
thereof have been duly paid:

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the

Philippine taxation system. It came about as a result of the perceived inadequacy of the
self-assessment system in capturing the true income of corporations.21 It was devised as a
relatively simple and effective revenue-raising instrument compared to the normal income
tax which is more difficult to control and enforce. It is a means to ensure that everyone will
make some minimum contribution to the support of the public sector. The congressional
deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations
of reporting constantly a loss in their operations to avoid the payment of taxes, and thus
avoid sharing in the cost of government. In this regard, the Tax Reform Act introduces for
the first time a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance,
tax manipulation in the country and for administrative convenience. … This will go a long
way in ensuring that corporations will pay their just share in supporting our public life and
our economic advancement.22

Domestic corporations owe their corporate existence and their privilege to do business to
the government. They also benefit from the efforts of the government to improve the
financial market and to ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large
turn-overs, report minimal or negative net income resulting in minimal or zero income
taxes year in and year out, through under-declaration of income or over-deduction of
expenses otherwise called tax shelters.23

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have
proposed the [MCIT]. Because from experience too, you have corporations which have been
losing year in and year out and paid no tax. So, if the corporation has been losing for the
past five years to ten years, then that corporation has no business to be in business. It is
dead. Why continue if you are losing year in and year out? So, we have this provision to
avoid this type of tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit. Continued and repeated
losses after operations of a corporation or consistent reports of minimal net income render
its financial statements and its tax payments suspect. For sure, certain tax avoidance
schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to
put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and
minimizes tax avoidance schemes achieved through sophisticated and artful manipulations
of deductions and other stratagems. Since the tax base was broader, the tax rate was
lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were
incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial
major capital expenditures, the imposition of the MCIT commences only on the fourth
taxable year immediately following the year in which the corporation commenced its
operations.25 This grace period allows a new business to stabilize first and make its
ventures viable before it is subjected to the MCIT.26

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal
income tax which shall be credited against the normal income tax for the three immediately
succeeding years.27

Third, since certain businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation
suffers losses due to prolonged labor dispute, force majeure and legitimate business
reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several
other countries already had their own system of minimum corporate income taxation.

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because
it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of
property without due process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct expenses; other major
expenditures, such as administrative and interest expenses which are equally necessary to
produce gross income, were not taken into account.31 Thus, pegging the tax base of the
MCIT to a corporation’s gross income is tantamount to a confiscation of capital because
gross income, unlike net income, is not "realized gain."

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because
it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of
property without due process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct expenses; other major
expenditures, such as administrative and interest expenses which are equally necessary to
produce gross income, were not taken into account.31 Thus, pegging the tax base of the
MCIT to a corporation’s gross income is tantamount to a confiscation of capital because
gross income, unlike net income, is not "realized gain."

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because
it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of
property without due process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct expenses; other major
expenditures, such as administrative and interest expenses which are equally necessary to
produce gross income, were not taken into account.31 Thus, pegging the tax base of the
MCIT to a corporation’s gross income is tantamount to a confiscation of capital because
gross income, unlike net income, is not "realized gain."32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist
nor endure. The exercise of taxing power derives its source from the very existence of the
State whose social contract with its citizens obliges it to promote public interest and the
common good.33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely

legislative.35 Essentially, this means that in the legislature primarily lies the discretion to
determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs
(place) of taxation.36 It has the authority to prescribe a certain tax at a specific rate for a
particular public purpose on persons or things within its jurisdiction. In other words, the
legislature wields the power to define what tax shall be imposed, why it should be imposed,
how much tax shall be imposed, against whom (or what) it shall be imposed and where it
shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in
its very nature no limits, so that the principal check against its abuse is to be found only in
the responsibility of the legislature (which imposes the tax) to its constituency who are to
pay it.37 Nevertheless, it is circumscribed by constitutional limitations. At the same time,
like any other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be
deprived of life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et
al.,38 we held that the due process clause may properly be invoked to invalidate, in
appropriate cases, a revenue measure39 when it amounts to a confiscation of
property.40 But in the same case, we also explained that we will not strike down a revenue
measure as unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.41 There must be a factual foundation to such an
unconstitutional taint.42 This merely adheres to the authoritative doctrine that, where the
due process clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character.43

Petitioner is correct in saying that income is distinct from capital.44 Income means all the
wealth which flows into the taxpayer other than a mere return on capital. Capital is a fund
or property existing at one distinct point in time while income denotes a flow of wealth
during a definite period of time.45 Income is gain derived and severed from capital.46 For
income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is
not income. In other words, it is income, not capital, which is subject to income tax.
However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by
a corporation in the sale of its goods, i.e., the cost of goods48 and other direct expenses from
gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the
normal net income tax, and only if the normal income tax is suspiciously low. The MCIT
merely approximates the amount of net income tax due from a corporation, pegging the
rate at a very much reduced 2% and uses as the base the corporation’s gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating
all deductible items and at the same time reducing the applicable tax rate.49

Statutes taxing the gross "receipts," "earnings," or "income" of particular

corporations are found in many jurisdictions. Tax thereon is generally held to be within
the power of a state to impose; or constitutional, unless it interferes with interstate
commerce or violates the requirement as to uniformity of taxation.50

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or
negative taxable income, merely defines the coverage of Section 27(E). This means that
even if a corporation incurs a net loss in its business operations or reports zero income
after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is
consistent with the law which imposes the MCIT on gross income notwithstanding the
amount of the net income. But the law also states that the MCIT is to be paid only if it is
greater than the normal net income. Obviously, it may well be the case that the MCIT would
be less than the net income of the corporation which posts a zero or negative taxable
income.
We now proceed to the issues involving the CWT.

Petitioner, after enumerating the distinctions between capital and ordinary assets under
RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and
(c)(ii) of RR 7-2003 were promulgated "with grave abuse of discretion amounting to lack of
jurisdiction" and "patently in contravention of law"62 because they ignore such distinctions.
Petitioner’s conclusion is based on the following premises: (a) the revenue regulations use
gross selling price (GSP) or fair market value (FMV) of the real estate as basis for
determining the income tax for the sale of real estate classified as ordinary assets and (b)
they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of
the net income at the end of the taxable period.

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to
promulgate the necessary rules and regulations for the effective enforcement of the
provisions of the law. Such authority is subject to the limitation that the rules and
regulations must not override, but must remain consistent and in harmony with, the law
they seek to apply and implement.64 It is well-settled that an administrative agency cannot
amend an act of Congress.65

We have long recognized that the method of withholding tax at source is a procedure of
collecting income tax which is sanctioned by our tax laws.66 The withholding tax system
was devised for three primary reasons: first, to provide the taxpayer a convenient manner
to meet his probable income tax liability; second, to ensure the collection of income tax
which can otherwise be lost or substantially reduced through failure to file the
corresponding returns and third, to improve the government’s cash flow.

The questioned provisions of RR 2-98, as amended, are well within the authority given by
Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32%
range; the withholding tax is imposed on the income payable and the tax is creditable
against the income tax liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations
Engaged in the Real Estate Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real
estate business’ income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to
extinguish its possible tax obligation. 69 They are installments on the annual tax which may
be due at the end of the taxable year.70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as
ordinary assets remains to be the entity’s net income imposed under Section 24 (resident
individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA
8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net
income tax payable by the taxpayer at the end of the taxable year.71 Precisely, Section
4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property
classified as ordinary assets remains to be the net taxable income

The sale of land and/or building classified as ordinary asset and other real property (other
than land and/or building treated as capital asset), regardless of the classification thereof,
all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under
Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic
corporations may become subject to the [MCIT] under Sec. 27(E) of the same Code,
whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and
credit the taxes withheld (by the withholding agent/buyer) against its tax due. If the tax
due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the
other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a
refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for
purposes of practicality and convenience. Obviously, the withholding agent/buyer who is
obligated to withhold the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of the taxable year. Instead, said
withholding agent’s knowledge and privity are limited only to the particular transaction in
which he is a party. In such a case, his basis can only be the GSP or FMV as these are the
only factors reasonably known or knowable by him in connection with the performance of
his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property
categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a
final tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital
asset based on its GSP or FMV. This final tax is also withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show
that ordinary assets are not treated in the same manner as capital assets. Final withholding
tax (FWT) and CWT are distinguished as follows:

FWT CWT
a) The amount of income tax withheld
by the withholding agent is
constituted as a full and final payment
of the income tax due from the payee
on the said income.
a) Taxes withheld on certain income
payments are intended to equal or at
least approximate the tax due of the
payee on said income.

b)The liability for payment of the tax b) Payee of income is required to

rests primarily on the payor as a
withholding agent.
Wrong to: Payee (seller) is the one
liable pag CGT.
report the income and/or pay the
difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more
than the tax due.
Here, person liable is the buyer, who
is the withholding agent.

c) The payee is not required to file an c) The income recipient is still

income tax return for the particular required to file an income tax return,
income.73 as prescribed in Sec. 51 and Sec. 52 of
the NIRC, as amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT
is imposed on the sale of ordinary assets. The inherent and substantial differences between
FWT and CWT disprove petitioner’s contention that ordinary assets are being lumped
together with, and treated similarly as, capital assets in contravention of the pertinent
provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction
are contrary to the provisions of RA 8424 on the manner and time of filing of the return,
payment and assessment of income tax involving ordinary assets.75

The fact that the tax is withheld at source does not automatically mean that it is treated
exactly the same way as capital gains. As aforementioned, the mechanics of the FWT are
distinct from those of the CWT. The withholding agent/buyer’s act of collecting the tax at
the time of the transaction by withholding the tax due from the income payable is the
essence of the withholding tax method of tax collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and
enumerates these as passive income. The BIR defines passive income by stating what it is
not:

…if the income is generated in the active pursuit and performance of the corporation’s
primary purposes, the same is not passive income…76

It is income generated by the taxpayer’s assets. These assets can be in the form of real
properties that return rental income, shares of stock in a corporation that earn dividends
or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income
payable to natural or juridical persons, residing in the Philippines." There is no
requirement that this income be passive income. If that were the intent of Congress, it
could have easily said so.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as
ordinary assets deprives its members of their property without due process of law because,
in their line of business, gain is never assured by mere receipt of the selling price. As a
result, the government is collecting tax from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the
property at the end of the taxable year. The seller will be able to claim a tax refund if its net
income is less than the taxes withheld. Nothing is taken that is not due so there is no
confiscation of property repugnant to the constitutional guarantee of due process. More
importantly, the due process requirement applies to the power to tax.79 The CWT does not
impose new taxes nor does it increase taxes.80 It relates entirely to the method and time of
payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome
because taxpayers have to wait years and may even resort to litigation before they are
granted a refund.81 This argument is misleading. The practical problems encountered in
claiming a tax refund do not affect the constitutionality and validity of the CWT as a method
of collecting the tax.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the
enterprise to pay labor wages, materials, cost of money and other expenses which can then
save the entity from having to obtain loans entailing considerable interest expense.
Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs;
heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government
agencies.82
Petitioner’s lamentations will not support its attack on the constitutionality of the CWT.
Petitioner’s complaints are essentially matters of policy best addressed to the executive
and legislative branches of the government. Besides, the CWT is applied only on the
amounts actually received or receivable by the real estate entity. Sales on installment are
taxed on a per-installment basis.83 Petitioner’s desire to utilize for its operational and
capital expenses money earmarked for the payment of taxes may be a practical business
option but it is not a fundamental right which can be demanded from the court or from the
government.

CIR vs. De La Salle University (2016)

the BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes:
(1) income tax on rental earnings from restaurants/canteens and bookstores operating
within the campus;

DLSU, a non-stock, non-profit educational institution, principally anchored its petition

on Article XIV, Section 4 (3) of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties.

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax Code, which states among others, that the
income of whatever kind and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from any of [its] activities
conducted for profit regardless of the disposition made of such income, shall be subject to tax
imposed by this Code.

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all
assets and revenues of non-stock, non-profit educational institutions used actually, directly
and exclusively for educational purposes are exempt from taxes and duties.53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit
educational institutions is novel to the 1987 Constitution and that Section 30 (H) of
the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the 1997 Tax
Code is almost an exact replica of Section 26 of the 1977 Tax Code -with the addition of
non-stock, non-profit educational institutions to the list of tax-exempt entities; and (3) that
the 1977 Tax Code was promulgated when the 1973 Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under
the 1973 Constitution was only for real property tax. Back then, the special tax treatment
on income of private educational institutions only emanates from statute, i.e., the 1977 Tax
Code. Only under the 1987 Constitution that exemption from tax of all the assets and
revenues of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purposes, was expressly and categorically enshrined.55
Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational institutions

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

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

(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in the manner provided by
law.

Proprietary educational institutions, including those cooperatively owned, may likewise

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

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

First, the constitutional provision refers to two kinds of educational institutions: (1) non-
stock, non-profit educational institutions and (2) proprietary educational institutions.69

Second, DLSU falls under the first category. Even the Commissioner admits the status of
DLSU as a non-stock, non-profit educational institution.70

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

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

educational institutions and proprietary educational institutions. The tax exemption
granted to non-stock, non-profit educational institutions is conditioned only on the actual,
direct and exclusive use of their revenues and assets for educational purposes. While tax
exemptions may also be granted to proprietary educational institutions, these exemptions
may be subject to limitations imposed by Congress.

otwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for
profit regardless of the disposition made of such income shall be subject to tax
imposed under this Code. [underscoring and emphasis supplied]
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to
non-stock, non-profit educational institutions such that the revenues and income they
derived from their assets, or from any of their activities conducted for profit, are
taxable even if these revenues and income are used for educational purposes.

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

We answer in the negative.

While the present petition appears to be a case of first impression,71 the Court in
the YMCA case had in fact already analyzed and explained the meaning of Article XIV,
Section 4 (3) of the Constitution. The Court in that case made doctrinal pronouncements
that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by
the YMCA, established as a "welfare, educational and charitable non-profit corporation,"
was subject to income tax under the Tax Code and the Constitution.72

The Court denied YMCA's claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA is not
tax-exempt per se; " what is exempted is not the institution itself... those exempted from
real estate taxes are lands, buildings and improvements actually, directly and exclusively
used for religious, charitable or educational purposes."74

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

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

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

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

The Court then significantly laid down the requisites for availing the tax exemption under
Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock,
non-profit educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly and exclusively for educational purposes.77

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

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

institutions, is not subject to limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income78 for
educational purposes.

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

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

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations.82 It may refer to the sale of goods, rendition of services, or the return of an
investment. Revenue is a component of the tax base in income tax,83 VAT,84 and local
business tax (LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a person or
entity.86 It may refer to real estate, cash deposit in a bank, investment in the stocks of a
corporation, inventory of goods, or any property from which the person or entity may
derive income or use to generate the same. In Philippine taxation, the fair market value of
real property is a component of the tax base in real property tax (RPT).87 Also, the landed
cost of imported goods is a component of the tax base in VAT on importation88 and tariff
duties.89
Thus, when a non-stock, non-profit educational institution proves that it uses
its revenues actually, directly, and exclusively for educational purposes, it shall be
exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it
uses its assets in the form of real property for educational purposes, it shall be exempted
from RPT.

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

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

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

The leased portion of the building may be subject to real property tax, as held in Abra
Valley College, Inc. v. Aquino.90 We ruled in that case that the test of exemption from
taxation is the use of the property for purposes mentioned in the Constitution. We also held
that the exemption extends to facilities which are incidental to and reasonably necessary
for the accomplishment of the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes,
removes such asset from the property tax exemption granted under the
Constitution.91 There is no exemption because the asset is not used actually, directly and
exclusively for educational purposes. The commercial use of the property is
also not incidental to and reasonably necessary for the accomplishment of the main
purpose of a university, which is to educate its students.

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

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

The tax exemption granted by the

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

We spell out below the difference in treatment if only to highlight the privileged status of
non-stock, non-profit educational institutions compared with their proprietary
counterparts.

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

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

CIR vs. St. Lukes Medical Center

SLMC is liable for income tax under

Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned

The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC
insofar as its revenues from paying patients are concerned has been settled in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.),39 where the Court ruled that:

x x x We hold that Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section
27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the introduction of Section
27(B) is to subject the taxable income of two specific institutions, namely, proprietary
non-profit educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(l).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be proprietary and non-
profit. 'Proprietary' means private, following the definition of a 'proprietary educational
institution' as 'any private school maintained and administered by private individuals or
groups' with a government permit. 'Non-profit' means no net income or asset accrues to or
benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v.
Club Filipino, Inc. de Cebu, this Court considered as non-profit a sports club organized for
recreation and entertainment of its stockholders and members. The club was primarily
funded by membership fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. The club was non-profit because of its purpose and
there was no evidence that it was engaged in a profit-making enterprise.

The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable.
Tue Court defined 'charity' in Lung Center of the Philippines v. Quezon City as 'a gift, to be
applied consistently with existing laws, for the benefit of an indefinite number of
persons, either by bringing their minds and hearts under the influence of education
or religion, by assisting them to establish themselves in life or [by] otherwise
lessening the burden of government.' A nonprofit club for the benefit of its members
fails this test. An organization may be considered as non-profit if it does not distribute any
part of its income to stockholders or members. However, despite its being a tax exempt
institution, any income such institution earns from activities conducted for profit is taxable,
as expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of

charity in Lung Center. The issue in Lung Center concerns exemption from real property tax
and not income tax. However, it provides for the test of charity in our jurisdiction. Charity
is essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and services to
the public which would otherwise fall on the shoulders of government. Thus, as a matter of
efficiency, the government forgoes taxes which should have been spent to address public
needs, because certain private entities already assume a part of the burden. This is the
rationale for the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which would have been
funded by appropriations from the Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax exemptions,
subject to the constitutional provision that '[n]o law granting any tax exemption shall be
passed without the concurrence of a majority of all the Members of Congress.' The
requirements for a tax exemption are strictly construed against the taxpayer because an
exemption restricts the collection of taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable
institution for the purpose of exemption from real property taxes. This ruling uses the
same premise as Hospital de San Juan and Jesus Sacred Heart College which says that
receiving income from paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
outpatient, or confined in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or
operating the institution.

For real property taxes, the incidental generation of income is permissible because the test
of exemption is the use of the property. The Constitution provides that '[c]haritable
institutions, churches and personages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.' The test of exemption is not strictly a requirement on the intrinsic nature or
character of the institution. The test requires that the institution use property in a certain
way, i.e., for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove
from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article VI of
the Constitution does not define a charitable institution, but requires that the institution
'actually, directly and exclusively' use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted
'exclusively' for charitable purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as 'one where no part
of its income is distributable as dividends to its members, trustees, or officers' and that any
profit 'obtain[ed] as an incident to its operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for which the corporation was
organized.' However, under Lung Center, any profit by a charitable institution must not
only be plowed back 'whenever necessary or proper,' but must be 'devoted or used
altogether to the charitable object which it is intended to achieve.'
The operations of the charitable institution generally refer to its regular activities. Section
30(E) of the NIRC requires that these operations be exclusive to charity. There is also a
specific requirement that 'no part of [the] net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person.' The use of lands, buildings
and improvements of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit

charitable institution. However, this does not automatically exempt St. Luke's from
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the
test of charity, a charitable institution is not ipso facto tax exempt.

To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property 'actually, directly and
exclusively' for charitable purposes.

To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be 'organized and operated exclusively' for charitable purposes.
Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that
the institution be 'operated exclusively' for social welfare.

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

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts 'any' activity for profit, such activity is not tax exempt even as its
not-for-profit activities remain tax exempt. This paragraph qualifies the requirements
in Section 30(E) that the '[n]on-stock corporation or association [must be] organized and
operated exclusively for . . . charitable . . . purposes . . . . ' It likewise qualifies the
requirement in Section 30(G) that the civic organization must be 'operated exclusively' for
the promotion of social welfare.

Thus, even if the charitable institution must be 'organized and operated exclusively'
for charitable purposes, it is nevertheless allowed to engage in 'activities conducted
for profit' without losing its tax exempt status for its not-for-profit activities. The only
consequence is that the 'income of whatever kind and character' of a charitable institution
'from any of its activities conducted for profit, regardless of the disposition made of such
income, shall be subject to tax.' Prior to the introduction of Section 27(B), the tax rate on
such income from for-profit activities was the ordinary corporate rate under Section 27(A).
With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying patients. It
cannot be disputed that a hospital which receives approximately ₱l.73 billion from paying
patients is not an institution 'operated exclusively' for charitable purposes. Clearly,
revenues from paying patients are income received from 'activities conducted for profit.'
Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's declared
₱l,730,367,965 as 'Revenues from Services to Patients' in contrast to its 'Free Services'
expenditure of ₱218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the
following 'calculation' to support its claim that 65.20% of its 'income after expenses was
allocated to free or charitable services' in 1998.

x x xx

In Lung Center, this Court declared:

'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as
enjoying a privilege exclusively.' . . . The words 'dominant use' or 'principal use' cannot
be substituted for the words 'used exclusively' without doing violence to the
Constitution and thelaw. Solely is synonymous with exclusively.

The Court cannot expand the meaning of the words 'operated exclusively' without violating
the NIRC. Services to paying patients are activities conducted for profit. They cannot be
considered any other way. There is a 'purpose to make profit over and above the cost' of
services. The ₱l.73 billion total revenues from paying patients is not even incidental
to St. Luke's charity expenditure of ₱2l8,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating
income in 1998. However, if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services to paying and non-paying
patients, then it cannot be said that the income is 'devoted or used altogether to the
charitable object which it is intended to achieve.' The income is plowed back to the
corporation not entirely for charitable purposes, but for profit as well. In any case, the last
paragraph of Section 30 of the NIRC expressly qualifies that income from activities for
profit is taxable 'regardless of the disposition made of such income.'

Jesus Sacred Heart College declared that there is no official legislative record explaining the
phrase 'any activity conducted for profit.' However, it quoted a deposition of Senator
Mariano Jesus Cuenco, who was a member of the Committee of Conference for the Senate,
which introduced the phrase 'or from any activity conducted for profit.'

P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree V d que
es una actividad esencial dicho hospital para el funcionamiento def colegio de medicina

de dicha universidad?

x x x x x x xxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa; pero
considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van
enfermos de buena posicion social economica, lo que se paga por estos enfermos debe estar
sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las palabras o
frase 'or from any activity conducted for profit.'

The question was whether having a hospital is essential to an educational institution like
the College of Medicine of the University of Santo Tomas.1awp++i1 Senator Cuenco
answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was one of the
reasons Congress inserted the phrase 'or any activity conducted for profit.'

The question in Jesus Sacred Heart College involves an educational institution. However, it
is applicable to charitable institutions because Senator Cuenco's response shows an intent
to focus on the activities of charitable institutions. Activities for profit should not escape
the reach of taxation. Being a non-stock and non-profit corporation does not, by this
reason alone, completely exempt an institution from tax. An institution cannot use its
corporate form to prevent its profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting
tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E)
and (G) of the NIRC requires that an institution be 'operated exclusively' for charitable or
social welfare purposes to be completely exempt from income tax. An institution under
Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-
profit activities. Such income from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should therefore be lin1ited to institutions
beneficial to the public and those which improve social welfare. A profit-making entity
should not be allowed to exploit this subsidy to the detriment of the government and other
taxpayers.

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary non-
profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its
profits to its members and such profits are reinvested pursuant to its corporate purposes.
St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the
BIR, which opined that St. Luke's is 'a corporation for purely charitable and social welfare
purposes' and thus exempt from income tax. In Michael J Lhuillier, Inc. v. Commissioner of
Internal Revenue, the Court said that 'good faith and honest belief that one is not subject to
tax on the basis of previous interpretation of government agencies tasked to implement the
tax law, are sufficient justification to delete the imposition of surcharges and interest.'40

A careful review of the pleadings reveals that there is no countervailing consideration for
the Court to revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis,
which states that "[o]nce a case has been decided in one way, any other case involving
exactly the same point at issue x x x should be decided in the same manner,"41 the Court
finds that SLMC is subject to 10% income tax insofar as its revenues from paying patients
are concerned.

To be clear, for an institution to be completely exempt from income tax, Section

30(E) and (G) of the 1997 NIRC requires said institution to operate exclusively for
charitable or social welfare purpose. But in case an exempt institution under Section
30(E) or (G) of the said Code earns income from its for-profit activities, it will not lose its
tax exemption. However, its income from for-profit activities will be subject to income tax
at the preferential 10% rate pursuant to Section 27(B) thereof.

Calasanz vs. CIR

Also a property initially classified as a capital asset may thereafter be treated as an

ordinary asset if a combination of the factors indubitably tend to show that the activity was
in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale of
inherited real property usually gives capital gain or loss even though the property has to be
subdivided or improved or both to make it salable. However, if the inherited property is
substantially improved or very actively sold or both it may be treated as held primarily for
sale to customers in the ordinary course of the heir's business. 9

Upon an examination of the facts on record, We are convinced that the activities of
petitioners are indistinguishable from those invariably employed by one engaged in the
business of selling real estate.

One strong factor against petitioners' contention is the business element of development
which is very much in evidence. Petitioners did not sell the land in the condition in which
they acquired it. While the land was originally devoted to rice and fruit trees, 10 it was
subdivided into small lots and in the process converted into a residential subdivision and
given the name Don Mariano Subdivision. Extensive improvements like the laying out of
streets, construction of concrete gutters and installation of lighting system and drainage
facilities, among others, were undertaken to enhance the value of the lots and make them
more attractive to prospective buyers. The audited financial statements 11 submitted
together with the tax return in question disclosed that a considerable amount was
expended to cover the cost of improvements. As a matter of fact, the estimated
improvements of the lots sold reached P170,028.60 whereas the cost of the land is only P
4,742.66. There is authority that a property ceases to be a capital asset if the amount
expended to improve it is double its original cost, for the extensive improvement indicates
that the seller held the property primarily for sale to customers in the ordinary course of
his business.

National Development Corporation vs. CIR

The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. 1 The purchase
price was to come from the proceeds of bonds issued by the Central Bank. 2 Initial
payments were made in cash and through irrevocable letters of credit. 3 Fourteen
promissory notes were signed for the balance by the NDC and, as required by the
shipbuilders, guaranteed by the Republic of the Philippines. 4 Pursuant thereto, the
remaining payments and the interests thereon were remitted in due time by the NDC to
Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo.

The petitioner argues that the Japanese shipbuilders were not subject to tax under the
above provision because all the related activities — the signing of the contract, the
construction of the vessels, the payment of the stipulated price, and their delivery to the
NDC — were done in Tokyo. 8 The law, however, does not speak of activity but of "source,"
which in this case is the NDC. This is a domestic and resident corporation with principal
offices in Manila.

As the Tax Court put it:

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

The law is clear. Our plain duty is to apply it as written. The residence of the obligor
which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta.
Mesa, Manila, Philippines; and as a corporation duly organized and existing under
the laws of the Philippines, it is a domestic corporation, resident of the Philippines.
(Sec. 84(c), National Internal Revenue Code.) The interest paid by petitioner, which
is admittedly a resident of the Philippines, is on the promissory notes issued by it.
Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan in
1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels
acquired by petitioner is interest derived from sources within the Philippines
subject to income tax under the then Section 24(b)(1) of the National Internal
Revenue Code.

CIR vs. British Overseas Airway Corporation

BOAC is a 100% British Government-owned corporation organized and existing under the
laws of the United Kingdom It is engaged in the international airline business and is a
member-signatory of the Interline Air Transport Association (IATA). As such it operates air
transportation service and sells transportation tickets over the routes of the other airline
members.

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific
criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each
case must be judged in the light of its peculiar environmental circumstances. The term
implies a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the purpose and
object of the business organization. 2 "In order that a foreign corporation may be regarded
as doing business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not one of a
temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales
agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1)
selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip
in the series corresponding to a different airline company; (3) receiving the fare from the
whole trip; and (4) consequently allocating to the various airline companies on the basis of
their participation in the services rendered through the mode of interline settlement as
prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those
activities were in exercise of the functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its organization as an international air
carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline
business, the generation of sales being the paramount objective. There should be no doubt
then that BOAC was "engaged in" business in the Philippines through a local agent during
the period covered by the assessments. Accordingly, it is a resident foreign corporation
subject to tax upon its total net income received in the preceding taxable year from all
sources within the Philippines.

The Tax Code defines "gross income" thus:

"Gross income" includes gains, profits, and income derived from salaries,
wages or compensation for personal service of whatever kind and in
whatever form paid, or from profession, vocations, trades, business,
commerce, sales, or dealings in property, whether real or personal, growing
out of the ownership or use of or interest in such property; also from
interests, rents, dividends, securities, or the transactions of any business
carried on for gain or profile, or gains, profits, and income derived from any
source whatever (Sec. 29[3]; Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of transport
documents. "The words 'income from any source whatever' disclose a legislative policy to
include all income not expressly exempted within the class of taxable income under our
laws." Income means "cash received or its equivalent"; it is the amount of money coming to
a person within a specific time ...; it means something distinct from principal or capital. For,
while capital is a fund, income is a flow. As used in our income tax law, "income" refers to
the flow of wealth.

The source of an income is the property, activity or service that produced the income. 8 For
the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets
in the Philippines is the activity that produces the income. The tickets exchanged hands
here and payments for fares were also made here in Philippine currency. The site of the
source of payments is the Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the
burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it
constitutes the contract between the ticket-holder and the carrier. It gives rise to the
obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of
the carrier to transport the passenger upon the terms and conditions set forth thereon. The
ordinary ticket issued to members of the traveling public in general embraces within its
terms all the elements to constitute it a valid contract, binding upon the parties entering
into the relationship. 9

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources
within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and
royalties, (5) sale of real property, and (6) sale of personal property, does not mention
income from the sale of tickets for international transportation. However, that does not
render it less an income from sources within the Philippines. Section 37, by its language,
does not intend the enumeration to be exclusive. It merely directs that the types of income
listed therein be treated as income from sources within the Philippines. A cursory reading
of the section will show that it does not state that it is an all-inclusive enumeration, and
that no other kind of income may be so considered. "

BOAC, however, would impress upon this Court that income derived from transportation is
income for services, with the result that the place where the services are rendered
determines the source; and since BOAC's service of transportation is performed outside the
Philippines, the income derived is from sources without the Philippines and, therefore, not
taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision
under review.

The absence of flight operations to and from the Philippines is not determinative of the
source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the "source";
and the source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a activity regularly pursued
within the Philippines. business a And even if the BOAC tickets sold covered the "transport
of passengers and cargo to and from foreign cities", 12 it cannot alter the fact that income
from the sale of tickets was derived from the Philippines. The word "source" conveys one
essential idea, that of origin, and the origin of the income herein is the Philippines. 13

De La Salle University – College of St. Benilde vs. CIR (2019)

Petitioner La Sallian Educational Innovators Foundation, Inc. (De La

Salle University-College of St. Benilde Foundation)/for brevity) is a nonstock, non-profit
domestic corporation duly organized and existing under the
laws of the Philippines.

However, respondent alleged that the petitioner Foundation has

already lost its tax-exempt status, making it liable to deficiency income tax.
The foundation may be a non-stock entity but it is definitely a profitoriented organization
wherein majority of its revenue-operating activities
~1erating huge amount of profit amounting to P643 million that
earned from expensive tuition fees collected from its students, mostly
belong to a [sic] upper class family.

The foundation's Cash in Bank in the amount of P775 million

comprise of investing activities and has significant movement in relation
to its charitable purposes, which mean that the foundation are [sic] not
giving sufficient donations which is the main reasons [sic] for its
qualification[s] [sic] for exemption.

On the other hand, petitioner Foundation consistently argued that it

enjoys a tax-exempt status from all taxes as a non-stock, non-profit
educational institution as expressly provided under Paragraph 4, Section 4,
Article XIV of the 1987 Constitution.

Furthermore, petitioner Foundation's claim that all the said income is

actually, directly and exclusively used or earmarked for promoting its
educational purpose and not a single centavo inure to the benefit of any of
the Foundation's members, tn1stees and officers.

Supreme Court ruling:

Clearly, non-stock, non-profit educational institutions are not required

to pay taxes on all their revenues and assets if they are used actually, directly
and exclusively for educational purposes.

According to the BIR, petitioner Foundation has failed to comply with

the constitutional requirements for being a profit-oriented educational
institution. Hence, it is no longer a tax-exempt entity, and is subject to a 10%
income tax rate as a taxable proprietary educational institution.

The Court disagrees.

Petitioner Foundation has presented adequate legal and factual basis

to prove that it remains as a tax exempt entity under Article XIV, Section 4,
Paragraph 3 of the 1987 Constitution.

Based on jurisprudence and tax rulings, a taxpayer shall be granted

with this tax exemption after proving that: (!l it falls under the
classification of 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.4

Petitioner Foundation has fulfilled both of the abovementioned

requirements.

For the first requirement, there is no contest as both the parties have
stipulated that petitioner Foundation is a non-stock, non-profit educational
institution.

the Petitioner Foundation's primary and secondary

purposes in its Amended Articles of Incorporation clearly provide that it is a
non-stock, non-profit educational entity.

Moreover, petitioner Foundation has no capital divided into shares. 47

No part of its income can be distributed as dividends to its members, tn1stees
and officers.48 The members of the Board of Trustees do not receive any
compensation for the performance of their duties, including attendance in
meetings.

petitioner Foundation did not secure a

new BIR Ruling on its claim for exemption after the Tax Code has been
amended. However, this Court finds such fact insignificant. The application
for a new BIR Ruling is unnecessary considering that the BIR Ruling was
never revoked, and the primary purpose of petitioner Foundation remained.

Based on the evidence presented, the P643,000,000.00 is not

petitioner Foundation's profit as it is just the gross receipt from school year
2002. 52 Unfortunately, respondent easily overlooked petitioner Foundation's
administrative and non-administrative expenses amounting to
P582,903,965.00. 53 This sum constituted the total operating expenses of
petitioner Foundation for the fiscal year ended May 31, 2002. 54 Thus, the
income of petitioner Foundation is only P60,375,183.00 or 9.38% of its
operating receipts.

Furthermore, the alleged P775,000,000 cash of petitioner Foundation

is in reality a part of its Cash and Cash Equivalents account. The amount of
P575,700,000.00 therein constitutes Funds Held in Trust to finance capital
improvements, scholarship, faculty development, retirement and for other
restricted uses. 57 The rest of the account consists of highly liquidated debt
instruments purchased with a short term maturity. 58 Clearly, there is nothing
in the petitioner Foundation's books that will indicate that it is driven by
profit or that its income is used for anything but in pursuit of its primary
purpose.

In several cases, this Court has ruled that a non-profit institution wilJ
not be considered profit driven simply because of generating profits. 59

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 advocated 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 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. 6

To reiterate, respondent never argued that the income of petitioner

Foundation was used in any manner other than for promoting its purpose as
a non-stock. non-profit educational institution. In fact, there is not even a
single argument or evidence presented to cast a doubt in the proper usage of
petitioner Foundation's income.

Furthermore, a simple reading of the Constitution would show that

Article XIV, Section 4 (3) does not require that the revenues and income
must have also been earned from educational activities or activities related to
the purposes of an educational institution. The phrase "all revenues" is
unqualified by any reference to the source of revenues. 63 Thus, so long as the
revenues and income are used actually, directly and exclusively for
educational purposes, then said revenues and income shall be exempt from
taxes and duties.

its income has been actually, exclusively and directly used for
performing its purpose as an educational institution. Undoubtedly, petitioner
Foundation has also proven this second requisite.
Thus, the tax exempt status of petitioner Foundation under the 1987
Constitution is clear.
BIR vs. First E-Bank Tower Condominium Corporation

A condominium corporation is not engaged in trade or business.

Obviously, none of these stated corporate purposes are geared

towards maintaining a livelihood or the obtention of profit. Even
though the Corporation is empowered to levy assessments or dues from
the unit owners, these amounts collected are not intended for the
incurrence of profit by the Corporation or its members, but to shoulder
the multitude of necessary expenses that arise from the maintenance of
the Condominium Project. Just as much is confirmed by Section 1,
Article V of the Amended By-Laws, which enumerate the particular
expenses to be defrayed by the regular assessments collected from the
unit owners. These would include the salaries of the employees of the
Corporation, and the cost of maintenance and ordinary repairs of the
common areas.

Yamane did emphasize that a corporation condominium is not designed

to engage in activities that generate income or profit.

The creation ofthe condominium corporation is sanctioned by Republic

Act No. 4726 (RA 4726)35 (The Condominium Act). Under the law, a
condominium is an interest in real property consisting of a separate interest in
a unit in a residential, industrial or commercial building and an undivided
interest in common, directly or indirectly, in the land on which it is located
and in other common areas of the building. To enable the orderly
administration over these common areas which the unit owners jointly own,
RA 4726 permits the creation of a condominium corporation for the purpose
of holding title to the common areas. The unit owners shall in proportion to
the appurtenant interests of their respective units automatically be members
or shareholders of the condominium corporation to the exclusion of others. 36
Sections 10 and 22 of RA 4726 focus on the non-profit purpose of a
condominium corporation. Under Section 10,37 the corporate purposes of a
condominium corporation are limited to holding the common areas, either in
ownership or any other interest in real property recognized by law;
management of the project; and to such other purposes necessary, incidental,
or convenient to the accomplishment of these purposes. Additionally, Section
10 prohibits the articles of incorporation or by-laws of the condominium
corporation from containing any provisions contrary to the provisions of RA
4726, the enabling or master deed, or the declaration of restrictions of the
condominium project. 38
Also, under Section 22,39 the condominium corporation, as the
management body, may only act for the benefit of the condominium owners
in disposing tangible and intangible personal property by sale or otherwise in
proportion to the condominium owners' respective interests in the common
areas.

Further, Section 940 allows a condominium corporation to provide for

the means by which it should be managed.

RMC No. 65-2012, sharply departs from Yamane and the law on
condominium corporations. It invalidly declares that the amounts paid as dues
or fees by members and tenants of a condominium corporation form part of
the gross income of the latter, thus, subject to income tax, value-added tax,
and withholding tax. The reason given --- a condominium corporation
furnishes its members and tenants with benefits, advantages, and privileges in
return for such payments, consequently, these payments constitute taxable
income or compensation for beneficial services it provides to its members and
tenants, hence, subject to income tax, value-added tax, and withholding tax.

We cannot agree.

b) Association dues, membership fees, and other

assessments/charges are not subject to income tax, value-added
tax and withholding tax

First. Capital is a fund or prope1iy existing at one distinct point in time

while income denotes a flow of wealth during a definite period of time.
Income is gain derived and severed from capital.41 Republic Act No. 8424
(RA 8424)42 or the Tax Reform Act of 1997 was in effect when RMC No.
65-2012 was issued on October 31, 2012. In defining taxable income,

Gross income means income derived from whatever source, including

compensation for services; the conduct of trade or business or the exercise of
a profession; dealings in property; interests; rents; royalties; dividends;
annuities; prizes and winnings; pensions; and a partner's distributive share in
the net income of a general professional partnership,43 among others.

Section 32 of RA 8424 does not include association dues, membership

fees, and other assessments/charges collected by condominium corporations
as sources of gross income. The subsequent amendment under the TRAIN
Law substantially replicates the old Section 32

As established in Yamane, the expenditures incurred by condominium

corporations on behalf of the condominium owners are not intended to generate revenue
nor equate to the cost of doing business.

As correctly argued by ANPC, membership fees, assessment dues,

and other fees of similar nature only constitute contributions to and/or
replenishment of the funds for the maintenance and operations of the
facilities offered by recreational clubs to their exclusive members. They
represent funds "held in trust" by these clubs to defray their operating
and general costs and hence, only constitute infusion of capital.
Case law provides that in order to constitute "income," there must
be realized "gain." Clearly, because of the nature of membership fees and
assessment dues as funds inherently dedicated for the maintenance,
preservation, and upkeep of the clubs' general operations and facilities,
nothing is to be gained from their collection. This stands in contrast to the
fees received by recreational clubs coming from their income-generating
facilities, such as bars, restaurants, and food concessionaires, or from
income-generating activities, like the renting out of sports equipment,
services, and other accommodations: In these latter examples, regardless of
the purpose of the fees' eventual use, gain is already realized from the
moment they are collected because capital maintenance, preservation, or
upkeep is not their pre-determined purpose. As such, recreational clubs are
generally free to use these fees for whatever purpose they desire and thus,
considered as unencumbered "fruits" coming from a business transaction.
Further, given these recreational clubs' non-profit nature,
membership fees and assessment dues cannot be considered as funds
that would represent these clubs' interest or profit from any
investment. In fact, these fees are paid by the clubs' members without
any expectation of any yield or gain (unlike in stock subscriptions), but
only for the above-stated purposes and in order to retain their
membership therein.
In fine, for as long as these membership fees, assessment dues,
and the like are treated as collections by recreational clubs from their
members as an inherent consequence of their membership, and are, by
nature, intended for the maintenance, preservation, and upkeep of the
clubs' general operations and facilities, then these fees cannot be
classified as "the income of recreational clubs from whatever source"
that are "subject to income tax. Instead, they only form part of capital
from which no income tax may be collected or imposed. (Emphasis
supplied)

Similarly, therefore, association dues, membership fees, and other

assessments/charges are not subject to income tax because they do not
constitute profit or gain. To repeat, they are collected purely for the benefit of
the condominium owners and are the incidental consequence of a
condominium corporation's responsibility to effectively oversee, maintain, or even
improve the common areas of the condominium as well as its
governance.

Second. Association dues, membership fees, and other

assessments/charges do not arise from transactions involving the sale, barter,
or exchange of goods or property. Nor are they generated by the performance
of services. As such, they are not subject to value-added tax