G.R. No.
167679 July 22, 2015
ING BANK N.V., engaged in banking operations in the Philippines as ING BANK N.V.
MANILA BRANCH, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
Qualified taxpayers with pending tax cases may still avail themselves of the tax
amnesty program under Republic Act No. 9480,1 otherwise known as the 2007 Tax
Amnesty Act. Thus, the provision in BIR Revenue Memorandum Circular No. 19-2008
excepting "[i]ssues and cases which were ruled by any court (even without finality) in
favor of the BIR prior to amnesty availment of the taxpayer" from the benefits of the law
is illegal, invalid, and null and void.2 The duty to withhold the tax on compensation
arises upon its accrual.
This is a Petition for Review3 appealing the April 5, 2005 Decision4 of the Court of Tax
Appeals En Banc, which in turn affirmed the August 9, 2004 Decision5 and November
12, 2004 Resolution6 of the Court of Tax Appeals Second Division. The August 9, 2004
Decision held petitioner ING Bank, N.V. Manila Branch (ING Bank) liable for (a)
deficiency documentary stamp tax for the taxable years 1996 and 1997 in the total
amount of ₱238,545,052.38 inclusive of surcharges; (b) deficiency onshore tax for the
taxable year 1996 in the total amount of ₱997,333.89 inclusive of surcharges and
interest; and (c) deficiency withholding tax on compensation for the taxable years 1996
and 1997 in the total amount of ₱564,542.67 inclusive of interest. The Resolution
denied ING Bank’s Motion for Reconsideration.7
While this case was pending before this court, ING Bank filed a Manifestation and
Motion8 stating that it availed itself of the government’s tax amnesty program under
Republic Act No. 9480 with respect to its deficiency documentary stamp tax and
deficiency onshore tax liabilities.9 What is at issue now is whether ING Bank is entitled
to the immunities and privileges under Republic Act No. 9480,and whether the
assessment for deficiency withholding tax on compensation is proper.
ING Bank, "the Philippine branch of Internationale Nederlanden Bank N.V., a foreign
banking corporation incorporated in the Netherlands[,] is duly authorized by the Bangko
Sentral ng Pilipinas to operate as a branch with full banking authority in the
Philippines."10
On January 3, 2000, ING Bank received a Final Assessment Notice11 dated December
3, 1999.12 The Final Assessment Notice also contained the Details of Assessment13
and 13 Assessment Notices "issued by the Enforcement Service of the Bureau of
Internal Revenue through its Assistant Commissioner Percival T. Salazar[.]"14 The
Final Assessment Notice covered the following deficiency tax assessments for taxable
years 1996 and 1997:15
(figures)
On February 2, 2000, ING Bank "paid the deficiency assessments for [the] 1996
compromise penalty, 1997 deficiency documentary stamp tax and 1997 deficiency final
tax in the respective amounts of ₱1,000.00, ₱1,000.00 and ₱75,013.25 [the original
amount of ₱73,752.47 plus additional interest]."16 ING Bank, however, "protested [on
the same day] the remaining ten (10) deficiency tax assessments in the total amount
of ₱672,576,939.18."17
ING Bank filed a Petition for Review before the Court of Tax Appeals on October 26,
2000. This case was docketed as C.T.A. Case No. 6187.18 The Petition was filed to
seek "the cancellation and withdrawal of the deficiency tax assessments for the years
1996 and 1997, including the alleged deficiency documentary stamp tax on special
savings accounts, deficiency onshore tax, and deficiency withholding tax on
compensation mentioned above."19
After trial, the Court of Tax Appeals Second Division rendered its Decision on August
9, 2004, with the following disposition:
WHEREFORE, the assessments for 1996 and 1997 deficiency income tax, 1996 and
1997 deficiency branch profit remittance tax and 1997 deficiency documentary stamp
tax on IBCLs exceeding five days are hereby CANCELLED and WITHDRAWN.
However, the assessments for 1996 and 1997 deficiency withholding tax on
compensation, 1996 deficiency onshore tax and 1996 and 1997 deficiency
documentary stamp tax on special savings accounts are hereby UPHELD in the
following amounts:

(figures)
Accordingly, petitioner is ORDERED to PAY the respondent the aggregate amount of
₱240,106,928.94, plus 20% delinquency interest per annum from February 3, 2000
until fully paid, pursuant to Section 249(C) of the National Internal Revenue Code of
1997.
SO ORDERED.20 (Emphasis in the original)
Both the Commissioner of Internal Revenue and ING Bank filed their respective
Motions for Reconsideration.21 Both Motions were denied through the Second
Division’s Resolution dated November 12, 2004, as follows:
WHEREFORE, the respondent’s Motion for Partial Reconsideration and the petitioner’s
Motion for Reconsideration are hereby DENIED for lack of merit. The pronouncement
reached in the assailed decision is REITERATED.
SO ORDERED.22
On December 8, 2004, ING Bank filed its appeal before the Court of Tax Appeals En
Banc.23 The Court of Tax Appeals En Banc denied due course to ING Bank’s Petition
for Review and dismissed the same for lack of merit in the Decision promulgated on
April 5, 2005.24
Hence, ING Bank filed its Petition for Review25 before this court. The Commissioner
of Internal Revenue filed its Comment26 on October 5, 2005 and ING Bank its Reply27
on December 14, 2005. Pursuant to this court’s Resolution28 dated January 25, 2006,
the Commissioner of Internal Revenue filed its Manifestation and Motion29 on February
14, 2006, stating that it is adopting its Comment as its Memorandum, and ING Bank
filed its Memorandum30 on March 9, 2006.
On December 20, 2007, ING Bank filed a Manifestation and Motion31 informing this
court that it had availed itself of the tax amnesty authorized and granted under Republic
Act No. 9480 covering "all national internal revenue taxes for the taxable year 2005 and
prior years, with or without assessments duly issued therefor, that have remained
unpaid as of December 31, 2005[.]"32 ING Bank stated that it filed before the Bureau
of Internal Revenue its Notice of Availment of Tax Amnesty Under Republic Act No.
948033 on December 14, 2007, together with the following documents:
(1) Statement of Assets, Liabilities and Net Worth (SALN) as of December 31, 2005
(original and amended declarations);34
(2) Tax Amnesty Return For Taxable Year 2005 and Prior Years (BIR Form No.
2116);35 and (3) Tax Amnesty Payment Form (Acceptance of Payment Form) for
Taxable Year 2005 and Prior Years (BIR Form No. 0617)36 showing payment of the
amnesty tax in the amount of ₱500,000.00.
ING Bank prayed that this court issue a resolution taking note of its availment of the tax
amnesty, and confirming its entitlement to all the immunities and privileges under
Section 6 of Republic Act No. 9480, particularly with respect to the "payment of
deficiency documentary stamp taxes on its special savings accounts for the taxable
years 1996 and 1997 and deficiency tax on onshore interest income derived under the
foreign currency deposit system for taxable year 1996[.]"37
Pursuant to this court’s Resolution38 dated January 23, 2008, the Commissioner of
Internal Revenue filed its Comment39 and ING Bank, its Reply.40
Originally, ING Bank raised the following issues in its pleadings:
First, whether "[t]he Court of Tax Appeals En Banc erred in concluding that petitioner’s
Special Saving Accounts are subject to documentary stamp tax (DST) as certificates
of deposit under Section 180 of the 1977 Tax Code";41
Second, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable
for deficiency onshore tax considering that under the 1977 Tax Code and the pertinent
revenue regulations, the obligation to pay the ten percent (10%) final tax on onshore
interest income rests on the payors-borrowers and not on petitioner as payee-
lender";42 and
Third, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for
deficiency withholding tax on compensation for the accrued bonuses in the taxable
years 1996 and 1997 considering that these were not distributed to petitioner’s officers
and employees during those taxable years, hence, were not yet subject to withholding
tax."43
However, ING Bank availed itself of the tax amnesty under Republic Act No. 9480, with
respect to its liabilities for deficiency documentary stamp taxes on its special savings
accounts for the taxable years 1996 and 1997 and deficiency tax on onshore interest
income under the foreign currency deposit system for taxable year 1996.
Consequently, the issues now for resolution are:
First, whether petitioner ING Bank may validly avail itself of the tax amnesty granted by
Republic Act No. 9480; and
Second, whether petitioner ING Bank is liable for deficiency withholding tax on accrued
bonuses for the taxable years 1996 and 1997.
Tax amnesty availment
Petitioner ING Bank asserts that it is "qualified to avail of the tax amnesty under Section
5 [of Republic Act No. 9480] and . . . not disqualified under Section 8 [of the same
law]."44 Respondent Commissioner of Internal Revenue, for its part, does not deny the
authenticity of the documents submitted by petitioner ING Bank or dispute the payment
of the amnesty tax. However, respondent Commissioner of Internal Revenue claims
that petitioner ING Bank is not qualified to avail itself of the tax amnesty granted under
Republic Act No. 9480 because both the Court of Tax Appeals En Banc and Second
Division ruled in its favor that confirmed the liability of petitioner ING Bank for deficiency
documentary stamp taxes, onshore taxes, and withholding taxes.45
Respondent Commissioner of Internal Revenue asserts that BIR Revenue
Memorandum Circular No. 19-2008 specifically excludes "cases which were ruled by
any court (even without finality) in favor of the BIR prior to amnesty availment of the
taxpayer" from the coverage of the tax amnesty under Republic Act No. 9480.46 In any
case, respondent Commissioner of Internal Revenue argues that petitioner ING Bank’s
availment of the tax amnesty is still subject to its evaluation,47 that it is "empowered to
exercise [its] sound discretion . . . in the implementation of a tax amnesty in favor of a
taxpayer,"48 and "petitioner cannot presume that its application . . . would be
granted[.]"49 Accordingly, respondent Commissioner of Internal Revenue prays that
"petitioner [ING Bank’s] motion be denied for lack of merit."50
Petitioner ING Bank counters that BIR Revenue Memorandum Circular No. 19-2008
cannot override Republic Act No. 9480 and its Implementing Rules and Regulations,
which only exclude from tax amnesty "tax cases subject of final and [executory]
judgment by the courts."51 Petitioner ING Bank asserts that its full compliance with the
conditions prescribed in Republic Act No. 9480 (the conditions being submission of the
requisite documents and payment of the amnesty tax), which respondent
Commissioner of Internal Revenue does not dispute, confirms that it is "qualified to
avail itself, and has actually availed itself, of the tax amnesty."52 It argues that there is
nothing in the law that gives respondent Commissioner of Internal Revenue the
discretion to rescind or erase the legal effects of its tax amnesty availment.53 Thus, the
issue is no longer about whether "[it] is entitled to avail itself of the tax amnesty[,]"54
but rather whether the effects of its tax amnesty availment extend to the assessments
of deficiency documentary stamp taxes on its special savings accounts for 1996 and
1997 and deficiency tax on onshore interest income for 1996.55
Petitioner ING Bank points out the Court of Tax Appeals’ ruling in Metropolitan Bank
and Trust Company v. Commissioner of Internal Revenue,56 to the effect that full
compliance with the requirements of the tax amnesty law extinguishes the tax
deficiencies subject of the amnesty availment.57 Thus, with its availment of the tax
amnesty and full compliance with all the conditions prescribed in the statute, petitioner
ING Bank asserts that it is entitled to all the immunities and privileges under Section 6
of Republic Act No. 9480.58
Withholding tax on compensation
Petitioner ING Bank claims that it is not liable for withholding taxes on bonuses accruing
to its officers and employees during taxable years 1996 and 1997.59 It maintains its
position that the liability of the employer to withhold the tax does not arise until such
bonus is actually distributed. It cites Section 72 of the 1977 National Internal Revenue
Code, which states that "[e]very employer making payment of wages shall deduct and
withhold upon such wages a tax," and BIR Ruling No. 555-88 (November 23, 1988)
declaring that "[t]he withholding tax on the bonuses should be deducted upon the
distribution of the same to the officers and employees[.]"60 Since the supposed
bonuses were not distributed to the officers and employees in 1996 and 1997 but were
distributed in the succeeding year when the amounts of the bonuses were finally
determined, petitioner ING Bank asserts that its duty as employer to withhold the tax
during these taxable years did not arise.61
Petitioner ING Bank further argues that the Court of Tax Appeals’ discussion on Section
29(j) of the 1993 National Internal Revenue Code and Section 3 of Revenue
Regulations No. 8-90 is not applicable because the issue in this case "is not whether
the accrued bonuses should be allowed as deductions from petitioner’s taxable income
but, rather, whether the accrued bonuses are subject to withholding tax on
compensation in the respective years of accrual[.]"62 Respondent Commissioner of
Internal Revenue counters that petitioner ING Bank’s application of BIR Ruling No. 555-
88 is misplaced because as found by the Second Division of the Court of Tax Appeals,
the factual milieu is different:63
In that ruling, bonuses are determined and distributed in the succeeding year "[A]fter
[sic] the audit of each company is completed (on or before April 15 of the succeeding
year)". The withholding and remittance of income taxes were also made in the year
they were distributed to the employees. . . .
In petitioner’s case, bonuses were determined during the year but were distributed in
the succeeding year. No withholding of income tax was effected but the bonuses were
claimed as an expense for the year. . . .
Since the bonuses were not subjected to withholding tax during the year they were
claimed as an expense, the same should be disallowed pursuant to the above-quoted
law.64
Respondent Commissioner of Internal Revenue contends that petitioner ING Bank’s
act of "claim[ing] [the] subject bonuses as deductible expenses in its taxable income
although it has not yet withheld and remitted the [corresponding withholding] tax"65 to
the Bureau of Internal Revenue contravened Section 29(j) of the 1997 National Internal
Revenue Code, as amended.66 Respondent Commissioner of Internal Revenue claims
that "subject bonuses should also be disallowed as deductible expenses of
petitioner."67
I II
Taxpayers with pending tax cases may avail themselves of the tax amnesty program
under Republic Act No. 9480.
In CS Garment, Inc. v. Commissioner of Internal Revenue,68 this court has "definitively
declare[d] . . . the exception ‘[i]ssues and cases which were ruled by any court (even
without finality) in favor of the BIR prior to amnesty availment of the taxpayer’ under
BIR [Revenue Memorandum Circular No.] 19-2008 [as] invalid, [for going] beyond the
scope of the provisions of the 2007 Tax Amnesty Law."69 Thus:
[N]either the law nor the implementing rules state that a court ruling that has not
attained finality would preclude the availment of the benefits of the Tax Amnesty Law.
Both R.A. 9480 and DOF Order No. 29-07 are quite precise in declaring that "[t]ax
cases subject of final and executory judgment by the courts" are the ones excepted
from the benefits of the law. In fact, we have already pointed out the erroneous
interpretation of the law in Philippine Banking Corporation (Now: Global Business Bank,
Inc.) v. Commissioner of Internal Revenue, viz:
The BIR’s inclusion of "issues and cases which were ruled by any court (even without
finality) in favor of the BIR prior to amnesty availment of the taxpayer" as one of the
exceptions in RMC 19-2008 is misplaced. RA 9480 is specifically clear that the
exceptions to the tax amnesty program include "tax cases subject of final and executory
judgment by the courts." The present case has not become final and executory when
Metrobank availed of the tax amnesty program.70 (Emphasis in the original, citation
omitted)
Moreover, in the fairly recent case of LG Electronics Philippines, Inc. v. Commissioner
of Internal Revenue,71 we confirmed that only cases that involve final and executory
judgments are excluded from the tax amnesty program as explicitly provided under
Section 8 of Republic Act No. 9480.72
Thus, petitioner ING Bank is not disqualified from availing itself of the tax amnesty
under the law during the pendency of its appeal before this court.
Petitioner ING Bank showed that it complied with the requirements set forth under
Republic Act No. 9480. Respondent Commissioner of Internal Revenue never
questioned or rebutted that petitioner ING Bank fully complied with the requirements
for tax amnesty under the law. Moreover, the contestability period of one (1) year from
the time of petitioner ING Bank’s availment of the tax amnesty law on December 14,
2007 lapsed. Correspondingly, it is fully entitled to the immunities and privileges
mentioned under Section 6 of Republic Act No. 9480. This is clear from the following
provisions:
SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to
avail himself of the tax amnesty authorized and granted under this Act shall file with the
Bureau of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied by
a Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005, in
such form asmay be prescribed in the implementing rules and regulations (IRR) of this
Act, and pay the applicable amnesty tax within six months from the effectivity of the
IRR.
....
SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31,
2005 shall be considered as true and correct except where the amount of declared
networth is understated to the extent of thirty percent (30%) or more as may be
established in proceedings initiated by, or at the instance of, parties other than the BIR
or its agents: Provided, That such proceedings must be initiated within one year
following the date of the filing of the tax amnesty return and the SALN. Findings of or
admission in congressional hearings, other administrative agencies of government,
and/or courts shall be admissible to prove a thirty percent (30%) under-declaration. . .
..
SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax amnesty
under Section 5 hereof, and have fully complied with all its conditions shall be entitled
to the following immunities and privileges:
a. The taxpayer shall be immune from the payment of taxes, as well as addition thereto,
and the appurtenant civil, criminal or administrative penalties under the National
Internal Revenue Code of 1997, as amended, arising from the failure to pay any and
all internal revenue taxes for taxable year 2005 and prior years.
b. The taxpayer’s Tax Amnesty Returns and the SALN as of December 31, 2005 shall
not be admissible as evidence in all proceedings that pertain to taxable year 2005 and
prior years, insofar as such proceedings relate to internal revenue taxes, before judicial,
quasi-judicial or administrative bodies in which he is a defendant or respondent, and
except for the purpose of ascertaining the networth beginning January 1, 2006, the
same shall not be examined, inquired or looked into by any person or government
office. However, the taxpayer may use this as a defense, whenever appropriate, in
cases brought against him.
c. The books of accounts and other records of the taxpayer for the years covered by
the tax amnesty availed of shall not be examined: Provided, That the Commissioner of
Internal Revenue may authorize in writing the examination of the said books of
accounts and other records to verify the validity or correctness of a claim for any tax
refund, tax credit (other than refund or credit of taxes withheld on wages), tax
incentives, and/or exemptions under existing laws. (Emphasis supplied)
Contrary to respondent Commissioner of Internal Revenue’s stance, Republic Act No.
9480 confers no discretion on respondent Commissioner of Internal Revenue. The
provisions of the law are plain and simple. Unlike the power to compromise or abate a
taxpayer’s liability under Section 20473 of the 1997 National Internal Revenue Code
that is within the discretion of respondent Commissioner of Internal Revenue,74 its
authority under Republic Act No. 9480 is limited to determining whether (a) the taxpayer
is qualified to avail oneself of the tax amnesty; (b) all the requirements for availment
under the law were complied with; and (c) the correct amount of amnesty tax was paid
within the period prescribed by law. There is nothing in Republic Act No. 9480 which
can be construed as authority for respondent Commissioner of Internal Revenue to
introduce exceptions and/or conditions to the coverage of the law nor to disregard its
provisions and substitute his own personal judgment.
Republic Act No. 9480 provides a general grant of tax amnesty subject only to the
cases specifically excepted by it. A tax amnesty "partakes of an absolute. . . waiver by
the Government of its right to collect what otherwise would be due it[.]"75 The effect of
a qualified taxpayer’s submission of the required documents and the payment of the
prescribed amnesty tax was immunity from payment of all national internal revenue
taxes as well as all administrative, civil, and criminal liabilities founded upon or arising
from non-payment of national internal revenue taxes for taxable year 2005 and prior
taxable years.76
Finally, the documentary stamp tax and onshore income tax are covered by the tax
amnesty program under Republic Act No. 9480 and its Implementing Rules and
Regulations.77 Moreover, as to the deficiency tax on onshore interest income, it is
worthy to state that petitioner ING Bank was assessed by respondent Commissioner
of Internal Revenue, not as a withholding agent, but as one that was directly liable for
the tax on onshore interest income and failed to pay the same.
Considering petitioner ING Bank’s tax amnesty availment, there is no more issue
regarding its liability for deficiency documentary stamp taxes on its special savings
accounts for 1996 and 1997 and deficiency tax on onshore interest income for 1996,
including surcharge and interest. III.
The Court of Tax Appeals En Banc affirmed the factual finding of the Second Division
that accrued bonuses were recorded in petitioner ING Bank’s books as expenses for
taxable years 1996 and 1997, although no withholding of tax was effected:
With the preceding defense notwithstanding, petitioner now maintained that the portion
of the disallowed bonuses in the amounts of ₱3,879,407.85 and ₱9,004,402.63 for the
respective years 1996 and 1997, were actually payments for reimbursements of
representation, travel and entertainment expenses of its officers. These expenses
according to petitioner are not considered compensation of employees and likewise not
subject to withholding tax.
In order to prove that the discrepancy in the accrued bonuses represents
reimbursement of expenses, petitioner availed of the services of an independent CPA
pursuant to CTA Circular No. 1-95, as amended. As a consequence, Mr. Ruben Rubio
was commissioned by the court to verify the accuracy of petitioner’s position and to
check its supporting documents.
In a report dated January 29, 2002, the commissioned independent CPA noted the
following pertinent findings: . . .
(table here)
Based on the above report, only the expenses in the name of petitioner’s employee
and those under its name can be given credence. Therefore, the following expenses
are valid expenses for income tax purposes:
(table here)
Consequently, petitioner is still liable for the amounts of ₱167,384.97 and ₱397,157.70
representing deficiency withholding taxes on compensation for the respective years of
1996 and 1997, computed as follows:
(figures)
An expense, whether the same is paid or payable, "shall be allowed as a deduction
only if it is shown that the tax required to be deducted and withheld therefrom [was]
paid to the Bureau of Internal Revenue[.]"79
Section 29(j) of the 1977 National Internal Revenue Code80 (now Section 34(K) of the
1997 National Internal Revenue Code) provides:
Section 29. Deductions from gross income. — In computing taxable income subject to
tax under Sec. 21(a); 24(a), (b) and (c); and 25(a) (1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this section: . . . .
....
(a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade
or business, including a reasonable allowance for salaries or other compensation for
personal services actually rendered; travelling expenses while away from home in the
pursuit of a trade, profession or business, rentals or other payments required to be
made as a condition to the continued use or possession, for the purpose of the trade,
profession or business, of property to which the taxpayer has not taken or is not taking
title or in which he has no equity.
....
(j) Additional requirement for deductibility of certain payments. — Any amount paid or
payable which is otherwise deductible from, or taken into account in computing gross
income for which depreciation or amortization may be allowed under this section, shall
be allowed as a deduction only if it is shown that the tax required to be deducted and
withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with
this section, Sections 5181 and 7482 of this Code. (Emphasis supplied)
Section 3 of Revenue Regulations No. 8-90 (now Section 2.58.5 of Revenue
Regulations No. 2-98) provides:

Section 3. Section 9 of Revenue Regulations No. 6-85 is hereby amended to read as
follows:
Section 9. (a) Requirement for deductibility. Any income payment, which is otherwise
deductible under Sections 29 and 54 of the Tax Code, as amended, shall be allowed
as a deduction from the payor’s gross income only if it is shown that the tax required to
be withheld has been paid to the Bureau of Internal Revenue in accordance with
Sections 50, 51, 72, and 74 also of the Tax Code.(Emphasis supplied)
Under the National Internal Revenue Code, every form of compensation for personal
services is subject to income tax and, consequently, to withholding tax. The term
"compensation" means all remunerations paid for services performed by an employee
for his or her employer, whether paid in cash or in kind, unless specifically excluded
under Sections 32(B)83 and 78(A)84 of the 1997 National Internal Revenue Code.85
The name designated to the remuneration for services is immaterial. Thus, "salaries,
wages, emoluments and honoraria, bonuses, allowances (such as transportation,
representation, entertainment, and the like), [taxable] fringe benefits[,] pensions and
retirement pay, and other income of a similar nature constitute compensation
income"86 that is taxable.
Hence, petitioner ING Bank is liable for the withholding tax on the bonuses since it
claimed the same as expenses in the year they were accrued.
Petitioner ING Bank insists, however, that the bonus accruals in 1996 and 1997 were
not yet subject to withholding tax because these bonuses were actually distributed only
in the succeeding years of their accrual (i.e., in 1997 and 1998) when the amounts were
finally determined.
Petitioner ING Bank’s contention is untenable.
The tax on compensation income is withheld at source under the creditable withholding
tax system wherein the tax withheld is intended to equal or at least approximate the tax
due of the payee on the said income. It was designed to enable (a) the individual
taxpayer to meet his or her income tax liability on compensation earned; and (b) the
government to collect at source the appropriate taxes on compensation.87 Taxes
withheld are creditable in nature.88 Thus, the employee is still required to file an income
tax return to report the income and/or pay the difference between the tax withheld and
the tax due on the income.89 For over withholding, the employee is refunded.90
Therefore, absolute or exact accuracy in the determination of the amount of the
compensation income is not a prerequisite for the employer’s withholding obligation to
arise.
It is true that the law and implementing regulations require the employer to deduct and
pay the income tax on compensation paid to its employees, either actually or
constructively.
Section 72 of the 1977 National Internal Revenue Code, as amended,91 states:
SECTION 72. Income tax collected at source. — (a) Requirement of withholding. —
Every employer making payment of wages shall deduct and withhold upon such wages
a tax determined in accordance with regulations to be prepared and promulgated by
the Minister of Finance. (Emphasis supplied)
Sections 7 and 14 of Revenue Regulations No. 6-82,92 as amended,93 relative to the
withholding of tax on compensation income, provide:
Section 7. Requirement of withholding.— Every employer or any person who pays or
controls the payment of compensation to an employee, whether resident citizen or
alien, non-resident citizen, or nonresident alien engaged in trade or business in the
Philippines, must withhold from such compensation paid, an amount computed in
accordance with these regulations.
I. Withholding of tax on compensation paid to resident employees. – (a)In general,
every employer making payment of compensation shall deduct and withhold from such
compensation income for the entire calendar year, a tax determined in accordance with
the prescribed new Withholding Tax Tables effective January 1, 1992 (ANNEX "A").
....
Section 14. Liability for the Tax.— The employer is required to collect the tax by
deducting and withholding the amount thereof from the employee’s compensation as
when paid, either actually or constructively. An employer is required to deduct and
withhold the tax notwithstanding that the compensation is paid in something other than
money (for example, compensation paid in stocks or bonds) and to pay the tax to the
collecting officer. If compensation is paid in property other than money, the employer
should make necessary arrangements to ensure that the amount of the tax required to
be withheld is available for payment to the collecting officer.
Every person required to deduct and withhold the tax from the compensation of an
employee is liable for the payment of such tax whether or not collected from the
employee. If, for example, the employer deducts less than the correct amount of tax, or
if he fails to deduct any part of the tax, he is nevertheless liable for the correct amount
of the tax. However, if the employer in violation of the provisions of Chapter XI, Title II
of the Tax Code fails to deduct and withhold and thereafter the employee pays the tax,
it shall no longer be collected from the employer. Such payment does not, however,
operate to relieve the employer from liability for penalties or additions to the tax for
failure to deduct and withhold within the time prescribed by law or regulations. The
employer will not be relieved of his liability for payment of the tax required to be withheld
unless he can show that the tax has been paid by the employee.
The amount of any tax withheld/collected by the employer is a special fund in trust for
the Government of the Philippines.
When the employer or other person required to deduct and withhold the tax under this
Chapter XI, Title II of the Tax Code has withheld and paid such tax to the Commissioner
of Internal Revenue or to any authorized collecting officer, then such employer or
person shall be relieved of any liability to any person. (Emphasis supplied)
Constructive payment of compensation is further defined in Revenue Regulations No.
6-82:
Section 25. Applicability; constructive receipt of compensation.
—....
Compensation is constructively paid within the meaning of these regulations when it is
credited to the account of or set apart for an employee so that it may be drawn upon
by him at any time although not then actually reduced to possession. To constitute
payment in such a case, the compensation must be credited or set apart for the
employee without any substantial limitation or restriction as to the time or manner of
payment or condition upon which payment is to be made, and must be made available
to him so that it may be drawn upon at any time, and its payment brought within his
control and disposition. (Emphasis supplied)
On the other hand, it is also true that under Section 45 of the 1997 National Internal
Revenue Code (then Section 39 of the 1977 National Internal Revenue Code, as
amended), deductions from gross income are taken for the taxable year in which "paid
or accrued" or "paid or incurred" is dependent upon the method of accounting income
and expenses adopted by the taxpayer.
In Commissioner of Internal Revenue v. Isabela Cultural Corporation,94 this court
explained the accrual method of accounting, as against the cash method:
Accounting methods for tax purposes comprise a set of rules for determining when and
how to report income and deductions. . . .
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as deduction from income for
the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses
and other allowable deductions for the current year but failed to do so cannot deduct
the same for the next year.
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation
to pay them, in opposition to actual receipt or payment, which characterizes the cash
method of accounting. Amounts of income accrue where the right to receive them
become fixed, where there is created an enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.
For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income
or expense? The accrual of income and expense is permitted when the all-events test
has been met. This test requires: (1) fixing of a right to income or liability to pay; and
(2) the availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy.1âwphi1 However, the
test does not demand that the amount of income or liability be known absolutely, only
that a taxpayer has at his disposal the information necessary to compute the amount
with reasonable accuracy. The all-events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may
be unknown, but is not as much as unknowable, within the taxable year. The amount
of liability does not have to be determined exactly; it must be determined with
"reasonable accuracy. "Accordingly, the term "reasonable accuracy" implies something
less than anex act or completely accurate amount.95 (Emphasis supplied, citations
omitted)
Thus, if the taxpayer is on cash basis, he expense is deductible in the year it was paid,
regardless of the year it was incurred. If he is on the accrual method, he can deduct the
expense upon accrual thereof. An item that is reasonably ascertained as to amount
and acknowledged to be due has "accrued"; actual payment is not essential to
constitute "expense."
Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the
obligation to pay is already fixed; (2) the amount can be determined with reasonable
accuracy; and (3) it is already knowable or the taxpayer can reasonably be expected
to have known at the closing of its books for the taxable year.
Section 29(j) of the 1977 National Internal Revenue Code96 (Section 34(K) of the 1997
National Internal Revenue Code) expressly requires, as a condition for deductibility of
an expense, that the tax required to be withheld on the amount paid or payable is shown
to have been remitted to the Bureau of Internal Revenue by the taxpayer constituted
as a withholding agent of the government.
The provision of Section 72 of the 1977 National Internal Revenue Code (Section 79 of
the 1997 National Internal Revenue Code) regarding withholding on wages must be
read and construed in harmony with Section 29(j) of the 1977 National Internal
Revenue Code (Section 34(K) of the 1997 National Internal Revenue Code) on
deductions from gross income. This is in accordance with the rule on statutory
construction that an interpretation is to be sought which gives effect to the whole of the
statute, such that every part is made effective, harmonious, and sensible,97 if possible,
and not defeated nor rendered insignificant, meaningless, and nugatory.98 If we go by
the theory of petitioner ING Bank, then the condition imposed by Section 29(j) would
have been rendered nugatory, or we would in effect have created an exception to this
mandatory requirement when there was none in the law.
Reading together the two provisions, we hold that the obligation of the payor/employer
to deduct and withhold the related withholding tax arises at the time the income was
paid or accrued or recorded as an expense in the payor’s/employer’s books, whichever
comes first.
Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its
books. Therefore, its obligation to withhold the related withholding tax due from the
deductions for accrued bonuses arose at the time of accrual and not at the time of
actual payment.
In Filipinas Synthetic Fiber Corporation v. Court of Appeals,99 the issue was raised on
"whether the liability to withhold tax at source on income payments to non-resident
foreign corporations arises upon remittance of the amounts due to the foreign creditors
or upon accrual thereof."100 In resolving this issue, this court considered the nature of
the accounting method employed by the withholding agent, which was the accrual
method, wherein it was the right to receive income, and not the actual receipt, that
determined when to report the amount as part of the taxpayer’s gross income.101 It
upheld the lower court’s finding that there was already a definite liability on the part of
petitioner at the maturity of the loan contracts.102 Moreover, petitioner already
deducted as business expense the said amounts as interests due to the foreign
corporation.103 Consequently, the taxpayer could not claim that there was "no duty to
withhold and remit income taxes as yet because the loan contract was not yet due and
demandable."104 Petitioner, "[h]aving ‘written-off’ the amounts as business expense in
its books, . . . had taken advantage of the benefit provided in the law allowing for
deductions from gross income."105
Here, petitioner ING Bank already recognized a definite liability on its part considering
that it had deducted as business expense from its gross income the accrued bonuses
due to its employees. Underlying its accrual of the bonus expense was a reasonable
expectation or probability that the bonus would be achieved. In this sense, there was
already a constructive payment for income tax purposes as these accrued bonuses
were already allotted or made available to its officers and employees.
We note petitioner ING Bank's earlier claim before the Court of Tax Appeals that the
bonus accruals in 1996 and 1997 were disbursed in the following year of accrual, as
reimbursements of representation, travel, and entertainment expenses incurred by its
employees.106 This shows that the accrued bonuses in the amounts of ₱400,075.0l
(1996) and Pl,034,119.43 (1997) on which deficiency withholding taxes of Pl67,384.97
(1996) and ₱397,157.70 (1997) were imposed, respectively, were already set apart or
made available to petitioner ING Bank's officers and employees. To avoid any tax issue,
petitioner ING Bank should likewise have recognized the withholding tax liabilities
associated with the bonuses at the time of accrual.

WHEREFORE, the Petition is PARTLY GRANTED. The assessments with respect to

petitioner ING Bank's liabilities for deficiency documentary stamp taxes on its special
savings accounts for the taxable years 1996 and 1997 and deficiency tax on onshore
interest income under the foreign currency deposit system for taxable year 1996 are
hereby SET ASIDE solely in view of petitioner ING Bank's availment of the tax amnesty
program under Republic Act No. 9480. The April 5, 2005 Decision of the Court of Tax
Appeals En Banc, which affirmed the August 9, 2004 Decision and November 12, 2004
Resolution of the Court of Tax Appeals Second Division holding petitioner ING Bank
liable for deficiency withholding tax on compensation for the taxable years 1996 and
1997 in the total amount of ₱564,542.67 inclusive of interest, is AFFIRMED.

SO ORDERED.
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on the ground that it
is erroneous. We have carefully studied it and find it is not; on the contrary, it is
supported by law and doctrine. So finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of twelve ocean-going vessels.
1 The purchase price was to come from the proceeds of bonds issued by the Central
Bank. 2 Initial payments were made in cash and through irrevocable letters of credit. 3
Fourteen promissory notes were signed for the balance by the NDC and, as required
by the shipbuilders, guaranteed by the Republic of the Philippines. 4 Pursuant thereto,
the remaining payments and the interests thereon were remitted in due time by the
NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in
Tokyo. 5
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as
interest on the balance of the purchase price. No tax was withheld. The Commissioner
then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations
followed but failed. The BIR thereupon served on the NDC a warrant of distraint and
levy to enforce collection of the claimed amount. 6 The NDC went to the Court of Tax
Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in
the sum of P900.00, representing the compromise penalty. 7 The NDC then came to
this Court in a petition for certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest remitted to them under
Section 37 of the Tax Code, thus:
SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources
within the Philippines. — The following items of gross income shall be treated as gross
income from sources within the Philippines:
(1) Interest. — Interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not subject to tax under the
above provision because all the related activities — the signing of the contract, the
construction of the vessels, the payment of the stipulated price, and their delivery to the
NDC — were done in Tokyo. 8 The law, however, does not speak of activity but of
"source," which in this case is the NDC. This is a domestic and resident corporation
with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's right to levy and
collect income tax on interest received by foreign corporations not engaged in trade or
business within the Philippines is not planted upon the condition that 'the activity or
labor — and the sale from which the (interest) income flowed had its situs' in the
Philippines. The law specifies: 'Interest derived from sources within the Philippines, and
interest on bonds, notes, or other interest-bearing obligations of residents, corporate or
otherwise.' Nothing there speaks of the 'act or activity' of non-resident corporations in
the Philippines, or place where the contract is signed. The residence of the obligor who
pays the interest rather than the physical location of the securities, bonds or notes or
the place of payment, is the determining factor of the source of interest income.
(Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc.
10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; (b) Exclusion from gross income. — The following items shall not be included in gross
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) income and shall be exempt from taxation under this Title:
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, xxx xxx xxx
Id., Vol. 8, p. 124.)

(4) Interest on Government Securities. — Interest upon the obligations of the

Here in the case at bar, petitioner National Development Company, a corporation duly Government of the Republic of the Philippines or any political subdivision thereof, but
organized and existing under the laws of the Republic of the Philippines, with address in the case of such obligations issued after approval of this Code, only to the extent
and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally provided in the act authorizing the issue thereof. (As amended by Section 6, R.A. No.
promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory 82; emphasis supplied)
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.) The law invoked by the petitioner as authorizing the issuance of securities is R.A. No.
And pursuant to the terms and conditions of these promisory notes, which are duly 1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311
signed by its Vice Chairman and General Manager, petitioner remitted to the Japanese does carry such authorization but, like R.A. No. 1407, does not exempt from taxes the
shipbuilders in Japan during the years 1960, 1961, and 1962 the sum of $830,613.17, interests on such securities.
$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.) It is also incorrect to suggest that the Republic of the Philippines could not collect taxes
on the interest remitted because of the undertaking signed by the Secretary of Finance
in each of the promissory notes that:
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 Upon authority of the President of the Republic of the Philippines, the undersigned, for
laws of the Philippines, it is a domestic corporation, resident of the Philippines. (Sec. value received, hereby absolutely and unconditionally guarantee (sic), on behalf of the
84(c), National Internal Revenue Code.) The interest paid by petitioner, which is Republic of the Philippines, the due and punctual payment of both principal and interest
admittedly a resident of the Philippines, is on the promissory notes issued by it. Clearly, of the above note.10
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
There is nothing in the above undertaking exempting the interests from taxes. Petitioner
under the then Section 24(b)(1) of the National Internal Revenue Code. 9
has not established a clear waiver therein of the right to tax interests. Tax exemptions
cannot be merely implied but must be categorically and unmistakably expressed. 11
Any doubt concerning this question must be resolved in favor of the taxing power. 12
There is no basis for saying that the interest payments were obligations of the Republic
of the Philippines and that the promissory notes of the NDC were government securities
exempt from taxation under Section 29(b)[4] of the Tax Code, reading as follows:
Nowhere in the said undertaking do we find any inhibition against the collection of the
disputed taxes. In fact, such undertaking was made by the government in consonance
with and certainly not against the following provisions of the Tax Code:
SEC. 29. Gross Income. — xxxx xxx xxx xxx
Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership
(companies colectivas), in whatever capacity acting, including lessees or mortgagors
of real or personal capacity, executors, administrators, receivers, conservators,
fiduciaries, employers, and all officers and employees of the Government of the
Philippines having control, receipt, custody; disposal or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or categorical gains, profits and
income of any nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in the
cases provided for in subsection (a) of this section) deduct and withhold from such
annual or periodical gains, profits and income a tax to twenty (now 30%) per centum
thereof: ...
Sec. 54. Payment of corporation income tax at source. — In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business within
the Philippines and not having any office or place of business therein, there shall be
deducted and withheld at the source in the same manner and upon the same items as
is provided in section fifty-three a tax equal to thirty (now 35%) per centum thereof, and
such tax shall be returned and paid in the same manner and subject to the same
conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed
the obligations of the NDC but without diminution of its taxing power under existing
laws.
In suggesting that the NDC is merely an administrator of the funds of the Republic of
the Philippines, the petitioner closes its eyes to the nature of this entity as a corporation.
As such, it is governed in its proprietary activities not only by its charter but also by the
Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due
on the interests earned by the Japanese shipbuilders. It was the income of these
companies and not the Republic of the Philippines that was subject to the tax the NDC
did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for
its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed
by Section 53(c) of the Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to deduct and withhold
any tax under this section shall make return thereof, in duplicate, on or before the
fifteenth day of April of each year, and, on or before the time fixed by law for the
payment of the tax, shall pay the amount withheld to the officer of the Government of
the Philippines authorized to receive it. Every such person is made personally liable for
such tax, and is indemnified against the claims and demands of any person for the
amount of any payments made in accordance with the provisions of this section. (As
amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of
Tax Appeals, 13 the Court quoted with approval the following regulation of the BIR on
the responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax
due, and promptly causing a query to be addressed to the Commissioner of Internal
Revenue for the determination whether or not the income paid to an individual is not
subject to withholding. In case the Commissioner of Internal Revenue decides that the
income paid to an individual is not subject to withholding, the withholding agent may
thereupon remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax
Regulations).
"Strict observance of said steps is required of a withholding agent before he could be
released from liability," so said Justice Jose P. Bengson, who wrote the decision.
"Generally, the law frowns upon exemption from taxation; hence, an exempting
provision should be construed strictissimi juris." 14
The petitioner was remiss in the discharge of its obligation as the withholding agent of
the government an so should be held liable for its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as
to costs. It is so ordered.
G.R. No. 184450, January 24, 2017
JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES,
MARAH SHARYN M. DE CASTRO AND CRIS P. TENORIO, Petitioners, v.
SECRETARY OF FINANCE AND THE COMMISSIONER OF INTERNAL REVENUE,
Respondents.
G.R. No. 184508
SENATOR MANUEL A. ROXAS, Petitioner, v. MARGARITO B. TEVES, IN HIS
CAPACITY AS SECRETARY OF THE DEPARTMENT OF FINANCE AND LILIAN B.
HEFTI, IN HER CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE, Respondents.
G.R. No. 184538
TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), REPRESENTED BY ITS
PRESIDENT, DEMOCRITO T. MENDOZA, Petitioner, v. MARGARITO B. TEVES, IN
HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF FINANCE AND LILIAN
B. HEFTI, IN HER CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE Respondents.
G.R. No. 185234
.SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT ASSOCIATION
OF THE PHILIPPINES, INC. AND ERNESTO G. EBRO, Petitioners, v. MARGARITO
B. TEVES, IN HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF FINANCE
AND SIXTO S. ESQUIVIAS IV, IN HIS CAPACITY AS COMMISSIONER OF THE
BUREAU OF INTERNAL REVENUE, Respondents.
DECISION
SERENO, C.J.:
Before us are consolidated Petitions for Certiorari, Prohibition and Mandamus, under
Rule 65 of the 1997 Revised Rules of Court. These Petitions seek to nullify certain
provisions of Revenue Regulation No. (RR) 10-2008. The RR was issued by the Bureau
of Internal Revenue (BIR) on 24 September 2008 to implement the provisions of
Republic Act No. (R.A.) 9504. The law granted, among others, income tax exemption
for minimum wage earners (MWEs), as well as an increase in personal and additional
exemptions for individual taxpayers.
Petitioners assail the subject RR as an unauthorized departure from the legislative
intent of R.A. 9504. The regulation allegedly restricts the implementation of the MWEs'
income tax exemption only to the period starting from 6 July 2008, instead of applying
the exemption to the entire year 2008. They further challenge the BIR's adoption of the
prorated application of the new set of personal and additional exemptions for taxable
year 2008. They also contest the validity of the RR's alleged imposition of a condition
for the availment by MWEs of the exemption provided by R.A. 9504. Supposedly, in the
event they receive other benefits in excess of P30,000, they can no longer avail
themselves of that exemption. Petitioners contend that the law provides for the
unconditional exemption of MWEs from income tax and, thus, pray that the RR be
nullified.chanroblesvirtuallawlibrary
ANTECEDENT FACTS
R.A. 9504
On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill
No. (S.B.) 2293. On 21 May 2008, former President Gloria M. Arroyo certified the
passage of the bill as urgent through a letter addressed to then Senate President
Manuel Villar. On the same day, the bill was passed on second reading IN the Senate
and, on 27 May 2008, on third reading. The following day, 28 May 2008, the Senate
sent S.B. 2293 to the House of Representatives for the latter's concurrence.
On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an
amendment to House Bill No. (H.B.) 3971.
On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51,
and 79 of Republic Act No. 8424, as Amended, Otherwise Known as the National
Internal Revenue Code of 1997," was approved and signed into law by President
Arroyo. The following are the salient features of the new law:
chanRoblesvirtualLawlibrary
It increased the basic personal exemption from P20,000 for a single individual, P25,000
for the head of the family, and P32,000 for a married individual to P50,000 for each
individual.
It increased the additional exemption for each dependent not exceeding four from
P8,000 to P25,000.
It raised the Optional Standard Deduction (OSD) for individual taxpayers from 10% of
gross income to 40% of the gross receipts or gross sales.
It introduced the OSD to corporate taxpayers at no more than 40% of their gross
income.
It granted MWEs exemption from payment of income tax on their minimum wage,
holiday pay, overtime pay, night shift differential pay and hazard pay.1
Section 9 of the law provides that it shall take effect 15 days following its publication in
the Official Gazette or in at least two newspapers of general circulation. Accordingly,
R.A. 9504 was published in the Manila Bulletin and Malaya on 21 June 2008. On 6 July
2008, the end of the 15-day period, the law took effect.
RR 10-2008
On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008, implementing
the provisions of R.A. 9504. The relevant portions of the said RR read as follows:
chanRoblesvirtualLawlibrary
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to
read as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income.
xxxx
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall
not be considered in determining the P30,000.00 ceiling of 'other benefits' excluded
from gross income under Section 32 (b) (7) (e) of the Code. Provided that, the excess
of the 'de minimis' benefits over their respective ceilings prescribed by these regulations
shall be considered as part of 'other benefits' and the employee receiving it will be
subject to tax only on the excess over the P30,000.00 ceiling. Provided, further, that
MWEs receiving 'other benefits' exceeding the P30,000.00 limit shall be taxable on the
excess benefits, as well as on his salaries, wages and allowances, just like an
employee receiving compensation income beyond the SMW.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to
the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).
The RTWPB of each region shall determine the wage rates in the different regions
based on established criteria and shall be the basis of exemption from income tax for
this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of P30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the
employer to MWEs who were actually assigned to danger or strife-torn areas, disease-
infested places, or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not
satisfy the above criteria is deemed subject to income tax and consequently, to
withholding tax.
xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read
as follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income.-
(A) Requirement of Withholding. - Every employer must withhold from compensation
paid an amount computed in accordance with these Regulations. Provided, that no
withholding of tax shall be required on the SMW, including holiday pay, overtime pay,
night shift differential and hazard pay of MWEs in the private/public sectors as defined
in these Regulations. Provided, further, that an employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of P30,000.00, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her
entire earnings are not exempt from income tax and, consequently, shall be subject to
withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504, there
shall be a transitory withholding tax table for the period from July 6 to December 31,
2008 (Annex "D") determined by prorating the annual personal and additional
exemptions under R.A. 9504 over a period of six months. Thus, for individuals,
regardless of personal status, the prorated personal exemption is P25,000. and for
each qualified dependent child (QDC), P12,500.
xxxx
SECTION 9. Effectivity. -
These Regulations shall take effect beginning July 6, 2008. (Emphases
supplied)ChanRoblesVirtualawlibrary
The issuance and effectivity of RR 10-2008 implementing R.A. 9504 spawned the
present Petitions.
G.R. No. 184450
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing
for the prorated application of the personal and additional exemptions for taxable year
2008 to begin only effective 6 July 2008 for being contrary to Section 4 of Republic Act
No. 9504.2
Petitioners argue that the prorated application of the personal and additional
exemptions under RR 10-2008 is not "the legislative intendment in this jurisdiction."3
They stress that Congress has always maintained a policy of "full taxable year
treatment"4 as regards the application of tax exemption laws. They allege further that
R.A. 9504 did not provide for a prorated application of the new set of personal and
additional exemptions.5
G.R. No. 184508
Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full
taxable year treatment of the income tax benefits of the new law. He relies on what he
says is clear legislative intent In his "Explanatory Note of Senate Bill No. 103," he
stresses "the very spirit of enacting the subject tax exemption law"6 as follows:
chanRoblesvirtualLawlibrary
With the poor, every little bit counts, and by lifting their burden of paying income tax,
we give them opportunities to put their money to daily essentials as well as savings.
Minimum wage earners can no longer afford to be taxed and to be placed in the
cumbersome income tax process in the same manner as higher-earning employees. It
is our obligation to ease their burdens in any way we can.7 (Emphasis
Supplied)ChanRoblesVirtualawlibrary
Apart from raising the issue of legislative intent, Senator Roxas brings up the following
legal points to support his case for the full-year application of R.A. 9504's income tax
benefits. He says that the pro rata application of the assailed RR deprives MWEs of the
financial relief extended to them by the law;8 that Umali v. Estanislao9 serves as
jurisprudential basis for his position that R.A. 9504 should be applied on a full-year
basis to taxable year 2008;10 and that the social justice provisions of the 1987
Constitution, particularly Articles II and XIII, mandate a full application of the law
according to the spirit of R.A. 9504.11
On the scope of exemption of MWEs under R.A. 9504, Senator Roxas argues that the
exemption of MWEs is absolute, regardless of the amount of the other benefits they
receive. Thus, he posits that the Department of Finance (DOF) and the BIR committed
grave abuse of discretion amounting to lack and/or excess of jurisdiction. They
supposedly did so when they provided in Section 1 of RR 10-2008 the condition that
an MWE who receives "other benefits" exceeding the P30,000 limit would lose the tax
exemption.12 He further contends that the real intent of the law is to grant income tax
exemption to the MWE without any limitation or qualification, and that while it would be
reasonable to tax the benefits in excess of P30,000, it is unreasonable and unlawful to
tax both the excess benefits and the salaries, wages and allowances.13
G.R. No. 184538
Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A.
9504 provide for the application of the tax exemption for the full calendar year 2008. It
also espouses the interpretation that R.A. 9504 provides for the unqualified tax
exemption of the income of MWEs regardless of the other benefits they receive.14 In
conclusion, it says that RR 10-2008, which is only an implementing rule, amends the
original intent of R.A. 9504, which is the substantive law, and is thus null and void.
G.R. No. 185234
Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the
Philippines, Inc., and Ernesto Ebro allege that R.A. 9504 unconditionally grants MWEs
exemption from income tax on their taxable income, as wel1 as increased personal and
additional exemptions for other individual taxpayers, for the whole year 2008. They note
that the assailed RR 10-2008 restricts the start of the exemptions to 6 July 2008 and
provides that those MWEs who received "other benefits" in excess of P30,000 are not
exempt from income taxation. Petitioners believe this RR is a "patent nullity"15 and
therefore void.
Comment of the OSG
The Office of the Solicitor General (OSG) filed a Consolidated Comment16 and took
the position that the application of R.A. 9504 was intended to be prospective, and not
retroactive. This was supposedly the general rule under the rules of statutory
construction: law will only be applied retroactively if it clearly provides for retroactivity,
which is not provided in this instance.17
The OSG contends that Umali v. Estanislao is not applicable to the present case. It
explains that R.A. 7167, the subject of that case, was intended to adjust the personal
exemption levels to the poverty threshold prevailing in 1991. Hence, the Court in that
case held that R.A. 7167 had been given a retroactive effect. The OSG believes that
the grant of personal exemptions no longer took into account the poverty threshold level
under R.A. 9504, because the amounts of personal exemption far exceeded the poverty
threshold levels.18

The OSG further argues that the legislative intent of non-retroactivity was effectively
confirmed by the "Conforme" of Senator Escudero, Chairperson of the Senate
Committee on Ways and Means, on the draft revenue regulation that became RR 10-
2008.chanroblesvirtuallawlibrary
ISSUES
Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may
be distilled into three major ones:
First, whether the increased personal and additional exemptions provided by R.A. 9504
should be applied to the entire taxable year 2008 or prorated, considering that R.A.
9504 took effect only on 6 July 2008.
Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July
2008 only.
Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing
that an MWE who receives other benefits in excess of the statutory limit of P30,00019
is no longer entitled to the exemption provided by R.A. 9504.chanroblesvirtuallawlibrary
THE COURT'S RULING
I.
Whether the increased personal and additional exemptions provided by R.A. 9504
should be applied to the entire taxable year 2008 or prorated, considering that the law
took effect only on 6 July 2008
The personal and additional exemptions established by R.A. 9504 should be applied to
the entire taxable year 2008.
Umali is applicable.
Umali v. Estanislao20 supports this Court's stance that R.A. 9504 should be applied on
a full-year basis for the entire taxable year 2008.21 In Umali, Congress enacted R.A.
7167 amending the 1977 National Internal Revenue Code (NIRC). The amounts of
basic personal and additional exemptions given to individual income taxpayers were
adjusted to the poverty threshold level. R.A. 7167 came into law on 30 January 1992.
Controversy arose when the Commission of Internal Revenue (CIR) promulgated RR
1-92 stating that the regulation shall take effect on compensation income earned
beginning 1 January 1992. The issue posed was whether the increased personal and
additional exemptions could be applied to compensation income earned or received
during calendar year 1991, given that R.A. 7167 came into law only on 30 January
1992, when taxable year 1991 had already closed.
This Court ruled in the affirmative, considering that the increased exemptions were
already available on or before 15 April 1992, the date for the filing of individual income
tax returns. Further, the law itself provided that the new set of personal and additional
exemptions would be immediately available upon its effectivity. While R.A. 7167 had
not yet become effective during calendar year 1991, the Court found that it was a piece
of social legislation that was in part intended to alleviate the economic plight of the
lower-income taxpayers. For that purpose, the new law provided for adjustments "to
the poverty threshold level" prevailing at the time of the enactment of the law. The
relevant discussion is quoted below:
chanRoblesvirtualLawlibrary
[T]he Court is of the considered view that Rep. Act 7167 should cover or extend to
compensation income earned or received during calendar year 1991.
Sec. 29, par.(L), Item No. 4 of the National Internal Revenue Code, as amended,
provides:
chanRoblesvirtualLawlibrary
Upon the recommendation of the Secretary of Finance, the President shall
automatically adjust not more often than once every three years, the personal and
additional exemptions taking into account, among others, the movement in consumer
price indices, levels of minimum wages, and bare subsistence
levels.ChanRoblesVirtualawlibrary
As the personal and additional exemptions of individual taxpayers were last adjusted
in 1986, the President, upon the recommendation of the Secretary of Finance, could
have adjusted the personal and additional exemptions in 1989 by increasing the same
even without any legislation providing for such adjustment. But the President did not.
However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act
7167, was introduced in the House of Representatives in 1989 although its passage
was delayed and it did not become effective law until 30 January 1992. A perusal,
however, of the sponsorship remarks of Congressman Hernando B. Perez, Chairman
of the House Committee on Ways and Means, on House Bill 28970, provides an
indication of the intent of Congress in enacting Rep. Act 7167. The pertinent legislative
journal contains the following:
chanRoblesvirtualLawlibrary
At the outset, Mr. Perez explained that the Bill Provides for increased personal
additional exemptions to individuals in view of the higher standard of living.
The Bill, he stated, limits the amount of income of individuals subject to income tax to
enable them to spend for basic necessities and have more disposable income.
xxxx
Mr. Perez added that inflation has raised the basic necessities and that it had been
three years since the last exemption adjustment in 1986.
xxxx
Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the
effects of the current inflation and of the implementation of the salary standardization
law. Stating that it is imperative for the government to take measures to ease the burden
of the individual income tax tilers, Mr. Perez then cited specific examples of how the
measure can help assuage the burden to the taxpayers.
He then reiterated that the increase in the prices of commodities has eroded the
purchasing power of the peso despite the recent salary increases and emphasized that
the Bill will serve to compensate the adverse effects of inflation on the taxpayers. xxx
(Journal of the House of Representatives, May 23, 1990, pp. 32-
33).ChanRoblesVirtualawlibrary
It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides
for, as adjustments "to the poverty threshold level." Certainly, "the poverty threshold
level" is the poverty threshold level at the time Rep. Act 7167 was enacted by Congress,
not poverty threshold levels in futuro, at which time there may be need of further
adjustments in personal exemptions. Moreover, the Court can not lose sight of the fact
that these personal and additional exemptions are fixed amounts to which an individual
taxpayer is entitled, as a means to cushion the devastating effects of high prices and a
depreciated purchasing power of the currency. In the end, it is the lower-income and
the middle-income groups of taxpayers (not the high-income taxpayers) who stand to
benefit most from the increase of personal and additional exemptions provided for by
Rep. Act 7167. To that extent, the act is a social legislation intended to alleviate in part
the present economic plight of the lower income taxpayers. It is intended to remedy the
inadequacy of the heretofore existing personal and additional exemptions for individual
taxpayers.
And then, Rep. Act 7167 says that the increased personal exemptions that it provides
for shall be available thenceforth, that is, after Rep. Act 7167 shall have become
effective. In other words, these exemptions are available upon the filing of personal
income tax returns which is, under the National Internal Revenue Code, done not later
than the 15th day of April after the end of a calendar year. Thus, under Rep. Act 7167,
which became effective, as aforestated, on 30 January 1992, the increased exemptions
are literally available on or before 15 April 1992 (though not before 30 January 1992).
But these increased exemptions can be available on 15 April 1992 only in respect of
compensation income earned or received during the calendar year 1991.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as
available in respect of compensation income received during the 1990 calendar year;
the tax due in respect of said income had already accrued, and been presumably paid,
by 15 April 1991 and by 15 July 1991, at which time Rep. Act 7167 had not been
enacted. To make Rep. Act 7167 refer back to income received during 1990 would
require language explicitly retroactive in purport and effect, language that would have
to authorize the payment of refunds of taxes paid on 15 April 1991 and 15 July 1991:
such language is simply not found in Rep. Act 7167.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as
available only in respect of compensation income received during 1992, as the
implementing Revenue Regulations No. 1-92 purport to provide. Revenue Regulations
No. 1-92 would in effect postpone the availability of the increased exemptions to 1
January-15 April 1993, and thus literally defer the effectivity of Rep. Act 7167 to 1
January 1993. Thus, the implementing regulations collide frontally with Section 3 of
Rep. Act 7167 which states that the statute "shall take effect upon its approval." The
objective of the Secretary of Finance and the Commissioner of Internal Revenue in
postponing through Revenue Regulations No. 1-92 the legal effectivity of Rep. Act 7167
is, of course, entirely understandable-to defer to 1993 the reduction of governmental
tax revenues which irresistibly follows from the application of Rep. Act 7167. But the
law-making authority has spoken and the Court can not refuse to apply the law-maker's
words. Whether or not the government can afford the drop in tax revenues resulting
from such increased exemptions was for Congress (not this Court) to decide.22
(Emphases supplied)ChanRoblesVirtualawlibrary
In this case, Senator Francis Escudero's sponsorship speech for Senate Bill No. 2293
reveals two important points about R.A. 9504: (1) it is a piece of social legislation; and
(2) its intent is to make the proposed law immediately applicable, that is, to taxable year
2008:
chanRoblesvirtualLawlibrary
Mr. President, distinguished colleagues, Senate Bill No. 2293 seeks, among others, to
exempt minimum wage earners from the payment of income and/or withholding tax. It
is an attempt to help our people cope with the rising costs of commodities that seem to
be going up unhampered these past few months.
Mr. President, a few days ago, the Regional Tripartite and Wages Productivity Board
granted an increase of P20 per day as far as minimum wage earners arc concerned.
By way of impact, Senate Bill No. 2293 would grant our workers an additional salary or
take-home pay of approximately P34 per day, given the exemption that will be granted
to all minimum wage earners. It might be also worthy of note that on the part of the
public sector, the Senate Committee on Ways and Means included, as amongst those
who will be exempted from the payment of income tax and/or withholding tax.
government workers receiving Salary Grade V. We did not make any distinction so as
to include Steps 1 to 8 of Salary Grade V as long as one is employed in the public
sector or in government.
In contradistinction with House Bill No. 3971 approved by the House of Representatives
pertaining to a similar subject matter, the House of Representatives, very much like the
Senate, adopted the same levels of exemptions which are:
chanRoblesvirtualLawlibrary
From an allowable personal exemption for a single individual of P20,000, to a head of
family of P25,000, to a married individual of P32,000, both the House and the Senate
versions contain a higher personal exemption of P50,000.ChanRoblesVirtualawlibrary
Also, by way of personal additional exemption as far as dependents are concerned, up
to four, the House, very much like the Senate, recommended a higher ceiling of
P25,000 for each dependent not exceeding four, thereby increasing the maximum
additional exemptions and personal additional exemptions to as high as P200,000,
depending on one's status in life.
The House also, very much like the Senate, recommended by way of trying to address
the revenue loss on the part of the government, an optional standard deduction (OSD)
on gross sales, and/or gross receipts as far as individual taxpayers are concerned.
However, the House, unlike the Senate, recommended a Simplified Net Income Tax
Scheme (SNITS) in order to address the remaining balance of the revenue loss.
By way of contrast, the Senate Committee on Ways and Means recommended, in lieu
of SNITS, an optional standard deduction of 40% for corporations as far as their gross
income is concerned.
Mr. President, if we total the revenue loss as well as the gain brought about by the 40%
OSD on individuals on gross sales and receipts and 40% on gross income as far as
corporations are concerned, with a conservative availment rate as computed by the
Department of Finance, the government would still enjoy a gain of P.78 billion or P780
million if we use the high side of the computation however improbable it may be.
For the record, we would like to state that if the availment rate is computed at 15% for
individuals and 10% for corporations, the potential high side of a revenue gain would
amount to approximately P18.08 billion.
Mr. President, we have received many suggestions increasing the rate of personal
exemptions and personal additional exemptions. We have likewise received various
suggestions pertaining to the expansion of the coverage of the tax exemption granted
to minimum wage earners to encompass as well other income brackets.
However, the only suggestion other than or outside the provisions contained in House
Bill No. 3971 that the Senate Committee on Ways and Means adopted, was an
expansion of the exemption to cover overtime, holiday, nightshirt differential, and
hazard pay also being enjoyed by minimum wage earners. It entailed an additional
revenue loss of P1 billion approximately on the part of the government. However, Mr.
President, that was taken into account when I stated earlier that there will still be a
revenue gain on the conservative side on the part of government of P780 million.
Mr. President, [my distinguished colleagues in the Senate, we wish to provide a higher
exemption for our countrymen because of the incessant and constant increase in the
price of goods. Nonetheless, not only Our Committee, but also the Senate and
Congress, must act responsibly in recognizing that much as we would like to give all
forms of help that we can and must provide to our people, we also need to recognize
the need of the government to defray its expenses in providing services to the public.
This is the most that we can give at this time because the government operates on a
tight budget and is short on funds when it comes to the discharge of its main
expenses.]23
Mr. President, time will perhaps come and we can improve on this version, but at
present, this is the best, I believe, that we can give our people. But by way of
comparison, it is still P10 higher than what the wage boards were able to give minimum
wage earners. Given that, we were able to increase their take-home pay by the amount
equivalent to the tax exemption we have granted.
We urge our colleagues, Mr. President, to pass this bill in earnest so that we can
immediately grant relief to our people.
Thank you, Mr. President. (Emphases Supplied)24ChanRoblesVirtualawlibrary
Clearly, Senator Escudero expressed a sense of urgency for passing what would
subsequently become R.A. 9504. He was candid enough to admit that the bill needed
improvement, but because time was of the essence, he urged the Senate to pass the
bill immediately. The idea was immediate tax relief to the individual taxpayers,
particularly low - compensation earners, and an increase in their take-home
pay.25cralawred
Senator Miriam Defensor-Santiago also remarked during the deliberations that "the
increase in personal exemption from P20,000 to P50,000 is timely and appropriate
given the increased cost of living. Also, the increase in the additional exemption for
dependent children is necessary and timely."26
Finally, we consider the President's certification of the necessity of e immediate
enactment of Senate Bill No. 2293. That certification became e basis for the Senate to
dispense with the three-day rule27 for passing a bill. It evinced the intent of the
President to afford wage earners immediate tax relief from the impact of a worldwide
increase in the prices of commodities. Specifically, the certification stated that the
purpose was to "address the urgent need to cushion the adverse impact of the global
escalation of commodity prices upon the most vulnerable within the low income group
by providing expanded income tax relief."28
In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly
intended to afford immediate tax relief to individual taxpayers, particularly low-income
compensation earners. Indeed, if R.A. 9504 was to take effect beginning taxable year
2009 or half of the year 2008 only, then the intent of Congress to address the increase
in the cost of living in 2008 would have been negated.
Therefore, following Umali, the test is whether the new set of personal and additional
exemptions was available at the time of the filing of the income tax return. In other
words, while the status of the individual taxpayers is determined at the close of the
taxable year,29 their personal and additional exemptions - and consequently the
computation of their taxable income - are reckoned when the tax becomes due, and
not while the income is being earned or received.
The NIRC is clear on these matters. The taxable income of an individual taxpayer shall
be computed on the basis of the calendar year.30 The taxpayer is required to fi1e an
income tax return on the 15th of April of each year covering income of the preceding
taxable year.31 The tax due thereon shall be paid at the time the return is filed.32
It stands to reason that the new set of personal and additional exemptions, adjusted as
a form of social legislation to address the prevailing poverty threshold, should be given
effect at the most opportune time as the Court ruled in Umali.
The test provided by Umali is consistent with Ingalls v. Trinidad,33 in which the Court
dealt with the matter of a married person's reduced exemption. As early as 1923, the
Court already provided the reference point for determining the taxable income:
chanRoblesvirtualLawlibrary
[T]hese statutes dealing with the manner of collecting the income tax and with the
deductions to be made in favor of the taxpayer have reference to the time when the
return is filed and the tax assessed. If Act No. 2926 took, as it did take, effect on January
1, 1921, its provisions must be applied to income tax returns filed, and assessments
made from that date. This is the reason why Act No. 2833, and Act No. 2926, in their
respective first sections, refer to income received during the preceding civil year. (Italics
in the original)ChanRoblesVirtualawlibrary
There, the exemption was reduced, not increased, and the Court effectively ruled that
income tax due from the individual taxpayer is properly determined upon the filing of
the return. This is done after the end of the taxable year, when all the incomes for the
immediately preceding taxable year and the corresponding personal exemptions and/or
deductions therefor have been considered. Therefore, the taxpayer was made to pay
a higher tax for his income earned during 1920, even if the reduced exemption took
effect on 1 January 1921.
In the present case, the increased exemptions were already available much earlier than
the required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6
July 2008, more than nine months before the deadline for the filing of the income tax
return for taxable year 2008. Hence, individual taxpayers were entitled to claim the
increased amounts for the entire year 2008. This was true despite the fact that incomes
were already earned or received prior to the law's effectivity on 6 July 2008.
Even more compelling is the fact that R.A. 9504 became effective during the taxable
year in question. In Umali, the Court ruled that the application of the law was
prospective, even if the amending law took effect after the close of the taxable year in
question, but before the deadline for the filing of the return and payment of the taxes
due for that year. Here, not only did R.A. 9504 take effect before the deadline for the
filing of the return and payment for the taxes due for taxable year 2008, it took effect
way before the close of that taxable year. Therefore, the operation of the new set of
personal and additional exemption in the present case was all the more prospective.
Additionally, as will be discussed later, the rule of full taxable year treatment for the
availment of personal and additional exemptions was established, not by the
amendments introduced by R.A. 9504, but by the provisions of the 1997 Tax Code
itself. The new law merely introduced a change in the amounts of the basic and
additional personal exemptions. Hence, the fact that R.A. 9504 took effect only on 6
July 2008 is irrelevant.
The present case is substantially identical with Umali and not with Pansacola.
Respondents argue that Umali is not applicable to the present case. They contend that
the increase in personal and additional exemptions were necessary in that case to
conform to the 1991 poverty threshold level; but that in the present case, the amounts
under R.A. 9504 far exceed the poverty threshold level. To support their case,
respondents cite figures allegedly coming from the National Statistical Coordination
Board. According to those figures, in 2007, or one year before the effectivity of R.A.
9504, the poverty threshold per capita was P14,866 or P89,196 for a family of six.34
We are not persuaded.
The variance raised by respondents borders on the superficial. The message of Umali
is that there must be an event recognized by Congress that occasions the immediate
application of the increased amounts of personal and additional exemptions. In Umali,
that event was the failure to adjust the personal and additional exemptions to the
prevailing poverty threshold level. In this case, the legislators specified the increase in
the price of commodities as the basis for the immediate availability of the new amounts
of personal and additional exemptions.
We find the facts of this case to be substantially identical to those of Umali.
First, both cases involve an amendment to the prevailing tax code. The present
petitions call for the interpretation of the effective date of the increase in personal and
additional exemptions. Otherwise stated, the present case deals with an amendment
(R.A. 9504) to the prevailing tax code (R.A. 8424 or the 1997 Tax Code). Like the
present case, Umali involved an amendment to the then prevailing tax code - it
interpreted the effective date of R.A. 7167, an amendment to the 1977 NIRC, which
also increased personal and additional exemptions.
Second, the amending law in both cases reflects an intent to make the new set of
personal and additional exemptions immediately available after the effectivity of the
law. As already pointed out, in Umali, R.A. 7167 involved social legislation intended to
adjust personal and additional exemptions. The adjustment was made in keeping with
the poverty threshold level prevailing at the time.
Third, both cases involve social legislation intended to cure a social evil - R.A. 7167
was meant to adjust personal and additional exemptions in relation to the poverty
threshold level, while R.A. 9504 was geared towards addressing the impact of the
global increase in the price of goods.
Fourth, in both cases, it was clear that the intent of the legislature was to hasten the
enactment of the law to make its beneficial relief immediately available.
Pansacola is not applicable.
In lieu of Umali, the OSG relies on our ruling in Pansacola v. Commissioner of Internal
Revenue.35 In that case, the 1997 Tax Code (R.A. 8424) took effect on 1 January
1998, and the petitioner therein pleaded for the application of the new set of personal
and additional exemptions provided thereunder to taxable year 1997. R.A. 8424
explicitly provided for its effectivity on 1 January 1998, but it did not provide for any
retroactive application.
We ruled against the application of the new set of personal and additional exemptions
to the previous taxable year 1997, in which the filing and payment of the income tax
was due on 15 April 1998, even if the NIRC had already taken effect on 1 January
1998. This court explained that the NIRC could not be given retroactive application,
given the specific mandate of the law that it shall take effect on 1 January 1998; and
given the absence of any reference to the application of personal and additional
exemptions to income earned prior to 1 January 1998. We further stated that what the
law considers for the purpose of determining the income tax due is the status at the
close of the taxable year, as opposed to the time of filing of the return and payment of
the corresponding tax.
The facts of this case are not identical with those of Pansacola.
First, Pansacola interpreted the effectivity of an entirely new tax code - R.A. 8424, the
Tax Reform Act of 1997. The present case, like Umali, involves a mere amendment of
some specific provisions of the prevailing tax code: R.A. 7167 amending then P.D. 1158
(the 1977 NIRC) in Umali and R.A. 9504 amending R.A. 8424 herein.
Second, in Pansacola, the new tax code specifically provided for an effective date - the
beginning of the following year - that was to apply to all its provisions, including new
tax rates, new taxes, new requirements, as well as new exemptions. The tax code did
not make any exception to the effectivity of the subject exemptions, even if transitory
provisions36 specifically provided for different effectivity dates for certain provisions.
Hence, the Court did not find any legislative intent to make the new rates of personal
and additional exemptions available to the income earned in the year previous to R.A.
8424's effectivity. In the present case, as previously discussed, there was a clear intent
on the part of Congress to make the new amounts of personal and additional
exemptions immediately available for the entire taxable year 2008. R.A. 9504 does not
even need a provision providing for retroactive application because, as mentioned
above, it is actually prospective - the new law took effect during the taxable year in
question.
Third, in Pansacola, the retroactive application of the new rates of personal and
additional exemptions would result in an absurdity - new tax rates under the new law
would not apply, but a new set of personal and additional exemptions could be availed
of. This situation does not obtain in this case, however, precisely because the new law
does not involve an entirely new tax code. The new law is merely an amendment to the
rates of personal and additional exemptions.
Nonetheless, R.A. 9504 can still be made applicable to taxable year 2008, even if we
apply the Pansacola test. We stress that Pansacola considers the close of the taxable
year as the reckoning date for the effectivity of the new exemptions. In that case, the
Court refused the application of the new set of personal exemptions, since they were
not yet available at the close of the taxable year. In this case, however, at the close of
the taxable year, the new set of exemptions was already available. In fact, it was
already available during the taxable year - as early as 6 July 2008 - when the new law
took effect.
There may appear to be some dissonance between the Court's declarations in Umali
and those in Pansacola, which held:
chanRoblesvirtualLawlibrary
Clearly from the above-quoted provisions, what the law should consider for the purpose
of determining the tax due from an individual taxpayer is his status and qualified
dependents at the close of the taxable year and not at the time the return is filed and
the tax due thereon is paid. Now comes Section 35(C) of the NIRC which provides,

xxxx
Emphasis must be made that Section 35(C) of the NIRC allows a taxpayer to still claim
the corresponding full amount of exemption for a taxable year, e.g. if he marries; have
additional dependents; he, his spouse, or any of his dependents die; and if any of his
dependents marry, turn 21 years old; or become gainfully employed. It is as if the
changes in his or his dependents status took place at the close of the taxable year.
Consequently, his correct taxable income and his corresponding allowable deductions
e.g. personal and additional deductions, if any, had already been determined as of the
end of the calendar year.
xxx. Since the NIRC took effect on January 1, 1998, the increased amounts of personal
and additional exemptions under Section 35, can only be allowed as deductions from
the individual taxpayers gross or net income, as the case maybe, for the taxable year
1998 to be filed in 1999. The NIRC made no reference that the personal and additional
exemptions shall apply on income earned before January 1,
1998.37ChanRoblesVirtualawlibrary
It must be remembered, however, that the Court therein emphasized that Umali was
interpreting a social legislation:
chanRoblesvirtualLawlibrary
In Umali, we noted that despite being given authority by Section 29(1)(4) of the National
Internal Revenue Code of 1977 to adjust these exemptions, no adjustments were made
to cover 1989. Note that Rep. Act No. 7167 is entitled "An Act Adjusting the Basic
Personal and Additional Exemptions Allowable to Individuals for Income Tax Purposes
to the Poverty Threshold Level, Amending for the Purpose Section 29, Paragraph (L),
Items (1) and (2) (A), of the National Internal Revenue Code, As Amended, and For
Other Purposes." Thus, we said in Umali, that the adjustment provided by Rep. Act No.
7167 effective 1992, should consider the poverty threshold level in 1991, the time it
was enacted. And we observed therein that since the exemptions would especially
benefit lower and middle-income taxpayers, the exemption should be made to cover
the past year 1991. To such an extent, Rep. Act No. 7167 was a social legislation
intended to remedy the non-adjustment in 1989. And as cited in Umali, this legislative
intent is also clear in the records of the House of Representatives Journal.
This is not so in the case at bar. There is nothing in the NIRC that expresses any such
intent. The policy declarations in its enactment do not indicate it was a social legislation
that adjusted personal and additional exemptions according to the poverty threshold
level nor is there any indication that its application should retroact. xxx38 (Emphasis
Supplied)ChanRoblesVirtualawlibrary
Therefore, the seemingly inconsistent pronouncements in Umali and Pansacola are
more apparent than real. The circumstances of the cases and the laws interpreted, as
well as the legislative intents thereof, were different.
The policy in this jurisdiction is full taxable year treatment.
We have perused R.A. 9504, and we see nothing that expressly provides or even
suggests a prorated application of the exemptions for taxable year 2008. On the other
hand, the policy of full taxable year treatment, especially of the personal and additional
exemptions, is clear under Section 35, particularly paragraph C of R.A. 8424 or the
1997 Tax Code:
chanRoblesvirtualLawlibrary
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided in Section 24(A) of this
Title, there shall be allowed a basic personal exemption as follows:
xxxx
(B) Additional Exemption for Dependents. - There shall be allowed an additional
exemption of... for each dependent not exceeding four (4).
xxxx
(C) Change of Status. - If the taxpayer marries or should have additional dependent(s)
as defined above during the taxable year, the taxpayer may claim the corresponding
additional exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such
year.
If the spouse or any of the dependents dies or if any of such dependents marries,
becomes twenty-one (21) years old or becomes gainfully employed during the taxable
year, the taxpayer may still claim the same exemptions as if the spouse or any of the
dependents died, or as if such dependents married, became twenty-one (21) years old
or became gainfully employed at the close of such year. (Emphases
supplied)ChanRoblesVirtualawlibrary
Note that paragraph C does not allow the prorating of the personal and additional
exemptions provided in paragraphs A and B, even in case a status - changing event
occurs during the taxable year. Rather, it allows the fullest benefit to the individual
taxpayer. This manner of reckoning the taxpayer's status for purposes of the personal
and additional exemptions clearly demonstrates the legislative intention; that is, for the
state to give the taxpayer the maximum exemptions that can be availed,
notwithstanding the fact that the latter's actual status would qualify only for a lower
exemption if prorating were employed.
We therefore see no reason why we should make any distinction between the income
earned prior to the effectivity of the amendment (from 1 January 2008 to 5 July 2008)
and that earned thereafter (from 6 July 2008 to 31 December 2008) as none is indicated
in the law. The principle that the courts should not distinguish when the law itself does
not distinguish squarely applies to this case.39
We note that the prorating of personal and additional exemptions was employed in the
1939 Tax Code. Section 23(d) of that law states:
chanRoblesvirtualLawlibrary
Change of status. - If the status of the taxpayer insofar as it affects the personal and
additional exemptions for himself or his dependents, changes during the taxable year,
the amount of the personal and additional exemptions shall be apportioned, under rules
and regulations prescribed by the Secretary of Finance, in accordance with the number
of months before and after such change. For the purpose of such apportionment a
fractional part of a month shall be disregarded unless it amounts to more than half a
month, in which case it shall be considered as a month.40 (Emphasis
supplied)ChanRoblesVirtualawlibrary
On 22 September 1950, R.A. 590 amended Section 23(d) of the 1939 Tax Code by
restricting the operation of the prorating of personal exemptions. As amended, Section
23(d) reads:
chanRoblesvirtualLawlibrary
(d) Change of status. - If the status of the taxpayer insofar as it affects the personal and
additional exemption for himself or his dependents, changes during the taxable year by
reason of his death, the amount of the personal and additional exemptions shall be
apportioned, under rules and regulations prescribed by the Secretary of Finance, in
accordance with the number of months before and after such change. For the purpose
of such apportionment a fractional part of a month shall be disregarded unless it
amounts to more than half a month, in which case it shall be considered as a month.41
(Emphasis supplied)ChanRoblesVirtualawlibrary
Nevertheless, in 1969, R. A. 6110 ended the operation of the prorating scheme in our
jurisdiction when it amended Section 23(d) of the 1939 Tax Code and adopted a full
taxable year treatment of the personal and additional exemptions. Section 23(d), as
amended, reads:
chanRoblesvirtualLawlibrary
(d) Change of status.
If the taxpayer married or should have additional dependents as defined in subsection
(c) above during the taxable year the taxpayer may claim the corresponding personal
exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional deductions for himself and his dependents as if he died at the close of
such year.
If the spouse or any of the dependents should die during the year, the taxpayer may
still claim the same deductions as if they died at the close of such
year.ChanRoblesVirtualawlibrary
P.D. 69 followed in 1972, and it retained the full taxable year scheme. Section 23(d)
thereof reads as follows:
chanRoblesvirtualLawlibrary
(d) Change of status. - If the taxpayer marries or should have additional dependents as
defined in subsection (c) above during the taxable year the taxpayer may claim the
corresponding personal exemptions in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional deductions for himself and his dependents as if he died at the close of
such year.
If the spouse or any of the dependents should die or become twenty-one years old
during the taxable year, the taxpayer may still claim the same exemptions as if they
died, or as if such dependents became twenty-one years old at the close of such
year.ChanRoblesVirtualawlibrary
The 1977 Tax Code continued the policy of full taxable year treatment. Section 23(d)
thereof states:
chanRoblesvirtualLawlibrary
(d) Change of status. - If the taxpayer married or should have additional dependents
as defined in subsection (c) above during the taxable year, the taxpayer may claim the
corresponding personal exemption in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional exemptions for himself and his dependents as if he died at the close of
such year.
If the spouse or any of the dependents should die or become twenty-one years old
during the taxable year, the taxpayer may still claim the same exemptions as if they
died, or as if such dependents became twenty-one years old at the close of such
year.ChanRoblesVirtualawlibrary
While Section 23 of the 1977 Tax Code underwent changes, the provision on full
taxable year treatment in case of the taxpayer's change of status was left untouched.42
Executive Order No. 37, issued on 31 July 1986, retained the change of status provision
verbatim. The provision appeared under Section 30(1)(3) of the NIRC, as amended:
chanRoblesvirtualLawlibrary
(3) Change of status. - If the taxpayer married or should have additional dependents
as defined above during the taxable year, the taxpayer may claim the corresponding
personal and additional exemptions, as the case may be, in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional exemptions for himself and his dependents as if he died at the close of
such year.
If the spouse or any of the dependents should die or if any of such dependents becomes
twenty-one years old during the taxable year, the taxpayer may still claim the same
exemptions as if they died, or if such dependents become twenty-one years old at the
close of such year.ChanRoblesVirtualawlibrary
Therefore, the legislative policy of full taxable year treatment of the personal and
additional exemptions has been in our jurisdiction continuously since 1969. The
prorating approach has long since been abandoned. Had Congress intended to revert
to that scheme, then it should have so stated in clear and unmistakeable terms. There
is nothing, however, in R.A. 9504 that provides for the reinstatement of the prorating
scheme. On the contrary, the change-of-status provision utilizing the full-year scheme
in the 1997 Tax Code was left untouched by R.A. 9504.
We now arrive at this important point: the policy of full taxable year treatment is
established, not by the amendments introduced by R.A. 9504, but by the provisions of
the 1997 Tax Code, which adopted the policy from as early as 1969.
There is, of course, nothing to prevent Congress from again adopting a policy that
prorates the effectivity of basic personal and additional exemptions. This policy,
however, must be explicitly provided for by law - to amend the prevailing law, which
provides for full-year treatment. As already pointed out, R.A. 9504 is totally silent on
the matter. This silence cannot be presumed by the BIR as providing for a half-year
application of the new exemption levels. Such presumption is unjust, as incomes do
not remain the same from month to month, especially for the MWEs.
Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new
personal and additional exemptions. In so doing, respondents overstepped the bounds
of their rule-making power. It is an established rule that administrative regulations are
valid only when these are consistent with the law.43 Respondents cannot amend, by
mere regulation, the laws they administer.44 To do so would violate the principle of
non--delegability of legislative powers.45
The prorated application of the new set of personal and additional exemptions for the
year 2008, which was introduced by respondents, cannot even be justified under the
exception to the canon of non-delegability; that is, when Congress makes a delegation
to the executive branch.46 The delegation would fail the two accepted tests for a valid
delegation of legislative power; the completeness test and the sufficient standard
test.47 The first test requires the law to be complete in all its terms and conditions, such
that the only thing the delegate will have to do is to enforce it.48 The sufficient standard
test requires adequate guidelines or limitations in the law that map out the boundaries
of the delegate's authority and canalize the delegation.49
In this case, respondents went beyond enforcement of the law, given the absence of a
provision in R.A. 9504 mandating the prorated application of the new amounts of
personal and additional exemptions for 2008. Further, even assuming that the law
intended a prorated application, there are no parameters set forth in R.A. 9504 that
would delimit the legislative power surrendered by Congress to the delegate. In
contrast, Section 23(d) of the 1939 Tax Code authorized not only the prorating of the
exemptions in case of change of status of the taxpayer, but also authorized the
Secretary of Finance to prescribe the corresponding rules and
regulations.chanroblesvirtuallawlibrary
II.
Whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008 only
The MWE is exempt for the entire taxable year 2008.
As in the case of the adjusted personal and additional exemptions, the MWE exemption
should apply to the entire taxable year 2008, and not only from 6 July 2008 onwards.
We see no reason why Umali cannot be made applicable to the MWE exemption, which
is undoubtedly a piece of social legislation. It was intended to alleviate the plight of the
working class, especially the low -income earners. In concrete terms, the exemption
translates to a P34 per day benefit, as pointed out by Senator Escudero in his
sponsorship speech.50
As it stands, the calendar year 2008 remained as one taxable year for an individual
taxpayer. Therefore, RR 10-2008 cannot declare the income earned by a minimum
wage earner from 1 January 2008 to 5 July 2008 to be taxable and those earned by
him for the rest of that year to be tax-exempt. To do so would be to contradict the NIRC
and jurisprudence, as taxable income would then cease to be determined on a yearly
basis.
Respondents point to the letter of former Commissioner of Internal Revenue Lilia B.
Hefti dated 5 July 2008 and petitioner Sen. Escudero's signature on the Conforme
portion thereof. This letter and the conforme supposedly establish the legislative intent
not to make the benefits of R.A. 9504 effective as of 1 January 2008.
We are not convinced. The conforme is irrelevant in the determination of legislative
intent.
We quote below the relevant portion of former Commissioner Hefti's letter:
chanRoblesvirtualLawlibrary
Attached herewith are salient features of the proposed regulations to implement RA
9504 xxx. We have tabulated critical issues raised during the public hearing and
comments received from the public which we need immediate written resolution based
on the inten[t]ion of the law more particularly the effectivity clause. Due to the
expediency and clamor of the public for its immediate implementation, may we request
your confirmation on the proposed recommendation within five (5) days from receipt
hereof. Otherwise, we shall construe your affirmation.51ChanRoblesVirtualawlibrary
We observe that a Matrix of Salient Features of Proposed Revenue Regulations per
R.A. 9504 was attached to the letter.52 The Matrix had a column entitled "Remarks"
opposite the Recommended Resolution. In that column, noted was a suggestion
coming from petitioner TMAP:
chanRoblesvirtualLawlibrary
TMAP suggested that it should be retroactive considering that it was [for] the benefit of
the majority and to alleviate the plight of workers. Exemption should be applied for the
whole taxable year as provided in the NIRC. xxx Umali v. Estanislao [ruled] that the
increase[d] exemption in 1992 [was applicable] [to] 1991.
Majority issues raised during the public hearing last July 1, 2008 and emails received
suggested [a] retroactive implementation.53 Italics in the
original)ChanRoblesVirtualawlibrary
The above remarks belie the claim that the conforme is evidence of the legislative intent
to make the benefits available only from 6 July 2008 onwards. There would have been
no need to make the remarks if the BIR had merely wanted to confirm was the
availability of the law's benefits to income earned starting 6 July 2008. Rather, the
implication is that the BIR was requesting the conformity of petitioner Senator Escudero
to the proposed implementing rules, subject to the remarks contained in the Matrix.
Certainly, it cannot be said that Senator Escudero's conforme is evidence of legislative
intent to the effect that the benefits of the law would not apply to income earned from 1
January 2008 to 5 July 2008.
Senator Escudero himself states in G.R. No. 185234:
chanRoblesvirtualLawlibrary
In his bid to ensure that the BIR would observe the effectivity dates of the grant of tax
exemptions and increased basic personal and additional exemptions under Republic
Act No. 9504, Petitioner Escudero, as Co-Chairperson of the Congressional Oversight
Committee on Comprehensive Tax Reform Program, and his counterpart in the House
of Representatives, Hon. Exequiel B. Javier, conveyed through a letter, dated 16
September 2008, to Respondent Teves the legislative intent that "Republic Act (RA)
No. 9504 must be made applicable to the entire taxable year 2008" considering that it
was "a social legislation intended to somehow alleviate the plight of minimum wage
earners or low income taxpayers". They also jointly expressed their "fervent hope that
the corresponding Revenue Regulations that will be issued reflect the true legislative
intent and rightful statutory interpretation of R.A. No.
9504."54ChanRoblesVirtualawlibrary
Senator Escudero repeats in his Memorandum:
chanRoblesvirtualLawlibrary
On 16 September 2008, the Chairpersons (one of them being herein Petitioner Sen.
Escudero) of the Congressional Oversight Committee on Comprehensive Tax Reform
Program of both House of Congress wrote Respondent DOF Sec. Margarito Teves,
and requested that the revenue regulations (then yet still to be issued)55 to implement
Republic Act No. 9504 reflect the true intent and rightful statutory interpretation thereof,
specifically that the grant of tax exemption and increased basic personal and additional
exemptions be made available for the entire taxable year 2008. Yet, the DOF
promulgated Rev. Reg. No. 10-2008 in contravention of such legislative intent.
xxx.56ChanRoblesVirtualawlibrary
We have gone through the records and we do not see anything that would to suggest
that respondents deny the senator's assertion.
Clearly, Senator Escudero's assertion is that the legislative intent is to make the MWE's
tax exemption and the increased basic personal and additional exemptions available
for the entire year 2008. In the face of his assertions, respondents' claim that his
conforme to Commissioner Hefti's letter was evidence of legislative intent becomes
baseless and specious. The remarks described above and the subsequent letter sent
to DOF Secretary Teves, by no less than the Chairpersons of the Bi-cameral
Congressional Oversight Committee on Comprehensive Tax Reform Program, should
have settled for respondents the matter of what the legislature intended for R.A. 9504's
exemptions.
Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the
availment of the MWE's tax exemption and the increased personal and additional
exemptions beginning only on 6 July 2008 is in contravention of the law it purports to
implement.
A clarification is proper at this point. Our ruling that the MWE exemption is available for
the entire taxable year 2008 is premised on the fact of one's status as an MWE; that is,
whether the employee during the entire year of 2008 was an MWE as defined by R.A.
9504. When the wages received exceed the minimum wage anytime during the taxable
year, the employee necessarily loses the MWE qualification. Therefore, wages become
taxable as the employee ceased to be an MWE. But the exemption of the employee
from tax on the income previously earned as an MWE remams.
This rule reflects the understanding of the Senate as gleaned from the exchange
between Senator Miriam Defensor-Santiago and Senator Escudero:
chanRoblesvirtualLawlibrary
Asked by Senator Defensor-Santiago on how a person would be taxed if, during the
year, he is promoted from Salary Grade 5 to Salary Grade 6 in July and ceases to be
a minimum wage employee, Senator Escudero said that the tax computation would be
based starting on the new salary in July.57ChanRoblesVirtualawlibrary
As the exemption is based on the employee's status as an MWE, the operative phrase
is when the employee ceases to be an MWE. Even beyond 2008, it is therefore possible
for one employee to be exempt early in the year for being an MWE for that period, and
subsequently become taxable in the middle of the same year with respect to the
compensation income, as when the pay is increased higher than the minimum wage.
The improvement of one's lot, however, cannot justly operate to make the employee
liable for tax on the income earned as an MWE.
Additionally, on the question of whether one who ceases to be an MWE may still be
entitled to the personal and additional exemptions, the answer must necessarily be yes.
The MWE exemption is separate and distinct from the personal and additional
exemptions. One's status as an MWE does not preclude enjoyment of the personal and
additional exemptions. Thus, when one is an MWE during a part of the year and later
earns higher than the minimum wage and becomes a non-MWE, only earnings for that
period when one is a non-MWE is subject to tax. It also necessarily follows that such
an employee is entitled to the personal and additional exemptions that any individual
taxpayer with taxable gross income is entitled.
A different interpretation will actually render the MWE exemption a totally oppressive
legislation. It would be a total absurdity to disqualifY an MWE from enjoying as much
as P150,00058 in personal and additional exemptions just because sometime in the
year, he or she ceases to be an MWE by earning a little more in wages. Laws cannot
be interpreted with such absurd and unjust outcome. It is axiomatic that the legislature
is assumed to intend right and equity in the laws it passes.59
Critical, therefore, is how an employee ceases to become an MWE and thus ceases to
be entitled to an MWE's exemption.
III.
Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in declaring that
an MWE who receives other benefits in excess of the statutory limit of P30,000 is no
longer entitled to the exemption provided by R.A. 9504, is consistent with the law.
Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively
declaring that an MWE who receives other benefits in excess of the statutory limit of
P30,000 is no longer entitled to the exemption provided by R.A. 9504.
The BIR added a requirement not found in the law.
The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder for easier
reference.
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to
read as follows:
chanRoblesvirtualLawlibrary
Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -
(A) Compensation Income Defined. - xxx
xxxx
(3) Facilities and privileges of relatively small value. - Ordinarily, facilities, and privileges
(such as entertainment. medical services, or so--called "courtesy" discounts on
purchases), otherwise known as "de minimis benefits," furnished or offered by an
employer to his employees, are not considered as compensation subject to income tax
and consequently to withholding tax, if such facilities or privileges are of relatively small
value and are offered or furnished by the employer merely as means of promoting the
health, goodwill, contentment, or efficiency of his employees.
The following shall be considered as "de minimis" benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and
rank and file employees:
chanRoblesvirtualLawlibrary
(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year and the monetized value of leave credits paid to government officials
and employees;chanrobleslaw
(b) Medical cash allowance to dependents of employees not exceedingP750.00 per
employee per semester or P125 per month;chanrobleslaw
(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to not
more than P1,500.00;chanrobleslaw
(d) Uniforms and clothing allowance not exceeding P4,000.00 per
annum;chanrobleslaw
(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;chanrobleslaw
(f) Laundry allowance not exceeding P300.00 per month;chanrobleslaw
(g) Employees achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000.00 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees;chanrobleslaw
(h) Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000.00 per employee per annum;chanrobleslaw
(i) Flowers, fruits, books, or similar items given to employees under special
circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not exceeding twenty--five percent (25%) of
the basic minimum wage.60ChanRoblesVirtualawlibrary
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall
not be considered in determining the P30,000.00 ceiling of 'other benefits' excluded
from gross income under Section 32(b)(7)(e) of the Code. Provided that, the excess of
the 'de minimis' benefits over their respective ceilings prescribed by these regulations
shall be considered as part of 'other benefits' and the employee receiving it will be
subject to tax only on the excess over the P30,000.00 ceiling. Provided, further, that
MWEs rece1vmg 'other benefits' exceeding the P30,000.00 limit shall be taxable on the
excess benefits, as well as on his salaries, wages and allowances, just like an
employee receiving compensation income beyond the SMW.
Any amount given by the employer as benefits to its employees, whether classified as
'de minimis' benefits or fringe benefits, shall constitute [a] deductible expense upon
such employer.
Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld
is available for payment to the Bureau of Internal Revenue.
xxxxChanRoblesVirtualawlibrary
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to
the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).
The RTWPB of each region shall determine the wage rates in the different regions
based on established criteria and shall be the basis of exemption from income tax for
this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of P30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt form income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the [statutory minimum wage], [h]oliday pay,
overtime pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.
For purposes of these regulations, hazard pay shall mean xxx.
In case of hazardous employment, xxx
The NWPC shall officially submit a Matrix of Wage Order by region xxx
Any reduction or diminution of wages for purposes of exemption from income tax shall
constitute misrepresentation and therefore, shall result to the automatic disallowance
of expense, i.e. compensation and benefits account, on the part of the employer. The
offenders may be criminally prosecuted under existing laws.
(14) Compensation income of employees in the public sector with compensation
income of not more than the SMW in the non-agricultural sector, as fixed by
RTWPB/NWPC, applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
The basic salary of MWEs in the public sector shall be equated to the SMW in the non-
agricultural sector applicable to the place where he/she is assigned. The determination
of the SMW in the public sector shall likewise adopt the same procedures and
consideration as those of the private sector.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of P30,000.00, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, night shift differential pay and
hazard pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire
earnings are not exempt from income tax and, consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night
shift differential pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean xxx
In case of hazardous employment, xxx
xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read
as follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income.-
(A) Requirement of Withholding. - Every employer must withhold from compensation
paid an amount computed in accordance with these Regulations. Provided, that no
withholding of tax shall be required on the SMW, including holiday pay, overtime pay,
night shift differential and hazard pay of MWEs in the private/public sectors as defined
in these Regulations. Provided, further, that an employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of P30,000.00, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her
entire earnings are not exempt from income tax and, consequently, shall be subject to
withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504, there
shall be a transitory withholding tax table for the period from July 6 to December 31,
2008 (Annex "D") determined by prorating the annual personal and additional
exemptions under R.A. 9504 over a period of six months. Thus, for individuals,
regardless of personal status, the prorated personal exemption is P25,000, and for
each qualified dependent child (QDC), P12,500.ChanRoblesVirtualawlibrary
On the other hand, the pertinent provisions of law, which are supposed to be
implemented by the above-quoted sections of RR 10-2008, read as follows:
chanRoblesvirtualLawlibrary
SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as
the National Internal Revenue Code of 1997, is hereby further amended by adding the
following definitions after Subsection (FF) to read as follows:
chanRoblesvirtualLawlibrary
Section 22. Definitions. - when used in this Title:61
(A) xxx
(FF) xxx
(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).
(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid
the statutory minimum wage, or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector
where he/she is assigned.ChanRoblesVirtualawlibrary
SECTION 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known
as the National Internal Revenue Code of 1997, is hereby further amended to read as
follows:
chanRoblesvirtualLawlibrary
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines. -
(1) xxx
xxxx; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year
from all sources within the Philippines by an individual alien who is a resident of the
Philippines.
(2) Rates of Tax on Taxable Income of Individuals.
The tax shall be computed in accordance with and at the rates established in the
following schedule:
xxxx
For married individuals, the husband and wife, subject to the provision of Section 51
(D) hereof, shall compute separately their individual income tax based on their
respective total taxable income: Provided, That if any income cannot be definitely
attributed to or identified as income exclusively earned or realized by either of the
spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.
Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift differential pay and hazard pay received
by such minimum wage earners shall likewise be exempt from income tax.
xxxxChanRoblesVirtualawlibrary
SECTION 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise known
as the National Internal Revenue Code of 1997, is hereby further amended to read as
follows:
chanRoblesvirtualLawlibrary
SEC. 51. Individual Return. -
(A) Requirements. -

(1) Except as provided in paragraph (2) of this Subsection, the following individuals are
required to file an income tax return:
(a) xxx
xxxx
(2) The following individuals shall not be required to file an income tax return:
(a) xxx
(b) An individual with respect to pure compensation income, as defined in Section
32(A)(1), derived from sources within the Philippines, the income tax on which has been
correctly withheld under the provisions of Section 79 of this Code:
Provided, That an individual deriving compensation concurrently from two or more
employers at any time during the taxable year shall file an income tax
return;chanrobleslaw
(c) xxx; and
(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual
who is exempt from income tax pursuant to the provisions of this Code and other laws,
general or special.
xxxxChanRoblesVirtualawlibrary
SECTION 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known
as the National Internal Revenue Code of 1997, is hereby further amended to read as
follows:
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SEC. 79. Income Tax Collected at Source. -
(A) Requirement of Withholding. - Except in the case of a minimum wage earner as
defined in Section 22(HH) of this Code, every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in accordance with the rules
and regulations to be prescribed by the Secretary of Finance, upon recommendation
of the Commissioner. (Emphases supplied)ChanRoblesVirtualawlibrary
Nowhere in the above provisions of R.A. 9504 would one find the qualifications
prescribed by the assailed provisions of RR 10-2008. The provisions of the law are
clear and precise; they leave no room for interpretation - they do not provide or require
any other qualification as to who are MWEs.
To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH)
says he/she must be one who is paid the statutory minimum wage if he/she works in
the private sector, or not more than the statutory minimum wage in the non-agricultural
sector where he/she is assigned, if he/she is a government employee. Thus, one is
either an MWE or he/she is not. Simply put, MWE is the status acquired upon passing
the litmus test - whether one receives wages not exceeding the prescribed minimum
wage.
The minimum wage referred to in the definition has itself a clear and definite meaning.
The law explicitly refers to the rate fixed by the Regional Tripartite Wage and
Productivity Board, which is a creation of the Labor Code.62 The Labor Code clearly
describes wages and Minimum Wage under Title II of the Labor Code. Specifically,
Article 97 defines "wage" as follows:
chanRoblesvirtualLawlibrary
(f) "Wage" paid to any employee shall mean the remuneration or earnings, however
designated, capable of being expressed in terms of money, whether fixed or
ascertained on a time, task, piece, or commission basis, or other method of calculating
the same, which is payable by an employer to an employee under a written or unwritten
contract of employment for work done or to be done, or for services rendered or to be
rendered and includes the fair and reasonable value, as determined by the Secretary
of Labor and Employment, of board, lodging, or other facilities customarily furnished by
the employer to the employee. "Fair and reasonable value" shall not include any profit
to the employer, or to any person affiliated with the
employer.ChanRoblesVirtualawlibrary
While the Labor Code's definition of "wage" appears to encompass any payments of
any designation that an employer pays his or her employees, the concept of minimum
wage is distinct.63 "Minimum wage" is wage mandated; one that employers may not
freely choose on their own to designate in any which way.

In Article 99, minimum wage rates are to be prescribed by the Regional Tripartite
Wages and Productivity Boards. In Articles 102 to 105, specific instructions are given
in relation to the payment of wages. They must be paid in legal tender at least once
every two weeks, or twice a month, at intervals not exceeding 16 days, directly to the
worker, except in case of force majeure or death of the worker.
These are the wages for which a minimum is prescribed. Thus, the minimum wage
exempted by R.A. 9504 is that which is referred to in the Labor Code. It is distinct and
different from other payments including allowances, honoraria, commissions,
allowances or benefits that an employer may pay or provide an employee.
Likewise, the other compensation incomes an MWE receives that are also exempted
by R.A. 9504 are all mandated by law and are based on this minimum wage.
Additional compensation in the form of overtime pay is mandated for work beyond the
normal hours based on the employee's regular wage.64
Those working between ten o'clock in the evening and six o'clock in the morning are
required to be paid a night shift differential based on their regular wage.65
Holiday/premium pay is mandated whether one works on regular holidays or on one's
scheduled rest days and special holidays. In all of these cases, additional
compensation is mandated, and computed based on the employee's regular wage.66
R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in
excess of the minimum wage as determined by the wage boards, including the
corresponding holiday, overtime, night differential and hazard pays.
In other words, the law exempts from income taxation the most basic compensation an
employee receives - the amount afforded to the lowest paid employees by the mandate
of law. In a way, the legislature grants to these lowest paid employees additional
income by no longer demanding from them a contribution for the operations of
government. This is the essence of R.A. 9504 as a social legislation. The government,
by way of the tax exemption, affords increased purchasing power to this sector of the
working class.
This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator Roxas:
chanRoblesvirtualLawlibrary
This bill seeks to exempt minimum wage earners in the private sector and government
workers in Salary Grades 1 to 3, amending certain provisions of Republic Act 8424,
otherwise known as the National Internal Revenue Code of 1997, as amended.
As per estimates by the National Wages and Productivity Board, there are 7 million
workers earning the minimum wage and even below. While these workers are in the
verge of poverty, it is unfair and unjust that the Government, under the law, is taking
away a portion of their already subsistence-level income.
Despite this narrow margin from poverty, the Government would still be mandated to
take a slice away from that family's meager resources. Even if the Government has
recently exempted minimum wage earners from withholding taxes, they are still liable
to pay income taxes at the end of the year. The law must be amended to correct this
injustice. (Emphases supplied)ChanRoblesVirtualawlibrary
The increased purchasing power is estimated at about P9,500 a year.67 RR 10-2008,
however, takes this away. In declaring that once an MWE receives other forms of
taxable income like commissions, honoraria, and fringe benefits in excess of the non-
taxable statutory amount of P30,000, RR 10-2008 declared that the MWE immediately
becomes ineligible for tax exemption; and otherwise non-taxable minimum wage, along
with the other taxable incomes of the MWE, becomes taxable again.
Respondents acknowledge that R.A. 9504 is a social legislation meant for social
justice,68 but they insist that it is too generous, and that consideration must be given
to the fiscal position and financial capability of the government.69 While they
acknowledge that the intent of the income tax exemption of MWEs is to free low-income
earners from the burden of taxation, respondents, in the guise of clarification, proceed
to redefine which incomes may or may not be granted exemption. These respondents
cannot do without encroaching on purely legislative prerogatives.
By way of review, this P30,000 statutory ceiling on benefits has its beginning in 1994
under R. A. 7833, which amended then Section 28(b)(8) of the 1977 NIRC. It is
substantially carried over as Section 32(B) (Exclusion from Gross Income) of Chapter
VI (Computation of Gross Income) of Title II (Tax on Income) in the 1997 NIRC (R.A.
8424). R.A. 9504 does not amend that provision of R.A. 8424, which reads:
chanRoblesvirtualLawlibrary
SEC. 32. Gross Income. -
(A) General Definition. - xxx
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this title:
chanRoblesvirtualLawlibrary
(1) xxx
xxxx
(7) Miscellaneous Items. -
(a) xxx
xxxx
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total exclusion
under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall
cover:
chanRoblesvirtualLawlibrary
(i) Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 668670;chanrobleslaw
(ii) Benefits received by employees pursuant to Presidential Decree No. 85171, as
amended by Memorandum Order No. 28, dated August 13, 1986;chanrobleslaw
(iii) Benefits received by officials and employees not covered by Presidential decree
No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided,
further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through
rules and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation
rate at the end of the taxable year.
(f) xxxChanRoblesVirtualawlibrary
The exemption granted to MWEs by R.A. 9504 reads:
chanRoblesvirtualLawlibrary
Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift differential pay and hazard pay received
by such minimum wage earners shall likewise be exempt from income
tax.ChanRoblesVirtualawlibrary
"Taxable income" is defined as follows:
chanRoblesvirtualLawlibrary
SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent
items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or other
special laws.ChanRoblesVirtualawlibrary
A careful reading of these provisions will show at least two distinct groups of items of
compensation. On one hand are those that are further exempted from tax by R.A. 9504;
on the other hand are items of compensation that R.A. 9504 does not amend and are
thus unchanged and in no need to be disturbed.
First are the different items of compensation subject to tax prior to R.A. 9504. These
are included in the pertinent items of gross income in Section 31. "Gross income" in
Section 32 includes, among many other items, "compensation for services in whatever
form paid, including, but not limited to salaries, wages, commissions, and similar items."
R.A. 9504 particularly exempts the minimum wage and its incidents; it does not provide
exemption for the many other forms of compensation.
Second are the other items of income that, prior to R.A. 9504, were excluded from
gross income and were therefore not subject to tax. Among these are other payments
that employees may receive from employers pursuant to their employer-employee
relationship, such as bonuses and other benefits. These are either mandated by law
(such as the 13th month pay) or granted upon the employer's prerogative or are
pursuant to collective bargaining agreements (as productivity incentives). These items
were not changed by R.A. 9504.
It becomes evident that the exemption on benefits granted by law in 1994 are now
extended to wages of the least paid workers under R.A. 9504. Benefits not beyond
P30,000 were exempted; wages not beyond the SMW are now exempted as well.
Conversely, benefits in excess of P30,000 are subject to tax and now, wages in excess
of the SMW are still subject to tax.
What the legislature is exempting is the MWE's minimum wage and other forms
statutory compensation like holiday pay, overtime pay, night shift differential pay, and
hazard pay. These are not bonuses or other benefits; these are wages. Respondents
seek to frustrate this exemption granted by the legislature.
In respondents' view, anyone rece1vmg 13th month pay and other benefits in excess
of P30,000 cannot be an MWE. They seek to impose their own definition of "MWE" by
arguing thus:
chanRoblesvirtualLawlibrary
It should be noted that the intent of the income tax exemption of MWEs is to free the
low-income earner from the burden of tax. R.A. No. 9504 and R.R. No. 10-2008 define
who are the low-income earners. Someone who earns beyond the incomes and
benefits above-enumerated is definitely not a low-income
earner.72ChanRoblesVirtualawlibrary
We do not agree.
As stated before, nothing to this effect can be read from R.A. 9504. The amendment is
silent on whether compensation-related benefits exceeding the P30,000 threshold
would make an MWE lose exemption. R.A. 9504 has given definite criteria for what
constitutes an MWE, and R.R. 10-2008 cannot change this.
An administrative agency may not enlarge, alter or restrict a provision of law. It cannot
add to the requirements provided by law. To do so constitutes lawmaking, which is
generally reserved for Congress.73 In CIR v. Fortune Tobacco,74 we applied the plain
meaning rule when the Commissioner of Internal Revenue ventured into unauthorized
administrative lawmaking:
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[A]n administrative agency issuing regulations may not enlarge, alter or restrict the
provisions of the law it administers, and it cannot engraft additional requirements not
contemplated by the legislature. The Court emphasized that tax administrators are not
allowed to expand or contract the legislative mandate and that the "plain meaning rule"
or verba legis in statutory construction should be applied such that where the words of
a statute are clear, plain and free from ambiguity, it must be given its literal meaning
and applied without attempted interpretation.
As we have previously declared, rule-making power must be confined to details for
regulating the mode or proceedings in order to carry into effect the law as it has been
enacted, and it cannot be extended to amend or expand the statutory requirements or
to embrace matters not covered by the statute. Administrative regulations must always
be in harmony with the provisions of the law because any resulting discrepancy
between the two will always be resolved in favor of the basic law.75 (Emphases
supplied)ChanRoblesVirtualawlibrary
We are not persuaded that RR 10-2008 merely clarifies the law. The CIR's clarification
is not warranted when the language of the law is plain and clear.76
The deliberations of the Senate reflect its understanding of the outworking of this MWE
exemption in relation to the treatment of benefits, both those for the P30,000 threshold
and the de minimis benefits:
chanRoblesvirtualLawlibrary
Senator Defensor Santiago. Thank you. Next question: How about employees who are
only receiving a minimum wage as base pay, but are earning significant amounts of
income from sales, commissions which may be even higher than their base pay? Is
their entire income from commissions also tax-free? Because strictly speaking, they
are minimum wage earners. For purposes of ascertaining entitlement to tax exemption,
is the basis only the base pay or should it be the aggregate compensation that is being
received, that is, inclusive of commissions, for example?
Senator Escudero. Mr. President, what is included would be only the base pay and, if
any, the hazard pay, holiday pay, overtime pay and night shift differential received by
a minimum wage earner. As far as commissions are concerned, only to the extent of
P30,000 would be exempted. Anything in excess of P30,000 would already be taxable
if it is being received by way of commissions. Add to that de minimis benefits being
received by an employee, such as rice subsidy or clothing allowance or transportation
allowance would also be exempted; but they are exempted already under the existing
law.
Senator Defensor Santiago. I would like to thank the sponsor. That makes it clear.77
(Emphases supplied)ChanRoblesVirtualawlibrary
Given the foregoing, the treatment of bonuses and other benefits that an employee
receives from the employer in excess of the P30,000 ceiling cannot but be the same
as the prevailing treatment prior to R.A. 9504 - anything in excess of P30,000 is taxable;
no more, no less.
The treatment of this excess cannot operate to disenfranchise the MWE from enjoying
the exemption explicitly granted by R.A. 9504.
The government's argument that the RR avoids a tax distortion has no merit.
The government further contends that the "clarification" avoids a situation akin to wage
distortion and discourages tax evasion. They claim that MWE must be treated equally
as other individual compensation income earners "when their compensation does not
warrant exemption under R.A. No. 9504. Otherwise, there would be gross inequity
between and among individual income taxpayers."78 For illustrative purposes,
respondents present three scenarios:
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37.1. In the first scenario, a minimum wage earner in the National Capital Region
receiving P382.00 per day has an annual salary of P119,566.00, while a non-minimum
wage earner with a basic pay of P385.00 per day has an annual salary of P120,505.00.
The difference in their annual salaries amounts to only P939.00, but the non-minimum
wage earner is liable for a tax of P8,601.00, while the minimum wage earner is tax-
exempt?
37.2. In the second scenario, the minimum wage earner's "other benefits" exceed the
threshold of P30,000.00 by P20,000.00. The non-minimum wage earner is liable for
P8,601.00, while the minimum wage earner is still tax-exempt.
37.3. In the third scenario, both workers earn "other benefits" at P50,000.00 more than
the P30,000 threshold. The non-minimum wage earner is liable for the tax of
P18,601.00, while the minimum wage earner is still tax-exempt.79 (Underscoring in the
original)ChanRoblesVirtualawlibrary
Again, respondents are venturing into policy-making, a function that properly belongs
to Congress. In British American Tobacco v. Camacho, we explained:80
We do not sit in judgment as a supra-legislature to decide, after a law is passed by
Congress, which state interest is superior over another, or which method is better suited
to achieve one, some or all of the state's interests, or what these interests should be in
the first place. This policy--determining power, by constitutional fiat, belongs to
Congress as it is its function to determine and balance these interests or choose which
ones to pursue. Time and again we have ruled that the judiciary does not settle policy
issues. The Court can only declare what the law is and not what the law should be.
Under our system of government, policy issues are within the domain of the political
branches of government and of the people themselves as the repository of all state
power. Thus, the legislative classification under the classification freeze provision, after
having been shown to be rationally related to achieve certain legitimate state interests
and done in good faith, must. perforce, end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited extent,
one of its avowed objectives (i.e. promoting fair competition among the players in the
industry) would suggest that, by Congress's own standards, the current excise tax
system on sin products is imperfect. But, certainly, we cannot declare a statute
unconstitutional merely because it can be improved or that it does not tend to achieve
all of its stated objectives. This is especially true for tax legislation which simultaneously
addresses and impacts multiple state interests. Absent a clear showing of breach of
constitutional limitations, Congress, owing to its vast experience and expertise in the
field of taxation, must be given sufficient leeway to formulate and experiment with
different tax systems to address the complex issues and problems related to tax
administration. Whatever imperfections that may occur, the same should be addressed
to the democratic process to refine and evolve a taxation system which ideally will
achieve most, if not all, of the state's objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of
Congress and the method by which the latter sought to achieve the same. But its
remedy is with Congress and not this Court. (Emphases supplied and citations
deleted)ChanRoblesVirtualawlibrary
Respondents cannot interfere with the wisdom of R.A. 9504. They must respect and
implement it as enacted.
Besides, the supposed undesirable "income distortion" has been addressed in the
Senate deliberations. The following exchange between Senators Santiago and
Escudero reveals the view that the distortion impacts only a few - taxpayers who are
single and have no dependents:
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Senator Santiago ....It seems to me awkward that a person is earning just P1 above
the minimum wage is already taxable to the full extent simply because he is earning PI
more each day, or o more than P30 a month, or P350 per annum. Thus, a single
individual earning P362 daily in Metro Manila pays no tax but the same individual if he
earns P363 a day will be subject to tax, under the proposed amended provisions, in the
amount of P4,875 - I no longer took into account the deductions of SSS, e cetera -
although that worker is just P360 higher than the minimum wage.
xxxx
I repeat, I am raising respectfully the point that a person who is earning just P1 above
the minimum wage is already taxable to the full extent just for a mere P1. May I please
have the Sponsor's comment.
Senator Escudero...I fully subscribe and accept the analysis and computation of the
distinguished Senator, Mr. President, because this was the very concern of this
representation when we were discussing the bill. It will create wage distortions up to
the extent wherein a person is paying or rather receiving a salary which is only higher
by P6,000 approximately from that of a minimum wage earner. So anywhere between
P1 to approximately P6,000 higher, there will be a wage distortion, although distortions
disappears as the salary goes up.
However, Mr. President, as computed by the distinguished Senator, the distortion is
only made apparent if the taxpayer is single or is not married and has no dependents.
Because at two dependents, the distortion would already disappear; at three
dependents, it would not make a difference anymore because the exemption would
already cover approximately the wage distortion that would be created as far as
individual or single taxpayers are concerned.81 (Emphases in the
original)ChanRoblesVirtualawlibrary
Indeed, there is a distortion, one that RR 10-2008 actually engenders. While
respondents insist that MWEs who are earning purely compensation income will lose
their MWE exemption the moment they receive benefits in excess of P30,000, RR 10-
2008 does not withdraw the MWE exemption from those who are earning other income
outside of their employer- employee relationship. Consider the following provisions of
RR 10-2008:
chanRoblesvirtualLawlibrary
Section 2.78.1 (B):
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to
the place where he/she is assigned.
xxxx
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of P30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night
shift differential pay and hazard pay shall still be exempt from withholding tax.
xxxx
(14) Compensation income of employees in the public sector with compensation
income of not more than the SMW in the non- agricultural sector, as fixed by
RTWPB/NWPC, applicable to the place where he/she is assigned.
xxxx
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of P30,000.00, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, night shift differential pay and
hazard pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire
earnings are not exempt from income tax and, consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night
shift differential pay and hazard pay shall still be exempt from withholding
tax.ChanRoblesVirtualawlibrary
These provisions of RR 10-2008 reveal a bias against those who are purely
compensation earners. In their consolidated comment, respondents reason:
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Verily, the interpretation as to who is a minimum wage earner as petitioners advance
will open the opportunity for tax evasion by the mere expedient of pegging the salary
or wage of a worker at the minimum and reflecting a worker's other incomes as some
other benefits. This situation will not only encourage tax evasion, it will likewise
discourage able employers from paying salaries or wages higher than the statutory
minimum. This should never be countenanced.82ChanRoblesVirtualawlibrary
Again, respondents are delving into policy-making they presume bad faith on the part
of the employers, and then shift the burden of this presumption and lay it on the backs
of the lowest paid workers. This presumption of bad faith does not even reflect
pragmatic reality. It must be remembered that a worker's holiday, overtime and night
differential pays are all based on the worker's regular wage. Thus, there will always be
pressure from the workers to increase, not decrease, their basic pay.
What is not acceptable is the blatant inequity between the treatment that RR 10-2008
gives to those who earn purely compensation income and that given to those who have
other sources of income. Respondents want to tax the MWEs who serve their employer
well and thus receive higher bonuses or performance incentives; but exempts the
MWEs who serve, m addition to their employer, their other business or professional
interests.
We cannot sustain respondentsposition.
In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the
taxable income received in excess of the minimum wage, but the MWEs will not lose
their exemption as such. Workers who receive the statutory minimum wage their basic
pay remain MWEs. The receipt of any other income during the year does not disqualify
them as MWEs. They remain MWEs, entitled to exemption as such, but the taxable
income they receive other than as MWEs may be subjected to appropriate taxes.
R.A. 9504 must be liberally construed.
We are mindful of the strict construction rule when it comes to the interpretation of tax
exemption laws.83 The canon, however, is tempered by several exceptions, one of
which is when the taxpayer falls within the purview of the exemption by clear legislative
intent. In this situation, the rule of liberal interpretation applies in favor of the grantee
and against the government.84
In this case, there is a clear legislative intent to exempt the minimum wage received by
an MWE who earns additional income on top of the minimum wage. As previously
discussed, this intent can be seen from both the law and the deliberations.
Accordingly, we see no reason why we should not liberally interpret R.A. 9504 in favor
of the taxpayers.
R.A. 9504 is a grant of tax relief long overdue.
We do not lose sight of the fact that R.A. 9504 is a tax relief that is long overdue.

Table 1 below shows the tax burden of an MWE over the years. We use as example
one who is a married individual without dependents and is working in the National
Capital Region (NCR). For illustration purposes, R.A. 9504 is applied as if the worker
being paid the statutory mmnnum wage is not tax exempt:
(table 1 here)
As shown on Table 1, we note that in 1992, the tax burden upon an MWE was just
about 3.2%, when Congress passed R.A. 7167, which increased the personal
exemptions for a married individual without dependents from P12,000 to P18,000; and
R.A. 7496, which revised the table of graduated tax rates (tax table).
Over the years, as the minimum wage increased, the tax burden of the MWE likewise
increased. In 1997, the MWE's tax burden was about 5.3%. When R.A. 8424 became
effective in 1998, some relief in the MWE's tax burden was seen as it was reduced to
4.0%. This was mostly due to the increase in personal exemptions, which were
increased from P18,000 to P32,000 for a married individual without dependents. It may
be noted that while the tax table was revised, a closer scrutiny of Table 3 below would
show that the rates actually increased for those who were earning less.
As the minimum wage continued to increase, the MWE's tax burden likewise did - by
August 2007, it was 9.5%. This means that in 2007, of the P362 minimum wage, the
MWE's take-home pay was only P327.62, after a tax of P34.38.
This scenario does not augur well for the wage earners. Over the years, even with the
occasional increase in the basic personal and additional exemptions, the contribution
the government exacts from its MWEs continues to increase as a portion of their
income. This is a serious social issue, which R.A. 9504 partly addresses. With the P20
increase in minimum wage from P362 to P382 in 2008, the tax due thereon would be
about P30. As seen in their deliberations, the lawmakers wanted all of this amount to
become additional take-home pay for the MWEs in 2008.92
The foregoing demonstrates the effect of inflation. When tax tables do not get adjusted,
inflation has a profound impact in terms of tax burden. "Bracket creep," "the process by
which inflation pushes individuals into higher tax brackets,"93 occurs, and its
deleterious results may be explained as follows:
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[A]n individual whose dollar income increases from one year to the next might be
obliged to pay tax at a higher marginal rate (say 25% instead of 15%) on the increase,
this being a natural consequence of rate progression. If, however, due to inflation the
benefit of the increase is wiped out by a corresponding increase in the cost of living,
the effect would be a heavier tax burden with no real improvement in the taxpayer's
economic position. Wage and salary-earners are especially vulnerable. Even if a
worker gets a raise in wages this year, the raise will be illusory if the prices of consumer
goods rise in the same proportion. If her marginal tax rate also increased, the result
would actually be a decrease in the taxpayer's real disposable
income.94ChanRoblesVirtualawlibrary
Table 2 shows how MWEs get pushed to higher tax brackets with higher tax rates due
only to the periodic increases in the minimum wage. This unfortunate development
illustrates how "bracket creep" comes about and how inflation alone increases their tax
burden:
(table 2)
The overall effect is the diminution, if not elimination, of the progressivity of the rate
structure under the present Tax Code. We emphasize that the graduated tax rate
schedule for individual taxpayers, which takes into account the ability to pay, is intended
to breathe life into the constitutional requirement of equity.101
R.A. 9504 provides relief by declaring that an MWE, one who is paid the statutory
minimum wage (SMW), is exempt trom tax on that income, as well as on the associated
statutory payments for hazardous, holiday, overtime and night work.
R.R. 10-2008, however, unjustly removes this tax relief. While R.A. 9504 grants MWEs
zero tax rights from the beginning or for the whole year 2008, RR 10-2008 declares
that certain workers - even if they are being paid the SMW, "shall not enjoy the
privilege."
Following RR10-2008's "disqualification" injunction, the MWE will continue to be
pushed towards the higher tax brackets and higher rates. As Table 2 shows, as of June
2016, an MWE would already belong to the 4th highest tax bracket of 20% (see also
Table 3), resulting in a tax burden of 9.9%. This means that for every P100 the MWE
earns, the government takes back P9.90.
Further, a comparative view of the tax tables over the years (Table 3) shows that while
the highest tax rate was reduced from as high as 70% under the 1977 NIRC, to 35% in
1992, and 32% presently, the lower income group actually gets charged higher taxes.
Before R.A. 8424, one who had taxable income of less than P2,500 did not have to pay
any income tax; under R.A. 8424, he paid 5% thereof. The MWEs now pay 20% or
even more, depending on the other benefits they receive including overtime, holiday,
night shift, and hazard pays.
(table 3)
The relief afforded by R.A.9504 is thus long overdue. The law must be now given full
effect for the entire taxable year 2008, and without the qualification introduced by RR
10-2008. The latter cannot disqualify MWEs from exemption from taxes on SMW and
on their on his SMW, holiday, overtime, night shift differential, and hazard
pay.chanroblesvirtuallawlibrary
rules and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation
rate at the end of the taxable year.ChanRoblesVirtualawlibrary
This same positive duty, which is also imposed upon the same officials regarding the
de minimis benefits provided under Section 33(C)(4), is a duty that has been exercised
several times. The provision reads:
chanRoblesvirtualLawlibrary
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under
this Section:

CONCLUSION (1) xxx

The foregoing considered, we find that respondents committed grave abuse of xxxx
discretion in promulgating Sections 1 and 3 of RR 10-2008, insofar as they provide for
(a) the prorated application of the personal and additional exemptions for taxable year
2008 and for the period of applicability of the MWE exemption for taxable year 2008 to (4) De minimis benefits as defined in the rules and regulations to be promulgated by
begin only on 6 July 2008; and (b) the disqualification of MWEs who earn purely the Secretary of Finance, upon recommendation of the
compensation income, whether in the private or public sector, from the privilege of Commissioner.ChanRoblesVirtualawlibrary
availing themselves of the MWE exemption in case they receive compensation - related
benefits exceeding the statutory ceiling of P30,000. WHEREFORE, the Court resolves to

As an aside, we stress that the progressivity of the rate structure under the present Tax (a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and
Code has lost its strength. In the main, it has not been updated since its revision in
1997, or for a period of almost 20 years. The phenomenon of "bracket creep" could be
prevented through the inclusion of an indexation provision, in which the graduated tax (b) DECLARE NULL and VOID the following provisions of Revenue Regulations No.
rates are adjusted periodically without need of amending the tax law. The 1997 Tax 10-2008:
Code, however, has no such indexation provision. It should be emphasized that
indexation to inflation is now a standard feature of a modern tax code.102
(i)

We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and
Commissioner of Internal Revenue the positive duty to periodically review the other
benefits, in consideration of the effect of inflation thereon, as provided under Section
32(B)(7)(e) entitled "13th Month Pay and Other Benefits":
chanRoblesvirtualLawlibrary
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided,
further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through
Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation
income from the privilege of the MWE exemption in case they receive bonuses and
other compensation-related benefits exceeding the statutory ceiling of P30,000;
(ii)
Section 3 insofar as it provides for the prorated application of the personal and
additional exemptions under R.A. 9504 for taxable year 2008, and for the period of
applicability of the MWE exemption to begin only on 6 July 2008.
(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue
to grant a refund, or allow the application of the refund by way of withholding tax
adjustments, or allow a claim for tax credits by (i) all individual taxpayers whose
incomes for taxable year 2008 were the subject of the prorated increase in personal
and additional tax exemption; and (ii) all MWEs whose minimum wage incomes were
subjected to tax for their receipt of the 13th month pay and other bonuses and benefits
exceeding the threshold amount under Section 32(B)(7)(e) of the 1997 Tax Code.

SO ORDERED.
COURAGE v. CIR On August 6, 2014, petitioners Confederation for Unity, Recognition and Advancement
of Government Employees (COURAGE), et al., organizations/unions of government
G.R. No. 213446, July 03, 2018 employees from the Sandiganbayan, Senate of the Philippines, Court of Appeals,
Department of Agrarian Reform, Department of Social Welfare and Development,
Department of Trade and Industry, Metro Manila Development Authority, National
DECISION Housing Authority and local government of Quezon City, filed a Petition for Prohibition
and Mandamus,1 imputing grave abuse of discretion on the part of respondent CIR in
issuing RMO No. 23-2014. According to petitioners, RMO No. 23-2014 classified as
CAGUIOA, J.: taxable compensation, the following allowances, bonuses, compensation for services
granted to government employees, which they alleged to be considered by law as non-
taxable fringe and de minimis benefits, to wit:

G.R. Nos. 213446 and 213658 are petitions for Certiorari, Prohibition and/or Mandamus
under Rule 65 of the Rules of Court, with Application for Issuance of Temporary
Restraining Order and/or Writ of Preliminary Injunction, uniformly seeking to: (a) issue I. Legislative Fringe Benefits
a Temporary Restraining Order to enjoin the implementation of Revenue Memorandum
Order (RMO) No. 23- 2014 dated June 20, 2014 issued by the Commissioner of Internal
Revenue (CIR); and (b) declare null, void and unconstitutional paragraphs A, B, C, and Anniversary Bonus
D of Section III, and Sections IV, VI and VII of RMO No. 23-2014. The petition in G.R.
No. 213446 also prays for the issuance of a Writ of Mandamus to compel respondents Additional Food Subsidy
to upgrade the P30,000.00 non-taxable ceiling of the 13th month pay and other benefits 13th Month Pay
for the concerned officials and employees of the government.
Food Subsidy

Cash Gift
The Antecedents
Cost of Living Assistance

Efficiency Incentive Bonus

On June 20, 2014, respondent CIR issued the assailed RMO No. 23-2014, in
furtherance of Revenue Memorandum Circular (RMC) No. 23-2012 dated February 14, Financial Relief Assistance
2012 on the "Reiteration of the Responsibilities of the Officials and Employees of
Government Offices for the Withholding of Applicable Taxes on Certain Income Grocery Allowance
Payments and the Imposition of Penalties for Non-Compliance Thereof," in order to Hospitalization
clarify and consolidate the responsibilities of the public sector to withhold taxes on its
transactions as a customer (on its purchases of goods and services) and as an Inflationary Assistance Allowance
employer (on compensation paid to its officials and employees) under the National
Internal Revenue Code (NIRC or Tax Code) of 1997, as amended, and other special Longevity Service Pay
laws. Medical Allowance

Mid-Year Eco. Assistance

The Petitions Productivity Incentive Benefit

Transition Allowance
G.R. No. 213446 Uniform Allowance
II. Judiciary Benefits Further, the petition also prays for the issuance of a writ of mandamus ordering
respondent CIR to perform its duty under Section 32(B)(7)(e)(iv) of the NIRC of 1997,
as amended, to upgrade the ceiling of the 13th month pay and other benefits for the
Additional Compensation Income concerned officials and employees of the government, including petitioners.7

Extraordinary & Miscellaneous Expenses

Monthly Special Allowance G.R. No. 213658

Additional Cost of Living Allowance (from Judiciary Development Fund)

Productivity Incentive Benefit On August 19, 2014, petitioners Armando A. Yanga, President of the Regional Trial
Court (RTC) Judges Association of Manila, and Ma. Cristina Carmela I. Japzon,
Grocery Allowance President of the Philippine Association of Court Employees – Manila Chapter, filed a
Petition for Certiorari and Prohibition8 as duly authorized representatives of said
Clothing Allowance associations, seeking to nullify RMO No. 23-2014 on the following grounds: (1)
Emergency Economic Assistance respondent CIR is bereft of any authority to issue the assailed RMO. The NIRC of 1997,
as amended, expressly vests to the Secretary of Finance the authority to promulgate
Year-End Bonus (13th Month Pay) all needful rules and regulations for the effective enforcement of tax provisions;9 and
(2) respondent CIR committed grave abuse of discretion amounting to lack or excess
Cash Gift of jurisdiction in the issuance of RMO No. 23-2014 when it subjected to withholding tax
Loyalty Cash Award (Milestone Bonus) benefits and allowances of court employees which are tax-exempt such as: (a) Special
Allowance for Judiciary (SAJ) under Republic Act (RA) No. 9227 and additional cost of
Christmas Allowance m. Anniversary Bonus2 living allowance (AdCOLA) granted under Presidential Decree (PD) No. 1949 which
are considered as non-taxable fringe benefits under Section 33(A) of the NIRC of 1997,
Petitioners further assert that the imposition of withholding tax on these allowances, as amended; (b) cash gift, loyalty awards, uniform and clothing allowance and
bonuses and benefits, which have been allotted by the Government to its employees additional compensation (ADCOM) granted to court employees which are considered
free of tax for a long time, violates the prohibition on non-diminution of benefits under de minimis under Section 33(C)(4) of the same Code; (c) allowances and benefits
Article 100 of the Labor Code;3 and infringes upon the fiscal autonomy of the granted by the Judiciary which are not taxable pursuant to Section 32(7)(E) of the NIRC
Legislature, Judiciary, Constitutional Commissions and Office of the Ombudsman of 1997, as amended; and (d) expenses for the Judiciary provided under Commission
granted by the Constitution.4 on Audit (COA) Circular 2012-001.10

Petitioners also claim that RMO No. 23-2014 (1) constitutes a usurpation of legislative Petitioners further assert that RMO No. 23-2014 violates their right to due process of
power and diminishes the delegated power of local government units inasmuch as it law because while it is ostensibly denominated as a mere revenue issuance, it is an
defines new offenses and prescribes penalty therefor, particularly upon local illegal and unwarranted legislative action which sharply increased the tax burden of
government officials;5 and (2) violates the equal protection clause of the Constitution officials and employees of the Judiciary without the benefit of being heard.11
as it discriminates against government officials and employees by imposing fringe
benefit tax upon their allowances and benefits, as opposed to the allowances and
benefits of employees of the private sector, the fringe benefit tax of which is borne and
On October 21, 2014, the Court resolved to consolidate the foregoing cases.12
paid by their employers.6

Respondents, through the Office of the Solicitor General (OSG), filed their Consolidated
Comment13 on December 23, 2014. They argue that the petitions are barred by the
doctrine of hierarchy of courts and petitioners failed to present any special and
important reasons or exceptional and compelling circumstance to justify direct recourse
to this Court.14
Maintaining that RMO No. 23-2014 was validly issued in accordance with the power of
the CIR to make rulings and opinion in connection with the implementation of internal
revenue laws, respondents aver that unlike Revenue Regulations (RRs), RMOs do not
require the approval or signature of the Secretary of Finance, as these merely provide
directives or instructions in the implementation of stated policies, goals, objectives,
plans and programs of the Bureau.15 According to them, RMO No. 23-2014 is in fact
a mere reiteration of the Tax Code and previous RMOs, and can be traced back to RR
No. 01-87 dated April 2, 1987 implementing Executive Order No. 651 which was
promulgated by then Secretary of Finance Jaime V. Ongpin upon recommendation of
then CIR Bienvenido A. Tan, Jr. Thus, the CIR never usurped the power and authority
of the legislature in the issuance of the assailed RMO.16 Also, contrary to petitioners'
assertion, the due process requirements of hearing and publication are not applicable
to RMO No. 23-2014.17
Respondents further argue that petitioners' claim that RMO No. 23-2014 is
unconstitutional has no leg to stand on. They explain that the constitutional guarantee
of fiscal autonomy to Judiciary and Constitutional Commissions does not include
exemption from payment of taxes, which is the lifeblood of the nation.18 They also aver
that RMO No. 23-2014 never intended to diminish the powers of local government units.
It merely reiterates the obligation of the government as an employer to withhold taxes,
which has long been provided by the Tax Code.19
Moreover, respondents assert that the allowances and benefits enumerated in Section
III A, B, C, and D, are not fringe benefits which are exempt from taxation under Section
33 of the Tax Code, nor de minimis benefits excluded from employees' taxable basic
salary. They explain that the SAJ under RA No. 9227 and AdCOLA under PD No. 1949
are additional allowances which form part of the employee's basic salary; thus, subject
to withholding taxes.20
Respondents also claim that RMO No. 23-2014 does not violate petitioners' right to
equal protection of laws as it covers all employees and officials of the government. It
does not create a new category of taxable income nor make taxable those which are
not taxable but merely reflect those incomes which are deemed taxable under existing
laws.21
Lastly, respondents aver that mandamus will not lie to compel respondents to increase
the ceiling for tax exemptions because the Tax Code does not impose a mandatory
duty on the part of respondents to do the same.22
The Petitions-in-Intervention
Meanwhile, on September 11, 2014, the National Federation of Employees
Associations of the Department of Agriculture (NAFEDA) et al., duly registered
union/association of employees of the Department of Agriculture, National Agricultural
and Fisheries Council, Commission on Elections, Mines and Geosciences Bureau, and
Philippine Fisheries Development Authority, claiming similar interest as petitioners in
G.R. No. 213446, filed a Petition-in-Intervention23 seeking the nullification of items III,
VI and VII of RMO No. 23-2014 based on the following grounds: (1) that respondent
CIR acted with grave abuse of discretion and usurped the power of the Legislature in
issuing RMO No. 23-2014 which imposes additional taxes on government employees
and prescribes penalties for government official's failure to withhold and remit the
same;24 (2) that RMO No. 23-2014 violates the equal protection clause because the
Commission on Human Rights (CHR) was not included among the constitutional
commissions covered by the issuance and the ADCOM of employees of the Judiciary
was subjected to withholding tax but those received by employees of the Legislative
and Executive branches are not;25 and (3) that respondent CIR failed to upgrade the
tax exemption ceiling for benefits under Section 32(B)(7) of the NIRC of 1997, as
amended.26
In its Comment,27 respondents, through the OSG, sought the denial of the Petition-in-
Intervention for failure of the intervenors to seek prior leave of Court and to demonstrate
that the existing consolidated petitions are not sufficient to protect their interest as
parties affected by the assailed RMO.28 They further contend that, contrary to the
intervenors' position, the CHR is not exempt from the applicability of RMO No. 23-
2014.29 They explain that the enumeration of government offices and constitutional
bodies covered by RMO No. 23-2014 is not exclusive; Section III thereof in fact states
that RMO No. 23-2014 covers all employees of the public sector.30 They also allege
that the ADCOM referred to in Section III(B) of the assailed RMO is unique to the
Judiciary; employees and officials in the executive and legislative do not receive this
specific type of ADCOM enjoyed by the employees and officials of the Judicial
branch.31
On October 10, 2014, a Motion for Intervention with attached Complaint in
Intervention32 was filed, in G.R. No. 213658, by the Members of the Association of
Regional Trial Court Judges in Iloilo City. Claiming that they are similarly situated with
petitioners, said intervenors pray that the Court declare null and void RMO No. 23-2014
and direct the Bureau of Internal Revenue (BIR) to refund the amount illegally exacted
from the salaries/compensations of the judges by virtue of the implementation of RMO
No. 23-2014.33 The intervenors claim that RMO No. 23-2014 violates their right to due
process as it takes away a portion of their salaries and compensation without giving
them the opportunity to be heard.34 They also aver that the implementation of RMO
No. 23-2014 resulted in the diminution of their salaries/compensation in violation of
Sections 3 and 10, Article VIII of the Constitution.35
In their Comment36 to the Motion, respondents adopted the arguments in their
Consolidated Comment and further stated that: (1) RMO No. 23-2014 does not diminish
the salaries and compensation of members of the judiciary as it has been judicially
settled that the imposition of taxes on salaries and compensation of judges and justices
is not equivalent to diminution of the same;37 (2) the allowances and benefits
enumerated under Section III(B) of RMO No. 23-2014 are not fringe benefits exempt
from taxation;38 (3) the AdCOLA and SAJ are not fringe benefits as these are
considered part of the basic salary of government employees subject to income tax;39
and (4) there is no valid ground for the refund of the taxes withheld pursuant to RMO
No. 23-2014.40
In sum, petitioners and intervenors (collectively referred to as petitioners) argue that:
RMO No. 23-2014 is ultra vires insofar as:
Sections III and IV of RMO No. 23-2014, for subjecting to withholding taxes non-taxable
allowances, bonuses and benefits received by government employees;
Sections VI and VII, for defining new offenses and prescribing penalties therefor,
particularly upon government officials;
RMO No. 23-2014 violates the equal protection clause as it discriminates against
government employees;
RMO No. 23-2014 violates fiscal autonomy enjoyed by government agencies;
The implementation of RMO No. 23-2014 results in diminution of benefits of
government employees, a violation of Article 100 of the Labor Code; and
Respondents may be compelled through a writ of mandamus to increase the tax-
exempt ceiling for 13th month pay and other benefits.
On the other hand, respondents counter that:
The instant consolidated petitions are barred by the doctrine of hierarchy of courts;
The CIR did not abuse its discretion in the issuance of RMO No. 23-2014 because:
It was issued pursuant to the CIR's power to interpret the NIRC of 1997, as amended,
and other tax laws, under Section 4 of the NIRC of 1997, as amended;
RMO No. 23-2014 does not discriminate against government employees. It does not
create a new category of taxable income nor make taxable those which are exempt;
RMO No. 23-2014 does not result in diminution of benefits;
The allowances, bonuses or benefits listed under Section III of the assailed RMO are
not fringe benefits;
The fiscal autonomy granted by the Constitution does not include tax exemption; and
Mandamus does not lie against respondents because the NIRC of 1997, as amended,
does not impose a mandatory duty upon them to increase the tax-exempt ceiling for
13th month pay and other benefits.
Incidentally, in a related case docketed as A.M. No. 16-12-04-SC, the Court, on July
11, 2017, issued a Resolution directing the Fiscal Management and Budget Office of
the Court to maintain the status quo by the non-withholding of taxes from the benefits
authorized to be granted to judiciary officials and personnel, namely, the Mid-year
Economic Assistance, the Year-end Economic Assistance, the Yuletide Assistance, the
Special Welfare Assistance (SWA) and the Additional SWA, until such time that a
decision is rendered in the instant consolidated cases.
The Court's Ruling
I.
Procedural
Non-exhaustion of administrative remedies.
It is an unquestioned rule in this jurisdiction that certiorari under Rule 65 will only lie if
there is no appeal, or any other plain, speedy and adequate remedy in the ordinary
course of law against the assailed issuance of the CIR.41 The plain, speedy and
adequate remedy expressly provided by law is an appeal of the assailed RMO with the
Secretary of Finance under Section 4 of the NIRC of 1997, as amended, to wit:
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.
– The power to interpret the provisions of this Code and other tax laws shall be under
the exclusive and original jurisdiction of the Commissioner, subject to review by the
Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the Bureau of Internal Revenue
is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the
Court of Tax Appeals.42
The CIR's exercise of its power to interpret tax laws comes in the form of revenue
issuances, which include RMOs that provide "directives or instructions; prescribe
guidelines; and outline processes, operations, activities, workflows, methods and
procedures necessary in the implementation of stated policies, goals, objectives, plans
and programs of the Bureau in all areas of operations, except auditing."43 These
revenue issuances are subject to the review of the Secretary of Finance. In relation
thereto, Department of Finance Department Order No. 007-0244 issued by the
Secretary of Finance laid down the procedure and requirements for filing an appeal
from the adverse ruling of the CIR to the said office. A taxpayer is granted a period of
thirty (30) days from receipt of the adverse ruling of the CIR to file with the Office of the
Secretary of Finance a request for review in writing and under oath.45
In Asia International Auctioneers, Inc. v. Parayno, Jr.,46 the Court dismissed the
petition seeking the nullification of RMC No. 31-2003 for failing to exhaust
administrative remedies. The Court held:
x x x It is settled that the premature invocation of the court's intervention is fatal to one's
cause of action. If a remedy within the administrative machinery can still be resorted to
by giving the administrative officer every opportunity to decide on a matter that comes
within his jurisdiction, then such remedy must first be exhausted before the court's
power of judicial review can be sought. The party with an administrative remedy must
not only initiate the prescribed administrative procedure to obtain relief but also pursue
it to its appropriate conclusion before seeking judicial intervention in order to give the
administrative agency an opportunity to decide the matter itself correctly and prevent
unnecessary and premature resort to the court.47
The doctrine of exhaustion of administrative remedies is not without practical and legal
reasons. For one thing, availment of administrative remedy entails lesser expenses and
provides for a speedier disposition of controversies. It is no less true to state that courts
of justice for reasons of comity and convenience will shy away from a dispute until the
system of administrative redress has been completed and complied with so as to give
the administrative agency concerned every opportunity to correct its error and to
dispose of the case.48 While there are recognized exceptions to this salutary rule,
petitioners have failed to prove the presence of any of those in the instant case.
Violation of the rule on hierarchy of courts.
Moreover, petitioners violated the rule on hierarchy of courts as the petitions should
have been initially filed with the CTA, having the exclusive appellate jurisdiction to
determine the constitutionality or validity of revenue issuances.
In The Philippine American Life and General Insurance Co. v. Secretary of Finance,49
the Court held that rulings of the Secretary of Finance in its exercise of its power of
review under Section 4 of the NIRC of 1997, as amended, are appealable to the CTA.50
The Court explained that while there is no law which explicitly provides where rulings
of the Secretary of Finance under the adverted to NIRC provision are appealable,
Section 7(a)51 of RA No. 1125, the law creating the CTA, is nonetheless sufficient,
albeit impliedly, to include appeals from the Secretary's review under Section 4 of the
NIRC of 1997, as amended.
Moreover, echoing its pronouncements in City of Manila v. Grecia-Cuerdo,52 that the
CTA has the power of certiorari within its appellate jurisdiction, the Court declared that
"it is now within the power of the CTA, through its power of certiorari, to rule on the
validity of a particular administrative rule or regulation so long as it is within its appellate
jurisdiction. Hence, it can now rule not only on the propriety of an assessment or tax
treatment of a certain transaction, but also on the validity of the revenue regulation or
revenue memorandum circular on which the said assessment is based."53
Subsequently, in Banco de Oro v. Republic,54 the Court, sitting En Banc, further held
that the CTA has exclusive appellate jurisdiction to review, on certiorari, the
constitutionality or validity of revenue issuances, even without a prior issuance of an
assessment. The Court En Banc reasoned:
We revert to the earlier rulings in Rodriguez, Leal, and Asia International Auctioneers,
Inc. The Court of Tax Appeals has exclusive jurisdiction to determine the
constitutionality or validity of tax laws, rules and regulations, and other administrative
issuances of the Commissioner of Internal Revenue.
Article VIII, Section 1 of the 1987 Constitution provides the general definition of judicial
power:
ARTICLE [VIII]
JUDICIAL DEPARTMENT
Section 1. The judicial power shall be vested in one Supreme Court and in such lower
courts as may be established by law.
Judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion amounting to lack or excess
of jurisdiction on the part of any branch or instrumentality of the Government.
(Emphasis supplied)
Based on this constitutional provision, this Court recognized, for the first time, in The
City of Manila v. Hon. Grecia-Cuerdo, the Court of Tax Appeals' jurisdiction over
petitions for certiorari assailing interlocutory orders issued by the Regional Trial Court
in a local tax case. Thus:
[W]hile there is no express grant of such power, with respect to the CTA, Section 1,
Article VIII of the 1987 Constitution provides, nonetheless, that judicial power shall be
vested in one Supreme Court and in such lower courts as may be established by law
and that judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable, and to
determine whether or not there has been a grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of any branch or instrumentality of the Government.
On the strength of the above constitutional provisions, it can be fairly interpreted that
the power of the CTA includes that of determining whether or not there has been grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC
in issuing an interlocutory order in cases falling within the exclusive appellate
jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional mandate, is
vested with jurisdiction to issue writs of certiorari in these cases. (Emphasis in the
original)
This Court further explained that the Court of Tax Appeals' authority to issue writs of
certiorari is inherent in the exercise of its appellate jurisdiction:
A grant of appellate jurisdiction implies that there is included in it the power necessary
to exercise it effectively, to make all orders that will preserve the subject of the action,
and to give effect to the final determination of the appeal. It carries with it the power to
protect that jurisdiction and to make the decisions of the court thereunder effective. The
court, in aid of its appellate jurisdiction, has authority to control all auxiliary and
incidental matters necessary to the efficient and proper exercise of that jurisdiction. For
this purpose, it may, when necessary, prohibit or restrain the performance of any act
which might interfere with the proper exercise of its rightful jurisdiction in cases pending
before it.
Lastly, it would not be amiss to point out that a court which is endowed with a particular
jurisdiction should have powers which are necessary to enable it to act effectively within
such jurisdiction. These should be regarded as powers which are inherent in its
jurisdiction and the court must possess them in order to enforce its rules of practice
and to suppress any abuses of its process and to defeat any attempted thwarting of
such process.
In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as
the CA and shall possess all the inherent powers of a court of justice.
Indeed, courts possess certain inherent powers which may be said to be implied from
a general grant of jurisdiction, in addition to those expressly conferred on them. These
inherent powers are such powers as are necessary for the ordinary and efficient
exercise of jurisdiction; or are essential to the existence, dignity and functions of the
courts, as well as to the due administration of justice; or are directly appropriate,
convenient and suitable to the execution of their granted powers; and include the power
to maintain the court's jurisdiction and render it effective in behalf of the litigants.
Thus, this Court has held that "while a court may be expressly granted the incidental
powers necessary to effectuate its jurisdiction, a grant of jurisdiction, in the absence of
prohibitive legislation, implies the necessary and usual incidental powers essential to
effectuate it, and, subject to existing laws and constitutional provisions, every regularly
constituted court has power to do all things that are reasonably necessary for the
administration of justice within the scope of its jurisdiction and for the enforcement of
its judgments and mandates." Hence, demands, matters or questions ancillary or
incidental to, or growing out of, the main action, and coming within the above principles,
may be taken cognizance of by the court and determined, since such jurisdiction is in
aid of its authority over the principal matter, even though the court may thus be called
on to consider and decide matters which, as original causes of action, would not be
within its cognizance. (Citations omitted)
Judicial power likewise authorizes lower courts to determine the constitutionality or
validity of a law or regulation in the first instance. This is contemplated in the
Constitution when it speaks of appellate review of final judgments of inferior courts in
cases where such constitutionality is in issue.
On June 16, 1954, Republic Act No. 1125 created the Court of Tax Appeals not as
another superior administrative agency as was its predecessor — the former Board of
Tax Appeals — but as a part of the judicial system with exclusive jurisdiction to act on
appeals from:
(1)
Decisions of the Collector of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal
Revenue;
(2)
Decisions of the Commissioner of Customs in cases involving liability for customs
duties, fees or other money charges; seizure, detention or release of property affected
fines, forfeitures or other penalties imposed in relation thereto; or other matters arising
under the Customs Law or other law or part of law administered by the Bureau of
Customs; and
(3)
Decisions of provincial or city Boards of Assessment Appeals in cases involving the
assessment and taxation of real property or other matters arising under the
Assessment Law, including rules and regulations relative thereto.
Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction over all
matters involving assessments that were previously cognizable by the Regional Trial
Courts (then courts of first instance).
In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction of the Court
of Tax Appeals and elevated its rank to the level of a collegiate court with special
jurisdiction. Section 1 specifically provides that the Court of Tax Appeals is of the same
level as the Court of Appeals and possesses "all the inherent powers of a Court of
Justice."
Section 7, as amended, grants the Court of Tax Appeals the exclusive jurisdiction to
resolve all tax-related issues:
Section 7. Jurisdiction. — The CTA shall exercise:
(a)
Exclusive appellate jurisdiction to review by appeal, as herein provided:
1)
Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue;
2)
Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue, where the National Internal
Revenue Code provides a specific period of action, in which case the inaction shall be
deemed a denial;
3)
Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally
decided or resolved by them in the exercise of their original or appellate jurisdiction;
4)
Decisions of the Commissioner of Customs in cases involving liability for customs
duties, fees or other money charges, seizure, detention or release of property affected,
fines, forfeitures or other penalties in relation thereto, or other matters arising under the
Customs Law or other laws administered by the Bureau of Customs;
5)
Decisions of the Central Board of Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment and taxation of real property originally
decided by the provincial or city board of assessment appeals;
6)
Decisions of the Secretary of Finance on customs cases elevated to him automatically
for review from decisions of the Commissioner of Customs which are adverse to the
Government under Section 2315 of the Tariff and Customs Code;
7)
Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product,
commodity or article, and the Secretary of Agriculture in the case of agricultural product,
commodity or article, involving dumping and countervailing duties under Section 301
and 302, respectively, of the Tariff and Customs Code, and safeguard measures under
Republic Act No. 8800, where either party may appeal the decision to impose or not to
impose said duties.
The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality
or validity of a tax law or regulation when raised by the taxpayer as a defense in
disputing or contesting an assessment or claiming a refund. It is only in the lawful
exercise of its power to pass upon all matters brought before it, as sanctioned by
Section 7 of Republic Act No. 1125, as amended.
This Court, however, declares that the Court of Tax Appeals may likewise take
cognizance of cases directly challenging the constitutionality or validity of a tax law or
regulation or administrative issuance (revenue orders, revenue memorandum circulars,
rulings).

Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes,
appeals from the decisions of quasi-judicial agencies (Commissioner of Internal
Revenue, Commissioner of Customs, Secretary of Finance, Central Board of
Assessment Appeals, Secretary of Trade and Industry) on tax-related problems must
be brought exclusively to the Court of Tax Appeals.
In other words, within the judicial system, the law intends the Court of Tax Appeals to
have exclusive jurisdiction to resolve all tax problems. Petitions for writs of certiorari
against the acts and omissions of the said quasi-judicial agencies should, thus, be filed
before the Court of Tax Appeals.
Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129 provides
an exception to the original jurisdiction of the Regional Trial Courts over actions
questioning the constitutionality or validity of tax laws or regulations. Except for local
tax cases, actions directly challenging the constitutionality or validity of a tax law or
regulation or administrative issuance may be filed directly before the Court of Tax
Appeals.
Furthermore, with respect to administrative issuances (revenue orders, revenue
memorandum circulars, or rulings), these are issued by the Commissioner under its
power to make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws. Tax rulings, on the other hand, are official positions
of the Bureau on inquiries of taxpayers who request clarification on certain provisions
of the National Internal Revenue Code, other tax laws, or their implementing
regulations. Hence, the determination of the validity of these issuances clearly falls
within the exclusive appellate jurisdiction of the Court of Tax Appeals under Section
7(1) of Republic Act No. 1125, as amended, subject to prior review by the Secretary of
Finance, as required under Republic Act No. 8424.55
A direct invocation of this Court's jurisdiction should only be allowed when there are
special, important and compelling reasons clearly and specifically spelled out in the
petition.56
Nevertheless, despite the procedural infirmities of the petitions that warrant their
outright dismissal, the Court deems it prudent, if not crucial, to take cognizance of, and
accordingly act on, the petitions as they assail the validity of the actions of the CIR that
affect thousands of employees in the different government agencies and
instrumentalities. The Court, following recent jurisprudence, avails itself of its judicial
prerogative in order not to delay the disposition of the case at hand and to promote the
vital interest of justice. As the Court held in Bloomberry Resorts and Hotels, Inc. v.
Bureau of Internal Revenue:57
From the foregoing jurisprudential pronouncements, it would appear that in questioning
the validity of the subject revenue memorandum circular, petitioner should not have
resorted directly before this Court considering that it appears to have failed to comply
with the doctrine of exhaustion of administrative remedies and the rule on hierarchy of
courts, a clear indication that the case was not yet ripe for judicial remedy. Notably,
however, in addition to the justifiable grounds relied upon by petitioner for its immediate
recourse (i.e., pure question of law, patently illegal act by the BIR, national interest, and
prevention of multiplicity of suits), we intend to avail of our jurisdictional prerogative in
order not to further delay the disposition of the issues at hand, and also to promote the
vital interest of substantial justice. To add, in recent years, this Court has consistently
acted on direct actions assailing the validity of various revenue regulations, revenue
memorandum circulars, and the likes, issued by the CIR. The position we now take is
more in accord with latest jurisprudence. x x x 58
II.
Substantive
The petitions assert that the CIR's issuance of RMO No. 23-2014, particularly Sections
III, IV, VI and VII thereof, is tainted with grave abuse of discretion. "By grave abuse of
discretion is meant, such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction."59 It is an evasion of a positive duty or a virtual refusal
to perform a duty enjoined by law or to act in contemplation of law as when the judgment
rendered is not based on law and evidence but on caprice, whim and despotism.60
As earlier stated, Section 4 of the NIRC of 1997, as amended, grants the CIR the power
to issue rulings or opinions interpreting the provisions of the NIRC or other tax laws.
However, the CIR cannot, in the exercise of such power, issue administrative rulings or
circulars inconsistent with the law sought to be applied. Indeed, administrative
issuances must not override, supplant or modify the law, but must remain consistent
with the law they intend to carry out.61 The courts will not countenance administrative
issuances that override, instead of remaining consistent and in harmony with the law
they seek to apply and implement.62 Thus, in Philippine Bank of Communications v.
Commissioner of Internal Revenue,63 the Court upheld the nullification of RMC No. 7-
85 issued by the Acting Commissioner of Internal Revenue because it was contrary to
the express provision of Section 230 of the NIRC of 1977.
Also, in Banco de Oro v. Republic,64 the Court nullified BIR Ruling Nos. 370-2011 and
DA 378-2011 because they completely disregarded the 20 or more-lender rule added
by Congress in the NIRC of 1997, as amended, and created a distinction for
government debt instruments as against those issued by private corporations when
there was none in the law.65
Conversely, if the assailed administrative rule conforms with the law sought to be
implemented, the validity of said issuance must be upheld. Thus, in The Philippine
American Life and General Insurance Co. v. Secretary of Finance,66 the Court
declared valid Section 7 (c.2.2) of RR No. 06-08 and RMC No. 25-11, because they
merely echoed Section 100 of the NIRC that the amount by which the fair market value
of the property exceeded the value of the consideration shall be deemed a gift; thus,
subject to donor's tax.67
In this case, the Court finds the petitions partly meritorious only insofar as Section VI
of the assailed RMO is concerned. On the other hand, the Court upholds the validity of
Sections III, IV and VII thereof as these are in fealty to the provisions of the NIRC of
1997, as amended, and its implementing rules.
Sections III and IV of RMO No. 23-2014 are valid.
Compensation income is the income of the individual taxpayer arising from services
rendered pursuant to an employer-employee relationship.68 Under the NIRC of 1997,
as amended, every form of compensation for services, whether paid in cash or in kind,
is generally subject to income tax and consequently to withholding tax.69 The name
designated to the compensation income received by an employee is immaterial.70
Thus, salaries, wages, emoluments and honoraria, allowances, commissions, fees,
(including director's fees, if the director is, at the same time, an employee of the
employer/corporation), bonuses, fringe benefits (except those subject to the fringe
benefits tax under Section 33 of the Tax Code), pensions, retirement pay, and other
income of a similar nature, constitute compensation income71 that are taxable and
subject to withholding.
The withholding tax system was devised for three primary reasons, namely: (1) to
provide the taxpayer a convenient manner to meet his probable income tax liability; (2)
to ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns; and (3) to improve the
government's cash flow.72 This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of governmental effort to
collect taxes through more complicated means and remedies.73
Section 79(A) of the NIRC of 1997, as amended, states:
SEC. 79. Income Tax Collected at Source. –
(A) Requirement of Withholding - Except in the case of a minimum wage earner as
defined in Section 22(HH) of this Code, every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in accordance with the rules
and regulations to be prescribed by the Secretary of Finance, upon recommendation
of the Commissioner.74
In relation to the foregoing, Section 2.78 of RR No. 2-98,75 as amended, issued by the
Secretary of Finance to implement the withholding tax system under the NIRC of 1997,
as amended, provides:
SECTION 2.78. Withholding Tax on Compensation. — The withholding of tax on
compensation income is a method of collecting the income tax at source upon receipt
of the income. It applies to all employed individuals whether citizens or aliens, deriving
income from compensation for services rendered in the Philippines. The employer is
constituted as the withholding agent.76
Section 2.78.3 of RR No. 2-98 further states that the term employee "covers all
employees, including officers and employees, whether elected or appointed, of the
Government of the Philippines, or any political subdivision thereof or any agency or
instrumentality"; while an employer, as Section 2.78.4 of the same regulation provides,
"embraces not only an individual and an organization engaged in trade or business, but
also includes an organization exempt from income tax, such as charitable and religious
organizations, clubs, social organizations and societies, as well as the Government of
the Philippines, including its agencies, instrumentalities, and political subdivisions."
The law is therefore clear that withholding tax on compensation applies to the
Government of the Philippines, including its agencies, instrumentalities, and political
subdivisions. The Government, as an employer, is constituted as the withholding agent,
mandated to deduct, withhold and remit the corresponding tax on compensation
income paid to all its employees.
However, not all income payments to employees are subject to withholding tax. The
following allowances, bonuses or benefits, excluded by the NIRC of 1997, as amended,
from the employee's compensation income, are exempt from withholding tax on
compensation:
Retirement benefits received under RA No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, under a reasonable private
benefit plan maintained by the employer subject to the requirements provided by the
Code [Section 32(B)(6)(a) of the NIRC of 1997, as amended and Section
2.78.1(B)(1)(a) of RR No. 2-98];
Any amount received by an official or employee or by his heirs from the employer due
to death, sickness or other physical disability or for any cause beyond the control of the
said official or employee, such as retrenchment, redundancy, or cessation of business
[Section 32(B)(6)(b) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(b) of
RR No. 2-98];
Social security benefits, retirement gratuities, pensions and other similar benefits
received by residents or non-resident citizens of the Philippines or aliens who come to
reside permanently in the Philippines from foreign government agencies and other
institutions private or public [Section 32(B)(6)(c) of the NIRC of 1997, as amended and
Section 2.78.1(B)(1)(c) of RR No. 2-98];
Payments of benefits due or to become due to any person residing in the Philippines
under the law of the United States administered by the United States Veterans
Administration [Section 32(B)(6)(d) of the NIRC of 1997, as amended and Section
2.78.1(B)(1)(d) of RR No. 2-98];
Payments of benefits made under the Social Security System Act of 1954 as amended
[Section 32(B)(6)(e) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(e) of
RR No. 2-98];
Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity
received by government officials and employees [Section 32(B)(6)(f) of the NIRC of
1997, as amended and Section 2.78.1(B)(1)(f) of RR No.2- 98];
Thirteenth (13th) month pay and other benefits received by officials and employees of
public and private entities not exceeding P82,000.00 [Section 32(B)(7)(e) of the NIRC
of 1997, as amended, and Section 2.78.1(8)(11) of RR No. 2-98, as amended by RR
No. 03-15];
GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual
employees [Section 32(B)(7)(f) of the NIRC of 1997, as amended and Section
2.78.1(8)(12) of RR No. 2-98];
Remuneration paid for agricultural labor [Section 2.78.1 (B)(2) of RR No. 2-98];
Remuneration for domestic services [Section 28, RA No. 10361 and Section 2.78.1
(B)(3) of RR No. 2-98];
Remuneration for casual labor not in the course of an employer's trade or business
[Section 2.78.1(8)(4) of RR No. 2-98];
Remuneration not more than the statutory minimum wage and the holiday pay,
overtime pay, night shift differential pay and hazard pay received by Minimum Wage
Earners [Section 24(A)(2) of the NIRC of 1997, as amended];
Compensation for services by a citizen or resident of the Philippines for a foreign
government or an international organization [Section 2.78.1(8)(5) of RR No. 2-98];
Actual, moral, exemplary and nominal damages received by an employee or his heirs
pursuant to a final judgment or compromise agreement arising out of or related to an
employer-employee relationship [Section 32(B)(4) of the NIRC of 1997, as amended
and Section 2.78.1 (B)(6) of RR No. 2-98];

The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death
of the insured, whether in a single sum or otherwise, provided however, that interest
payments agreed under the policy for the amounts which are held by the insured under
such an agreement shall be included in the gross income [Section 32(B)(1) of the NIRC
of 1997, as amended and Section 2.78.1 (B)(7) of RR No. 2-98];
The amount received by the insured, as a return of premium or premiums paid by him
under life insurance, endowment, or annuity contracts either during the term or at the
maturity of the term mentioned in the contract or upon surrender of the contract [Section
32(8)(2) of the NIRC of 1997, as amended and Section 2.78.1(B)(8) of RR No. 2-98];
Amounts received through Accident or Health Insurance or under Workmen's
Compensation Acts, as compensation for personal injuries or sickness, plus the amount
of any damages received whether by suit or agreement on account of such injuries or
sickness [Section 32(8)(4) of the NIRC of 1997, as amended and Section 2.78.1(8)(9)
of RR No. 2-98];
Income of any kind to the extent required by any treaty obligation binding upon the
Government of the Philippines [Section 32(8)(5) of the NIRC of 1997, as amended and
Section 2.78.1(B)(10) of RR No. 2-98];
Fringe and De minimis Benefits. [Section 33(C) of the NIRC of 1997, as amended); and
Other income received by employees which are exempt under special laws (RATA
granted to public officers and employees under the General Appropriations Act and
Personnel Economic Relief Allowance granted to government personnel).
Petitioners assert that RMO No. 23-2014 went beyond the provisions of the NIRC of
1997, as amended, insofar as Sections III and IV thereof impose new or additional
taxes to allowances, benefits or bonuses granted to government employees. A closer
look at the assailed Sections, however, reveals otherwise.
For reference, Sections III and IV of RMO No. 23-2014 read, as follows:
III. OBLIGATION TO WITHHOLD ON COMPENSATION PAID TO GOVERNMENT
OFFICIALS AND EMPLOYEES
As an employer, government offices including government-owned or controlled
corporations (such as but not limited to the Bangko Sentral ng Pilipinas, Metropolitan
Waterworks and Sewerage System, Philippine Deposit Insurance Corporation,
Government Service Insurance System, Social Security System), as well as provincial,
city and municipal governments are constituted as withholding agents for purposes of
the creditable tax required to be withheld from compensation paid for services of its
employees.
Under Section 32(A) of the NIRC of 1997, as amended, compensation for services, in
whatever form paid and no matter how called, form part of gross income. Compensation
income includes, among others, salaries, fees, wages, emoluments and honoraria,
allowances, commissions (e.g. transportation, representation, entertainment and the
like); fees including director's fees, if the director is, at the same time, an employee of
the employer/corporation; taxable bonuses and fringe benefits except those which are
subject to the fringe benefits tax under Section 33 of the NIRC; taxable pensions and
retirement pay; and other income of a similar nature.
The foregoing also includes allowances, bonuses, and other benefits of similar nature
received by officials and employees of the Government of the Republic of the
Philippines or any of its branches, agencies and instrumentalities, its political
subdivisions, including government-owned and/or controlled corporations (herein
referred to as officials and employees in the public sector) which are composed of (but
are not limited to) the following:
Allowances, bonuses, honoraria or benefits received by employees and officials in the
Legislative Branch, such as anniversary bonus, Special Technical Assistance
Allowance, Efficiency Incentive Benefits, Additional Food Subsidy, Eight[h] (8th) Salary
Range Level Allowance, Hospitalization Benefits, Medical Allowance, Clothing
Allowance, Longevity Pay, Food Subsidy, Transition Allowance, Cost of Living
Allowance, Inflationary Adjustment Assistance, Mid-Year Economic Assistance,
Financial Relief Assistance, Grocery Allowance, Thirteenth (13th Month Pay, Cash Gift
and Productivity Incentive Benefit and other allowances, bonuses and benefits given
by the Philippine Senate and House of Representatives to their officials and employees,
subject to the exemptions enumerated herein.
Allowances, bonuses, honoraria or benefits received by employees and officials in the
Judicial Branch, such as the Additional Compensation (ADCOM), Extraordinary and
Miscellaneous Expenses (EME), Monthly Special Allowance from the Special
Allowance for the Judiciary, Additional Cost of Living Allowance from the Judiciary
Development Fund, Productivity Incentive Benefit, Grocery Allowance, Clothing
Allowance, Emergency Economic Allowance, Year-End Bonus, Cash Gift, Loyalty
Cash Award (Milestone Bonus), SC Christmas Allowance, anniversary bonuses and
other allowances, bonuses and benefits given by the Supreme Court of the Philippines
and all other courts and offices under the Judicial Branch to their officials and
employees, subject to the exemptions enumerated herein.
Compensation for services in whatever form paid, including, but not limited to
allowances, bonuses, honoraria or benefits received by employees and officials in the
Constitutional bodies (Commission on Election, Commission on Audit, Civil Service
Commission) and the Office of the Ombudsman, subject to the exemptions enumerated
herein.
Allowances, bonuses, honoraria or benefits received by employees and officials in the
Executive Branch, such as the Productivity Enhancement Incentive (PEI),
Performance-Based Bonus, anniversary bonus and other allowances, bonuses and
benefits given by the departments, agencies and other offices under the Executive
Branch to their officials and employees, subject to the exemptions enumerated herein.
Any amount paid either as advances or reimbursements for expenses incurred or
reasonably expected to be incurred by the official and employee in the performance of
his/her duties are not compensation subject to withholding, if the following conditions
are satisfied:
The employee was duly authorized to incur such expenses on behalf of the
government; and
Compliance with pertinent laws and regulations on accounting and liquidation of
advances and reimbursements, including, but not limited to withholding tax rules. The
expenses should be duly receipted for and in the name of the government office
concerned.
Other than those pertaining to intelligence funds duly appropriated and liquidated, any
amount not in compliance with the foregoing requirements shall be considered as part
of the gross taxable compensation income of the taxpayer. Intelligence funds not duly
appropriated and not properly liquidated shall form part of the compensation of the
government officials/personnel concerned, unless returned.
IV. NON-TAXABLE COMPENSATION INCOME – Subject to existing laws and
issuances, the following income received by the officials and employees in the public
sector are not subject to income tax and withholding tax on compensation:
Thirteenth (13th Month Pay and Other Benefits not exceeding Thirty Thousand Pesos
(P30,000.00) paid or accrued during the year. Any amount exceeding Thirty Thousand
Pesos (P30,000.00) are taxable compensation. This includes:
Benefits received by officials and employees of the national and local government
pursuant to Republic Act no. 6686 ("An Act Authorizing Annual Christmas Bonus to
National and Local Government Officials and Employees Starting CY 1998");
Benefits received by employees pursuant to Presidential Decree No. 851 ("Requiring
All Employers to Pay Their Employees a 13th Month Pay"), as amended by
Memorandum Order No. 28, dated August 13, 1986;
Benefits received by officials and employees not covered by Presidential Decree No.
851, as amended by Memorandum Order No. 28, dated August 19, 1986;
Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award,
gift in cash or in kind and other benefits of similar nature actually received by officials
and employees of government offices, including the additional compensation allowance
(ACA) granted and paid to all officials and employees of the National Government
Agencies (NGAs) including state universities and colleges (SUCs), government-owned
and/or controlled corporations (GOCCs), government financial institutions (GFIs) and
Local Government Units (LGUs).
Facilities and privileges of relatively small value or "De Minimis Benefits" as defined in
existing issuances and conforming to the ceilings prescribed therein;
Fringe benefits which are subject to the fringe benefits tax under Section 33 of the
NIRC, as amended;
Representation and Transportation Allowance (RATA) granted to public officers and
employees under the General Appropriations Act;
Personnel Economic Relief Allowance (PERA) granted to government personnel;
The monetized value of leave credits paid to government officials and employees;
Mandatory/compulsory GSIS, Medicare and Pag-Ibig Contributions, provided that,
voluntary contributions to these institutions in excess of the amount considered
mandatory/compulsory are not excludible from the gross income of the taxpayer and
hence, not exempt from Income Tax and Withholding Tax;
Union dues of individual employees;
Compensation income of employees in the public sector with compensation income of
not more than the Statutory Minimum Wage (SMW) in the non-agricultural sector
applicable to the place where he/she is assigned;
Holiday pay, overtime pay, night shift differential pay, and hazard pay received by
Minimum Wage Earners (MWEs);
Benefits received from the GSIS Act of 1937, as amended, and the retirement
gratuity/benefits received by government officials and employees under pertinent
retirement laws;
All other benefits given which are not included in the above enumeration but are
exempted from income tax as well as withholding tax on compensation under existing
laws, as confirmed by BIR.77
Clearly, Sections III and IV of the assailed RMO do not charge any new or additional
tax. On the contrary, they merely mirror the relevant provisions of the NIRC of 1997, as
amended, and its implementing rules on the withholding tax on compensation income
as discussed above. The assailed Sections simply reinforce the rule that every form of
compensation for personal services received by all employees arising from employer-
employee relationship is deemed subject to income tax and, consequently, to
withholding tax,78 unless specifically exempted or excluded by the Tax Code; and the
duty of the Government, as an employer, to withhold and remit the correct amount of
withholding taxes due thereon.
While Section III enumerates certain allowances which may be subject to withholding
tax, it does not exclude the possibility that these allowances may fall under the
exemptions identified under Section IV – thus, the phrase, "subject to the exemptions
enumerated herein." In other words, Sections III and IV articulate in a general and broad
language the provisions of the NIRC of 1997, as amended, on the forms of
compensation income deemed subject to withholding tax and the allowances, bonuses
and benefits exempted therefrom. Thus, Sections III and IV cannot be said to have
been issued by the CIR with grave abuse of discretion as these are fully in accordance
with the provisions of the NIRC of 1997, as amended, and its implementing rules.
Furthermore, the Court finds untenable petitioners' contention that the assailed
provisions of RMO No. 23-2014 contravene the equal protection clause, fiscal
autonomy, and the rule on non-diminution of benefits.
The constitutional guarantee of equal protection is not violated by an executive
issuance which was issued to simply reinforce existing taxes applicable to both the
private and public sector. As discussed, the withholding tax system embraces not only
private individuals, organizations and corporations, but also covers organizations
exempt from income tax, including the Government of the Philippines, its agencies,
instrumentalities, and political subdivisions. While the assailed RMO is a directive to
the Government, as a reminder of its obligation as a withholding agent, it did not, in any
manner or form, alter or amend the provisions of the Tax Code, for or against the
Government or its employees.
Moreover, the fiscal autonomy enjoyed by the Judiciary, Ombudsman, and
Constitutional Commissions, as envisioned in the Constitution, does not grant immunity
or exemption from the common burden of paying taxes imposed by law. To borrow
former Chief Justice Corona's words in his Separate Opinion in Francisco, Jr. v. House
of Representatives,79 "fiscal autonomy entails freedom from outside control and
limitations, other than those provided by law. It is the freedom to allocate and utilize
funds granted by law, in accordance with law and pursuant to the wisdom and dispatch
its needs may require from time to time."80
It bears to emphasize the Court's ruling in Nitafan v. Commissioner of Internal
Revenue81 that the imposition of taxes on salaries of Judges does not result in
diminution of benefits. This applies to all government employees because the intent of
the framers of the Organic Law and of the people adopting it is "that all citizens should
bear their aliquot part of the cost of maintaining the government and should share the
burden of general income taxation equitably."82
Determination of existence of fringe benefits is a question of fact.
Petitioners, nonetheless, insist that the allowances, bonuses and benefits enumerated
in Section III of the assailed RMO are, in fact, fringe and de minimis benefits exempt
from withholding tax on compensation. The Court cannot, however, rule on this issue
as it is essentially a question of fact that cannot be determined in this petition
questioning the constitutionality of the RMO.
To be sure, settled is the rule that exemptions from tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing authority.83 One who claims tax
exemption must point to a specific provision of law conferring, in clear and plain terms,
exemption from the common burden84 and prove, through substantial evidence, that it
is, in fact, covered by the exemption so claimed.85 The determination, therefore, of the
merits of petitioners' claim for tax exemption would necessarily require the resolution
of both legal and factual issues, which this Court, not being a trier of facts, has no
jurisdiction to do; more so, in a petition filed at first instance.
Among the factual issues that need to be resolved, at the first instance, is the nature of
the fringe benefits granted to employees. The NIRC of 1997, as amended, does not
impose income tax, and consequently a withholding tax, on payments to employees
which are either (a) required by the nature of, or necessary to, the business of the
employer; or (b) for the convenience or advantage of the employer.86 This, however,
requires proper documentation. Without any documentary proof that the payment
ultimately redounded to the benefit of the employer, the same shall be considered as a
taxable benefit to the employee, and hence subject to withholding taxes.87
Another factual issue that needs to be confirmed is the recipient of the alleged fringe
benefit. Fringe benefits furnished or granted, in cash or in kind, by an employer to its
managerial or supervisory employees, are not considered part of compensation
income; thus, exempt from withholding tax on compensation.88 Instead, these fringe
benefits are subject to a fringe benefit tax equivalent to 32% of the grossed-up
monetary value of the benefit, which the employer is legally required to pay.89 On the
other hand, fringe benefits given to rank and file employees, while exempt from fringe
benefit tax,90 form part of compensation income taxable under the regular income tax
rates provided in Section 24(A)(2) of the NIRC, of 1997, as amended;91 and
consequently, subject to withholding tax on compensation.
Furthermore, fringe benefits of relatively small value furnished by the employer to his
employees (both managerial/supervisory and rank and file) as a means of promoting
health, goodwill, contentment, or efficiency, otherwise known as de minimis benefits,
that are exempt from both income tax on compensation and fringe benefit tax; hence,
not subject to withholding tax,92 are limited and exclusive only to those enumerated
under RR No. 3-98, as amended.93 All other benefits given by the employer which are
not included in the said list, although of relatively small value, shall not be considered
as de minimis benefits; hence, shall be subject to income tax as well as withholding tax
on compensation income, for rank and file employees, or fringe benefits tax for
managerial and supervisory employees, as the case may be.94
Based on the foregoing, it is clear that to completely determine the merits of petitioners'
claimed exemption from withholding tax on compensation, under Section 33 of the
NIRC of 1997, there is a need to confirm several factual issues. As such, petitioners
cannot but first resort to the proper courts and administrative agencies which are better
equipped for said task.
All told, the Court finds Sections III and IV of the assailed RMO valid. The NIRC of
1997, as amended, is clear that all forms of compensation income received by the
employee from his employer are presumed taxable and subject to withholding taxes.
The Government of the Philippines, its agencies, instrumentalities, and political
subdivisions, as an employer, is required by law to withhold and remit to the BIR the
appropriate taxes due thereon. Any claims of exemption from withholding taxes by an
employee, as in the case of petitioners, must be brought and resolved in the appropriate
administrative and judicial proceeding, with the employee having the burden to prove
the factual and legal bases thereof.
Section VII of RMO No. 23-2014 is valid; Section VI contravenes, in part, the provisions
of the NIRC of 1997, as amended, and its implementing rules.
Petitioners claim that RMO No. 23-2014 is ultra vires insofar as Sections VI and VII
thereof define new offenses and prescribe penalties therefor, particularly upon
government officials.
The NIRC of 1997, as amended, clearly provides the offenses and penalties relevant
to the obligation of the withholding agent to deduct, withhold and remit the correct
amount of withholding taxes on compensation income, to wit:
TITLE X
Statutory Offenses and Penalties
CHAPTER I
Additions to the Tax
SEC. 247. General Provisions. –
(a) The additions to the tax or deficiency tax prescribed in this Chapter shall apply to
all taxes, fees and charges imposed in this Code. The amount so added to the tax shall
be collected at the same time, in the same manner and as part of the tax.
(b) If the withholding agent is the Government or any of its agencies, political
subdivisions or instrumentalities, or a government- owned or -controlled corporation,
the employee thereof responsible for the withholding and remittance of the tax shall be
personally liable for the additions to the tax prescribed herein.
(c) The term "person", as used in this Chapter, includes an officer or employee of a
corporation who as such officer, employee or member is under a duty to perform the
act in respect of which the violation occurs.
SEC. 248. Civil Penalties. — x x x95
SEC. 249. Interest. – x x x96
xxxx
SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. – Any person
required to withhold, account for, and remit any tax imposed by this Code or who
willfully fails to withhold such tax, or account for and remit such tax, or aids or abets in
any manner to evade any such tax or the payment thereof, shall, in addition to other
penalties provided for under this Chapter, be liable upon conviction to a penalty equal
to the total amount of the tax not withheld, or not accounted for and remitted.97
SEC. 252. Failure of a Withholding Agent to Refund Excess Withholding Tax. – Any
employer/withholding agent who fails or refuses to refund excess withholding tax shall,
in addition to the penalties provided in this Title, be liable to a penalty equal to the total
amount of refunds which was not refunded to the employee resulting from any excess
of the amount withheld over the tax actually due on their return.
CHAPTER II
Crimes, Other Offenses and Forfeitures
xxxx
SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax,
Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. – Any
person required under this Code or by rules and regulations promulgated thereunder
to pay any tax, make a return, keep any record, or supply correct and accurate
information, who willfully fails to pay such tax, make such return, keep such record, or
supply such correct and accurate information, or withhold or remit taxes withheld, or
refund excess taxes withheld on compensation, at the time or times required by law or
rules and regulations shall, in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000)
and suffer imprisonment of not less than one (l) year but not more than ten (10) years.
CHAPTER III
Penalties Imposed on Public Officers
xxxx
SEC. 272. Violation of Withholding Tax Provision. – Every officer or employee of the
Government of the Republic of the Philippines or any of its agencies and
instrumentalities, its political subdivisions, as well as government-owned or -controlled
corporations, including the Bangko Sentral ng Pilipinas (BSP), who, under the
provisions of this Code or rules and regulations promulgated thereunder, is charged
with the duty to deduct and withhold any internal revenue tax and to remit the same in
accordance with the provisions of this Code and other laws is guilty of any offense
hereinbelow specified shall, upon conviction for each act or omission be punished by a
fine of not less than Five thousand pesos (P5,000) but not more than Fifty thousand
pesos (P50,000) or suffer imprisonment of not less than six (6) months and one day (1)
but not more than two (2) years, or both:
(a) Failing or causing the failure to deduct and withhold any internal revenue tax under
any of the withholding tax laws and implementing rules and regulations;
(b) Failing or causing the failure to remit taxes deducted and withheld within the time
prescribed by law, and implementing rules and regulations; and
(c) Failing or causing the failure to file return or statement within the time prescribed, o
rendering or furnishing a false or fraudulent return or statement required under the
withholding tax laws and rules and regulations.98
Based on the foregoing, and similar to Sections III and IV of the assailed RMO, the
Court finds that Section VII thereof was issued in accordance with the provisions of the
NIRC of 1997, as amended, and RR No. 2-98. For easy reference, Section VII of RMO
No. 23-2014 states:
VII. PENALTY PROVISION
In case of non-compliance with their obligation as withholding agents, the
abovementioned persons shall be liable for the following sanctions:
Failure to Collect and Remit Taxes (Section 251, NIRC) "Any person required to
withhold, account for, and remit any tax imposed by this Code or who willfully fails to
withhold such tax, or account for and remit such tax, or aids or abets in any manner to
evade any such tax or the payment thereof, shall, in addition to other penalties provided
for under this Chapter, be liable upon conviction to a penalty equal to the total amount
of the tax not withheld, or not accounted for and remitted."
Failure to File Return, Supply Correct and Accurate Information, Pay Tax Withhold and
Remit Tax and Refund Excess Taxes Withheld on Compensation (Section 255, NIRC)
"Any person required under this Code or by rules and regulations promulgated
thereunder to pay any tax make a return, keep any record, or supply correct the
accurate information, who willfully fails to pay such tax, make such return, keep such
record, or supply correct and accurate information, or withhold or remit taxes withheld,
or refund excess taxes withheld on compensation, at the time or times required by law
or rules and regulations shall, in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000)
and suffer imprisonment of not less than one (1) year but not more than ten (10) years.
Any person who attempts to make it appear for any reason that he or another has in
fact filed a return or statement, or actually files a return or statement and subsequently
withdraws the same return or statement after securing the official receiving seal or
stamp of receipt of internal revenue office wherein the same was actually filed shall,
upon conviction therefor, be punished by a fine of not less than Ten thousand pesos
(P10,000) but not more than Twenty thousand pesos (P20,000) and suffer
imprisonment of not less than one (1) year but not more than three (3) years."
Violation of Withholding Tax Provisions (Section 272, NIRC)
"Every officer or employee of the Government of the Republic of the Philippines or any
of its agencies and instrumentalities, its political subdivisions, as well as government-
owned or controlled corporations, including the Bangko Sentral ng Pilipinas (BSP), who
is charged with the duty to deduct and withhold any internal revenue tax and to remit
the same is guilty of any offense herein below specified shall, upon conviction for each
act or omission be punished by a fine of not less than Five thousand pesos (P5,000)
but not more than Fifty thousand pesos (P50,000) or suffer imprisonment of not less
than six (6) months and one (1) day but not more than two (2) years, or both:
Failing or causing the failure to deduct and withhold any internal revenue tax under any
of the withholding tax laws and implementing rules and regulations; or
 b)

Failing or causing the failure to remit taxes deducted and withheld within the time For Office of the City Government-cities- the Chief Accountant, City Treasurer and the
prescribed by law, and implementing rules and regulations; or City Mayor;

Failing or causing the failure to file return or statement within the time prescribed, or
rendering or furnishing a false or fraudulent return or statement required under the
withholding tax laws and rules and regulations." c)

All revenue officials and employees concerned shall take measures to ensure the full For Office of the Municipal Government-municipalities- the Chief Accountant, Municipal
enforcement of the provisions of this Order and in case of any violation thereof, shall Treasurer and the Mayor;
commence the appropriate legal action against the erring withholding agent.

Verily, tested against the provisions of the NIRC of 1997, as amended, Section VII of d)
RMO No. 23-2014 does not define a crime and prescribe a penalty therefor. Section
VII simply mirrors the relevant provisions of the NIRC of 1997, as amended, on the Office of the Barangay-Barangay Treasurer and Barangay Captain
penalties for the failure of the withholding agent to withhold and remit the correct
amount of taxes, as implemented by RR No. 2-98.

However, with respect to Section VI of the assailed RMO, the Court finds that the CIR e)
overstepped the boundaries of its authority to interpret existing provisions of the NIRC For NGAs, GOCCs and other Government Offices, the Chief Accountant and the Head
of 1997, as amended. of Office or the Official holding the highest position (such as the President, Chief
Executive Officer, Governor, General Manager).

Section VI of RMO No. 23-2014 reads: To recall, the Government of the Philippines, or any political subdivision or agency
thereof, or any GOCC, as an employer, is constituted by law as the withholding agent,
mandated to deduct, withhold and remit the correct amount of taxes on the
compensation income received by its employees. In relation thereto, Section 82 of the
VI. PERSONS RESPONSIBLE FOR WITHHOLDING NIRC of 1997, as amended, states that the return of the amount deducted and withheld
upon any wage paid to government employees shall be made by the officer or
employee having control of the payments or by any officer or employee duly designated
The following officials are duty bound to deduct, withhold and remit taxes: for such purpose.99 Consequently, RR No. 2-98 identifies the Provincial Treasurer in
provinces, the City Treasurer in cities, the Municipal Treasurer in municipalities,
Barangay Treasurer in barangays, Treasurers of government-owned or -controlled
a) corporations (GOCCs), and the Chief Accountant or any person holding similar position
and performing similar function in national government offices, as persons required to
For Office of the Provincial Government-province- the Chief Accountant, Provincial deduct and withhold the appropriate taxes on the income payments made by the
Treasurer and the Governor; government.100
However, nowhere in the NIRC of 1997, as amended, or in RR No. 2-98, as amended,
would one find the Provincial Governor, Mayor, Barangay Captain and the Head of
Government Office or the "Official holding the highest position (such as the President,
Chief Executive Officer, Governor, General Manager)" in an Agency or GOCC as one
of the officials required to deduct, withhold and remit the correct amount of withholding
taxes. The CIR, in imposing upon these officials the obligation not found in law nor in
the implementing rules, did not merely issue an interpretative rule designed to provide
guidelines to the law which it is in charge of enforcing; but instead, supplanted details
thereon — a power duly vested by law only to respondent Secretary of Finance under
Section 244 of the NIRC of 1997, as amended.
Moreover, respondents' allusion to previous issuances of the Secretary of Finance
designating the Governor in provinces, the City Mayor in cities, the Municipal Mayor in
municipalities, the Barangay Captain in barangays, and the Head of Office (official
holding the highest position) in departments, bureaus, agencies, instrumentalities,
government-owned or -controlled corporations, and other government offices, as
officers required to deduct and withhold,101 is bereft of legal basis. Since the 1977
NIRC and Executive Order No. 651, which allegedly breathed life to these issuances,
have already been repealed with the enactment of the NIRC of 1997, as amended, and
RR No. 2-98, these previous issuances of the Secretary of Finance have ceased to
have the force and effect of law.
Accordingly, the Court finds that the CIR gravely abused its discretion in issuing Section
VI of RMO No. 23-2014 insofar as it includes the Governor, City Mayor, Municipal
Mayor, Barangay Captain, and Heads of Office in agencies, GOCCs, and other
government offices, as persons required to withhold and remit withholding taxes, as
they are not among those officials designated by the 1997 NIRC, as amended, and its
implementing rules.
Petition for Mandamus is moot and academic.
As regards the prayer for the issuance of a writ of mandamus to compel respondents
to increase the P30,000.00 non-taxable income ceiling, the same has already been
rendered moot and academic due to the enactment of RA No. 10653.102
The Court takes judicial notice of RA No. 10653, which was signed into law on February
12, 2015, which increased the income tax exemption for 13th month pay and other
benefits, under Section 32(B)(7)(e) of the NIRC of 1997, as amended, from P30,000.00
to P82,000.00.103 Said law also states that every three (3) years after the effectivity of
said Act, the President of the Philippines shall adjust the amount stated therein to its
present value using the Consumer Price Index, as published by the National Statistics
Office.104
Recently, RA No. 10963,105 otherwise known as the "Tax Reform for Acceleration and
Inclusion (TRAIN)" Act, further increased the income tax exemption for 13th month pay
and other benefits to P90,000.00.106
A case is considered moot and academic if it ceases to present a justiciable controversy
by virtue of supervening events, so that an adjudication of the case or a declaration on
the issue would be of no practical value or use. Courts generally decline jurisdiction
over such case or dismiss it on the ground of mootness.107
With the enactment of RA Nos. 10653 and 10963, which not only increased the tax
exemption ceiling for 13th month pay and other benefits, as petitioners prayed, but also
conferred upon the President the power to adjust said amount, a supervening event
has transpired that rendered the resolution of the issue on whether mandamus lies
against respondents, of no practical value. Accordingly, the petition for mandamus
should be dismissed for being moot and academic.
As a final point, the Court cannot turn a blind eye to the adverse effects of this Decision
on ordinary government employees, including petitioners herein, who relied in good
faith on the belief that the appropriate taxes on all the income they receive from their
respective employers are withheld and paid. Nor does the Court ignore the situation of
the relevant officers of the different departments of government that had believed, in
good faith, that there was no need to withhold the taxes due on the compensation
received by said ordinary government employees. Thus, as a measure of equity and
compassionate social justice, the Court deems it proper to clarify and declare, pro hac
vice, that its ruling on the validity of Sections III and IV of the assailed RMO is to be
given only prospective effect.108
WHEREFORE, premises considered, the Petitions and Petitions-in- Interventions are
PARTIALLY GRANTED. Section VI of Revenue Memorandum Order No. 23-2014 is
DECLARED null and void insofar as it names the Governor, City Mayor, Municipal
Mayor, Barangay Captain, and Heads of Office in government agencies, government-
owned or -controlled corporations, and other government offices, as persons required
to withhold and remit withholding taxes.
Sections III, IV and VII of RMO No. 23-2014 are DECLARED valid inasmuch as they
merely mirror the provisions of the National Internal Revenue Code of 1997, as
amended. However, the Court cannot rule on petitioners' claims of exemption from
withholding tax on compensation income because these involve issues that are
essentially factual or evidentiary in nature, which must be raised in the appropriate
administrative and/or judicial proceeding.

The Court's Decision upholding the validity of Sections III and IV of the assailed RMO
is to be applied only prospectively.

Finally, the Petition for Mandamus in G.R. No. 213446 is hereby DENIED on the ground
of mootness.

SO ORDERED.
[G.R. No. 165617, February 25 : 2011]

xxxx

SUPREME TRANSLINER, INC., MOISES C. ALVAREZ AND PAULITA S. ALVAREZ, Balance of Principal
PETITIONERS, VS. BPI FAMILY SAVINGS BANK, INC., RESPONDENT.
P 9,551,827.64

Add:
[G.R. No. 165837]
Interest Due

1,417,761.24
BPI FAMILY SAVINGS BANK, INC., PETITIONER, VS. SUPREME TRANSLINER,
INC., MOISES C. ALVAREZ AND PAULITA S. ALVAREZ, RESPONDENTS. Late Payment Charges

155,546.25

DECISION MRI

0.00

VILLARAMA, JR., J.: Fire Insurance

0.00

This case involves the question of the correct redemption price payable to a mortgagee Foreclosure Expenses
bank as purchaser of the property in a foreclosure sale. 155,817.23

Sub-total
On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director, P 11,280,952.36
Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount of
P9,853,000.00 from BPI Family Savings Bank with a 714-square meter lot covered by Less: Unapplied Payment
Transfer Certificate of Title No. T-79193 in the name of Moises C. Alvarez and Paulita
S. Alvarez, as collateral.[1] 908,241.01

Total Amount Due As of 08/07/96 (Auction Date)

For non-payment of the loan, the mortgage was extrajudicially foreclosed and the 10,372,711.35
property was sold to the bank as the highest bidder in the public auction conducted by
the Office of the Provincial Sheriff of Lucena City. On August 7, 1996, a Certificate of
Sale[2] was issued in favor of the bank and the same was registered on October 1, Add:
1996.
Attorney's Fees (15%)

1,555,906.70
Before the expiration of the one-year redemption period, the mortgagors notified the
bank of their intention to redeem the property. Accordingly, the following Statement of Liquidated Damages (15%)
Account[3] was prepared by the bank indicating the total amount due under the 1,555,906.70
mortgage loan agreement:
Interest on P 10,372,711.35 from 08/07/96 to 04/07/97 (243 days) at 17.25% p.a. The mortgagors requested for the elimination of liquidated damages and reduction of
attorney's fees and interest (1% per month) but the bank refused. On May 21, 1997,
the mortgagors redeemed the property by paying the sum of P15,704,249.12. A
1,207,772.58 Certificate of Redemption[4] was issued by the bank on May 27, 1997.

xxxx
On June 11, 1997, the mortgagors filed a complaint against the bank to recover the
allegedly unlawful and excessive charges totaling P5,331,237.77, with prayer for
Asset Acquired Expenses: damages and attorney's fees, docketed as Civil Case No. 97-72 of the Regional Trial
Court of Lucena City, Branch 57.

Documentary Stamps
In its Answer with Special and Affirmative Defenses and Counterclaim, the bank
155,595.00 asserted that the redemption price reflecting the stipulated interest, charges and/or
Capital Gains Tax expenses, is valid, legal and in accordance with documents duly signed by the
mortgagors. The bank further contended that the claims are deemed waived and the
518,635.57 mortgagors are already estopped from questioning the terms and conditions of their
contract.
Foreclosure Fee

207,534.23
On September 30, 1997, the bank filed a motion to set the case for hearing on the
Registration and Filing Fee special and affirmative defenses by way of motion to dismiss. The trial court denied
23,718.00 the motion on January 8, 1998 and also denied the bank's motion for reconsideration.
The bank elevated the matter to the Court of Appeals (CA-G.R. SP No. 47588) which
Add'l. Registration & Filing Fee dismissed the petition for certiorari on February 26, 1999.

660.00

On February 14, 2002, the trial court rendered its decision[5] dismissing the complaint
and the bank's counterclaims. The trial court held that plaintiffs-mortgagors are bound
906,142.79 by the terms of the mortgage loan documents which clearly provided for the payment
of the following interest, charges and expenses: 18% p.a. on the loan, 3% post-default
Interest on P 906,142.79 from 08/07/96 to 04/07/97 (243 days) at 17.25% p.a.
penalty, 15% liquidated damages, 15% attorney's fees and collection and legal costs.
105,509.00 Plaintiffs-mortgagors' claim that they paid the redemption price demanded by the
defendant bank under extreme pressure was rejected by the trial court since there was
Cancellation Fee active negotiation for the final redemption price between the bank's representatives and
plaintiffs-mortgagors who at the time had legal advice from their counsel, together with
300.00
Orient Development Banking Corporation which committed to finance the redemption.
Total Amount Due As of 04/07/97 (Subject to Audit)

P 15,704,249.12
According to the trial court, plaintiffs-mortgagors are estopped from questioning the
xxxx correctness of the redemption price as they had freely and voluntarily signed the letter-
agreement prepared by the defendant bank, and along with Orient Bank expressed
their conformity to the terms and conditions therein, thus:
 That we will issue the Certificate of Redemption after full payment of P15,704,249.12.
representing the outstanding balance of the loan as of May 15, 1997 including interest
May 14, 1997 and other charges thereof within a period of five (5) working days after clearance of the
check payment.

ORIENT DEVELOPMENT BANKING CORPORATION That we will release the title and the Certificate of Redemption and other pertinent
papers only to your authorized representative with complete authorization and
7th Floor Ever Gotesco Corporate Center identification.

C.M. Recto Avenue corner Matapang Street That all expenses related to the cancellation of your annotated mortgage lien should
the Bank be not fully paid on the period above indicated shall be charged to you.
Manila

If you find the foregoing conditions acceptable, please indicate your conformity on the
Attention: MS. AIDA C. DELA ROSA space provided below and return to us the duplicate copy.
Senior Vice-President

Very truly yours,

Gentlemen:

BPI FAMILY BANK

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

Manager
With regard to the proposed refinancing of the account, we interpose no objection to
the annotation of your mortgage lien thereon subject to the following conditions:
CONFORME:

That all expenses for the registration of the annotation of mortgage and other incidental
registration and cancellation expenses shall be borne by the borrower. ORIENT DEVELOPMENT BANKING CORPORATION
That you will recognize our mortgage liens as first and superior until the loan with us is
fully paid.
(SGD.) AIDA C. DELA ROSA
That you will annotate your mortgage lien and pay us the full amount to close the loan
within five (5) working days from the receipt of the titles. If within this period, you have Senior Vice President
not registered the same and paid us in full, you will immediately and unconditionally
return the titles to us without need of demand, free from liens/encumbrances other than
our lien. CONFORME:
That in case of loss of titles, you will undertake and shoulder the cost of re-issuance of
a new owner's titles.
SUPREME TRANS LINER, INC.
(SGD.) MOISES C. ALVAREZ/PAULITA S. ALVAREZ
Mortgagors[6]
(Underscoring in the original; emphasis supplied.)
As to plaintiffs-mortgagors' contention that the amounts representing attorney's fees
and liquidated damages were already included in the P10,372,711.35 bid price, the trial
court said this was belied by their own evidence, the Statement of Account showing the
breakdown of the redemption price as computed by the defendant bank.
The mortgagors appealed to the CA (CA-G.R. CV No. 74761) which, by Decision[7]
dated April 6, 2004 reversed the trial court and decreed as follows:
WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED
and SET ASIDE. A new one is hereby entered as follows:
Plaintiffs-appellants' complaint for damages against defendant-appellee is hereby
REINSTATED;
Defendant-appellee is hereby ORDERED to return to plaintiffs-appellees (sic) the
invalidly collected amount of P3,111,813.40 plus six (6) percent legal interest from May
21, 1997 until fully returned;
Defendant-appellee is hereby ORDERED to pay plaintiffs-appellees (sic) the amount
of P100,000.00 as moral damages, P100,000.00 as exemplary damages and
P100,000.00 as attorney's fees;
Costs against defendant-appellee.
SO ORDERED.[8]
The CA ruled that attorney's fees and liquidated damages were already included in the
bid price of P10,372,711.35 as per the recitals in the Certificate of Sale that said amount
was paid to the foreclosing mortgagee to satisfy not only the principal loan but also
"interest and penalty charges, cost of publication and expenses of the foreclosure
proceedings." These "penalty charges" consist of 15% attorney's fees and 15%
liquidated damages which the bank imposes as penalty in cases of violation of the
terms of the mortgage deed. The total redemption price thus should only be
P12,592,435.72 and the bank should return the amount of P3,111,813.40 representing
attorney's fees and liquidated damages. The appellate court further stated that the
mortgagors cannot be deemed estopped to question the propriety of the charges
because from the very start they had repeatedly questioned the imposition of attorney's
fees and liquidated damages and were merely constrained to pay the demanded
redemption price for fear that the redemption period will expire without them redeeming
their property.[9]
By Resolution[10] dated October 12, 2004, the CA denied the parties' respective
motions for reconsideration.
Hence, these petitions separately filed by the mortgagors and the bank.
In G.R. No. 165617, the petitioners-mortgagors raise the single issue of whether the
foreclosing mortgagee should pay capital gains tax upon execution of the certificate of
sale, and if paid by the mortgagee, whether the same should be shouldered by the
redemptioner. They specifically prayed for the return of all asset-acquired expenses
consisting of documentary stamps tax, capital gains tax, foreclosure fee, registration
and filing fee, and additional registration and filing fee totaling P906,142.79, with 6%
interest thereon from May 21, 1997.[11]
On the other hand, the petitioner bank in G.R. No. 165837 assails the CA in holding
that -
1. ... the Certificate of Sale, the bid price of P10,372,711.35 includes penalty charges
and as such for purposes of computing the redemption price petitioner can no longer
impose upon the private respondents the penalty charges in the form of 15% attorney's
fees and the 15% liquidated damages in the aggregate amount of P3,111,813.40,
although the evidence presented by the parties show otherwise.
2. ... private respondents cannot be considered to be under estoppel to question the
propriety of the aforestated penalty charges despite the fact that, as found by the
Honorable Trial Court, "there was very active negotiation between the parties in the
computation of the redemption price" culminating into the signing freely and voluntarily a) To the payment of the expenses and cost of foreclosure and sale, including the
by the petitioner, the private respondents and Orient Bank, which financed the attorney's fees as herein provided;
redemption of the foreclosed property, of Exhibit "3", wherein they mutually agreed that
the redemption price is in the sum of P15,704,249.12.
b) To the satisfaction of all interest and charges accruing upon the obligations herein
and hereby secured.
3. ... petitioner [to] pay private respondents damages in the aggregate amount of
P300,000.00 on the ground that the former acted in bad faith in the imposition upon
them of the aforestated penalty charges, when in truth it is entitled thereto as the law c) To the satisfaction of the principal amount of the obligations herein and hereby
and the contract expressly provide and that private respondents agreed to pay the secured.
same.[12]

d) To the satisfaction of all other obligations then owed by the Borrower/Mortgagor to

On the correct computation of the redemption price, Section 78 of Republic Act No. the Bank or any of its subsidiaries/affiliates such as, but not limited to BPI Credit
337, otherwise known as the General Banking Act, governs in cases where the Corporation; or to Bank of the Philippine Islands or any of its subsidiaries/affiliates such
mortgagee is a bank.[13] Said provision reads: as, but not limited to BPI Leasing Corporation, BPI Express Card Corporation, BPI
Securities Corporation and BPI Agricultural Development Bank; and

SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any

mortgage on real estate which is security for any loan granted before the passage of e) The balance, if any, to be due to the Borrower/Mortgagor.
this Act or under the provisions of this Act, the mortgagor or debtor whose real property
has been sold at public auction, judicially or extrajudicially, for the full or partial payment
of an obligation to any bank, banking or credit institution, within the purview of this Act
shall have the right, within one year after the sale of the real estate as a result of the xxxx
foreclosure of the respective mortgage, to redeem the property by paying the amount
fixed by the court in the order of execution, or the amount due under the mortgage
deed, as the case may be, with interest thereon at the rate specified in the mortgage, 31. Attorney's Fees: In case the Bank should engage the services of counsel to enforce
and all the costs, and judicial and other expenses incurred by the bank or institution its rights under this Agreement, the Borrower/Mortgagor shall pay an amount equivalent
concerned by reason of the execution and sale and as a result of the custody of said to fifteen (15%) percent of the total amount claimed by the Bank, which in no case shall
property less the income received from the property. x x x x (Emphasis supplied.) be less than P2,000.00, Philippine currency, plus costs, collection expenses and
disbursements allowed by law, all of which shall be secured by this mortgage.[15]

Under the Mortgage Loan Agreement,[14] petitioners-mortgagors undertook to pay the

attorney's fees and the costs of registration and foreclosure. The following contract Additionally, the Disclosure Statement on Loan/Credit Transaction[16] also duly signed
terms would show that the said items are separate and distinct from the bid price which by the petitioners-mortgagors provides:
represents only the outstanding loan balance with stipulated interest thereon.

10. ADDITIONAL CHARGES IN CASE CERTAIN STIPULATIONS ARE NOT MET BY

23. Application of Proceeds of Foreclosure Sale. The proceeds of sale of the THE BORROWER
mortgaged property/ies shall be applied as follows:

a. Post Default Penalty 3.00% per month

b. Attorney's Services 15% of sum due but not less than P2,000.00
c. Liquidated Damages 15% of sum due but not less than P10,000.00
d. Collection & Legal Cost As provided by the Rules of Court
e. Others (Specify)
As correctly found by the trial court, that attorney's fees and liquidated damages were
not yet included in the bid price of P10,372,711.35 is clearly shown by the Statement
of Account as of April 4, 1997 prepared by the petitioner bank and given to petitioners-
mortgagors. On the other hand, par. 23 of the Mortgage Loan Agreement indicated
that asset acquired expenses were to be added to the redemption price as part of
"costs and other expenses incurred" by the mortgagee bank in connection with the
foreclosure sale.
Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors'
argument that there is no legal basis for the inclusion of this charge in the redemption
price. Under Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale
or exchange or other disposition of real property classified as capital asset under
Section 34(a)[17] of the Tax Code shall be subject to the final capital gains tax. The
term sale includes pacto de retro and other forms of conditional sale. Section 2.2 of
Revenue Memorandum Order (RMO) No. 29-86 (as amended by RMO No. 16-88 and
as further amended by RMO Nos. 27-89 and 6-92) states that these conditional sales
"necessarily include mortgage foreclosure sales (judicial and extrajudicial foreclosure
sales)." Further, for real property foreclosed by a bank on or after September 3, 1986,
the capital gains tax and documentary stamp tax must be paid before title to the
property can be consolidated in favor of the bank.[18]
Under Section 63 of Presidential Decree No. 1529 otherwise known as the Property
Registration Decree, if no right of redemption exists, the certificate of title of the
mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser.
But where the right of redemption exists, the certificate of title of the mortgagor shall
not be cancelled, but the certificate of sale and the order confirming the sale shall be
registered by brief memorandum thereof made by the Register of Deeds upon the
certificate of title. In the event the property is redeemed, the certificate or deed of
redemption shall be filed with the Register of Deeds, and a brief memorandum thereof
shall be made by the Register of Deeds on the certificate of title.
It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged
real property until after the expiration of the one-year redemption period as provided in
Act No. 3135 and title thereto is consolidated in the name of the mortgagee in case of
non-redemption. In the interim, the mortgagor is given the option whether or not to
redeem the real property. The issuance of the Certificate of Sale does not by itself
transfer ownership.[19]
RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the
payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure
sale of capital assets initiated by banks, finance and insurance companies.
SEC. 3. CAPITAL GAINS TAX. -
(1) In case the mortgagor exercises his right of redemption within one year from the
issuance of the certificate of sale, no capital gains tax shall be imposed because no
capital gains has been derived by the mortgagor and no sale or transfer of real property
was realized. x x x
(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale imposed
under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based
on the bid price of the highest bidder but only upon the expiration of the one-year period
of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118,
and shall be paid within thirty (30) days from the expiration of the said one-year
redemption period.
SEC. 4. DOCUMENTARY STAMP TAX. -
(1) In case the mortgagor exercises his right of redemption, the transaction shall only
be subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax
Code of 1997 because no land or realty was sold or transferred for a consideration.
(2) In case of non-redemption, the corresponding documentary stamp tax shall be
levied, collected and paid by the person making, signing, issuing, accepting, or
transferring the real property wherever the document is made, signed, issued, accepted
or transferred where the property is situated in the Philippines. x x x (Emphasis
supplied.)
Although the subject foreclosure sale and redemption took place before the effectivity inclusion of the said charge in the total redemption price was unwarranted and the
of RR No. 4-99, its provisions may be given retroactive effect in this case. corresponding amount paid by the petitioners-mortgagors should be returned to them.

Section 246 of the NIRC of 1997 states: WHEREFORE, premises considered, both petitions are PARTLY GRANTED.

SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification, or reversal of
any of the rules and regulations promulgated in accordance with the preceding Sections
or any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification, or reversal will be prejudicial to
the taxpayers, except in the following cases:
In G.R. No. 165617, BPI Family Savings Bank, Inc. is hereby ordered to RETURN the
amounts representing capital gains and documentary stamp taxes as reflected in the
Statement of Account To Redeem as of April 7, 1997, to petitioners Supreme
Transliner, Inc., Moises C. Alvarez and Paulita Alvarez, and to retain only the sum
provided in RR No. 4-99 as documentary stamps tax due on the foreclosure sale.

(a) where the taxpayer deliberately misstates or omits material facts from his return or
in any document required of him by the Bureau of Internal Revenue;
(b) where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
In G.R. No. 165837, petitioner BPI Family Savings Bank, Inc. is hereby declared
entitled to the attorney's fees and liquidated damages included in the total redemption
price paid by Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez. The
sums awarded as moral and exemplary damages, attorney's fees and costs in favor of
Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez are DELETED.

The Decision dated April 6, 2004 of the Court of Appeals in CA-G.R. CV No. 74761 is
(c) where the taxpayer acted in bad faith. accordingly MODIFIED.

In this case, the retroactive application of RR No. 4-99 is more consistent with the policy SO ORDERED.
of aiding the exercise of the right of redemption. As the Court of Tax Appeals
concluded in one case, RR No. 4-99 "has curbed the inequity of imposing a capital
gains tax even before the expiration of the redemption period [since] there is yet no
transfer of title and no profit or gain is realized by the mortgagor at the time of
foreclosure sale but only upon expiration of the redemption period."[20] In his
commentaries, De Leon expressed the view that while revenue regulations as a general
rule have no retroactive effect, if the revocation is due to the fact that the regulation is
erroneous or contrary to law, such revocation shall have retroactive operation as to
affect past transactions, because a wrong construction of the law cannot give rise to a
vested right that can be invoked by a taxpayer.[21]

Considering that herein petitioners-mortgagors exercised their right of redemption

before the expiration of the statutory one-year period, petitioner bank is not liable to
pay the capital gains tax due on the extrajudicial foreclosure sale. There was no actual
transfer of title from the owners-mortgagors to the foreclosing bank. Hence, the
G.R. No. 164050 July 20, 2011
MERCURY DRUG CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
PEREZ, J.:
This petition for review on certiorari calls for an interpretation of the term "cost" as used
in Section 4(a) of Republic Act No. 7432, otherwise known as "An Act to Maximize the
Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges
and For Other Purposes."
A rundown of the pertinent facts is presented below.
Pursuant to Republic Act No. 7432, petitioner Mercury Drug Corporation (petitioner), a
retailer of pharmaceutical products, granted a 20% sales discount to qualified senior
citizens on their purchases of medicines. For the taxable year April to December 1993
and January to December 1994, the amounts representing the 20% sales discount
totalled ₱3,719,287.681 and ₱35,500,593.44,2 respectively, which petitioner claimed
as deductions from its gross income.
Realizing that Republic Act No. 7432 allows a tax credit for sales discounts granted to
senior citizens, petitioner filed with the Commissioner of Internal Revenue (CIR) claims
for refund in the amount of ₱2,417,536.00 for the year 1993 and ₱23,075,386.00 for
the year 1994. Petitioner presented a computation3 of its overpayment of income tax,
thus:
(table here)
When the CIR failed to act upon petitioner’s claims, the latter filed a petition for review
with the Court of Tax Appeals. On 6 September 2000, the Court of Tax Appeals
rendered the following judgment:4
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, Revenue Regulations No. 2-94 of the
Respondent is declared null and void insofar as it treats the 20% discount given by
private establishments as a deduction from gross sales. Respondent is hereby
ORDERED to GRANT A REFUND OR ISSUE A TAX CREDIT CERTIFICATE to
Petitioner in the reduced amount of ₱1,688,178.43 representing the latter’s overpaid
income tax for the taxable year 1993. However, the claim for refund for taxable year
1994 is denied for lack of merit.5
The Court of Tax Appeals favored petitioner by declaring that the 20% sales discount
should be treated as tax credit rather than a mere deduction from gross income. The
Court of Tax Appeals however found some discrepancies and irregularities in the cash
slips submitted by petitioner as basis for the tax refund. Hence, it disallowed the claim
for taxable year 1994 and some portion of the amount claimed for 1993 by petitioner,
viz:
So, contrary to the allegation of Petitioner that it granted 20% sales discounts to senior
citizens in the total amount of ₱3,719,888.00 for taxable year 1993 and ₱35,500,554.00
for taxable year 1994, this Court’s study and evaluation of the evidence show that for
taxable year 1993 only the amounts of ₱3,522,123.25 and for 1994, the amount of
₱8,789,792.27 were properly substantiated. The amount of ₱3,522,123.25
corresponding to 1993 will be further reduced to ₱2,989,930.43 as this Court’s
computation is based on the cost of the 20% discount and not on the total amount of
the 20% discount based on the decision of the Court of Appeals in Commissioner of
Internal Revenue v. Elmas Drug Corporation, CA-SP No. 49946 promulgated on
October 19, 1999, where it ruled:
"Thus the cost of the 20% discount represents the actual amount spent by drug
corporations in complying with the mandate of RA 7432. Working on this premise, it
could not have been the intention of the lawmakers to grant these companies the full
amount of the 20% discount as this could be extending to them more than what they
actually sacrificed when they gave the 20% discount to senior citizens." (Underscoring
supplied).
Similarly the amount of ₱8,789,792.27 corresponding to taxable year 1994 will be
reduced to ₱7,393,094.28 based on the aforequoted Court of Appeals decision. These
reductions are illustrated as follows:
(table here) interpreted the term "cost" as used in Section 4(a) of Republic Act No. 7432 to mean
the acquisition cost of the medicines sold to senior citizens. Therefore, it upheld the
With the foregoing changes in the amount of discounts granted by Petitioner in 1993 computation provided by the Court of Tax Appeals in its 20 December 2000 Resolution.
and 1994, it necessarily follows that adjustments have to be made in the computation
of the refundable amount which is entirely different from the computation presented
by the Petitioner. This Court’s conclusion is that Petitioner is only entitled to a tax
credit of P1,688,178.43 for taxable year 1993 detailed as follows: Petitioner filed a motion for partial reconsideration which the Court of Appeals denied
in a Resolution9 dated 23 June 2004. This prompted petitioner to file the instant petition
(table here) for review. Petitioner raises the following legal grounds for the allowance of its petition:
and no refund or tax credit for taxable year 1994 as the computation below shows
that Petitioner, instead of having a tax credit of P23,075,386.00 as claimed in the
Petition, still has a tax due of P5,032,113.72 detailed as follows: I.

(table here)

The conclusion of tax liability instead of tax overpayment pertaining to taxable year LIMITING THE TAX CREDIT ON THE ACQUISITION COST OF THE MEDICINES
1994 has the effect of negating the tax refund of Petitioner because the basis of such SOLD AMOUNTS TO A TAKING OF PROPERTY FOR PUBLIC USE WITHOUT JUST
refund is the fact that there is tax credit. Under the circumstances, instead to tax credit, COMPENSATION.
Petitioner has a tax liability of P5,032,113.72, hence the refund for the period must fail.6

II.
Moreover, the Court of Tax Appeals stated that the claim for tax credit must be based
on the actual cost of the medicine and not the whole amount of the 20% senior citizens
discount. It applied the formula: cost of sales/gross sales x amount of 20% sales
FORCING PETITIONER TO GRANT 20% DISCOUNT ON SALE OF MEDICINE TO
discount.
SENIOR CITIZENS WITHOUT FULLY REIMBURSING IT FOR THE AMOUNT OF
DISCOUNT GRANTED VIOLATES THE DUE PROCESS CLAUSE FOR BEING
OPPRESSIVE, UNREASONABLE, CONFISCATORY, AND AN UNDUE RESTRAINT
Petitioner moved for partial reconsideration. In a Resolution dated 20 December 2000, OF TRADE.
the Court of Tax Appeals modified its earlier ruling by increasing the creditable tax
amount to ₱18,038,489.71, inclusive of the taxable years 1993 and 1994. The Court of
Tax Appeals finally granted the claim for refund for the taxable year 1994 on the basis
III.
of the cash slips submitted by petitioner, in the sum of ₱16,350,311.28, thus:

(table here)
EVEN THE COURT OF APPEALS HAD AN INTERPRETATION OF THE TERM
Petitioner elevated the case to the Court of Appeals via a Petition for Review under
"COST" THAT IS DIFFERENT FROM, AND BROADER THAN THE
Rule 43. Petitioner sought a partial modification of the above resolution raising as legal
INTERPRETATION OF THE COURT OF TAX APPEALS. YET, THE COURT OF
issue the basis of the computation of tax credit. Petitioner contended that the actual
APPEALS AFFIRMED IN TOTO THE COURT OF TAX APPEALS’ DECISION.
discount granted to the senior citizens, rather than the acquisition cost of the item
availed by senior citizens, should be the basis for computation of tax credit.

IV.
On 20 October 2003, the Court of Appeals rendered a Decision8 sustaining the Court
of Tax Appeals and dismissing the petition. Citing the Court of Appeals cases of
Commissioner of Internal Revenue v. Elmas Drug Corporation and Trinity Franchising
and Management Corp. v. Commissioner of Internal Revenue, the appellate court
THE COURT MAY CONSIDER THE SPIRIT AND REASON OF THE LAW WHERE A
LITERAL MEANING WOULD LEAD TO INJUSTICE OR DEFEAT THE CLEAR
INTENT OF THE LAWMAKERS.
V.
RESPONDENT MUST ACCORD PETITIONER THE SAME TREATMENT AS MAR-
TESS DRUG IN ACCORDANCE WITH THE PRINCIPLE OF EQUAL PROTECTION
OF LAWS.10
Petitioner adopts a two-tiered approach towards defending its thesis. First, petitioner
explains that in addition to the direct expenses incurred in acquiring the medicine
intended for re-sale to senior citizens, operating expenses or administrative overhead
are likewise incurred. Limiting the tax credit on the acquisition cost of the medicines
sold amounts to a taking of property for public use without just compensation, petitioner
argues. Moreover, petitioner contends that to compel it to grant 20% discount on sale
of medicine to senior citizens without fully reimbursing it for the amount of discount
granted violates the due process clause for being oppressive, unreasonable,
confiscatory and an undue restraint of trade. In the second tier, petitioner maintains
that the term "cost" should at least include all business expenses directly incurred to
produce the merchandise and to bring them to their present location and use. Petitioner
alleges that while the Court of Appeals subscribes to the above interpretation, it
nevertheless affirmed in toto the Court of Tax Appeals’ erroneous decision.
In lieu of its Comment, the Office of the Solicitor General (OSG) filed a Manifestation
and Motion supporting petitioner’s theory that the amount of tax credit should be
computed based on sales discounts properly substantiated by petitioner. The OSG
adverted to the case of Bicolandia Drug Corporation (Formerly Elmas Drug
Corporation) v. Commissioner of Internal Revenue11 wherein we held that the term
"cost" refers to the amount of the 20% discount extended by a private establishment to
senior citizens in their purchase of medicines, which amount should be applied as a tax
credit. The OSG opines that the allowance of claim for additional tax credits should be
based on sales discounts properly substantiated before the Court of Appeals.
The main thrust of the petition is to determine whether the claim for tax credit should
be based on the full amount of the 20% senior citizens’ discount or the acquisition cost
of the merchandise sold.
Preliminarily, Republic Act No. 7432 is a piece of social legislation aimed to grant
benefits and privileges to senior citizens. Among the highlights of this Act is the grant
of sales discounts on the purchase of medicines to senior citizens. Section 4(a) of
Republic Act No. 7432 reads:
SEC. 4. Privileges for the Senior Citizens. — The senior citizens shall be entitled to the
following:
a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of transportation services, hotels and similar lodging establishments,
restaurants and recreation centers and purchase of medicines anywhere in the country:
Provided, That private establishments may claim the cost as tax credit;
The burden imposed on private establishments amounts to the taking of private
property for public use with just compensation in the form of a tax credit.12
The foregoing proviso specifically allows the 20% senior citizens' discount to be claimed
by the private establishment as a tax credit and not merely as a tax deduction from
gross sales or gross income. The law however is silent as to how the "cost of the
discount" as tax credit should be construed.
Indeed, there is nothing novel in the issues raised in this petition. Our rulings in
Bicolandia Drug Corporation (Formerly Elmas Drug Corporation) v. Commissioner of
Internal Revenue,13 Cagayan Valley Drug Corporation v. Commissioner of Internal
Revenue,14 and M.E. Holding Corporation v. Court of Appeals15 operate as stare
decisis16 with respect to this legal question.
In Bicolandia, we construed the term "cost" as referring to the amount of the 20%
discount extended by a private establishment to senior citizens in their purchase of
medicines.17 The Court of Appeals’ decision in Commissioner of Internal Revenue v.
Elmas Drug Corporation dated 19 October 1999 was relied upon by the Court of
Appeals as basis for its interpretation of the term "cost" when it decided the instant case
in 20 October 2003. As correctly pointed out by the OSG, said case had been elevated
to this Court and had been eventually resolved with finality on 22 June 2006 in the case
entitled Bicolandia Drug Corporation v. Commissioner of Internal Revenue.lawphi1
We reiterated this ruling in the 2008 case of Cagayan Valley Drug by holding that
petitioner therein is entitled to a tax credit for the full 20% sales discounts it extended
to qualified senior citizens. This holds true despite the fact that petitioner suffered a net SO ORDERED.
loss for that taxable year.18

The most recent case in point is M.E. Holding Corporation which bears a strikingly
similar set of facts and issues with the case at bar. Both petitioners filed their respective
income tax return initially treating the 20% sales discount to senior citizens as
deductions from its gross income. When advised that the discount should be treated as
tax credit, they both filed a claim for overpayment. The Bureau of Internal Revenue on
both occasions failed to act timely on the claims, hence they appealed before the Court
of Tax Appeals. The Court of Tax Appeals in M.E. Holding concedes that the 20% sales
discount granted to qualified senior citizens should be treated as tax credit but it placed
reliance on the Court of Appeals’ decision in Commissioner of Internal Revenue v.
Elmas Drug Corporation where the term "cost of the discount" was interpreted to mean
only the direct acquisition cost, excluding administrative and other incremental costs.
This was the very same case relied upon by the Court of Appeals in the present case.
We finally affirmed in M.E. Holding that the tax credit should be equivalent to the actual
20% sales discount granted to qualified senior citizens.

It is worthy to mention that Republic Act No. 7432 had undergone two (2) amendments;
first in 2003 by Republic Act No. 9257 and most recently in 2010 by Republic Act No.
9994. The 20% sales discount granted by establishments to qualified senior citizens is
now treated as tax deduction and not as tax credit. As we have likewise declared in
Commissioner of Internal Revenue v. Central Luzon Drug Corporation,19 this case
covers the taxable years 1993 and 1994, thus, Republic Act No. 7432 applies.

Based on the foregoing, we sustain petitioner’s argument that the cost of discount
should be computed on the actual amount of the discount extended to senior citizens.
However, we give full accord to the factual findings of the Court of Tax Appeals with
respect to the actual amount of the 20% sales discount, i.e., the sum of ₱3,522,123.25.
for the year 1993 and ₱34,211,769.45 for the year 1994. Therefore, petitioner is entitled
to a tax credit equivalent to the actual amounts of the 20% sales discount as determined
by the Court of Tax Appeals. A new computation for tax refund is in order, to wit:

(table here)

WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the
Court of Appeals are REVERSED and SET ASIDE. Respondent Commissioner of
Internal Revenue is ORDERED to issue tax credit certificates in favor of petitioner in
the amounts of ₱2,289,381.71 and ₱22,237,650.34.
G.R. No. 143672 April 24, 2003
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
GENERAL FOODS (PHILS.), INC., respondent.
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution1
of the Court of Appeals reversing the decision2 of the Court of Tax Appeals which in
turn denied the protest filed by respondent General Foods (Phils.), Inc., regarding the
assessment made against the latter for deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is engaged
in the manufacture of beverages such as "Tang," "Calumet" and "Kool-Aid," filed its
income tax return for the fiscal year ending February 28, 1985. In said tax return,
respondent corporation claimed as deduction, among other business expenses, the
amount of P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction
claimed by respondent corporation. Consequently, respondent corporation was
assessed deficiency income taxes in the amount of P2,635, 141.42. The latter filed a
motion for reconsideration but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals
but the appeal was dismissed:
With such a gargantuan expense for the advertisement of a singular product, which
even excludes "other advertising and promotions" expenses, we are not prepared to
accept that such amount is reasonable "to stimulate the current sale of merchandise"
regardless of Petitioner’s explanation that such expense "does not connote
unreasonableness considering the grave economic situation taking place after the
Aquino assassination characterized by capital fight, strong deterioration of the
purchasing power of the Philippine peso and the slacking demand for consumer
products" (Petitioner’s Memorandum, CTA Records, p. 273). We are not convinced with
such an explanation. The staggering expense led us to believe that such expenditure
was incurred "to create or maintain some form of good will for the taxpayer’s trade or
business or for the industry or profession of which the taxpayer is a member." The term
"good will" can hardly be said to have any precise signification; it is generally used to
denote the benefit arising from connection and reputation (Words and Phrases, Vol.
18, p. 556 citing Douhart vs. Loagan, 86 III. App. 294). As held in the case of Welch vs.
Helvering, efforts to establish reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business expenses but capital
expenditures. (Atlas Mining and Development Corp. vs. Commissioner of Internal
Revenue, supra). For sure such expenditure was meant not only to generate present
sales but more for future and prospective benefits. Hence, "abnormally large
expenditures for advertising are usually to be spread over the period of years during
which the benefits of the expenditures are received" (Mertens, supra, citing Colonial
Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we
hereby RESOLVE to DISMISS the instant petition for lack of merit and ORDER the
Petitioner to pay the respondent Commissioner the assessed amount of P2,635,141.42
representing its deficiency income tax liability for the fiscal year ended February 28,
1985."3
Aggrieved, respondent corporation filed a petition for review at the Court of Appeals
which rendered a decision reversing and setting aside the decision of the Court of Tax
Appeals:
Since it has not been sufficiently established that the item it claimed as a deduction is
excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby
GRANTED. Accordingly, the Decision, dated 8 February 1994 of respondent Court of
Tax Appeals is REVERSED and SET ASIDE and the letter, dated 31 May 1988 of
respondent Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.4
Thus, the instant petition, wherein the Commissioner presents for the Court’s
consideration a lone issue: whether or not the subject media advertising expense for
"Tang" incurred by respondent corporation was an ordinary and necessary expense
fully deductible under the National Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be construed in
strictissimi juris against the taxpayer and liberally in favor of the taxing authority;5 and
he who claims an exemption must be able to justify his claim by the clearest grant of
organic or statute law. An exemption from the common burden cannot be permitted to
exist upon vague implications.6
Deductions for income tax purposes partake of the nature of tax exemptions; hence, if
tax exemptions are strictly construed, then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media
advertising expense for "Tang" paid or incurred by respondent corporation for the fiscal
year ending February 28, 1985 "necessary and ordinary," hence, fully deductible under
the NIRC? Or was it a capital expenditure, paid in order to create "goodwill and
reputation" for respondent corporation and/or its products, which should have been
amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
(a) In general.- There shall be allowed as deduction from gross income all ordinary and
necessary expenses paid or incurred during the taxable year in carrying on, or which
are directly attributable to, the development, management, operation and/or conduct of
the trade, business or exercise of a profession.
Simply put, to be deductible from gross income, the subject advertising expense must
comply with the following requisites: (a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable year; (c) it must have been
paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers.7
The parties are in agreement that the subject advertising expense was paid or incurred
within the corresponding taxable year and was incurred in carrying on a trade or
business. Hence, it was necessary. However, their views conflict as to whether or not
it was ordinary. To be deductible, an advertising expense should not only be necessary
but also ordinary. These two requirements must be met.
The Commissioner maintains that the subject advertising expense was not ordinary on
the ground that it failed the two conditions set by U.S. jurisprudence: first,
"reasonableness" of the amount incurred and second, the amount incurred must not be
a capital outlay to create "goodwill" for the product and/or private respondent’s
business. Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness
of an advertising expense. There being no hard and fast rule on the matter, the right to
a deduction depends on a number of factors such as but not limited to: the type and
size of business in which the taxpayer is engaged; the volume and amount of its net
earnings; the nature of the expenditure itself; the intention of the taxpayer and the
general economic conditions. It is the interplay of these, among other factors and
properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang"
alone was almost one-half of its total claim for "marketing expenses." Aside from that,
respondent-corporation also claimed P2,678,328 as "other advertising and promotions
expense" and another P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost
double the amount of respondent corporation’s P4,640,636 general and administrative
expenses.
We find the subject expense for the advertisement of a single product to be inordinately
large. Therefore, even if it is necessary, it cannot be considered an ordinary expense
deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future
sale of merchandise or use of services. The second type involves expenditures
incurred, in whole or in part, to create or maintain some form of goodwill for the
taxpayer’s trade or business or for the industry or profession of which the taxpayer is a
member. If the expenditures are for the advertising of the first kind, then, except as to
the question of the reasonableness of amount, there is no doubt such expenditures are
deductible as business expenses. If, however, the expenditures are for advertising of
the second kind, then normally they should be spread out over a reasonable period of
time.
We agree with the Court of Tax Appeals that the subject advertising expense was of
the second kind. Not only was the amount staggering; the respondent corporation itself
also admitted, in its letter protest8 to the Commissioner of Internal Revenue’s
assessment, that the subject media expense was incurred in order to protect
respondent corporation’s brand franchise, a critical point during the period under
review.
The protection of brand franchise is analogous to the maintenance of goodwill or title
to one’s property. This is a capital expenditure which should be spread out over a
reasonable period of time.9
Respondent corporation’s venture to protect its brand franchise was tantamount to
efforts to establish a reputation. This was akin to the acquisition of capital assets and
therefore expenses related thereto were not to be considered as business expenses
but as capital expenditures.10
True, it is the taxpayer’s prerogative to determine the amount of advertising expenses
it will incur and where to apply them.11 Said prerogative, however, is subject to certain
considerations. The first relates to the extent to which the expenditures are actually
capital outlays; this necessitates an inquiry into the nature or purpose of such
expenditures.12 The second, which must be applied in harmony with the first, relates
to whether the expenditures are ordinary and necessary. Concomitantly, for an
expense to be considered ordinary, it must be reasonable in amount. The Court of Tax
Appeals ruled that respondent corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the subject
advertising expense in order to protect its brand franchise. We consider this as a capital
outlay since it created goodwill for its business and/or product. The P9,461,246 media
advertising expense for the promotion of a single product, almost one-half of petitioner
corporation’s entire claim for marketing expenses for that year under review, inclusive
of other advertising and promotion expenses of P2,678,328 and P1,548,614 for
consumer promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the conclusions
of quasi-judicial agencies such as the Court of Tax Appeals, a highly specialized body
specifically created for the purpose of reviewing tax cases. The CTA, by the nature of
its functions, is dedicated exclusively to the study and consideration of tax problems. It
has necessarily developed an expertise on the subject. We extend due consideration
to its opinion unless there is an abuse or improvident exercise of authority.13 Since
there is none in the case at bar, the Court adheres to the findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible error when it
declared the subject media advertising expense to be deductible as an ordinary and
necessary expense on the ground that "it has not been established that the item being
claimed as deduction is excessive." It is not incumbent upon the taxing authority to
prove that the amount of items being claimed is unreasonable. The burden of proof to
establish the validity of claimed deductions is on the taxpayer.14 In the present case,
that burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed
decision of the Court of Appeals is hereby REVERSED and SET ASIDE. Pursuant to
Sections 248 and 249 of the Tax Code, respondent General Foods (Phils.), Inc. is
hereby ordered to pay its deficiency income tax in the amount of P2,635,141.42, plus
25% surcharge for late payment and 20% annual interest computed from August 25,
1989, the date of the denial of its protest, until the same is fully paid.
SO ORDERED.
G.R. No. L-26911 January 27, 1981
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. L-26924 January 27, 1981
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION and COURT
OF TAX APPEALS, respondents.
DE CASTRO, J.:
These are two (2) petitions for review from the decision of the Court of Tax Appeals of
October 25, 1966 in CTA Case No. 1312 entitled "Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue." One (L-26911) was
filed by the Atlas Consolidated Mining & Development Corporation, and in the other L-
26924), the Commissioner of Internal Revenue is the petitioner.
This tax case (CTA No. 1312) arose from the 1957 and 1958 deficiency income tax
assessments made by the Commissioner of Internal Revenue, hereinafter referred to
as Commissioner, where the Atlas Consolidated Mining and Development Corporation,
hereinafter referred to as Atlas, was assessed P546,295.16 for 1957 and P215,493.96
for 1958 deficiency income taxes.
Atlas is a corporation engaged in the mining industry registered under the laws of the
Philippines. On August 20, 1962, the Commissioner assessed against Atlas the sum of
P546,295.16 and P215,493.96 or a total of P761,789.12 as deficiency income taxes for
the years 1957 and 1958. For the year 1957, it was the opinion of the Commissioner
that Atlas is not entitled to exemption from the income tax under Section 4 of Republic
Act 909 1 because same covers only gold mines, the provision of which reads:
New mines, and old mines which resume operation, when certified to as such by the
Secretary of Agriculture and Natural Resources upon the recommendation of the
Director of Mines, shall be exempt from the payment of income tax during the first three
(3) years of actual commercial production. Provided that, any such mine and/or mines
making a complete return of its capital investment at any time within the said period,
shall pay income tax from that year.
For the year 1958, the assessment of deficiency income tax of P761,789.12 covers the
disallowance of items claimed by Atlas as deductible from gross income.
On October 9, 1962, Atlas protested the assessment asking for its reconsideration and
cancellation. 2 Acting on the protest, the Commissioner conducted a reinvestigation of
the case.
On October 25, 1962, the Secretary of Finance ruled that the exemption provided in
Republic Act 909 embraces all new mines and old mines whether gold or other
minerals. 3 Accordingly, the Commissioner recomputed Atlas deficiency income tax
liabilities in the light of the ruling of the Secretary of Finance. On June 9, 1964, the
Commissioner issued a revised assessment entirely eliminating the assessment of
P546,295.16 for the year 1957. The assessment for 1958 was reduced from
P215,493.96 to P39,646.82 from which Atlas appealed to the Court of Tax Appeals,
assailing the disallowance of the following items claimed as deductible from its gross
income for 1958:
(table here)
After hearing, the Court of Tax Appeals rendered a decision on October 25, 1966
allowing the above mentioned disallowed items, except the items denominated by Atlas
as stockholders relation service fee and suit expenses. 4 Pertinent portions of the
decision of the Court of Tax Appeals read as follows:
Under the facts, circumstances and applicable law in this case, the unallowable
deduction from petitioner's gross income in 1958 amounted to P32,189.79.
Stockholders relation service fee.................................... P25,523.14

Suit and litigation expenses................................................ 6,666.65
Total................................................................................... P32,189.79
As the exemption of petitioner from the payment of corporate income tax under Section
4, Republic Act 909, was good only up to the Ist quarter of 1958 ending on March 31
of the same year, only three-fourth (3/4) of the net taxable income of petitioner is subject
to income tax, computed as follows:
1958
(table here)
From the Court of Tax Appeals' decision of October 25, 1966, both parties appealed to
this Court by way of two (2) separate petitions for review docketed as G. R. No. L-
26911 (Atlas, petitioner) and G. R. No. L-29924 (Commissioner, petitioner).
G. R. No. L-26911—Atlas appealed only that portion of the Court of Tax Appeals'
decision disallowing the deduction from gross income of the so-called stockholders
relation service fee amounting to P25,523.14, making a lone assignment of error that
— addition, not only must the taxpayer meet the business test, he must substantially prove
THE COURT OF TAX APPEALS ERRED IN ITS CONCLUSION THAT THE EXPENSE
IN THE AMOUNT OF P25,523.14 PAID BY PETITIONER IN 1958 AS ANNUAL
PUBLIC RELATIONS EXPENSES WAS INCURRED FOR ACQUISITION OF
ADDITIONAL CAPITAL, THE SAME NOT BEING SUPPORTED BY THE EVIDENCE.
It is the contention of Atlas that the amount of P25,523.14 paid in 1958 as annual public
relations expenses is a deductible expense from gross income under Section 30 (a) (1)
of the National Internal Revenue Code. Atlas claimed that it was paid for services of a
public relations firm, P.K Macker & Co., a reputable public relations consultant in New
York City, U.S.A., hence, an ordinary and necessary business expense in order to
compete with other corporations also interested in the investment market in the United
States. 5 It is the stand of Atlas that information given out to the public in general and
to the stockholder in particular by the P.K MacKer & Co. concerning the operation of
the Atlas was aimed at creating a favorable image and goodwill to gain or maintain their
patronage.
The decisive question, therefore, in this particular appeal taken by Atlas to this Court is
whether or not the expenses paid for the services rendered by a public relations firm
P.K MacKer & Co. labelled as stockholders relation service fee is an allowable
deduction as business expense under Section 30 (a) (1) of the National Internal
Revenue Code.
The principle is recognized that when a taxpayer claims a deduction, he must point to
some specific provision of the statute in which that deduction is authorized and must
be able to prove that he is entitled to the deduction which the law allows. As previously
adverted to, the law allowing expenses as deduction from gross income for purposes
of the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a
deduction of "all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business." An item of expenditure, in order to
be deductible under this section of the statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be
deductible as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying in a trade or business. 6 In
by evidence or records the deductions claimed under the law, otherwise, the same will
be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary
and necessary does not justify its deduction. 7
While it is true that there is a number of decisions in the United States delving on the
interpretation of the terms "ordinary and necessary" as used in the federal tax laws, no
adequate or satisfactory definition of those terms is possible. Similarly, this Court has
never attempted to define with precision the terms "ordinary and necessary." There are
however, certain guiding principles worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an expense will be considered "necessary"
where the expenditure is appropriate and helpful in the development of the taxpayer's
business. 8 It is "ordinary" when it connotes a payment which is normal in relation to
the business of the taxpayer and the surrounding circumstances. 9 The term "ordinary"
does not require that the payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be unique or non-recurring to
the particular taxpayer affected. 10

There is thus no hard and fast rule on the matter. The right to a deduction depends in
each case on the particular facts and the relation of the payment to the type of business
in which the taxpayer is engaged. The intention of the taxpayer often may be the
controlling fact in making the determination. 11 Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer's business, the answer to the
question as to whether the expenditure is an allowable deduction as a business
expense must be determined from the nature of the expenditure itself, which in turn
depends on the extent and permanency of the work accomplished by the expenditure.
12
We do not agree with the contention of Atlas that the conclusion of the Court of Tax
Appeals in holding that the expense of P25,523.14 was incurred for acquisition of
additional capital is not supported by the evidence. The burden of proof that the
expenses incurred are ordinary and necessary is on the taxpayer 16 and does not rest
upon the Government. To avail of the claimed deduction under Section 30(a) (1) of the
National Internal Revenue Code, it is incumbent upon the taxpayer to adduce
substantial evidence to establish a reasonably proximate relation petition between the
expenses to the ordinary conduct of the business of the taxpayer. A logical link or nexus
between the expense and the taxpayer's business must be established by the taxpayer.

G. R. No. L-26924-In his petition for review, the Commissioner of Internal Revenue
assigned as errors the following:
It appears that on December 27, 1957, Atlas increased its capital stock from
P15,000,000 to P18,325,000. 13 It was claimed by Atlas that its shares of stock worth
P3,325,000 were sold in the United States because of the services rendered by the
public relations firm, P. K. Macker & Company. The Court of Tax Appeals ruled that the I
information about Atlas given out and played up in the mass communication media
resulted in full subscription of the additional shares issued by Atlas; consequently, the
questioned item, stockholders relation service fee, was in effect spent for the THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM
acquisition of additional capital, ergo, a capital expenditure. GROSS INCOME OF THE SO- CALLED TRANSFER AGENT'S FEES ALLEGEDLY
PAID BY RESPONDENT;

We sustain the ruling of the tax court that the expenditure of P25,523.14 paid to P.K.
Macker & Co. as compensation for services carrying on the selling campaign in an II
effort to sell Atlas' additional capital stock of P3,325,000 is not an ordinary expense in
line with the decision of U.S. Board of Tax Appeals in the case of Harrisburg Hospital
Inc. vs. Commissioner of Internal Revenue. 14 Accordingly, as found by the Court of THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM
Tax Appeals, the said expense is not deductible from Atlas gross income in 1958 GROSS INCOME OF LISTING EXPENSES ALLEGEDLY INCURRED BY
because expenses relating to recapitalization and reorganization of the corporation RESPONDENT;
(Missouri-Kansas Pipe Line vs. Commissioner of Internal Revenue, 148 F. (2d), 460;
Skenandos Rayon Corp. vs. Commissioner of Internal Revenue, 122 F. (2d) 268, Cert.
denied 314 U.S. 6961), the cost of obtaining stock subscription (Simons Co., 8 BTA
631), promotion expenses (Beneficial Industrial Loan Corp. vs. Handy, 92 F. (2d) 74), III
and commission or fees paid for the sale of stock reorganization (Protective Finance
Corp., 23 BTA 308) are capital expenditures.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE AMOUNT OF
P60,000 REPRESENTED BY RESPONDENT AS "PROVISION FOR
That the expense in question was incurred to create a favorable image of the CONTINGENCIES" WAS ADDED BACK BY RESPONDENT TO ITS GROSS INCOME
corporation in order to gain or maintain the public's and its stockholders' patronage, IN COMPUTING THE INCOME TAX DUE FROM IT FOR 1958;
does not make it deductible as business expense. As held in the case of Welch vs.
Helvering, 15 efforts to establish reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business expense but capital expenditures. IV
THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY THE AMOUNT OF
P6,666.65 AS SUIT EXPENSES, THE CORRECT AMOUNT THAT SHOULD HAVE
BEEN DISALLOWED BEING P17,499.98.
It is well to note that only in the Court of Tax Appeals did the Commissioner raise for
the first time (in his memorandum) the question of whether or not the business
expenses deducted from Atlas gross income in 1958 may be allowed in the absence of
proof of payments. 17 Before this Court, the Commissioner reiterated the same as
ground against deductibility when he claimed that the Court of Tax Appeals erred in
allowing the deduction of transfer agent's fee and stock listing fee from gross income
in the absence of proof of payment thereof.
The Commissioner contended that under Section 30 (a) (1) of the National Internal
Revenue Code, it is a requirement for an expense to be deductible from gross income
that it must have been "paid or incurred during the year" for which it is claimed; that in
the absence of convincing and satisfactory evidence of payment, the deduction from
gross income for the year 1958 income tax return cannot be sustained; and that the
best evidence to prove payment, if at all any has been made, would be the vouchers
or receipts issued therefor which ATLAS failed to present.
Atlas admitted that it failed to adduce evidence of payment of the deduction claimed in
its 1958 income tax return, but explains the failure with the allegation that the
Commissioner did not raise that question of fact in his pleadings, or even in the report
of the investigating examiner and/or letters of demand and assessment notices of
ATLAS which gave rise to its appeal to the Court of Tax Appeal. 18 It was emphasized
by Atlas that it went to trial and finally submitted this case for decision on the
assumption that inasmuch as the fact of payment was never raised as a vital issue by
the Commissioner in his answer to the petition for review in the Court of Tax Appeal,
the issues is limited only to pure question of law—whether or not the expenses
deducted by petitioner from its gross income for 1958 are sanctioned by Section 30 (a)
(1) of the National Internal Revenue Code.
On this issue of whether or not the Commissioner can raise the fact of payment for the
first time on appeal in its memorandum in the Court of Tax Appeal, we fully agree with
the ruling of the tax court that the Commissioner on appeal cannot be allowed to adopt
a theory distinct and different from that he has previously pursued, as shown by the
BIR records and the answer to the amended petition for review. 19 As this Court said
in the case of Commissioner of Customs vs. Valencia 20 such change in the nature of
the case may not be made on appeal, specially when the purpose of the latter is to
seek a review of the action taken by an administrative body, forming part of a coordinate
branch of the Government, such as the Executive department. In the case at bar, the
Court of Tax Appeal found that the fact of payment of the claimed deduction from gross
income was never controverted by the Commissioner even during the initial stages of
routinary administrative scrutiny conducted by BIR examiners. 21 Specifically, in his
answer to the amended petition for review in the Court of Tax Appeal, the
Commissioner did not deny the fact of payment, merely contesting the legitimacy of the
deduction on the ground that same was not ordinary and necessary business
expenses. 22
As consistently ruled by this Court, the findings of facts by the Court of Tax Appeal will
not be reviewed in the absence of showing of gross error or abuse. 23 We, therefore,
hold that it was too late for the Commissioner to raise the issue of fact of payment for
the first time in his memorandum in the Court of Tax Appeals and in this instant appeal
to the Supreme Court. If raised earlier, the matter ought to have been seriously delved
into by the Court of Tax Appeals. On this ground, we are of the opinion that under all
the attendant circumstances of the case, substantial justice would be served if the
Commissioner be held as precluded from now attempting to raise an issue to disallow
deduction of the item in question at this stage. Failure to assert a question within a
reasonable time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it.
On the second assignment of error, aside from alleging lack of proof of payment of the
expense deducted, the Commissioner contended that such expense should be
disallowed for not being ordinary and necessary and not incurred in trade or business,
as required under Section 30 (a) (1) of the National Internal Revenue Code. He
asserted that said fees were therefore incurred not for the production of income but for
the acquisition petition of capital in view of the definition that an expense is deemed to
be incurred in trade or business if it was incurred for the production of income, or in the
expectation of producing income for the business. In support of his contention, the
Commissioner cited the ruling in Dome Mines, Ltd vs. Commisioner of Internal Revenue
24 involving the same issue as in the case at bar where the U.S. Board of Tax Appeal
ruled that expenses for listing capital stock in the stock exchange are not ordinary and
necessary expenses incurred in carrying on the taxpayer's business which was gold
mining and selling, which business is strikingly similar to Atlas.
On the other hand, the Court of Tax Appeal relied on the ruling in the case of
Chesapeake Corporation of Virginia vs. Commissioner of Internal Revenue 25 where
the Tax Court allowed the deduction of stock exchange fee in dispute, which is an
annually recurring cost for the annual maintenance of the listing.
We find the Chesapeake decision controlling with the facts and circumstances of the
instant case. In Dome Mines, Ltd case the stock listing fee was disallowed as a
deduction not only because the expenditure did not meet the statutory test but also
because the same was paid only once, and the benefit acquired thereby continued
indefinitely, whereas, in the Chesapeake Corporation case, fee paid to the stock
exchange was annual and recurring. In the instant case, we deal with the stock listing
fee paid annually to a stock exchange for the privilege of having its stock listed. It must
be noted that the Court of Tax Appeal rejected the Dome Mines case because it
involves a payment made only once, hence, it was held therein that the single payment
made to the stock exchange was a capital expenditure, as distinguished from the
instant case, where payments were made annually. For this reason, we hold that said
listing fee is an ordinary and necessary business expense
On the third assignment of error, the Commissioner con- tended that the Court of Tax
Appeal erred when it held that the amount of P60,000 as "provisions for contingencies"
was in effect added back to Atlas income.
On this issue, this Court has consistently ruled in several cases adverted to earlier, that
in the absence of grave abuse of discretion or error on the part of the tax court its
findings of facts may not be disturbed by the Supreme Court. 26 It is not within the
province of this Court to resolve whether or not the P60,000 representing "provision for
contingencies" was in fact added to or deducted from the taxable income. As ruled by
the Court of Tax Appeals, the said amount was in effect added to Atlas taxable income.
27 The same being factual in nature and supported by substantial evidence, such
findings should not be disturbed in this appeal.
Finally, in its fourth assignment of error, the Commissioner contended that the CTA
erred in disallowing only the amount of P6,666.65 as suit expenses instead of
P17,499.98.
It appears that petitioner deducted from its 1958 gross income the amount of
P23,333.30 as attorney's fees and litigation expenses in the defense of title to the
Toledo Mining properties purchased by Atlas from Mindanao Lode Mines Inc. in Civil
Case No. 30566 of the Court of First Instance of Manila for annulment of the sale of
said mining properties. On the ground that the litigation expense was a capital
expenditure under Section 121 of the Revenue Regulation No. 2, the investigating
revenue examiner recommended the disallowance of P13,333.30. The Commissioner,
however, reduced this amount of P6,666.65 which latter amount was affirmed by the
respondent Court of Tax Appeals on appeal.
There is no question that, as held by the Court of Tax Ap- peals, the litigation expenses
under consideration were incurred in defense of Atlas title to its mining properties. In
line with the decision of the U.S. Tax Court in the case of Safety Tube Corp. vs.
Commissioner of Internal Revenue, 28 it is well settled that litigation expenses incurred
in defense or protection of title are capital in nature and not deductible. Likewise, it was
ruled by the U.S. Tax Court that expenditures in defense of title of property constitute
a part of the cost of the property, and are not deductible as expense. 29
Surprisingly, however, the investigating revenue examiner recommended a partial
disallowance of P13,333.30 instead of the entire amount of P23,333.30, which, upon
review, was further reduced by the Commissioner of Internal Revenue. Whether it was
due to mistake, negligence or omission of the officials concerned, the arithmetical error
committed herein should not prejudice the Government. This Court will pass upon this
particular question since there is a clear error committed by officials concerned in the
computation of the deductible amount. As held in the case of Vera vs. Fernandez, 30
this Court emphatically said that taxes are the lifeblood of the Government and their
prompt and certain availability are imperious need. Upon taxation depends the
Government's ability to serve the people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of government officials entrusted with the
collection of taxes should not be allowed to bring harm or detriment to the people, in
the same manner as private persons may be made to suffer individually on account of
his own negligence, the presumption being that they take good care of their personal
affair. This should not hold true to government officials with respect to matters not of
their own personal concern. This is the philosophy behind the government's exception,
as a general rule, from the operation of the principle of estoppel. 31
WHEREFORE, judgment appealed from is hereby affirmed with modification that the
amount of P17,499.98 (3/4 of P23,333.00) representing suit expenses be disallowed
as deduction instead of P6,666.65 only. With this amount as part of the net income, the
corresponding income tax shall be paid thereon, with interest of 6% per annum from
June 20, 1959 to June 20,1962.
SO ORDERED.
G.R. No. L-24059 November 28, 1969
C. M. HOSKINS & CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Ross, Salcedo, Del Rosario, Bito and Misa for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo
R. Rosete and Special Attorney Michaelina R. Balasbas for respondent.
TEEHANKEE, J.:
We uphold in this taxpayer's appeal the Tax Court's ruling that payment by the taxpayer
to its controlling stockholder of 50% of its supervision fees or the amount of P99,977.91
is not a deductible ordinary and necessary expense and should be treated as a
distribution of earnings and profits of the taxpayer.
Petitioner, a domestic corporation engaged in the real estate business as brokers,
managing agents and administrators, filed its income tax return for its fiscal year ending
September 30, 1957 showing a net income of P92,540.25 and a tax liability due thereon
of P18,508.00, which it paid in due course. Upon verification of its return, respondent
Commissioner of Internal Revenue, disallowed four items of deduction in petitioner's
tax returns and assessed against it an income tax deficiency in the amount of
P28,054.00 plus interests. The Court of Tax Appeals upon reviewing the assessment
at the taxpayer's petition, upheld respondent's disallowance of the principal item of
petitioner's having paid to Mr. C. M. Hoskins, its founder and controlling stockholder
the amount of P99,977.91 representing 50% of supervision fees earned by it and set
aside respondent's disallowance of three other minor items. The Tax Court therefore
determined petitioner's tax deficiency to be in the amount of P27,145.00 and on
November 8, 1964 rendered judgment against it, as follows:
WHEREFORE, premises considered, the decision of the respondent is hereby
modified. Petitioner is ordered to pay to the latter or his representative the sum of
P27,145.00, representing deficiency income tax for the year 1957, plus interest at 1/2%
per month from June 20, 1959 to be computed in accordance with the provisions of
Section 51(d) of the National Internal Revenue Code. If the deficiency tax is not paid
within thirty (30) days from the date this decision becomes final, petitioner is also
ordered to pay surcharge and interest as provided for in Section 51 (e) of the Tax Code,
without costs.
Petitioner questions in this appeal the Tax Court's findings that the disallowed payment
to Hoskins was an inordinately large one, which bore a close relationship to the
recipient's dominant stockholdings and therefore amounted in law to a distribution of its
earnings and profits.
We find no merit in petitioner's appeal.
As found by the Tax Court, "petitioner was founded by Mr. C. M. Hoskins in 1937, with
a capital stock of 1,000 shares at a par value of P1.00 each share; that of these 1,000
shares, Mr. C. M. Hoskins owns 996 shares (the other 4 shares being held by the other
four officers of the corporation), which constitute exactly 99.6% of the total authorized
capital stock (p. 92, t.s.n.); that during the first four years of its existence, Mr. C. M.
Hoskins was the President, but during the taxable period in question, that is, from
October 1, 1956 to September 30, 1957, he was the chairman of the Board of Directors
and salesman-broker for the company (p. 93, t.s.n.); that as chairman of the Board of
Directors, he received a salary of P3,750.00 a month, plus a salary bonus of about
P40,000.00 a year (p. 94, t.s.n.); that he was also a stockholder and officer of the
Paradise Farms, Inc. and Realty Investments, Inc., from which petitioner derived a large
portion of its income in the form of supervision fees and commissions earned on sales
of lots (pp. 97-99, t.s.n.; Financial Statements, attached to Exhibit '1', p. 11, BIR rec.);
that as chairman of the Board of Directors of petitioner, his duties were: "To act as a
salesman; as a director, preside over meetings and to get all of the real estate business
I could for the company by negotiating sales, purchases, making appraisals, raising
funds to finance real estate operations where that was necessary' (p. 96, t.s.n.); that
he was familiar with the contract entered into by the petitioner with the Paradise Farms,
Inc. and the Realty Investments, Inc. by the terms of which petitioner was 'to program
the development, arrange financing, plan the proposed subdivision as outlined in the
prospectus of Paradise Farms, Inc., arrange contract for road constructions, with the
provision of water supply to all of the lots and in general to serve as managing agents
for the Paradise Farms, Inc. and subsequently for the Realty Investment, Inc." (pp. 96-
97. t.s.n.)
Considering that in addition to being Chairman of the board of directors of petitioner
corporation, which bears his name, Hoskins, who owned 99.6% of its total authorized
capital stock while the four other officers-stockholders of the firm owned a total of four-
tenths of 1%, or one-tenth of 1% each, with their respective nominal shareholdings of
one share each was also salesman-broker for his company, receiving a 50% share of
the sales commissions earned by petitioner, besides his monthly salary of P3,750.00
amounting to an annual compensation of P45,000.00 and an annual salary bonus of
P40,000.00, plus free use of the company car and receipt of other similar allowances
and benefits, the Tax Court correctly ruled that the payment by petitioner to Hoskins of
the additional sum of P99,977.91 as his equal or 50% share of the 8% supervision fees
received by petitioner as managing agents of the real estate, subdivision projects of
Paradise Farms, Inc. and Realty Investments, Inc. was inordinately large and could not
be accorded the treatment of ordinary and necessary expenses allowed as deductible
items within the purview of Section 30 (a) (i) of the Tax Code.
If such payment of P99,977.91 were to be allowed as a deductible item, then Hoskins
would receive on these three items alone (salary, bonus and supervision fee) a total of
P184,977.91, which would be double the petitioner's reported net income for the year
of P92,540.25. As correctly observed by respondent. If independently, a one-time
P100,000.00-fee to plan and lay down the rules for supervision of a subdivision project
were to be paid to an experienced realtor such as Hoskins, its fairness and deductibility
by the taxpayer could be conceded; but here 50% of the supervision fee of petitioner
was being paid by it to Hoskins every year since 1955 up to 1963 and for as long as its
contract with the subdivision owner subsisted, regardless of whether services were
actually rendered by Hoskins, since his services to petitioner included such planning
and supervision and were already handsomely paid for by petitioner.
The fact that such payment was authorized by a standing resolution of petitioner's
board of directors, since "Hoskins had personally conceived and planned the project"
cannot change the picture. There could be no question that as Chairman of the board
and practically an absolutely controlling stockholder of petitioner, holding 99.6% of its
stock, Hoskins wielded tremendous power and influence in the formulation and making
of the company's policies and decisions. Even just as board chairman, going by
petitioner's own enumeration of the powers of the office, Hoskins, could exercise great
power and influence within the corporation, such as directing the policy of the
corporation, delegating powers to the president and advising the corporation in
determining executive salaries, bonus plans and pensions, dividend policies, etc.1
Petitioner's invoking of its policy since its incorporation of sharing equally sales
commissions with its salesmen, in accordance with its board resolution of June 18,
1946, is equally untenable. Petitioner's Sales Regulations provide:
Compensation of Salesmen
8. Schedule I — In the case of sales to prospects discovered and worked by a
salesman, even though the closing is done by or with the help of the Sales Manager or
other members of the staff, the salesmen get one-half (1/2) of the total commission
received by the Company, but not exceeding five percent (5%). In the case of
subdivisions, when the office commission covers general supervision, the 1/2-rule does
not apply, the salesman's share being stipulated in the case of each subdivision. In
most cases the salesman's share is 4%. (Exh. "N-1").2
It will be readily seen therefrom that when the petitioner's commission covers general
supervision, it is provided that the 1/2 rule of equal sharing of the sales commissions
does not apply and that the salesman's share is stipulated in the case of each
subdivision. Furthermore, what is involved here is not Hoskins' salesman's share in the
petitioner's 12% sales commission, which he presumably collected also from petitioner
without respondent's questioning it, but a 50% share besides in petitioner's planning
and supervision fee of 8% of the gross sales, as mentioned above. This is evident from
petitioner's board's resolution of July 14, 1953 (Exhibit 7), wherein it is recited that in
addition to petitioner's sales commission of 12% of gross sales, the subdivision owners
were paying to petitioner 8% of gross sales as supervision fee, and a collection fee of
5% of gross collections, or total fees of 25% of gross sales.
The case before us is similar to previous cases of disallowances as deductible items of
officers' extra fees, bonuses and commissions, upheld by this Court as not being within
the purview of ordinary and necessary expenses and not passing the test of reasonable
compensation.3 In Kuenzle & Streiff, Inc. vs. Commissioner of Internal Revenue
decided by this Court on May 29, 1969,4 we reaffirmed the test of reasonableness,
enunciated in the earlier 1967 case involving the same parties, that: "It is a general rule
that 'Bonuses to employees made in good faith and as additional compensation for the
services actually rendered by the employees are deductible, provided such payments,
when added to the stipulated salaries, do not exceed a reasonable compensation for
the services rendered' (4 Mertens Law of Federal Income Taxation, Sec. 25.50, p. 410).
The conditions precedent to the deduction of bonuses to employees are: (1) the
payment of the bonuses is in fact compensation; (2) it must be for personal services
actually rendered; and (3) the bonuses, when added to the salaries, are 'reasonable . .
. when measured by the amount and quality of the services performed with relation to
the business of the particular taxpayer' (Idem., Sec. 25, 44, p. 395).
"There is no fixed test for determining the reasonableness of a given bonus as
compensation. This depends upon many factors, one of them being 'the amount and
quality of the services performed with relation to the business.' Other tests suggested
are: payment must be 'made in good faith'; 'the character of the taxpayer's business, not legally be permitted, by way of corporate resolutions authorizing payment of
the volume and amount of its net earnings, its locality, the type and extent of the inordinately large commissions and fees to its controlling stockholder, to dilute and
services rendered, the salary policy of the corporation'; 'the size of the particular diminish its corresponding corporate tax liability.
business'; 'the employees' qualifications and contributions to the business venture'; and
'general economic conditions' (4 Mertens, Law of Federal Income Taxation, Secs.
25.44, 25.49, 25.50, 25.51, pp. 407-412). However, 'in determining whether the ACCORDINGLY, the decision appealed from is hereby affirmed, with costs in both
particular salary or compensation payment is reasonable, the situation must be instances against petitioner.
considered as whole. Ordinarily, no single factor is decisive. . . . it is important to keep
in mind that it seldom happens that the application of one test can give satisfactory
answer, and that ordinarily it is the interplay of several factors, properly weighted for
the particular case, which must furnish the final answer." Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro,
Fernando and Barredo, JJ., concur.

Petitioner's case fails to pass the test. On the right of the employer as against
respondent Commissioner to fix the compensation of its officers and employees, we
there held further that while the employer's right may be conceded, the question of the
allowance or disallowance thereof as deductible expenses for income tax purposes is
subject to determination by respondent Commissioner of Internal Revenue. Thus: "As
far as petitioner's contention that as employer it has the right to fix the compensation of
its officers and employees and that it was in the exercise of such right that it deemed
proper to pay the bonuses in question, all that We need say is this: that right may be
conceded, but for income tax purposes the employer cannot legally claim such bonuses
as deductible expenses unless they are shown to be reasonable. To hold otherwise
would open the gate of rampant tax evasion.

"Lastly, We must not lose sight of the fact that the question of allowing or disallowing
as deductible expenses the amounts paid to corporate officers by way of bonus is
determined by respondent exclusively for income tax purposes. Concededly, he has no
authority to fix the amounts to be paid to corporate officers by way of basic salary,
bonus or additional remuneration — a matter that lies more or less exclusively within
the sound discretion of the corporation itself. But this right of the corporation is, of
course, not absolute. It cannot exercise it for the purpose of evading payment of taxes
legitimately due to the State."

Finally, it should be noted that we have here a case practically of a sole proprietorship
of C. M. Hoskins, who however chose to incorporate his business with himself holding
virtually absolute control thereof with 99.6% of its stock with four other nominal
shareholders holding one share each. Having chosen to use the corporate form with its
legal advantages of a separate corporate personality as distinguished from his
individual personality, the corporation so created, i.e., petitioner, is bound to comport
itself in accordance with corporate norms and comply with its corporate obligations.
Specifically, it is bound to pay the income tax imposed by law on corporations and may
G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005
Decision1 of the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26,
2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5211, which
cancelled and set aside the Assessment Notices for deficiency income tax and
expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against
respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from
the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the
amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December
31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for the
months of April and May 1986.6
(2) The alleged understatement of ICC’s interest income on the three promissory notes
due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and
surcharge) was allegedly due to the failure of ICC to withhold 1% expanded withholding
tax on its claimed P244,890.00 deduction for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On
February 9, 1995, however, it received a final notice before seizure demanding
payment of the amounts stated in the said notices. Hence, it brought the case to the
CTA which held that the petition is premature because the final notice of assessment
cannot be considered as a final decision appealable to the tax court. This was reversed
by the Court of Appeals holding that a demand letter of the BIR reiterating the payment
of deficiency tax, amounts to a final decision on the protested assessment and may
therefore be questioned before the CTA. This conclusion was sustained by this Court
on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded to the CTA for
further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC in 1986 because it
was only in the said year when the bills demanding payment were sent to ICC. Hence,
even if some of these professional services were rendered to ICC in 1984 or 1985, it
could not declare the same as deduction for the said years as the amount thereof could
not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject
promissory notes. It found that it was the BIR which made an overstatement of said
income when it compounded the interest income receivable by ICC from the promissory
notes of Realty Investment, Inc., despite the absence of a stipulation in the contract
providing for a compounded interest; nor of a circumstance, like delay in payment or
breach of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its
claimed deduction for security services as shown by the various payment orders and
confirmation receipts it presented as evidence. The dispositive portion of the CTA’s
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-
000680 for deficiency income tax in the amount of P333,196.86, and Assessment
Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount
of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986, are
hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services)
were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only
in 1986 when ICC received the billing statements for said services. It further ruled that
ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes on the payments
for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition
contending that since ICC is using the accrual method of accounting, the expenses for
the professional services that accrued in 1984 and 1985, should have been declared
as deductions from income during the said years and the failure of ICC to do so bars it
from claiming said expenses as deduction for the taxable year 1986. As to the alleged
deficiency interest income and failure to withhold expanded withholding tax
assessment, petitioner invoked the presumption that the assessment notices issued by
the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the
deduction of the expenses for professional and security services from ICC’s gross
income; and (2) held that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc; and that ICC withheld the required 1% withholding tax
from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must have been paid or incurred during
the taxable year; (c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be supported by receipts, records or other
pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is further
qualified by Section 45 of the National Internal Revenue Code (NIRC) which states that:
"[t]he deduction provided for in this Title shall be taken for the taxable year in which
‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon
the basis of which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and
how to report income and deductions.12 In the instant case, the accounting method
used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as deduction from income for
the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses
and other allowable deductions for the current year but failed to do so cannot deduct
the same for the next year.13
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation
to pay them, in opposition to actual receipt or payment, which characterizes the cash
method of accounting. Amounts of income accrue where the right to receive them
become fixed, where there is created an enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.14
For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income
or expense? The accrual of income and expense is permitted when the all-events test
has been met. This test requires: (1) fixing of a right to income or liability to pay; and
(2) the availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy. However, the test
does not demand that the amount of income or liability be known absolutely, only that
a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may
be unknown, but is not as much as unknowable, within the taxable year. The amount
of liability does not have to be determined exactly; it must be determined with
"reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something
less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
year.[16] Accrual method of accounting presents largely a question of fact; such that
the taxpayer bears the burden of proof of establishing the accrual of an item of income
or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and
one who claims an exemption must be able to justify the same by the clearest grant of
organic or statute law. An exemption from the common burden cannot be permitted to
exist upon vague implications. And since a deduction for income tax purposes partakes
of the nature of a tax exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal
and auditing services. The expenses for legal services pertain to the 1984 and 1985
legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna
& Bengson, and for reimbursement of the expenses of said firm in connection with
ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has
been its counsel since the 1960’s.19 From the nature of the claimed deductions and
the span of time during which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the compensation
for its legal services. The failure to determine the exact amount of the expense during
the taxable year when they could have been claimed as deductions cannot thus be
attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the
exercise of due diligence could have inquired into the amount of their obligation to the
firm, especially so that it is using the accrual method of accounting. For another, it could
have reasonably determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that
the taxpayer bears the burden of establishing the accrual of an expense or income.
However, ICC failed to discharge this burden. As to when the firm’s performance of its
services in connection with the 1984 tax problems were completed, or whether ICC
exercised reasonable diligence to inquire about the amount of its liability, or whether it
does or does not possess the information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact which ICC never established. It
simply relied on the defense of delayed billing by the firm and the company, which
under the circumstances, is not sufficient to exempt it from being charged with
knowledge of the reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense deductions
in 1986. This is so because ICC failed to present evidence showing that even with only
"reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in the year
1985, it cannot determine the professional fees which said company would charge for
its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions
for the professional services were allowable deductions for the taxable year 1986.
Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly
deducted from its gross income for the said year and were therefore properly disallowed
by the BIR.
As to the expenses for security services, the records show that these expenses were
incurred by ICC in 198620 and could therefore be properly claimed as deductions for
the said year.
Anent the purported understatement of interest income from the promissory notes of
Realty Investment, Inc., we sustain the findings of the CTA and the Court of Appeals
that no such understatement exists and that only simple interest computation and not
a compounded one should have been applied by the BIR. There is indeed no stipulation
between the latter and ICC on the application of compounded interest.21 Under Article
1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should
not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the
required withholding tax from its claimed deductions for security services and remitted
the same to the BIR is supported by payment order and confirmation receipts.22
Hence, the Assessment Notice for deficiency expanded withholding tax was properly
cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for

deficiency income tax should be cancelled and set aside but only insofar as the claimed
deductions of ICC for security services. Said Assessment is valid as to the BIR’s
disallowance of ICC’s expenses for professional services. The Court of Appeal’s
cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of
P4,897.79 for deficiency expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005

Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the
MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed
the expense deduction of Isabela Cultural Corporation for professional and security
services, is declared valid only insofar as the expenses for the professional fees of SGV
& Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s
liability under Assessment Notice No. FAS-1-86-90-000680.

SO ORDERED