TAX CASES

1. Southern Luzon Drug Corp. vs DSWD

-RA 7432- 20% discount to senior citizens; To recoup the amount given as discount to qualified
senior citizens, covered establishments can claim an equal amount as tax credit which can be
applied against the income tax due from them;
RA 9257- new law retained the 20% discount on the purchase of medicines but removed the
annual income ceiling thereby qualifying all senior citizens to the privileges under the law.
Further, R.A. No. 9257 modified the tax treatment of the discount granted to senior citizens, from
tax credit to tax deduction from gross income, computed based on the net cost of goods sold or
services rendered.
-The change in the tax treatment of the discount given to senior citizens did not sit well with
some drug store owners and corporations, claiming it affected the profitability of their business.
-Carlos Superdrug Corporation (Carlos Superdrug), together with other corporation and
proprietors operating drugstores in the Philippines, filed a Petition for Prohibition with Prayer for
Temporary Restraining Order (TRO) and/or Preliminary Injunction assailing the constitutionality
of Section 4(a) of R.A. No. 9257 primarily on the ground that it amounts to taking of private
property without payment of just compensation.
-the Court upheld the constitutionality of the law

ISSUE: police power?

RULING: the Court finds nothing in the instant case that merits a reversal of the earlier ruling of
the Court in Carlos Superdrug;
-the change in the tax treatment of the discount was a valid exercise of police power
-A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it
would not meet the definition of just compensation;
-The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to
nation-building, and to grant benefits and privileges to them for their improvement and well-
being as the State considers them an integral part of our society. The priority given to senior
citizens finds its basis in the Constitution as set forth in the law itself.

2. Drugstores Assoc. of the Phil. Vs National Council on Disability Affairs

-Republic Act (R.A.) No. 7277, entitled "An Act Providing for the Rehabilitation, Self-
Development and Self-Reliance of Disabled Persons and their Integration into the
Mainstream of Society and for Other Purposes," otherwise known as the "Magna Carta for
Disabled Persons," was passed into law.

DOF issued Revenue Regulations No. 1-2009[16] prescribing rules and regulations to
implement R.A. 9442 relative to the tax privileges of PWDs and tax incentives for
establishments granting the discount. Section 4 of Revenue Regulations No. 001-09 states
that drugstores can only deduct the 20% discount from their gross income subject to some
conditions.

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 FACTS: RA 7277 mandates a 20% on purchase of medicines in favor of persons with
disabilities. 

ISSUE: Is this an instance of eminent domain?

HELD: No, this is not an exercise of eminent domain. This is an exercise of police power to
promote the welfare of the people, especially those who have less in life. Consequently, there
is no need for just compensation. The law leaves reasonable and viable economic usefulness;
hence, there is no “taking.”

ISSUE: Does the law violate the reasonable means test (due process), considering it only
requires an ID?

HELD: No, it does not violate due process. The implementation is reasonable because, before a
person is issued a PWD ID, he must first show a medical certificate of his disability if it is not
apparent by the naked eye.

3. Diaz vs Sec. of Finance (principles of sound tax system)

-Facts:
petitioners... filed this petition for declaratory relief... assailing the validity of the impending
imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections
of... tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as
regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the
approval of EVAT Law... and... the 1997 National Internal Revenue Code... at the House of
Representatives.  Timbol, on the other hand, claims that she served as Assistant Secretary of the
Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in... the past
administration.
On August 13, 2010 the Court issued a TRO... enjoining the implementation of the VAT.
The Court required the government, represented by respondents Cesar V. Purisima, Secretary of the
Department of Finance, and Kim S. Jacinto-Henares, Commissioner of
Internal Revenue, to comment on the petition within 10 days from notice.
Later, the Court issued another resolution treating the petition as one for prohibition.
The government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides... otherwise; that the Court should seek
the meaning and intent of the law from the words used in the statute; and that the imposition of VAT
on tollway operations has been the subject as early as 2003 of several BIR rulings and circulars.

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The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements... between the
government and tollway operators.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT.
Issues:
Whether or not the imposition of VAT on tollway operators... is not administratively feasible and
cannot be... implemented.
Ruling:
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax
system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax...
imposition invalid "except to the extent that specific constitutional or statutory limitations are
impaired."
Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is
not necessarily invalid unless some aspect... of it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate...
hearing provides some clue as to how the BIR intends to go about it,... the facts pertaining to the
matter are not sufficiently established for the Court to pass judgment on. Besides, any concern about
how the VAT on tollway operations will be enforced... must first be addressed to the BIR on whom
the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt the
BIR's discretion on the matter, absent any clear violation of law or the Constitution.
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the
VAT law's coverage when she sought to impose VAT on tollway operations.   Section 108(A) of the
Code clearly states that services of all other franchise grantees are subject to
VAT, except as may be provided under Section 119 of the Code. Tollway operators are not among
the franchise grantees subject to franchise tax under the latter provision. Neither are their services
among the VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege,
then it would have been well for the law to clearly say so.  Tax exemptions must be justified by clear
statutory grant and based on language in the law too plain to be... mistaken.
But as the law is written, no such exemption obtains for tollway operators.

4. Planters Products Inc vs Fertiphil Corp. (scope and limitations of taxation)

Facts:
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic
market

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After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy.
With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid
under LOI No. 1465, but PPI refused to accede to the demand.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of
taxation. It claims that the LOI was implemented for the purpose of assuring the fertilizer
supply and distribution in the country and for benefiting a foundation created by law to
hold... in trust for millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a
private company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also
argues that, even if the LOI is enacted under the police power, it is still unconstitutional...
because it did not promote the general welfare of the people or public interest.
Issues:
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE
FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR
BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR
MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A
VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND POLICE
POWER FOR PUBLIC PURPOSES.
Ruling:
The P10 levy under LOI No. 1465 is... an exercise of the power of taxation.
We agree with the RTC that the imposition of the levy was an exercise by the State of its
taxation power.
the primary purpose of the levy is revenue generation. If the purpose is primarily revenue,
or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly
called a tax.
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose.
Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was
not. for a public purpose. The levy was imposed to give undue benefit to PPI.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company.
Second, the LOI provides that the imposition of the P10 levy was conditional and dependent
upon PPI becoming financially "viable." This suggests that the levy was actually imposed to
benefit PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and
deposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI.[49] This
proves that PPI benefited from the LOI. It is also proves that the... main purpose of the law
was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI.

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 All told, the RTC and the CA did not err in holding that the levy imposed under LOI No.
1465 was not for a public purpose. LOI No. 1465 failed to comply with the public purpose
requirement for tax laws.

FACTS:

 President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided,
among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades
of fertilizers which resulted in having Fertiphil paying P 10/bag sold to the Fertilizer and Perticide
Authority (FPA).
 FPA remits its collection to Far East Bank and Trust Company who applies to the payment of
corporate debts of Planters Products Inc. (PPI)
 After the Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy.  Upon return of
democracy, Fertiphil demanded a refund but PPI refused.  Fertiphil filed a complaint for collection and
damages against FPA and PPI with the RTC on the ground that LOI No. 1465 is unjust, unreaonable
oppressive, invalid and unlawful resulting to denial of due process of law.  
 FPA answered that it is a valid exercise of the police power of the state in ensuring the stability of the
fertilizing industry in the country and that Fertiphil did NOT sustain damages since the burden imposed
fell on the ultimate consumers.
 RTC and CA favored Fertiphil holding that it is an exercise of the power of taxation ad is as such
because it  is NOT for public purpose as PPI is a private corporation.

W/N LOI No. 1465 is an invalid exercise of the power of taxation rather the police power
Yes. Police power and the power of taxation are inherent powers of the state but distinct and have
different tests for validity.  Police power is the power of the state to enact the legislation that may
interfere with personal liberty on property in order to promote general welfare.  While, the power of
taxation is the power to levy taxes as to be used for public purpose.  The main purpose of police power
is the regulation of a behavior or conduct, while taxation is revenue generation. The lawful subjects
and lawful means tests are used to determine the validity of a law enacted under the police power.  
The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.

In this case, it is for purpose of revenue.  But it is a robbery for the State to tax the citizen and use the
funds generation for a private purpose.  Public purpose does NOT only pertain to those purpose which
are traditionally viewed as essentially governmental function such as   building roads and delivery of
basic services, but also includes those purposes designed to promote social justice. Thus, public
money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian
reform.

5. ABAKADA Guro vs Ermita

Facts:
ABAKADA GURO Party List, et al., filed a petition for prohibition questioning the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National
Internal Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties;
Section 5 imposes a 10% VAT on importation of goods; and
Section 6 imposes a 10% VAT on sale of services and use or lease of properties;

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 These provisions contain a provision which authorizing the President, upon recommendation of the
Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions
have been satisfied.

Issues:
Whether or not there is a violation of Article VI, Section 24 of the Constitution. (all appropriation, revenue
or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall
originate exclusively in the HR, but the Senate may propose or concur with amendments)

Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the
Constitution. SECTION 28. (2) The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government. Whether or not there is a violation of the due process and equal
protection of the Constitution.

Ruling:
No, the revenue bill exclusively originated in the House of Representatives, the Senate was acting
within its constitutional power to introduce amendments to the House bill when it included provisions in
Senate Bill No. 1950 amending corporate income taxes, percentage, and excise and franchise taxes.

No, there is no undue delegation of legislative power but only of the discretion as to the execution of a
law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power
when it describes what job must be done, who must do it, and what is the scope of his authority; in our
complex economy that is frequently the only way in which the legislative process can go forward. In this
case, it is not a delegation of legislative power but a delegation of ascertainment of facts upon which
enforcement and administration of the increased rate under the law is contingent.

No, the power of the State to make reasonable and natural classifications for the purposes of taxation
has long been established. Whether it relates to the subject of taxation, the kind of property, the rates
to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the
State’s power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such
power absent a clear showing of unreasonableness, discrimination, or arbitrariness.

6. Gerochi vs. D of Energy (EPIRA)

Facts:

On June 8, 2001 Congress enacted RA 9136 or the Electric Power Industry Act of 2001. Petitioners Romeo
P. Gerochi and company assail the validity of Section 34 of the EPIRA Law for being an undue delegation
of the power of taxation. Section 34 provides for the imposition of a “Universal Charge” to all electricity
end users after a period of (1) one year after the effectively of the EPIRA Law. The universal charge to be
collected would serve as payment for government debts, missionary electrification, equalization of taxes
and royalties applied to renewable energy and imported energy, environmental charge and for a charge to
account for all forms of cross subsidies for a period not exceeding three years. The universal charge shall
be collected by the ERC on a monthly basis from all end users and will then be managed by the PSALM
Corp. through the creation of a special trust fund.

EPIRA

Universal Charge... respondent Panay Electric Company, Inc. (PECO) charged petitioner Romeo P.
Gerochi and all other... end-users with the Universal Charge as reflected in their respective electric bills
starting from the month of July 2003.[17]

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The power to tax is strictly a... legislative function and as such, the delegation of said power to any
executive or administrative agency like the ERC is unconstitutional, giving the same unlimited authority

The assailed provision clearly provides that the Universal Charge is to be determined, fixed and... approved
by the ERC, hence leaving to the latter complete discretionary legislative authority.

Universal Charge has the characteristics of a tax and is collected to fund the operations of the NPC.

unlike a tax which is imposed to provide income for public purposes, such as support of the government,
administration of the law, or payment of public expenses, the... assailed Universal Charge is levied for a
specific regulatory purpose, which is to ensure the viability of the country's electric power industry.

Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor General
(OSG), share the same view that the Universal Charge is not a tax because it is levied for a specific
regulatory purpose, which is to ensure the viability of the country's electric... power industry, and is,
therefore, an exaction in the exercise of the State's police power

Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance with law, a
National Grid Code and a Distribution Code which shall include, but not limited to the followin

Issues:

Universal Charge imposed under Sec. 34 of the EPIRA is a tax... undue delegation of legislative power to
tax... power of taxation from the police power.

Ruling:

In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power,
particularly its regulatory dimension, is invoked.

it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise of the
State's police power. Public welfare is surely promoted.

The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is
complete in all its essential terms and conditions, and that it contains sufficient standards.

the law is complete and passes the first test for valid delegation of legislative power.

we therefore hold that there is no undue delegation of legislative power to the ERC.

every law has in its favor the presumption of constitutionality, and to justify its nullification, there
must be a clear and unequivocal breach of the Constitution and not one that is doubtful, speculative,
or argumentative

Principles:

The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature
which imposes the tax on the constituency that is to pay... it.

police power is the power of the state to promote public welfare by restraining and regulating the use of
liberty and property.

police power grants a wide panoply of instruments through which the State, as parens patriae, gives
effect to a host of its regulatory powers.[

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 The conservative and pivotal distinction between these two powers rests in the purpose for which the
charge is made

If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is
a tax... but if regulation is the primary purpose, the fact... that revenue is incidentally raised does not
make the imposition a tax.[36]... it is a well-established doctrine that the taxing power may be used as
an implement of police power. No, the universal charge as provided for in section 34 is not a tax but
an exaction of the regulatory power (police power) of the state. The universal charge under section 34
is incidental to the regulatory duties of the ERC, hence the provision assailed is not for generation of
revenue and therefore it cannot be considered as tax, but an execution of the states police power thru
regulation.

7. Tolentino vs. Sec. of Finance

FACTS:
The present case involves motions seeking reconsideration of the Court’s decision dismissing the petitions
for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-
Added Tax Law. The motions, of which there are 10 in all, have been filed by the several petitioners.

The Philippine Press Institute, Inc. (PPI) contends that by removing the exemption of the press from the
VAT while maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, “even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional”,
citing in support of the case of Murdock v. Pennsylvania.

Chamber of Real Estate and Builders Associations, Invc., (CREBA), on the other hand, asserts that R.A.
No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt without
reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress
shall “evolve a progressive system of taxation”.

Further, the Cooperative Union of the Philippines (CUP), argues that legislature was to adopt a definite
policy of granting tax exemption to cooperatives that the present Constitution embodies provisions on
cooperatives. To subject cooperatives to the VAT would, therefore, be to infringe a constitutional policy.

ISSUE:
Whether or not, based on the aforementioned grounds of the petitioners, the Expanded Value-Added Tax
Law should be declared unconstitutional.

RULING:
No. With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The
reason is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign
prerogative. Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax
burden to which other businesses have long ago been subject. The PPI asserts that it does not really matter
that the law does not discriminate against the press because “even nondiscriminatory taxation on
constitutionally guaranteed freedom is unconstitutional.” The Court was speaking in that case (Murdock v.
Pennsylvania) of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its imposition on the
press is unconstitutional because it lays a prior restraint on the exercise of its right. The VAT is, however,
different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional
right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of
services and the lease of properties purely for revenue purposes. To subject the press to its payment is
not to burden the exercise of its right any more than to make the press pay income tax or subject it to
general regulation is not to violate its freedom under the Constitution.

Anent the first contention of CREBA, it has been held in an early case that even though such taxation
may affect particular contracts, as it may increase the debt of one person and lessen the security of
another, or may impose additional burdens upon one class and release the burdens of another, still
the tax must be paid unless prohibited by the Constitution, nor can it be said that it impairs the

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 obligation of any existing contract in its true legal sense. It is next pointed out that while Section 4 of
R.A. No. 7716 exempts such transactions as the sale of agricultural products, food items, petroleum, and
medical and veterinary services, it grants no exemption on the sale of real property which is equally
essential. The sale of food items, petroleum, medical and veterinary services, etc., which are essential
goods and services was already exempt under Section 103, pars. (b) (d) (1) of the NIRC before the
enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to
these transactions while subjecting those of petitioner to the payment of the VAT. Finally, it is contended
that R.A. No. 7716 also violates Art. VI, Section 28(1) which provides that “The rule of taxation shall be
uniform and equitable. The Congress shall evolve a progressive system of taxation”. Nevertheless, equality
and uniformity of taxation mean that all taxable articles or kinds of property of the same class be taxed at
the same rate. The taxing power has the authority to make reasonable and natural classifications for
purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to
all persons, firms, and corporations placed in similar situation. Furthermore, the Constitution does not
really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply
provides is that Congress shall “evolve a progressive system of taxation.” The constitutional provision has
been interpreted to mean simply that “direct taxes are . . . to be preferred [and] as much as possible, indirect
taxes should be minimized.” The mandate to Congress is not to prescribe, but to evolve, a progressive
tax system.

8. Pagcor vs. BIR

FACTS: The Philippine Amusement and Gaming Corporation (PAGCOR) assailed the validity of Section 1
of Republic Act 9337, amending Section 27(C) of the National Internal Revenue Code (NIRC). The
amendment omitted PAGCOR from the list of government owned or controlled corporations, consequently
eliminating its exemption from income taxes.

As such, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 33-
2013, subjecting PAGCOR to a corporate income tax which will be derived from the income of its
operations and licensing of gambling casinos, gaming clubs, gaming pools, and other similar recreation and
amusement parks.

The circular also subjected PAGCOR to a 5% franchise tax derived from the gross revenue from its
operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement
places.

PAGCOR requested a consideration, but the BIR commissioner denied this. PAGCOR now contends that
RMC No. 33-2013 is an erroneous application of the law, because under their charter (P.D. 1869 as
amended by R.A. 9487), they can only be subjected to 5% franchise tax from related services. The BIR
however contends that P.D. 1869 is already deemed repealed because of R.A. 9337.

Facts:

Petitioner further seeks to prohibit the implementation of Bureau of Internal Revenue (BIR)
Revenue Regulations No. 16-2005 for being contrary to law.

With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended.

Different groups came to this Court via petitions for certiorari and prohibition[11] assailing the validity and
constitutionality of R.A. No. 9337

10% Value Added Tax (VAT) on sale of goods and properties

10% VAT on importation of goods

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 10% VAT on sale of services and use or lease of properties... the Court dismissed all the petitions and
upheld the constitutionality of R.A. No. 9337.

On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,[13] specifically
identifying PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the
National Internal Revenue Code of 1997, as amended by R.A.

No. 9337.

Furthermore, according to the OSG,... public respondent BIR exceeded its statutory authority when it
enacted RR No. 16-2005, because the latter's provisions are contrary to the mandates of P.D. No. 1869 in
relation to R.A. No. 9337.

Issues:

whether or not PAGCOR is still exempt... hether or not PAGCOR is still exempt... t from

VAT with the enactment of R.A. No. 9337.

Ruling:

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10%
VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that
petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to... the removal of petitioner's
exemption from the payment of corporate income tax, which was already addressed above by this
Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k)
thereof... the following transactions shall be exempt from the value-added tax:

Transactions which are exempt under international agreements to which the Philippines is a signatory or
under special laws

Petitioner is exempt from the payment of VAT, because PAGCOR's charter, P.D. No. 1869, is a
special law that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337

The following services performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate;

Services rendered to persons or entities whose exemption under special laws... subjects the supply of such
services to zero percent (0%) rate... although R.A. No. 9337 introduced amendments to Section 108 of R.A.
No. 8424 by imposing VAT on other services not previously covered, it did not amend the portion of
Section 108 (B) (3) that subjects to zero percent rate services performed by

VAT-registered persons to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0%
rate.

9. CIR vs CA, YMCA

Facts:

Private Respondent YMCA... private respondent earned, among others, an income of P676,829.80 from
leasing out a portion of its premises to small shop owners

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 (CIR) issued an assessment to private respondent, in the total amount of P415,615.01 including surcharge
and interest, for deficiency income tax

Private respondent formally protested the assessment and, as a supplement to its basic protest, filed a letter
dated October 8, 1985. In reply, the CIR denied the claims of YMCA.

the YMCA filed a petition for review at the Court if Tax Appeals... the CTA issued this ruling in favor of
the YMCA

[T]he leasing of private respondent's facilities to small shop owners, to restaurant and canteen operators and
the operation of the parking lot are reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the [private... respondents]

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution... the respondent CTA did not err in saying
that the rental from small shops and parking fees do not result in the loss of the exemption.

Issues:

Is the rental income of the YMCA from its real estate subject to tax?

Ruling:

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording
of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their properties, real or personal, be... subject to the
imposed by the same Code. Because the last paragraph of said section unequivocally subjects to tax
the rent income f the YMCA from its rental property,[20] the Court is duty-bound to abide strictly
by its literal meaning and to refrain from... resorting to any convoluted attempt at construction.

As... previously stated, a reading of said paragraph ineludibly shows that the income from any property
of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable. The
phrase "any of their activities conducted for profit" does not qualify the... word "properties." This makes
income from the property of the organization taxable, regardless of how that income is used -- whether for
profit or for lofty non-profit purposes.

10. CIR vs DLSU

Facts
In 2004, the Bureau of Internal Revenue (BIR) issued a letter authorizing it’s revenue officers to
examine the book of accounts of and records for the year 2003 De La Salle University (DLSU) and
later on issued a demand letter to demand payment of tax deficiencies for:

Income tax on rental earnings from restaurants/canteens and bookstores operating within the
campus;
Value-added tax (VAT) on business income; and
Documentary stamp tax (DST) on loans and lease contracts for the years 2001,2002, and 2003,
amounting to P17,303,001.12.
DLSU protested the assessment that was however not acted upon, and later on filed a petition for review
with the Court of Tax Appeals(CTA). DLSU argues that as a non-stock, non-profit educational
institution, it is exempt from paying taxes according to Article XIV, Section 4 (3) of the Constitution
(All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties.)

The CTA only granted the removal of assessment on the loan transactions. Both CIR and DLSU
moved for reconsideration, the motion of the CIR was denied. The CIR appealed to the CTA en banc
arguing that DLSU’s use of its revenues and assets for non-educational or commercial purposes removed

11
these items from the exemption, that a tax-exempt organization like DLSU is exempt only from property
tax but not from income tax on the rentals earned from property. Thus, DLSU’s income from the leases of
its real properties is not exempt from taxation even if the income would be used for educational purposes.
DLSU on the other hand offered supplemental pieces of documentary evidence to prove that its rental
income was used actually, directly and exclusively for educational purposes and no objection was made by
the CIR.

Thereafter, DLSU filed a separate petition for review with the CTA En Banc on the following grounds:

The entire assessment should have been cancelled because it was based on an invalid LOA;
Assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment because
DLSU submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in a
separate case where the CTA cancelled Ateneo’s tax assessment; and
The CTA Division erred in finding that a portion of DLSU’s rental income was not proved to have been
used actually, directly and exclusively for educational purposes.
That under RMO No.43-90, LOA should cover only 1 year, the LOA issued by CIR is invalid for covering
the years 2001-2003
The CTA en banc ruled that the case of Ateneo is not applicable because it involved different parties,
factual settings, bases of assessments, sets of evidence, and defenses, it however further reduced the
liability of DLSU to P2,554,825.47

CIR argued that the rental income is taxable regardless of how such income is derived, used or disposed of.
DLSU’s operations of canteens and bookstores within its campus even though exclusively serving the
university community do not negate income tax liability. Article XIV, Section 4 (3) of the Constitution
must be harmonized with Section 30 (H) of the Tax Code, which states among others, that the income of
whatever kind and character of [a non-stock and non-profit educational institution] from any of [its]
properties, real or personal, or from any of (its] activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed by this Code.
that a tax-exempt organization like DLSU is exempt only from property tax but not from income tax on the
rentals earned from property. Thus, DLSU’s income from the leases of its real properties is not exempt
from taxation even if the income would be used for educational purposes.

DLSU argued that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of non-
stock, non-profit educational institutions used actually, directly and exclusively for educational purposes
are exempt from taxes and duties. Under the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and effect. Section 30 (H) of
the 1997 Tax Code insofar as it subjects to tax the income of whatever kind and character of a non- stock
and non-profit educational institution from any of its properties, real or personal, or from any of its
activities conducted for profit regardless of the disposition made of such income, should be declared
without force and effect in view of the constitutionally granted tax exemption on “all revenues and assets of
non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes.“
that it complied with the requirements for the application of Article XIV, Section 4 (3) of the Constitution.

Issue:

Whether DLSU is taxable as a non-stock, non-profit educational institution whose income have been
used actually, directly and exclusively for educational purposes.
Whether the entire assessment should be void because of the defective LOA
Held:

First issue:
A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the
revenues and income must have also been sourced from educational activities or activities related to
the purposes of an educational institution. The phrase all revenues is unqualified by any reference to the
source of revenues. Thus, so long as the revenues and income are used actually, directly and

12
 exclusively for educational purposes, then said revenues and income shall be exempt from taxes and
duties.
Revenues consist of the amounts earned by a person or entity from the conduct of business operations. It
may refer to the sale of goods, rendition of services, or the return of an investment. Revenue is a
component of the tax base in income tax, VAT, and local business tax (LBT). Assets, on the other hand, are
the tangible and intangible properties owned by a person or entity. It may refer to real estate, cash deposit
in a bank, investment in the stocks of a corporation, inventory of goods, or any property from which the
person or entity may derive income or use to generate the same. In Philippine taxation, the fair market
value of real property is a component of the tax base in real property tax (RPT). Also, the landed cost of
imported goods is a component of the tax base in VAT on importation and tariff duties. Thus, when a non-
stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively
for educational purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand, when it
also shows that it uses its assets in the form of real property for educational purposes, it shall be exempted
from RPT.
The last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the
Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purpose. We make this declaration in the
exercise of and consistent with our duty to uphold the primacy of the Constitution.
Second Issue:
No.“A Letter of Authority LOA should cover a taxable period not exceeding one taxable year. The
practice of issuing LOAs covering audit of unverified prior years is hereby prohibited. If the audit of a
taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.”
The requirement to specify the taxable period covered by the LOA is simply to inform the taxpayer of the
extent of the audit and the scope of the revenue officer’s authority. Without this rule, a revenue officer can
unduly burden the taxpayer by demanding random accounting records from random unverified years,
which may include documents from as far back as ten years in cases of fraud audit.
The assessment for taxable year 2003 is valid because this taxable period is specified in the LOA. DLSU
was fully apprised that it was being audited for taxable year 2003. While the assessments for taxable years
2001 and 2002 are void for having been unspecified on separate LOAs as required under RMO No. 43-90.

11. La Sallian Innovators vs CIR

FACTS:
The Commissioner of Internal Revenue (CIR) assessed petitioner La Sallian Educational Innovators
Foundation, Inc. (De La Salle University-College of St. Benilde Foundation) with deficiency income and
value-added taxes on the ground that the foundation, a non-stock non-profit entity was actually a
profit-oriented organization because it collected expensive tuition fees from its students and that seventy
percent (70%) of the foundation’s earning went to administrative purposes.

ISSUE:
Whether or not petitioner is no longer tax-exempt.

RULING:
The Court held that the taxpayer is still tax-exempt as it falls under the classification of non stock, non-
profit educational institution and the income it seeks to be exempted from taxation is used actually,
directly and exclusively for educational purposes. Petitioner fulfilled these requirements: its articles of
incorporation provides its principal purpose; its capital is not divided into shares; no part of its income was
distributed to its members, trustees and officer; and the member of the board do not receive any
compensation for the performance of their duties, including attendance in meetings.

Tax privilege granted by the Constitution itself to non-stock non-profit educational institution is
necessary to promote quality and affordable education in the country. A profit on the part of an
educational institution will ensure liquidity on the part of the institution and will ensure that they
have enough resources to improve and develop quality education. The tax exemption will redound to
the benefit of the students, without tax exemption students will be charged unreasonable tuition fees.

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12. Abra Valley College vs Aquino
Fact: Petitioner, filed a complaint in the court a quo to annul and declare void the “Notice of Seizure’
and the “Notice of Sale” of its lot and building located at Bangued, Abra, for non-payment of real
estate taxes and penalties. The “Notice of Sale” was caused to be served upon the petitioner by the
respondent treasurers for the sale at public auction of said college lot and building, which sale was held on
the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the highest bid which
was duly accepted. the respondent filed through counsel a motion to dismiss the complaint. Nonetheless,
the trial court disagreed because of the use of the second floor by the Director of petitioner school for
residential purposes. He thus ruled for the government and rendered the assailed decision. Hence
petitioner instead availed of the instant petition for review on certiorari with prayer for preliminary
injunction before the Supreme Court. Adrian Avilado Antazo

Issue: Whether the Educational Institution Properties which is not exclusively used for educational
purposes is not eligible for tax exemption.

Held: Yes, Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school
building as well as the lot where it is built, should be taxed, not because the second floor of the same is
being used by the Director and his family for residential purposes, but because the first floor thereof is
being used for commercial purposes. However, since only a portion is used for purposes of
commerce, it is only fair that half of the assessed tax be returned to the school involved. Moreover, the
exemption in favor of property used exclusively for charitable or educational purposes is ‘not limited
to property actually indispensable’ therefor but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said purposes. But it must be stressed however, that
while the court allows a more liberal and non-restrictive interpretation of the phrase “exclusively used for
educational purposes”, reasonable emphasis has always been made that exemption extends to facilities
which are incidental to and reasonably necessary for the accomplishment of the main purposes. Otherwise
stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by
jurisprudence, The lease of the first floor thereof to the Northern Marketing Corporation cannot by
any stretch of the imagination be considered incidental to the purpose of education.

The decision of the CFI Abra (Branch I) is affirmed subject to the modification that half of the
assessed tax be returned to the petitioner. The modification is derived from the fact that the ground
floor is being used for commercial purposes (leased) and the second floor being used as incidental to
education (residence of the director).

Reasonable emphasis has always been made that the exemption extends to facilities which are
incidental to and reasonably necessary for the accomplishment of the main purposes. The use of the
school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence.
In the case at bar, the lease of the first floor of the building to the Northern Marketing Corporation
cannot by any stretch of the imagination be considered incidental to the purpose of education. The
test of exemption from taxation is the use of the property for purposes mentioned in the Constitution.

13. Mandanas vs Exec.Secretary

-local autonomy
-Fiscal autonomy means that local governments have the power to create their own sources of revenue in
addition to their equitable share in the national taxes released by the National Government, as well as the
power to allocate their resources in accordance with their own priorities.[1] Such autonomy is as
indispensable to the viability of the policy of decentralization as the other.
-Municipal governments are only agents of the national government. Local councils exercise only
delegated legislative powers conferred on them by Congress as the national lawmaking body. The delegate
cannot be superior to the principal or exercise powers higher than those of the latter. It is a heresy to
suggest that the local government units can undo the acts of Congress, from which they have derived their
power in the first place, and negate by mere ordinance the mandate of the statute.

14. Lung Center vs. QC

Facts:

14
non-stock and non-profit entity... registered owner of a parcel of land

A big space at the ground floor is being leased to private parties, for canteen and small store space... to
medical or professional practitioners who use the same as their private clinics... for their patients whom
they charge for their professional services... almost one-half of the entire area on the left side of the
building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of
Quezon Avenue and Elliptical Road, is being... leased for commercial purposes to a private enterprise
known as the Elliptical Orchids and Garden Center.

assessed for real property taxes... filed a Claim for Exemption... predicated on its claim that it is a...
charitable institution.

The petitioner alleged that under

Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes.

it is a charitable institution within the context of Section 28(3), Article VI of the 1987 Constitution. It
asserts that its character as a charitable institution is not altered by the fact that it admits paying patients and
renders medical services to... them, leases portions of the land to private parties, and rents out portions of
the hospital to private medical practitioners from which it derives income to be used for operational
expenses

Hence, even if a portion of its real estate is leased out to private individuals from whom it derives income,
it does not lose its character as a charitable institution, and its exemption from the... payment of real estate
taxes on its real property

Issues:

whether the petitioner is a charitable institution... whether the real properties of the... petitioner are exempt
from real property taxes.

Ruling:

petitioner is a charitable institution

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the
provisions of the decree, is to be administered by the Office of the President of the Philippines with the
Ministry of Health and the Ministry of Human Settlements.

It was... organized for the welfare and benefit of the Filipino people principally to help combat the high
incidence of lung and pulmonary diseases in the Philippines.

Articles of Incorporation,... the medical services of the petitioner are to be rendered to the public in general
in any and all walks of life including those who are poor and the needy without discrimination.

After all, any person, the rich as well as the poor, may fall sick or be injured or wounded... and become a
subject of charity.[

, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as the
building constructed thereon.

If real property is used for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation

15
 While portions of the hospital are used for the treatment of patients and the dispensation of medical
services to... them, whether paying or non-paying, other portions thereof are being leased to private
individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private
individual for her business enterprise under the business name "Elliptical Orchids and Garden Center."

Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the
land and the area thereof which are leased to private persons, and to... compute the real property taxes due
thereon as provided for by law.

Principles:

charity... a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of
persons, either by bringing their minds and hearts under the influence of education or religion, by assisting
them to establish... themselves in life or otherwise lessening the burden of government.

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

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those
portions of its real property that are leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for... charitable purposes.

laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally
in favor of the taxing power.

The tax exemption under this constitutional provision covers property taxes only... what is exempted
is not the institution itself . .

.; those exempted from real estate taxes are lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the
petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b)
its real properties are ACTUALLY, DIRECTLY... and EXCLUSIVELY used for charitable purpose

Exclusive"... possessed and enjoyed to the exclusion of others;... the portions of the land leased to private
entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes...
the portions of the land occupied by the hospital and... portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes.

15. Herrera vs QC BOAA

Facts:

On July 24, 1952, the Director of the Bureau of Hospitals authorized the petitioners to establish and operate
the 'St. Catherine's Hospital

On or about January 3, 1953, the petitioners... sent a letter to the Quezon City Assessor requesting
exemption from payment of real estate tax on the lot, building and other improvements comprising
the hospital stating that the same was established for charitable and humanitarian purposes and not
for commercial gain

After an inspection of the premises in question and after a careful study of the case, the exemption from
real property taxes was granted effective the years 1953, 1954 and 1955.

16
however, in a letter dated August 10, 1955... the Quezon City Assessor notified the petitioners that the
aforesaid properties were re-classified from 'exempt' to 'taxable' and thus assessed for real property
taxes effective 1956

The building involved in this case is principally used as a hospital. It is mainly a surgical and orthopedic
hospital with emphasis on obstetrical cases, the latter constituting 90% of the total number of cases
registered therein. The hospital has thirty-two (32) beds, of... which twenty (20) are for charity-patients and
twelve (12) for pay-patients.

Petitioners also operate within the premises of the hospital the 'St. Catherine's School of Midwifery' which
was granted government recognition by the Secretary of Education on February 1, 1955

This school has an enrollment of about two... hundred students. The students are charge a matriculation fee
of P300.00 for 1-1/2 years, plus P50.00 a month for board and lodging, which Includes transportation to the
St. Mary Hospital.

Issues:

whether or not the lot, building and other improvements occupied by the St. Catherine Hospital are exempt
from the real property tax

Ruling:

the admission of pay-patients does not... detract from the charitable character of a hospital, if all of
its funds are devoted "exclusively to the maintenance of the institution" as a "public charity"

"where rendering charity is its primary object, and the funds derived from payments made by
patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a
profit has been made will not deprive the hospital of its benevolent character"

Moreover, the exemption in favor of property used exclusively for charitable or educational purposes
is "not limited to property actually indispensable" therefore... but extends to facilities which are
"incidental to and reasonably... necessary for" the accomplishment of said purposes, such as, in the
case of hospitals, "a school for training nurses, a nurses' home, property use to provide housing facilities for
interns, resident doctors, superintendents, and other members of the hospital staff, and... recreational
facilities for student nurses, interns and residents"

Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is, therefore,
a charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is
devoted exclusively to benevolent purposes, it being... admitted that the income derived from pay-patients
is devoted to the improvement of the charity wards

Again, the existence of "St. Catherine's School of Midwifery", with an enrollment of about 200
students, who practice partly in St. Catherine's Hospital and partly in St. Mary's Hospital, which,
likewise, belongs to petitioners herein, does not, and cannot, affect the... exemption to which St.
Catherine's Hospital is entitled under our fundamental law.

"all lands, buildings and improvements used exclusively for religious, charitable or educational purposes
shall be exempt from taxation," pursuant to the Constitution, regardless of whether or not material profits
are derived from... the operation of the institutions in question.

Similarly, the garage in the building above referred to which was obviously essential to the operation of the
school of midwifery, for the students therein enrolled practiced, not only in St. Catherine's Hospital, but,
also, in St. Mary's Hospital, and were entitled to... transportation thereto and the fact that petitioner's family
resided in said building for Mrs. Herrera received no compensation as directress of St. Catherine's Hospital

17
 were incidental to the operation of the latter and of said school, and, accordingly, did not affect the...
charitable character of said hospital and the educational nature of said school.

16. Lung Center of the Philippines vs QC

FACTS:
Petitioner is a non-stock, non-profit entity established by virtue of PD No. 1823, seeks exemption from real
property taxes when the City Assessor issued Tax Declarations for the land and the hospital building.
Petitioner predicted on its claim that it is a charitable institution. The request was denied, and a petition
hereafter filed before the Local Board of Assessment Appeals of Quezon City (QC-LBAA) for reversal of
the resolution of the City Assessor. Petitioner alleged that as a charitable institution, is exempted from real
property taxes under Sec 28(3) Art VI of the Constitution. QC-LBAA dismissed the petition and the
decision was likewise affirmed on appeal by the Central Board of Assessment Appeals of Quezon City. The
Court of Appeals affirmed the judgment of the CBAA.

ISSUE:
1. Whether or not petitioner is a charitable institution within the context of PD 1823 and the 1973 and 1987
Constitution and Section 234(b) of RA 7160.

2. Whether or not petitioner is exempted from real property taxes.

RULING:
1. Yes. The Court hold that the petitioner is a charitable institution within the context of the 1973 and 1987
Constitution. Under PD 1823, the petitioner is a non-profit and non-stock corporation which, subject to the
provisions of the decree, is to be administered by the Office of the President with the Ministry of Health
and the Ministry of Human Settlements. The purpose for which it was created was to render medical
services to the public in general including those who are poor and also the rich, and become a subject of
charity. Under PD 1823, petitioner is entitled to receive donations, even if the gift or donation is in the form
of subsidies granted by the government.

2. Partly No. Under PD 1823, the lung center does not enjoy any property tax exemption privileges for its
real properties as well as the building constructed thereon.
The property tax exemption under Sec. 28(3), Art. VI of the Constitution of the property taxes only. This
provision was implanted by Sec.243 (b) of RA 7160.which provides that in order to be entitled to the
exemption, the lung center must be able to prove that: it is a charitable institution and; its real properties are
actually, directly and exclusively used for charitable purpose. Accordingly, the portions occupied by the
hospital used for its patients are exempt from real property taxes while those leased to private entities are
not exempt from such taxes.

17. Mandanas vs Exec. Secretary

FACTS:
It is the Congress who implements the constitutional mandatefor decentralization and local autonomy
through enacting R.A. No.7160, otherwise known as the Local Government Code (LGC), inorder
to guarantee the fiscal autonomy of the Local GovernmentUnits (LGUs). Share of the LGUs has
been regularly released as theInternal Revenue Allotment (IRA). The implementing rules
andregulations (IRR) of the LGC, the IRA is determined on the basis ofactual collections of the National
Internal Revenue Taxes (NIRTs) ascertified by the Bureau of Internal Revenue (BIR). The petitioners
hereby challenge the manner in which the justshare in the national taxes of the local government units
(LGUs) hasbeen computed.It is being alleged by the petitioners that certain collections ofNIRTs by the
Bureau of Customs (BOC) have not been included inthe computation of the IRA. Albeit collection by the

18
 BOC of taxessuch as excise taxes, value added taxes (VATs) and documentstamp taxes (DSTs),
should form part of the base from which the IRAshould be computed because they constitute NIRTs.

THE CASE:
This case is a special civil action for certiorari, prohibition andmandamus assailing the manner the
General Appropriations Act(GAA) for FY 2012 computed the IRA for the LGUs.

ISSUE: Whether or not the existing shares given to the LGUs by virtueof the GAA is consistent with the
constitutional mandate to give LGUsa ‘just share’ to national taxes following Article X, Section 6 of
the1987 Constitution

RULING OF THE COURT: The 1987 Constitution limits Congress’ control over the LGUsby ordaining
in Section 25 of its Article II that: “The sate shall ensurethe autonomy of local governments.” The
constitutional mandate toensure local autonomy refers to decentralization wherein it should beinstituted
through the LGC in order to enable a more responsive andaccountable local government structure. It
has also delegated thepower to tax to the LGUs by authorizing them to create their ownsources of
income that would make them self-reliant as it has beenformalized from Section 128 to Section 133 of the
LGC. It furtherensures that each and every LGU will have a just share in nationaltaxes as enacted by the
Congress through Section 284 to Section288 of the LGC as well in the development of the national
wealththrough the enactment of Section 289 to Section 294 of the LGC.Indeed, the requirement for the
automatic release to the LGUs of theirjust share in the national taxes is but a consequence of
theconstitutional mandate for fiscal decentralization.Therefore, the court ordered the Secretary of
Department ofFinance; the Secretary of the Department of Budget Management;the Commissioner of
Internal Revenue; the Commissioner ofCustoms; and the National Treasurer to include all
collections ofnational taxes in the computation of the base of the just share of theLocal Government Units
according to the ratio provided in the now-modified Section 284 of R.A. No. 7160 (Local
Government Code)except those accruing to special purpose funds and specialallotments for the
utilization and development of the national wealth.

DOCTRINES/PRINCIPLES: Local Autonomy. One of the features of the 1987 Constitution is its push
towards decentralization of government and local autonomy. Local autonomy has its two facets, the
administrative and the fiscal. Fiscal autonomy means that local governments have the power to create
their equitable share in the national taxes released by the national government, as well as the power to
allocate their resources in accordance with their own priorities. Such autonomy is as
indispensable to the viability of the policy of decentralization as the other.

Tax and Other Forms of Exactions

18. Chevron vs BCDA

Due Process and Police Power

Chevron vs. BCDA

19. Angeles City Foundation vs Angeles City

Petitioner: Angeles University Foundation

Respondents: City of Angeles, Juliet Quinsaat, in her capacity as Treasurer of Angeles City and Engr.
Donato N. Dizon, in his capacity as Acting Angeles City Building Official

Facts:

Petitioner Angeles University Foundation (AUF) is an educational institution established on May 25, 1962
and was converted into a non-stock, non-profit education foundation under the provisions of Republic Act
(RA) No. 6055 on December 4, 1975.

19
On August 2005, petitioner filed with the Office of the City Building Official in the City of Angeles
Pampanga an application for a building permit for the construction of an 11-storey building in its main
Campus. A Building Permit Fee Assessment and an order of payment for Locational Clearance Fees was
issued by the said office.

Petitioner claimed, through a letter addressed to respondents City Treasurer and Acting City Building
Official, that it is exempted from the payment of the building permit and locational clearance fees and cited
legal opinions rendered by the Department of Justice (DOJ).

Respondents referred the matter to the Bureau of Local Government Finance (BLGF) of the Department of
Finance, which in turn endorsed the query to the DOJ. DOJ replied and affirmed the claim of the petitioner.

Despite the petitioner’s plea, however, respondents refused to issue the building permit. Petitioner then
appealed the matter to the City Mayor but received no written response. Consequently, petitioner paid
under protest a total of P826,662.99 and the Building Permit and other documents were issued afterwards.

Petitioner formally requested the respondents to refund the fees it paid under protest through letters dated
June 15, 2006 and August 7, 2006. But the respondents denied the claim for refund.

On August 31, 2006, petitioner filed a Complaint before the trial court seeking for the refund of
P826,662.99 plus interest at a rate of 12% per annum, and for attorneys fee in the amount of P300,000.00
and litigation expenses.

On September 21, 2007, the trial court rendered judgment in favor of the petitioner. Respondents appeal to
the CA which reversed the trial court’s decision. Petitioner filed a motion for reconsideration but was
denied.

So the petitioner filed a petition for review on certiorari before the Supreme Court.

Issue:

Whether or not the building permit fee is a tax from which petitioner is exempt.

Discussion:

The building permit fee is neither a tax nor a charge on property. Based on Sections 102, 103 and 104, the
building permit fee is a regulatory imposition on certain activities the owner may conduct either to build
such structures or to repair, alter, renovate or demolish the same. Since building permit fees are not charges
on property, they are not impositions from which petitioner is exempt.

As to petitioner’s argument that the building permit fees collected by respondents are in reality taxes
because the primary purpose is to raise revenues for the local government unit, the same does not hold
water.

A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held
to be a tax rather than an exercise of the police power. In this case, the Secretary of Public Works and
Highways who is mandated to prescribe and fix the amount of fees and other charges that the Building
Official shall collect in connection with the performance of regulatory functions, has promulgated and
issued the Implementing Rules and Regulations which provide for the bases of assessment of such fees.

The court cited the case of CHEVRON PHILIPPINES, INC. VS. BASES CONVERSION
DEVELOPMENT AUTHORITY and explained the difference between tax and regulation:

IN DISTINGUISHING TAX AND REGULATION AS A FORM OF POLICE POWER, THE

DETERMINING FACTOR IS THE PURPOSE OF THE IMPLEMENTED MEASURE. IF THE
PURPOSE IS PRIMARILY TO RAISE REVENUE, THEN IT WILL BE DEEMED A TAX EVEN

20
 THOUGH THE MEASURE RESULTS IN SOME FORM OF REGULATION. ON THE OTHER HAND,
IF THE PURPOSE IS PRIMARILY TO REGULATE, THEN IT IS DEEMED A REGULATION AND
AN EXERCISE OF THE POLICE POWER OF THE STATE, EVEN THOUGH INCIDENTALLY,
REVENUE IS GENERATED.

In GEROCHI V. DEPARTMENT OF ENERGY, the Court stated:

THE CONSERVATIVE AND PIVOTAL DISTINCTION BETWEEN THESE TWO (2) POWERS
RESTS IN THE PURPOSE FOR WHICH THE CHARGE IS MADE. IF GENERATION OF REVENUE
IS THE PRIMARY PURPOSE AND REGULATION IS MERELY INCIDENTAL, THE IMPOSITION IS
A TAX; BUT IF REGULATION IS THE PRIMARY PURPOSE, THE FACT THAT REVENUE IS
INCIDENTALLY RAISED DOES NOT MAKE THE IMPOSITION A TAX.

The petition was denied and the decision of the Court of Appeals was affirmed.
Construction and Interpretation

20. CIR vs Puregold Duty Free

COMMISSIONER OF INTERNAL REVENUE vs. PUREGOLD DUTY FREE, INC.
G.R. No. 202789, June 22, 2015

FACTS:

As an enterprise located within CSEZ and registered with the CDC, Puregold had been issued Certificate of
Tax Exemption No. 94-4, later superseded by Certificate of Tax Exemption No. 98-54, which enumerated
the tax incentives granted to it, including tax and duty-free importation of goods.

In Coconut Oil Refiners v. Torres, however, this Court annulled the adverted Sec. 5 of EO 80, in effect
withdrawing the preferential tax treatment heretofore enjoyed by all businesses located in the CSEZ.Deputy
Commissioner for Special Concerns/OIC-Large Taxpayers Service of the Bureau of Internal Revenue
(BIR) Kim Jacinto-Henares then issued a Preliminary Assessment Notice regarding unpaid VAT and excise
tax on wines, liquors and tobacco products imported by Puregold from January 1998 to May 2004. In due
time, Puregold protested the assessment.Pending the resolution of Puregold's protest, Congress enacted RA
9399, specifically to grant a tax amnesty to business enterprises affected by this Court's rulings in John Hay
People's Coalition v. Lim and Coconut Oil Refiners. Under RA 9399, availment of the tax amnesty relieves
the qualified taxpayers of any civil, criminal and/or administrative liabilities arising from, or incident to,
nonpayment of taxes, duties and other charges.Puregold availed itself of the tax amnesty under RA 9399,
filing for the purpose the necessary requirements and paying the amnesty tax.Nonetheless, Puregold
received a formal letter of demand from the BIR for the payment of
₱2,780,610,17 4.51, supposedly representing deficiency VAT and excise taxes on its importations of
alcohol and tobacco products from January 1998 to May 2004. In its response-letter, Puregold requested the
cancellation of the assessment on the ground that it has already availed of the tax amnesty under RA 9399.

Puregold filed a Petition for Review with the CTA questioning the timeliness of the assessment and arguing
that the doctrines of operative fact and non-retroactivity of rulings bar the Commissioner of Internal
Revenue (CIR) from assessing it of deficiency VAT and excise taxes. More importantly, Puregold asserted
that, by virtue of its availment of the tax amnesty granted by RA 9399, it has been relieved of any civil,
criminal and/or administrative liabilities arising from or incident to nonpayment of taxes, duties and other
charges.

Following an exchange of motions, the CTA 2nd Division issued a Resolution ordering the cancellation of
the protested assessment against Puregold in view of its availment of tax amnesty under RA 9399.

ISSUE:

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Whether or not the CTA’s ruling is contrary to the intent of RA 9399 which excludes deficiency tax; thus,
Puregold remains to be liable for excise taxes on its wine, liquors, and tobacco importations.

RULING:

No. The issue on the coverage and applicability of RA 9399 to Puregold has already been addressed and
disposed of by the CTA when it pointed out that RA 9399 covers all applicable tax and duty liabilities,
inclusive of fines, penalties, interests and other additions thereto. Consequently, the government, through
the enactment of RA 9399, has expressed its intention to waive its right to collect taxes, which in this case
is the tax imposed under Sec. 131 (A) of the 1997 NIRC, subject to the condition that Puregold has
complied with the requirements provided therein.Furthermore, a tax amnesty, by nature, is designed to be a
general grant of clemency and the only exceptions are those specifically mentioned.We cannot now deflect
from the foregoing decision by reading into a law granting tax amnesty a qualification that is simply not
there.We agree with both the Court of Appeals and Court of Tax Appeals that Executive Order No. 41 is
quite explicit and requires hardly anything beyond a simple application of its provisions.

Doctrines of Taxation

CIR vs Solidbank Corp.

Facts:
Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to P1,474,693.44.
It alleged that the total included P350,807,875.15 representing gross receipts from passive income which
was already subjected to 20%final withholding tax (FWT).

The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWT should not
form part of its taxable gross receipts for purposes of computing the tax.

Solidbank, relying on the strength of this decision, filed with the BIR a letter-request for the refund or tax
credit. It also filed a petition for review with the CTA where the it ordered the refund.

The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receipts because
the FWT was not actually received by the bank but was directly remitted to the government.

The Commissioner claims that although the FWT was not actually received by Solidbank, the fact that the
amount redounded to the bank’s benefit makes it part of the taxable gross receipts in computing the Gross
Receipts Tax. Solidbank says the CA ruling is correct.

Issue:
Whether or not the FWT forms part of the gross receipts tax.

Held:
Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed. The
payor, a separate entity, acts as no more than an agent of the government for the collection of tax in order to
ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds
constitutive of the tax base.

These proceeds are either actual or constructive. Both parties agree that there is no actual receipt by the
bank. What needs to be determined is if there is constructive receipt. Since the payee is the real taxpayer,
the rule on constructive receipt can be rationalized.

The Court applied provisions of the Civil Code on actual and constructive possession. Article 531 of the
Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and
legal formalities established. The withholding process is one such act. There may not be actual receipt of
the income withheld; however, as provided for in Article 532, possession by any person without any power

22
 shall be considered as acquired when ratified by the person in whose name the act of possession is
executed.

In our withholding tax system, possession is acquired by the payor as the withholding agent of the
government, because the taxpayer ratifies the very act of possession for the government. There is thus
constructive receipt.

The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that
are subjected to FWT are tantamount to delivery, receipt or remittance. Besides, Solidbank admits that its
income is subjected to a tax burden immediately upon “receipt”, although it claims that it derives no
pecuniary benefit or advantage through the withholding process.

There being constructive receipt, part of which is withheld, that income is included as part of the tax base
on which the gross receipts tax is imposed.

21. Nursery Care Corpo vs Acevedo

ANTECEDENTS:
The City of Manila assessed and collected taxes from the individual petitioners (Nursery Care Corporation;
Shoemart, Inc.; Star Appliance Center, Inc.; H&B, Inc.; Supplies Station, Inc.; and Hardware Workshop,
Inc.), pursuant to the provisions under the Revenue Code of Manila, to wit:

1. Section 15. Tax on Wholesalers, Distributors, or Dealers); and

2. Section 17. Tax on Retailers
At the same time, the City of Manila imposed additional taxes upon the petitioners pursuant to Section 21
of the same code, as amended, as a condition for the renewal of their respectivebusiness licenses for the
year 1999. Section 21 of the Revenue Code of Manila stated:
Section 21.Tax on Business Subject to the Excise, Value-Added or Percentage Taxes under the NIRC.—On
any of thefollowing businesses and articles of commerce x xxa tax of FIFTY PERCENT (50%) OF ONE
PERCENT (1%) per annum on the gross sales or receipts of the preceding calendar year is hereby imposed:

a) On person who sells goods and services in the course of trade or businesses; x xx
PROVIDED, that all registered businesses in the City of Manila already paying the aforementioned tax
shall be exempted from payment thereof.

To comply with the City of Manila’s assessment of taxes under Section 21, supra, the petitioners paid under
protest the following amounts corresponding to the first quarter of 1999.
Petitioners formally requested the Office of the City Treasurer for the tax credit or refund of the local
business taxes paid under protest. However, then City Treasurer Anthony Acevedo (Acevedo) denied the
request, which led the petitioners to file their respective petitions for certiorari in the Regional Trial Court
(RTC) in Manila.
The petitioners point out that the enforcement of Section 21 against then constituted double taxation
because:

1. The local business taxes under Section 15 and Section 17 of the Revenue Code of Manila were
already being paid by them.
2. That the proviso in Section 21 exempted all registered businesses in the City of Manila from
paying the tax imposed under Section 21; and
3. That the exemption was more in accord with Section 143 of the Local Government Code, the law
that vested in the municipal and city governments the power to impose business taxes.
The respondents counter, however, that double taxation did not occur from the imposition and collection of
the tax pursuant to Section 21 of the Revenue Code of Manila:

1. That the taxes imposed pursuant to Section 21 were in the concept of indirect taxes upon the
consumers of the goods and services sold by a business establishment; and

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 2. That the petitioners did not exhaust their administrative remedies by first appealing to the
Secretary of Justice to challenge the constitutionality or legality of the tax ordinance.

ISSUE:

1. Whether the petitioners were entitled to the tax credit or tax refund for the taxes paid under
Section 21 of the Revenue Code of Manila
RULING:
Collection of taxes pursuant to Section 21 of the Revenue Code of Manila constituted double taxation
Double taxation means taxing the same property twice when it should be taxed only once; that is, “taxing
the same person twice by the same jurisdiction for the same thing.”It is otherwise described as “direct
duplicate taxation,” the two taxes must be imposed on:

1. the same subject matter;

2. for the same purpose;
3. by the same taxing authority;

4. within the same jurisdiction;

5. during the same taxing period; and
6. the taxes must be of the same kind or character.
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc.,
theCourt held that all the elements of double taxation concurred upon the City of Manila’s assessment on
and collection from the petitioners of taxes for the first quarter of 1999 pursuant to Section 21 of the
Revenue Code of Manila.
Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person who sold goods
and services in the course of trade or business based on a certain percentage of his gross sales or receipts in
the preceding calendar year, while Section 15 and Section 17 likewise imposed the tax on a person who
sold goods and services in the course of trade or business but only identified such person with particularity,
namely, the wholesaler, distributor or dealer (Section 15), and the retailer (Section 17), all the taxes —
being imposed on the privilege of doing business in the City of Manila in order to make the taxpayers
contribute to the city’s revenues — were imposed on the same subject matter and for the same purpose.
Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and within the same
jurisdiction in the same taxing period (i.e., per calendar year).
Thirdly, the taxes were all in the nature of local business taxes.

22. Swedish Match Phil Inc vs City of Manila

FACTS:

Swedish Match AB (SMAB) had 3 subsidiary corporations in the Philippines, all organized under
Philippine laws, to wit: Phimco Industries (Phimco), Provident Tree Farms (PTF), and OTT/Louie.
STORA, the parent company of SMAB, decided to sell SMAB of Sweden and its worldwide match, lighter,
and shaving products operation to Swedish Match NV (SMNV).

Ed Enriquez, VP of Swedish Match Sociedad Anonimas (SMSA) which is SMAB’s management company,
was held under strict instructions that the sale of Phimco shares should be executed on or before 30 June
1990 in view of the tight loan covenants of SMNV. He came to the Philippines and informed the Philippine
financial and business circles that the Phimco shares were for sale. Several interested parties tendered
offers to acquire the Phimco shares one of which was private respondent, Antonio Litonjua, the president
and general manager of ALS Management & Development Corporation.

On November 1989, Litonjua submitted to SMAB a firm offer to buy all of the latter’s shares in Phimco
and all of Phimco’s shares in PTF and OTT for P750,000,000.00. However, CEO Massimo Rossi informed
respondents that their price offer was below their expectations. Again, on May 1990, Litonjua offered to
buy the disputed shares, excluding the lighter division for US$36M. Rossi wrote that ALS should undertake
a due diligence process or pre-acquisition audit and review of the draft contract for the Match and Forestry

24
 activities of Phimco at ALS convenience. 2 days prior to the deadline for submission of the final bid,
Litonjua told Rossi that they would be unable to submit the final offer by 30 June 1990, considering that
the acquisition audit of Phimco and the review of the draft agreements had not yet been completed. Thus,
Enriquez sent notice to Litonjua that they would be constrained to entertain bids from other parties in view
of Litonjua’s failure to make a firm commitment for the shares of Swedish Match. In his letter, Litonjua
asserted that they submitted the best bid and that they were already finalizing the terms of the sale.

More than 2 months from receipt of Litonjua’s last letter, Enriquez advised the former that the proposed
sale of SMAB’s shares in Phimco with local buyers did not materialize. Enriquez then invited Litonjua to
resume negotiations with SMAB for the sale of Phimco shares. He indicated that SMAB would be prepared
to negotiate with ALS on an exclusive basis for a period of 15 days from 26 September 1990 subject to the
terms contained in the letter. Additionally, Enriquez clarified that if the sale would not be completed at the
end of the 15-day period, SMAB would enter into negotiations with other buyers. Litonjua emphasized that
the new offer constituted an attempt to reopen the already perfected contract of sale of the shares in his
favor. CA ruled that the series of written communications between petitioners and respondents collectively
constitute a sufficient memorandum of their agreement under Article 1403 of the Civil Code. Thus, letters
exchanged by and between the parties, taken together, were sufficient to establish that an agreement to sell
the disputed shares to respondents was reached. On the other hand, petitioners stress that Litonjua made it
clear in his letters that the quoted prices were merely tentative and still subject to further negotiations
between him and the seller. They point out that there was no meeting of the minds on the essential terms
and conditions of the sale because SMAB did not accept respondent’s offer that consideration would be
paid in Philippine pesos. They argued as well that the foregoing circumstances prove that they failed to
reach an agreement on the sale of the Phimco shares.

ISSUE:

Was there a perfected contract of sale with respect to Phimco shares?

HELD:

No. There was no perfected contract of sale since Litonjua’s letter of proposing acquisition of the Phimco
shares for US$36M was merely an offer. Consent in a contract of sale should be manifested by the meeting
of the offer and acceptance upon the thing and the cause which are to constitute the contract. The lack of a
definite offer on the part of respondents could not possibly serve as the basis of their claim that the sale of
the Phimco shares in their favor was perfected, for one essential element of a contract of sale was obviously
wanting the price certain in money or its equivalent. The price must be certain, otherwise there is no true
consent between the parties. Respondents’ failure to submit their final bid on the deadline set by petitioners
prevented the perfection of the contract of sale. It was not perfected due to the absence of one essential
element which was the price certain in money or its equivalent.

23. CIR vs S.C. Johnson and Son

Facts: Respondent is a domestic corporation organized and operating under the Philippine Laws, entered
into a licensed agreement with the SC Johnson and Son, USA, a non-resident foreign corporation based in
the USA pursuant to which the respondent was granted the right to use the trademark, patents and
technology owned by the later including the right to manufacture, package and distribute the products
covered by the Agreement and secure assistance in management, marketing and production from SC
Johnson and Son USA.

For the use of trademark or technology, respondent was obliged to pay SC Johnson and Son, USA royalties
based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments
which respondent paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00.

On October 29, 1993, respondent filed with the International Tax Affairs Division (ITAD) of the BIR a
claim for refund of overpaid withholding tax on royalties arguing that, the antecedent facts attending
respondents case fall squarely within the same circumstances under which said MacGeorge and Gillette

25
 rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential
tax rate of 10% should apply to the respondent. So, royalties paid by the respondent to SC Johnson and
Son, USA is only subject to 10% withholding tax.

The Commissioner did not act on said claim for refund. Private respondent SC Johnson & Son, Inc. then
filed a petition for review before the CTA, to claim a refund of the overpaid withholding tax on royalty
payments from July 1992 to May 1993.

On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and ordered the CIR to issue a tax
credit certificate in the amount of P163,266.00 representing overpaid withholding tax on royalty payments
beginning July 1992 to May 1993.

The CIR thus filed a petition for review with the CA which rendered the decision subject of this appeal on
November 7, 1996 finding no merit in the petition and affirming in toto the CTA ruling.

Issue: Whether or not tax refunds are considered as tax exemptions.

Held: It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in
derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming
the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able
to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a
refund of the alleged overpayment of tax on royalties; however there is nothing on record to support a
claim that the tax on royalties under the RP-US Treaty is paid under similar circumstances as the tax on
royalties under the RP-West Germany Tax Treaty.

24. Deutsche Bank AG Manila vs CIR

A minute resolution is not a binding precedent; Binding effect of tax treaties;
Facts:

In October 2003, Deutsche Bank AG Manila Branch (petitioner) withheld and remitted PHP 67,688,553.51
tothe Bureau of Internal Revenue (BIR) representing the 15% branch profit remittance tax (BPRT) on its
regularbanking unit (RBU) net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and
prior taxable years.

Believing that it made an overpayment of the BPRT, petitioner filed with the BIR on October 4, 2005
anadministrative claim for refund or issuance of its tax credit certificate in the total amount of PHP
22,562,851.17. Onthe same date, petitioner requested from the International Tax Affairs Division (ITAD) a
confirmation of itsentitlement to the preferential tax rate of 10% under the RP-Germany Tax
Treaty.Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review
with the Court ofTax Appeals (CTA) on October 18, 2005.The CTA Second Division denied the claim for
refund on the ground that the application for a tax treaty relief wasnot filed with ITAD prior to the payment
of its BPRT and actual remittance of its branch profits to DB Germany, orprior to its availment of the
preferential rate of ten percent (10%) under the RP-Germany Tax Treaty provision. TheCTA Second
Division held that petitioner violated the 15-day rule for tax treaty relief application mandated underSection
III paragraph (2) of Revenue Memorandum Order (RMO) No. 1-2000.The CTA
En Banc
affirmed the CTA Second Division and held that a ruling from the ITAD of the BIR must be securedprior
to the availment of a preferential tax rate under a tax treaty.Hence, the present petition.

The issue
is whether the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations of
thebenefit of a tax treaty.

26
 Held:
No.
Our Constitution provides for adherence to the general principles of international law as part of the law
ofthe land. The time-honored international principle of pacta sunt servanda demands the performance in
good faithof treaty obligations on the part of the states that enter into the agreement. Every treaty in force is
binding upon theparties, and obligations under the treaty must be performed by them in good faith. More
importantly, treaties havethe force and effect of law in this jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in
turn,help the taxpayer avoid simultaneous taxations in two different jurisdictions."A state that has
contracted valid international obligations is bound to make in its legislations those modificationsthat may
be necessary to ensure the fulfillment of the obligations undertaken. Thus, laws and issuances mustensure
that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must
notimpose additional requirements that would negate the availment of the reliefs provided for under
internationalagreements. More so, when the RP-Germany Tax Treaty does not provide for any pre-requisite
for the availment ofthe benefits under said agreement.The obligation to comply with a tax treaty must take
precedence over the objective of RMO No.1-2000. Logically, noncompliance with tax treaties has negative

25. CIR vs Estate of Toda

FACTS:
Cibeles Insurance Corporation (CIC) authorized Benigno P. Toda, Jr., President and owner of 99.991% of
its issued and outstanding capital stock, to sell a 16-storey commercial building known as Cibeles Building
and the two parcels of land on which the building stands for an amount of not less than P90 million.

Six months later, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn,
sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary
public. For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.

When CIC filed for corporate annual income tax return for the year 1989, it declared its gain from the sale
of real property in the amount of P75,728.021. After crediting withholding taxes of P254,497.00, it paid
P26,341,2078 for its net taxable income of P75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks.Three and a half years later, Toda died.

ISSUES:
1. Whether or not the tax planning scheme adopted by CIC constitutes tax evasion that would justify an
assessment of deficiency income tax.
2. Whether or not the Estate is liable for the 1989 deficiency income tax of Cibeles Insurance Corporation.

RULING:
Yes. Tax evasion is a scheme not sanctioned by law and when it is availed of, it subjects the taxpayer to
further or additional civil or criminal liabilities. Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is due;
(2) an accompanying state of mind which is described as being “evil,” in “bad faith,” “willfull,” or
“deliberate and not accidental”; and
(3) a course of action or failure of action which is unlawful.

All these factors are present in the instant case. It was proven that the real buyer of the properties was RMI,
and not the intermediary Altonaga. The scheme resorted to by CIC in making it appear that there were two
sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI, thereby
reducing the tax from 35% to 5%, cannot be considered a legitimate tax planning because it is tainted with
fraud.

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 2. Yes. Toda agreed to hold himself personally liable when he sold his shares of stock to Le Hun T. Choa.
In the Deed of Sale of Shares of Stock Toda, Toda undertook and agreed “to hold the BUYER and Cibeles
free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989.

It is important to note that a corporation has a juridical personality distinct and separate from the persons
owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to
answer for the liabilities of a corporation and vice versa. However, there are certain instances in which
personal liability may arise. Personal liability of a corporate director, trustee, or officer along with the
corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or
other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.

NOTES:
Fraud in its general sense, “is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken
of another.”

26. Domingo vs Garlitos

FACTS:
In special proceedings No. 14 entitled “In the matter of the Intestate Estate of the Late Walter Scott Price”,
the Court of First Instance of Leyte ordered the payment of the estate and inheritance taxes, charges and
penalties, amounting to P40,058.55 by the estate. It became final and executory so the fiscal applied for the
execution of the judgment which was denied on the ground that the Government was indebted to the estate
in the amount of P262,200 which had been appropriated for the purposes of R.A. No. 2700.
Furthermore, the Court ordered that the payment of the claim of the Collector of Internal Revenue be
deferred until the Government shall have paid its accounts to the administratrix herein amounting to
P262,200.00

ISSUE:
Are compensation and writ of execution the proper procedure for the payment of debts and expenses of
administration?

RULING:
No, a writ of execution is not the proper procedure for the payment of debts and expenses of
administration. The proper procedure is for the court to order the sale of personal estate or the sale or
mortgage of real property of the deceased and all debts or expenses of administrator and with the written
notice to all the heirs, legatees and devisees residing in the Philippines. And when sale or mortgage of real
estate is to be made, the regulations contained in Rule 90, section 7, of the Rules of Court should be
complied with.
Execution may issue only where the devisees, legatees or heirs have entered into possession of their
respective portions in the estate prior to settlement and payment of the debts and expenses of administration
and it is later ascertained that there are such debts and expenses to be paid, in which case “the court having
jurisdiction of the estate may, by order for that purpose, after hearing, settle the amount of their several
liabilities, and order how much and in what manner each person shall contribute, and may issue execution
if circumstances require”

27. Air Canada vs CIR

FACTS:

28
Air Canada is a foreign corporation organized and existing under the laws of Canada. On April 24, 2000, it
was granted an authority to operate as an offline carrier by the Civil Aeronautics Board, subject to certain
conditions, which authority would expire on April 24, 2005. As an off-line carrier, Air Canada does not
have flights originating from or coming to the Philippines and does not operate any airplane in the
Philippines.
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent
in the Philippines. Aerotel sells Air Canada’s passage documents in the Philippines.
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through
Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings
in the total amount of ₱5,185,676.77.
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income
taxes amounting to ₱5,185,676.77 before the Bureau of Internal Revenue (BIR). It’s basis was found in the
revised definition of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal
Revenue Code (NIRC) .
The CTA denied the petition. It found that Air Canada was engaged in business in the Philippines through a
local agent that sells airline tickets on its behalf. As such, it held that while Air Canada was not liable for
tax on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless liable to pay the 32%
corporate income tax on income derived from the sale of airline tickets within the Philippines pursuant to
Section 28(A)(1). On appeal, the CTA En Banc affirmed the ruling of the CTA First Division.

ISSUES & HELD:

1) Whether Air Canada is subject to the 2½% tax on Gross Philippine Billings pursuant to Section
28(A)(3).

NO. Air Canada is not liable to tax on Gross Philippine Billings under Section 28(A)(3). The tax attaches
only when the carriage of persons, excess baggage, cargo, and mail originated from the Philippines in a
continuous and uninterrupted flight, regardless of where the passage documents were sold. Not having
flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings tax.

2) If not, whether Air Canada is a resident foreign corporation engaged in trade or business and thus,
can be subject to the regular corporate income tax of 32% pursuant to Section 28(A)(1);

YES. Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) , thus, it
may be subject to 32% tax on its taxable income.

The Court in Commissioner of Internal Revenue v. British Overseas Airways Corporation declared British
Overseas Airways Corporation, an international air carrier with no landing rights in the Philippines, as a
resident foreign corporation engaged in business in the Philippines through its local sales agent that sold
and issued tickets for the airline company.

An offline carrier is “any foreign air carrier not certificated by the Civil Aeronautics Board, but who
maintains office or who has designated or appointed agents or employees in the Philippines, who sells or
offers for sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate for, or
holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges
for such transportation.”

Petitioner is undoubtedly “doing business” or “engaged in trade or business” in the Philippines. In the case
at hand, Aerotel performs acts or works or exercises functions that are incidental and beneficial to the
purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to petitioner.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in
the Philippines for a period of five years. Petitioner is, therefore, a resident foreign corporation that is
taxable on its income derived from sources within the Philippines.

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

(A) Tax on Resident Foreign Corporations. -
....

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 (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two
and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the
cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (Emphasis supplied)

3) Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

YES. While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) on its taxable
income from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1½% of gross
revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to
petitioner as a “foreign corporation organized and existing under the laws of Canada.”

Our Constitution provides for adherence to the general principles of international law as part of the law of
the land. The time-honored international principle of pacta sunt servanda demands the performance in good
faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this jurisdiction. (Deutsche Bank AG Manila
Branch v. Commissioner of Internal Revenue).
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject
to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding
taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
(Emphasis supplied)

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

NO. As discussed in South African Airways, the grant of a refund is founded on the assumption that the tax
return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated
in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the
refund.
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of
1 ½% of its gross revenues amounting to P345,711,806.08149 from the third quarter of 2000 to the second
quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the 1997 NIRC 32% of
taxable income, that is, gross income less deductions will exceed the maximum ceiling of 1 ½% of gross
revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund
is forthcoming.

28. CS Garment vs CIR

FACTS:
Petitioner is registered with the PEZA under Certificate of Registration No. 89-064, duly approved on
December 18, 1989. As such, it is engaged in the business of manufacturing garments for sale abroad. On
November 24, 1999, petitioner received from respondent Letter of Authority No. 00012641, authorizing the

30
 examination of petitioner’s books of accounts and other accounting records for all internal revenue taxes
covering the period January 1, 1998 to December 31, 1998. On October 23, 2001, petitioner received 5
formal demand letters with accompanying Assessment Notices from respondent requiring it to pay the
alleged deficiency VAT, Income, DST and withholding tax assessments for taxable year 1998 in the
aggregate amount of P2,046,580.10. Petitioner filed a formal written protest with the respondent assailing
the above assessments within the sixty-day period after the filing of the protest and submitted additional
documents in support of its protest. Respondent failed to act with finality on the protest filed by petitioner
within the period of 180 days. Hence, petitioner appealed before the CTA via a Petition for Review filed on
August 6, 2002 or within 30 days from the last day of the aforesaid 180-day period.

ISSUE: Whether or not CS Garment is already immune from paying the deficiency taxes stated in the 1998
tax assessments of the CIR, as modified by the CTA.

RULING: YES.
A careful scrutiny of the 2007 Tax Amnesty Law would tell us that the law contains two types of
conditions – one suspensive, the other resolutory. In the context of tax amnesty, the rights referred to are
those arising out of the privileges and immunities granted under the applicable tax amnesty law. In availing
themselves of the benefits of the tax amnesty program, taxpayers must first accomplish the following forms
and prepare them for submission: (1) Notice of Availment of Tax Amnesty Form; (2) Tax Amnesty Return
Form (BIR Form No. 2116); (3) Statement of Assets, Liabilities and Net worth (SALN) as of December 31,
2005; and (4) Tax Amnesty Payment Form (Acceptance of Payment Form or BIR Form No. 0617). The
OSG has already confirmed to this Court that CS Garment has complied with all of the documentary
requirements of the law. Consequently, and contrary to the assertion of the OSG, no further assessment by
the BIR is necessary. CS Garment is now entitled to invoke the immunities and privileges under Section 6
of the law.
With respect to its last assertion, the OSG quotes the following guidelines under BIR RMC 19-2008 to
establish that CS Garment is disqualified from availing itself of the tax amnesty program: While tax
amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor
of the taxing authority, it is also a well-settled doctrine that the rule-making power of administrative
agencies cannot be extended to amend or expand statutory requirements or to embrace matters not
originally encompassed by the law.

TAXPAYER’S SUIT

29. Remulla vs Maliksi

DOCTRINE:
Jurisprudence dictates that a taxpayer may be allowed to sue where there is a claim that public funds are
illegally disbursed or that public money is being deflected to any improper purpose, or that public funds are
wasted through the enforcement of an invalid or unconstitutional law or ordinance. ART. 7 paragraph 3
Administrative or executive acts, orders and regulations shall be valid only when they are not contrary to
laws or the Constitution.

FACTS:
Marietta de Villa in her personal capacity and as administratrix of the estate of her late husband Guillermo,
ceded, through a deed of donation of their property in favor of the Province of Cavite, on which now stands
various government offices and facilities. Thereafter, the Province of Cavite filed an expropriation case
seeking to expropriate the subject property which the former intends to develop as the Provincial Capitol
Site. De Villa opposed the said expropriation proceedings claiming that there are still areas within the
donated portion which the Province of Cavite failed to develop and she also alleged that the fair market
value of subject property should be P45.00 per s/m. While said expropriation case was still pending, she
sold a portion of the subject property to Goldenrod. Respondent Cavite Governor Erineo Maliksi issued an
EO authorizing the creation of a committee which recommend the terms and conditions for the proper
settlement expropriation case. The foregoing recommendations were adopted in a Compromise Agreement
entered into by and between Maliksi and Trece Martires Mayor and the owners of Goldenrod. Said
compromise was approved by the RTC in a decision. In the CA. Remulla, in his personal capacity as

31
 taxpayer and Vice-Governor filed a petition for annulment of judgement of RTC that said compromise is
grossly disadvantageous to the government and that extrinsic fraud tainted the expropriation proceedings
considering that there was collusion between the parties.

ISSUE:
Whether or Not Remulla’s petition for annulment of judgement be denied

RULING:
No. Records bear out that Remulla filed his petition for annulment of judgment in two capacities: first, in
his personal capacity as a taxpayer; and, second, in his official capacity as then presiding officer of the
Sangguniang Panlalawigan of the Province of Cavite. With respect to the first, jurisprudence dictates that a
taxpayer may be allowed to sue where there is a claim that public funds are illegally disbursed or that
public money is being deflected to any improper purpose, or that public funds are wasted through the
enforcement of an invalid or unconstitutional law or ordinance. In this case, public funds of the Province of
Cavite stand to be expended to enforce the compromise judgment. As such, Remulla – being a resident-
taxpayer of the Province of Cavite – has the legal standing to file the petition for annulment of judgment
and, therefore, the same should not have been dismissed on said ground. Notably, the fact that there lies no
proof that public funds have already been disbursed should not preclude Remulla from assailing the validity
of the compromise judgment. Lest it be misunderstood, the concept of legal standing is ultimately a
procedural technicality which may be relaxed by the Court if the circumstances so warrant. As observed in
Mamba v. Lara, the Court did not hesitate to give standing to taxpayers in cases where serious legal issues
were raised or where public expenditures of millions of pesos were involved. Likewise, it has also been
ruled that a taxpayer need not be a party to the contract in order to challenge its validity, or to seek the
annulment of the same on the ground of extrinsic fraud. Indeed, for as long as taxes are involved, the
people have a right to question contracts entered into by the government, as in this case. Anent the second,
Remulla equally lodged the petition for annulment of judgment in his official capacity as then Vice-
Governor and Presiding Officer of the Sangguniang Panlalawigan of the Province of Cavite. As such, he
represents the interests of the province itself which is, undoubtedly, a real party in interest since it stands
to be either benefited or injured by the execution of the compromise judgment.

30. Secretary of Finance vs Lazatin

Facts:
In response to reports of smuggling of petroleum and petroleum products and to ensure the correct taxes are
paid and collected, petitioner Secretary of Finance Cesar V. Purisima — pursuant to his authority to
interpret tax laws 3 and upon the recommendation of petitioner Commissioner of Internal Revenue (CIR)
Kim S. Jacinto-Henares signed RR 2-2012 on February 17, 2012.
The RR requires the payment of value-added tax (VAT) and excise tax on the importation of all petroleum
and petroleum products coming directly from abroad and brought into the Philippines, including Freeport
and economic zones (FEZs). 4 It then allows the credit or refund of any VAT or excise tax paid if the
taxpayer proves that the petroleum previously brought in has been sold to a duly registered FEZ locator and
used pursuant to the registered activity of such locator. 5
In other words, an FEZ locator must first pay the required taxes upon entry into the FEZ of a petroleum
product, and must thereafter prove the use of the petroleum product for the locator's registered activity in
order to secure a credit for the taxes paid.
Carmelo F. Lazatin, in his capacity as Pampanga First District Representative, filed a petition for
prohibition and injunction 6 against the petitioners to annul and set aside RR 2-2012.
Lazatin posits that Republic Act No. (RA) 9400 7 treats the Clark Special Economic Zone and Clark
Freeport Zone (together hereinafter referred to as Clark FEZ) as a separate customs territory and allows tax
and duty-free importations of raw materials, capital and equipment into the zone. Thus, the imposition of
VAT and excise tax, even on the importation of petroleum products into FEZs (like Clark FEZ), directly
contravenes the law.
The respondent Ecozone Plastic Enterprises Corporation (EPEC) sought to intervene in the proceedings as
a co-petitioner. 8
EPEC claims that, as a Clark FEZ locator, it stands to suffer when RR 2-2012 is implemented. EPEC insists
that RR 2-2012's mechanism of requiring even locators to pay the tax first and to subsequently claim a
credit or to refund the taxes paid effectively removes the locators' tax-exempt status. CAIHTE

32
The RTC declared RR 2-2012 unconstitutional. RR 2-2012 violates RA 9400 because it imposes taxes that,
by law, are not due in the first place. 14 Since RA 9400 clearly grants tax and duty-free incentives to Clark
FEZ locators, a revocation of these incentives by an RR directly contravenes the express intent of the
Legislature. 15 In effect, the petitioners encroached upon the prerogative to enact, amend, or repeal laws,
which the Constitution exclusively granted to Congress.
The Petition
Petitioners argue that EPEC does not have legal standing to intervene. That EPEC will ultimately bear the
VAT and excise tax as an end-user, is misguided. 20 The burden of payment of VAT and excise tax may be
shifted to the buyer 21 and this burden, from the point of view of the transferee, is no longer a tax but
merely a component of the cost of goods purchased. The statutory liability for the tax remains with the
seller. Thus, EPEC cannot say that when the burden is passed on to it, RR 2-2012 effectively imposes tax
on it as a Clark FEZ locator.
The petitioners point out that RR 2-2012 imposes an "advance tax" only upon importers of petroleum
products. If EPEC is indeed a locator, then it enjoys tax and duty exemptions granted by RA 9400 so long
as it does not bring the petroleum or petroleum products to the Philippine customs territory. 22
The petitioners legally argue that RR 2-2012 is valid and constitutional.
Petitioners contend that while RA 9400 does grant tax and customs duty incentives to Clark FEZ locators,
there are conditions before these benefits may be availed of. The locators cannot invoke outright exemption
from VAT and excise tax on its importations without first satisfying the conditions set by RA 9400, that is,
the importation must not be removed from the FEZ and introduced into the Philippine customs territory. 25
These locators enjoy what petitioners call a qualified tax exemption. They must first pay the corresponding
taxes on its imported petroleum. Then, they must submit the documents required under RR 2-2012. If they
have sufficiently shown that the imported products have not been removed from the FEZ, their earlier
payment shall be subject to a refund.
The petitioners lastly argue that RR 2-2012 does not withdraw the locators' tax exemption privilege. The
regulation simply requires proof that a locator has complied with the conditions for tax exemption. If the
locator cannot show that the goods were retained and/or consumed within the FEZ, such failure creates the
presumption that the goods have been introduced into the customs territory without the appropriate permits.
26 On the other hand, if they have duly proven the disposition of the goods within the FEZ, their "advance
payment" is subject to a refund. Thus, to the petitioners, to the extent that a refund is allowable, there is in
reality a tax exemption. 27
Counter-arguments
RR 2-2012 illegally imposes taxes
on Clark FEZs.
The respondents underscore that RA 9400 provides FEZ locators certain incentives, such as tax- and duty-
free importations of raw materials and capital equipment.
They admit that the law subjects to taxes and duties the goods that were brought into the FEZ and
subsequently introduced to the Philippine customs territory. However, contrary to petitioners' position that
locators' tax and duty exemptions are qualified, their incentives apply automatically.
According to the respondents, petitioners' interpretation of the law contravenes the policy laid down by RA
9400, because it makes the incentives subject to a suspensive condition. They claim that the condition —
the removal of the goods from the FEZ and their subsequent introduction to the customs territory — is
resolutory; locators enjoy the granted incentives upon bringing the goods into the FEZ. It is only when the
goods are shown to have been brought into the customs territory will the proper taxes and duties have to be
paid. 33 RR 2-2012 reverses this process by requiring the locators to pay "advance" taxes and duties first
and to subsequently prove that they are entitled to a refund, thereafter.
The respondents add that even the refund mechanism under RR 2-2012 is problematic. They claim that RR
2-2012 only allows a refund when the petroleum products brought into the FEZ are subsequently sold to
FEZ locators or to entities that similarly enjoy exemption from direct and indirect taxes. The issuance does
not envision a situation where the petroleum products are directly brought into the FEZ and are consumed
by the same entity/locator.
Issue/s:
I. Whether respondents Lazatin and EPEC have legal standing to bring the action of declaratory relief; and
II. Whether RR 2-2012 is valid and constitutional.
Ruling:
We do not find the petition meritorious.

33
I. Respondents have legal
standing to file petition for
declaratory relief.
EPEC has legal standing as a
Clark FEZ locator.
EPEC intervened in the proceedings before the RTC based on the allegation that, as a Clark FEZ locator, it
will be directly affected by the implementation of RR 2-2012. 52
We agree with EPEC.
It is not disputed that RR 2-2012 relates to the imposition of VAT and excise tax and applies to all
petroleum and petroleum products that are imported directly from abroad to the Philippines, including
FEZs. 53
As an enterprise located in the Clark FEZ, its importations of petroleum and petroleum products will be
directly affected by RR 2-2012. Thus, its interest in the subject matter — a personal and substantial one —
gives it legal standing to question the issuance's validity.
In sum, the respondents' respective interests in this case are sufficiently substantial to be directly affected
by the implementation of RR 2-2012. The RTC therefore did not err when it gave due course to Lazatin's
petition for declaratory relief as well as EPEC's petition-in-intervention.
In light of this ruling, we see no need to rule on the claimed transcendental importance of the issues raised.
II. RR 2-2012 is invalid and
unconstitutional.
We rule that RR 2-2012 is invalid and unconstitutional because: a) it illegally imposes taxes upon FEZ
enterprises, which, by law, enjoy tax-exempt status, and b) it effectively amends the law (i.e., RA 7227, as
amended by RA 9400) and thereby encroaches upon the legislative authority reserved exclusively by the
Constitution for Congress.
FEZ enterprises enjoy tax- and
duty-free incentives on its
importations.
To effectively extend the same benefits enjoyed in Subic to the Clark FEZ, the legislature enacted RA 9400
to amend RA 7227. 55 Subsequently, the Department of Finance issued Department Order No. 3-2008 56
to implement RA 9400 (Implementing Rules).
Under RA 9400 and its Implementing Rules, Clark FEZ is considered a customs territory separate and
distinct from the Philippines customs territory. Thus, as opposed to importations into and establishments in
the Philippines customs territory, 57 which are fully subject to Philippine customs and tax laws,
importations into and establishments located within the Clark FEZ (FEZ Enterprises) 58 enjoy special
incentives, including tax and duty-free importation. 59 More specifically, Clark FEZ enterprises shall be
entitled to the freeport status of the zone and a 5% preferential income tax rate on its gross income, in lieu
of national and local taxes. 60
RA 9400 and its Implementing Rules grant the following:
First, the law provides that importation of raw materials and capital equipment into the FEZs shall be tax-
and duty-free. It is the specific transaction (i.e., importation) that is exempt from taxes and duties.
Second, the law also grants FEZ enterprises tax- and duty-free importation and a preferential rate in the
payment of income tax, in lieu of all national and local taxes. These incentives exempt the establishment
itself from taxation.
Thus, the Legislature intended FEZs to enjoy tax incentives in general — whether with respect to the
transactions that take place within its special jurisdiction, or the persons/establishments within the
jurisdiction. From this perspective, the tax incentives enjoyed by FEZ enterprises must be understood to
necessarily include the tax exemption of importation of selected articles into the FEZ.
We have ruled in the past that FEZ enterprises' tax exemptions must be interpreted within the context and
in a manner that promotes the legislative intent of RA 7227 61 and, by extension, RA 9400. Thus, we
recognized that FEZ enterprises are exempt from both direct and indirect internal revenue taxes. 62 In
particular, they are considered VAT-exempt entities. 63
In line with this comprehensive interpretation, we rule that the tax exemption enjoyed by FEZ enterprises
covers internal revenue taxes imposed on goods brought into the FEZ, including the Clark FEZ, such as
VAT and excise tax.
RR 2-2012 illegally imposes VAT and excise
tax on goods brought into the FEZs.

34
Section 3 of RR 2-2012 provides the following:
First, whenever petroleum and petroleum products are imported and/or brought directly to the Philippines,
the importer of these goods is required to pay the corresponding VAT and excise tax due on the
importation.
However, RR 2-2012 explicitly covers even petroleum and petroleum products imported and/or brought
into the various FEZs in the Philippines. Hence, when an FEZ enterprise brings petroleum and petroleum
products into the FEZ, under RR 2-2012, it shall be considered an importer liable for the taxes due on these
products.
FEZ enterprises enjoy a qualified tax exemption such that they have to pay the tax due on the importation
first, and thereafter claim a refund, which shall be allowed only upon showing that the goods were not
introduced to the Philippine customs territory.
Since the tax exemptions enjoyed by FEZ enterprises under the law extend even to VAT and excise tax, it
follows and we accordingly rule that the taxes imposed by Section 3 of RR 2-2012 directly contravene
these exemptions. First, the regulation erroneously considers petroleum and petroleum products brought
into a FEZ as taxable importations. Second, it unreasonably burdens FEZ enterprises by making them pay
the corresponding taxes — an obligation from which the law specifically exempts them — even if there is a
subsequent opportunity to refund the payments made.
Petroleum and petroleum products brought
into the FEZ and which remain therein are
not taxable importations.
RR 2-2012 clearly imposes VAT and excise tax on the importation of petroleum and petroleum products
into FEZs. Strictly speaking, however, articles brought into these FEZs are not taxable importations under
the law based on the following considerations:
First, importation refers to bringing goods from abroad into the Philippine customs jurisdiction. It begins
from the time the goods enter the Philippine jurisdiction and is deemed terminated when the applicable
taxes and duties have been paid or the goods have left the jurisdiction of the BOC. 68
Second, under the Tax Code, imported goods are subject to VAT and excise tax. These taxes shall be paid
prior to the release of the goods from customs custody. 69 Also, for VAT purposes, an importer refers to
any person who brings goods into the Philippines.
Third, the Philippine VAT system adheres to the cross border doctrine. 71 Under this rule, no VAT shall be
imposed to form part of the cost of the goods destined for consumption outside the Philippine customs
territory. 72 Thus, we have already ruled before that an FEZ enterprise cannot be directly charged for the
VAT on its sales, nor can VAT be passed on to them indirectly as added cost to their purchases. 73
Fifth, the Implementing Rules provides that goods initially introduced into the FEZs and subsequently
brought out therefrom and introduced into the Philippine customs territory shall be considered as
importations and thereby subject to the VAT. 76 One such instance is the sale by any FEZ enterprise to a
customer located in the customs territory, which the VAT regulations refer to as a technical importation. 77
We find it clear from all these that when goods (e.g., petroleum and petroleum products) are brought into
an FEZ, the goods remain to be in foreign territory and are not therefore goods introduced into Philippine
customs territory subject to Philippine customs and tax laws. 78
Therefore, the act of bringing the goods into an FEZ is not a taxable importation. As long as the goods
remain (e.g., sale and/or consumption of the article within the FEZ) in the FEZ or re-exported to another
foreign jurisdiction, they shall continue to be tax-free. 79 However, once the goods are introduced into the
Philippine customs territory, it ceases to enjoy the tax privileges accorded to FEZs. It shall then be
considered as an importation subject to all applicable national internal revenue taxes and customs duties.
The tax exemption granted to FEZ
enterprises is an immunity from tax liability
and from the payment of the tax.
The petitioners argue that RR 2-2012 does not withdraw the tax exemption privileges of FEZ enterprises.
As their tax exemption is merely qualified, they cannot invoke outright exemption. Thus, FEZ enterprises
are required to pay internal revenue taxes first on their imported petroleum under RR 2-2012. They may
then refund their previous payment upon showing that the condition under RA 9400 has been satisfied —
that is, the goods have not been introduced to the Philippines customs territory. 81 To the petitioners, to the
extent that a refund is allowable, there is still in reality a tax exemption. 82
We disagree with this contention.

35
 First, FEZ enterprises bringing goods into the FEZ should not be considered as importers subject to tax in
the same manner that the very act of bringing goods into these special territories does not make them
taxable importations. We emphasize that the exemption from taxes and duties under RA 9400 are granted
not only to importations into the FEZ, but also specifically to each FEZ enterprise.
We agree with the respondents.
It is worthy to note that RR 2-2012 does not even refer to a specific Tax Code provision it wishes to
implement. While it purportedly establishes mere administration measures for the collection of VAT and
excise tax on the importation of petroleum and petroleum products, not once did it mention the pertinent
chapters of the Tax Code on VAT and excise tax.
While we recognize petitioners' essential rationale in issuing RR 2-2012, the procedures proposed by the
issuance cannot be implemented at the expense of entities that have been clearly granted statutory tax
immunity.

ORGANIZATION AND FUNCTIONS OF THE BIR

31. Philamlife vs DOF

32. Banco de oRo vs RP

Petitioners: BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,
METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS,
PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS
DEVELOPMENT BANK
Respondents: REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE,
BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE,
THE NATIONAL TREASURER AND BUREAU OF TREASURY

Facts:
This is a petition for certiorari, prohibition and/or mandamus filed by petitioners under Rule 65 of the Rules
of Court.
The case involves the proper tax treatment of the discount or interest income arising from the P35 billion
worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury. The Commissioner of
Internal Revenue issued BIR Ruling No. 370-2011 (2011 BIR Ruling), declaring that the PEACe Bonds
being deposit substitutes are subject to the 20% final withholding tax. Pursuant to this ruling, the Secretary
of Finance directed the Bureau of Treasury to withhold a 20% final tax from the face value of the PEACe
Bonds upon their payment at maturity on October 18, 2011.
Petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to them was
in violation of their property rights, right to due process, as well as Sec 246 of the 197 NIRC. And that
Commissioner of Internal Revenue gravely and seriously abused her discretion in the exercise of her rule
making power.
Respondents argue that petitioners' direct resort to this court to challenge the 2011 BIR Ruling violates the
doctrines of exhaustion of administrative remedies and hierarchy of courts, resulting in a lack of cause of
action that justifies the dismissal of the petition.|||

Issue:
Whether or not doctrine of hierarchy of courts was violated by the BIR and acted outside its jurisdiction in
connection with the 2011 BIR Ruling.

Ruling:
Yes. The Court agreed with the respondents that the jurisdiction to review the rulings of the Commissioner
of Internal Revenue pertains to the Court of Tax Appeals.||| In exceptional cases, however, this court
entertained direct recourse to it when "dictated by public welfare and the advancement of public policy, or

36
demanded by the broader interest of justice, or the orders complained of were found to be patent nullities,
or the appeal was considered as clearly an inappropriate remedy."
Non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had been
rendered moot by this court's issuance of the temporary restraining order enjoining the implementation of
the 2011 BIR Ruling. The temporary restraining order effectively recognized the urgency and necessity of
direct resort to this court.|||

INCOME TAXATION

a. Definition, Nature and General Principles

1. ING Bank vs CIR

LEONEN, J.:
Facts: 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."
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]."

Furthermore, 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. It maintains its position that the
liability of the employer to withhold the tax does not arise until such bonus is actually distributed.
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.

In petitioner's case, bonuses were determined during the year (1996 and 1997¬) 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.

Issues:
1. whether petitioner ING Bank may validly avail itself of the tax amnesty granted by Republic Act
No. 9480;
2. whether petitioner ING Bank is liable for deficiency withholding tax on accrued bonuses for the
taxable years 1996 and 1997. yes
Ruling:
I. Yes. Qualified taxpayers with pending tax cases may still avail themselves of the tax amnesty
program. Thus, the provision in BIR Revenue Memorandum Circular No. 19-2008 excepting "issues
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. The duty
to withhold the tax on compensation arises upon its accrual.

II. Yes. 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.

37
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.

For Magis people:

- Sec. 29, par. (j), NIRC
- Compensation income
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. Taxes withheld are creditable in nature. 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. For over withholding, the employee is refunded. 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.

- Constructive receipt
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.

- Cash basis vs. accrual method

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.

38
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.95 (Emphasis supplied, citations omitted)

Thus, if the taxpayer is on cash basis, the 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."

Documentary Stamp Tax

PARTIES:
Petitioner ING Bank, N.V., engaged in banking operations in the Philippines as ING Bank N.V.
Manila Branch
Respondent Commissioner of Internal Revenue

SUMMARY:
This is a partial MR by CIR, arguing that the deficiency DST on special savings accounts of petitioner
bank that was set aside by the Court in its previous ruling should not be included in the Tax Amnesty
Program (basis for the setting aside of the tax assessments) because Revenue Regulations excepted
taxes passed on and collected from customers for remittance to the BIR. The Tax Amnesty Program
Law also excludes existing cases of withholding agents with respect to their withholding tax
liabilities. The Supreme Court ruled that DST tax is included as a national tax in the amnesty program.
The bank’s DST can only be excluded if the bank is deemed to be a “withholding or collecting agent”
of the DST and not as a party directly liable for it. SC discussed the revenue regulations, and found
that for a bank to be a collecting agent only as regards to DST, it has to be exempted from DST. In this
case, there is no proof that petitioner is exempt from the documentary stamp tax on the special
savings accounts. Neither is there any agreement/evidence on record showing the party liable for
the documentary stamp tax due on the accounts. Therefore it cannot be said that petitioner passed on
and collected the documentary stamp taxes on special savings accounts from its clients.

DOCTRINES:
A documentary stamp tax is a tax on documents, instruments, loan agreements, and papers evidencing
the acceptance, assignment, sale, or transfer of an obligation, right, or property. The tax is “levied on
the exercise by persons of certain privileges conferred by law for the creation, revision, or termination
of specific legal relationships through the execution of specific instruments.” The law taxes the
document because of the transaction.

Revenue Regulations No. 9-2000 clarifies that all parties to a transaction, and not only the person
making, signing, issuing, accepting, or transferring the document, are primarily liable for the
documentary stamp tax. The general rule therefore is any of the parties to a transaction shall be liable

39
for the full amount of the documentary stamp tax due, unless they agree among themselves on who
shall be liable for the same.

In this case, petitioner is directly liable for the documentary stamp tax as the maker and issuer
of the instrument or any written memorandum evidencing the special savings account transaction.
As a party to a taxable transaction, petitioner is responsible for the payment and remittance of the
documentary stamp tax. However, if petitioner were exempt from the tax, it should be required to
remit the same only as a collecting agent of respondent.

FACTS:
Respondent filed this partial MR of a July 22, 2015 decision which partially granted the Rule 45
petition of ING NV Manila Branch, wherein SC set aside the assessments for deficiency
documentary stamp taxes on petitioner’s special savings accounts for the taxable years 1996 and
1997 and deficiency tax on onshore interest income for taxable year 1996 “in view of [its]
availment of the tax amnesty program under Republic Act No. 9480.

Respondent CIR argues for the first time that the documentary stamp taxes on petitioner’s special
savings accounts for taxable years 1996 and 1997 are not covered by Republic Act No. 9480
(Tax Amnesty), pursuant to Question-1 of Revenue Memorandum Circular Nos. Basically because
the revenue regulations excludes taxes passed on and collected from customers for remittance to the
BIR.

Petitioner, in turn, faults respondent for misleading the SC by falsely asserting that it collected
documentary stamp taxes from its clients, when it was the failure of the respondent to collect and remit
DST from special savings account that gave rise to the tax deficiency in the first place.

Republic Act No. 9480 provides a general grant of tax amnesty subject only to the cases
specifically excepted by it. Note that withholding agents with respect to their withholding tax
liabilities are excepted.

ISSUES:
WON documentary stamp taxes are excluded from the tax amnesty granted by Republic Act No. 9480.
(NO, it is included)

RATIO:
The documentary stamp tax is one of the taxes covered by the Tax Amnesty Program under RA 9480.
It expressly covers “all national internal revenue taxes for the taxable year 2005 and prior years . . .” It
provides a general grant of tax amnesty subject only to the cases specifically excepted by it. As
relevant to this case, withholding agents with respect to their withholding tax liabilities; (Sec 8 a.)

Reliance on Rev. Memo Nos. 69-2007 and 19-2008 which provided that taxes passed-on and collected
from customers for remittance to the BIR are excluded from the amnesty program is erroneous because
administrative issuances such as revenue memorandum circulars cannot amend nor modify the law.

40
As to a valid excepted scenario: withholding agents with respect to their withholding tax liabilities;
(Sec 8 a.) SC explained that the liability of the withholding agent is independent from that of the
taxpayer:

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

For reliance on Rev. Memo Nos 69-2007 and 19-2008 to be sustainable, the added exception “taxes
passed-on and collected from customers for remittance to the [Bureau of Internal Revenue]” provided
in Revenue Memorandum Circular Nos. 69-2007 and 19-2008 must be essentially equivalent to the
withholding tax liabilities of a withholding agent. Thus, a taxpayer who is deemed to be a “withholding
or collecting agent” of “the tax collected from [its] customer” is excluded from the coverage of the tax
amnesty, with respect to its liability as a withholding or collecting agent.

When is the bank deemed a collecting agent only, when it comes to DST on the special savings
account? The Court held that documentary stamp taxes on special savings accounts are direct liabilities
of petitioner and not simply “[t]axes passed-on and collected from customers for remittance to the
[Bureau of Internal Revenue]” as argued by respondent.

A documentary stamp tax is a tax on documents, instruments, loan agreements, and papers evidencing
the acceptance, assignment, sale, or transfer of an obligation, right, or property. The tax is “levied on
the exercise by persons of certain privileges conferred by law for the creation, revision, or termination
of specific legal relationships through the execution of specific instruments.”

Under Section 173 of the 1997 National Internal Revenue Code, the documentary stamp tax due is paid
by the person “making, signing, issuing, accepting, or transferring” the instrument. Revenue
Regulations No. 9-2000 clarifies that all parties to a transaction, and not only the person making,
signing, issuing, accepting, or transferring the document, are primarily liable for the documentary
stamp tax.

As a general rule, therefore, any of the parties to a transaction shall be liable for the full amount of the
documentary stamp tax due, unless they agree among themselves on who shall be liable for the same.

The Revenue Regulation No. 9-2000 further provides mode of payment and remittance of the tax:

General rule, any of the aforesaid parties to the taxable transaction shall pay and remit the full amount
of the tax in accordance with the provisions of Section 200 of the Code.

An exception is if one of the parties to the taxable transaction is exempt from the tax, the other party
who is not exempt shall be the one directly liable for the tax, in which case, the tax shall be paid and
remitted by the said non-exempt party, unless otherwise provided in these Regulations.

If the said tax-exempt party is one of the persons enumerated in Section 3(c)(4) hereof he shall be
constituted as agent of the Commissioner for the collection of the tax, in which case, he shall remit the
tax so collected in the same manner and in accordance with the provisions of Section 200 of the Code:
Provided, however, that if he fails to collect and remit the same as herein required, he shall be treated

41
personally liable for the tax, in addition to the penalties prescribed under Title X of the Code for failure
to pay the tax on time.

In Sec 3(c)(4) of the revenue memorandum, when a bank (among others) is one of the parties to the
taxable document or transaction – which includes stamp tax on bonds, debentures, certificates of
indebtedness, deposit substitute, or other similar instruments – such bank/entity shall be responsible for
the remittance of the stamp tax prescribed under Title VII of the Code: Provided, however, that if such
entity is exempt from the tax herein imposed, it shall remit the tax as a collecting agent, pursuant to the
preceding paragraph 3(b)(2).
SC has also previously held that a special savings account is subject to DST . A certificate of
deposit is “a written acknowledgment by a bank of the receipt of a sum of money on deposit which the
bank promises to pay to the depositor, to the order of the depositor, or to some other or his order,
whereby the relation of debtor or creditor between the bank and the depositor is created.

Thus petitioner is directly liable for the documentary stamp as the maker and issuer of the instrument
or any written memorandum evidencing the special savings account transaction.

However, if petitioner were exempt from the tax, it should be required to remit the same only as a
collecting agent of respondent.

In this case, there is no proof that petitioner is exempt from the documentary stamp tax on the
special savings accounts. Neither is there any agreement/evidence on record showing the party
liable for the documentary stamp tax due on the accounts.

Therefore it cannot be said that petitioner passed on and collected the documentary stamp taxes on
special savings accounts from its clients. Thus the petitioner cannot be excepted from the tax amnesty
program.

DISPOSITIVE:
Motion for reconsideration denied with finality.

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 Review[3] appealing the April 5, 2005 Decision[4] of the Court of Tax Appeals
En Banc, which in turn affirmed the August 9, 2004 Decision[5] and November 12, 2004
Resolution[6] 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 P238,545,052.38 inclusive of surcharges;
(b) deficiency onshore tax for the taxable year 1996 in the total amount of P997,333.89 inclusive of
surcharges and interest; and (c) deficiency withholding tax on compensation for the taxable years 1996
and 1997 in the total amount of P564,542.67 inclusive of interest. The Resolution denied ING Bank's
Motion for Reconsideration.[7]

42
 While this case was pending before this court, ING Bank filed a Manifestation and Motion[8] 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 Notice[11] dated December 3, 1999.
[12] The Final Assessment Notice also contained the Details of Assessment[13] 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.

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
P1,000.00, P1,000.00 and P75,013.25 [the original amount of P73,752.47 plus additional
interest]."[16] ING Bank, however, "protested [on the same day] the remaining ten (10) deficiency
tax assessments in the total amount of P672,576,939.18."[17]

ING Bank filed a Petition for Review before the Court of Tax Appeals on October 26, 2000.
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

ISSUES RAISED by ING:

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."

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.

HELD:

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.

43
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 as may 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:
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.

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.

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.

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.

44
An expense, whether the same is paid ox 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

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.

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.

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. 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.

Thus, if the taxpayer is on cash basis, the 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

45
item that is reasonably ascertained as to amount and acknowledged to be due has "accrued"; actual payment
is not essential to constitute "expense."

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.

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 P564,542.67 inclusive of interest, is AFFIRMED.

2. Air Canada vs CIR

FACTS:
Air Canada is a foreign corporation organized and existing under the laws of Canada. On April
24, 2000, it was granted an authority to operate as an offline carrier by the Civil Aeronautics
Board, subject to certain conditions, which authority would expire on April 24, 2005. As an off-
line carrier, Air Canada does not have flights originating from or coming to the Philippines and
does not operate any airplane in the Philippines.
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general
sales agent in the Philippines. Aerotel sells Air Canada’s passage documents in the Philippines.
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air
Canada, through Aerotel, filed quarterly and annual income tax returns and paid the income tax
on Gross Philippine Billings in the total amount of ₱5,185,676.77.
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid
income taxes amounting to ₱5,185,676.77 before the Bureau of Internal Revenue (BIR). It’s basis
was found in the revised definition of Gross Philippine Billings under Section 28(A)(3)(a) of the
1997 National Internal Revenue Code (NIRC) .
The CTA denied the petition. It found that Air Canada was engaged in business in the
Philippines through a local agent that sells airline tickets on its behalf. As such, it held that while
Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it was
nevertheless liable to pay the 32% corporate income tax on income derived from the sale of
airline tickets within the Philippines pursuant to Section 28(A)(1). On appeal, the CTA En Banc
affirmed the ruling of the CTA First Division.

ISSUES & HELD:

1) Whether Air Canada is subject to the 2½% tax on Gross
Philippine Billings pursuant to Section 28(A)(3).

NO. Air Canada is not liable to tax on Gross Philippine Billings under Section 28(A)(3). The tax
attaches only when the carriage of persons, excess baggage, cargo, and mail originated from the
Philippines in a continuous and uninterrupted flight, regardless of where the passage documents
were sold. Not having flights to and from the Philippines, petitioner is clearly not liable for the
Gross Philippine Billings tax.

46
2) If not, whether Air Canada is a resident foreign corporation
engaged in trade or business and thus, can be subject to the regular corporate income tax of 32%
pursuant to Section 28(A)(1);

YES. Petitioner falls within the definition of resident foreign corporation under Section 28(A)
(1) , thus, it may be subject to 32% tax on its taxable income.

The Court in Commissioner of Internal Revenue v. British Overseas Airways Corporation

declared British Overseas Airways Corporation, an international air carrier with no landing
rights in the Philippines, as a resident foreign corporation engaged in business in the Philippines
through its local sales agent that sold and issued tickets for the airline company.

An offline carrier is “any foreign air carrier not certificated by the Civil Aeronautics Board, but
who maintains office or who has designated or appointed agents or employees in the Philippines,
who sells or offers for sale any air transportation in behalf of said foreign air carrier and/or
others, or negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells,
provides, furnishes, contracts, or arranges for such transportation.”

Petitioner is undoubtedly “doing business” or “engaged in trade or business” in the Philippines.

In the case at hand, Aerotel performs acts or works or exercises functions that are incidental and
beneficial to the purpose of petitioner’s business. The activities of Aerotel bring direct receipts or
profits to petitioner. Further, petitioner was issued by the Civil Aeronautics Board an authority
to operate as an offline carrier in the Philippines for a period of five years. Petitioner is,
therefore, a resident foreign corporation that is taxable on its income derived from sources
within the Philippines.

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

(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a
tax of two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and
the place of payment of the ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form part of the Gross Philippine
Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of passenger takes
place at any port outside the Philippines on another airline, only the aliquot portion of the cost of
the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (Emphasis supplied)

3) Whether the Republic of the Philippines-Canada Tax Treaty is

enforceable;

YES. While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) on its
taxable income from sale of airline tickets in the Philippines, it could only be taxed at a
maximum of 1½% of gross revenues, pursuant to Article VIII of the Republic of the Philippines-
Canada Tax Treaty that applies to petitioner as a “foreign corporation organized and existing
under the laws of Canada.”

Our Constitution provides for adherence to the general principles of international law as part of
the law of the land. The time-honored international principle of pacta sunt servanda demands
the performance in good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations under the treaty
must be performed by them in good faith. More importantly, treaties have the force and effect of

47
law in this jurisdiction. (Deutsche Bank AG Manila Branch v. Commissioner of Internal
Revenue).
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized,
or existing under the laws of any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied)

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

NO. As discussed in South African Airways, the grant of a refund is founded on the assumption
that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to and constitutes a challenge against the
truth and accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at
the rate of 1 ½% of its gross revenues amounting to P345,711,806.08149 from the third quarter
of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under Section
28(A)(l) of the 1997 NIRC 32% of taxable income, that is, gross income less deductions will
exceed the maximum ceiling of 1 ½% of gross revenues as decreed in Article VIII of the Republic
of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.

FACTS: Air Canada is an offline air carrier selling passage tickets in the Philippines, through a general
sales agent, Aerotel. As an off-line carrier, [Air Canada] does not have flights originating from or
coming to the Philippines [and does not] operate any airplane [in] the Philippines[.]

Air Canada filed a claim for refund for more than 5 million pesos. It claims that there was
overpayment, saying that the applicable tax rate against it is 2.5% under the law on tax on Resident
Foreign Corporations (RFCs) for international carriers. It argues that, as an international carrier doing
business in the Philippines, it is not subject to tax at the regular rate of 32%.

Air Canada also claims that it is not taxable because its income is taxable only in Canada because of
the Philippines-Canada Treaty (treaty). According to it, even if taxable, the rate should not exceed
1.5% as stated in said treaty.

However, the CTA ruled that Air Canada was engaged in business in the Philippines through a local
agent that sells airline tickets on its behalf. As such, it should be taxed as a resident foreign corporation
at the regular rate of 32%.

The CTA also said that Air Canada cannot avail of the lower tax rate under the treaty because it has a
"permanent establishment" in the Philippines. Hence, Air Canada cannot avail of the tax exemption
under the treaty.

ISSUES:
[1] Is Air Canada, an offline international carrier selling passage documents through Aerotel, a RFC?
[2] As an offline international carrier selling passage documents, is Air Canada subject to 2.5% tax on
Gross Philippine Billings or to the regular 32% tax?
[3] Can Air Canada benefit from the treaty's elimination of double taxation in favor of Canada or the
preferential rate of 1.5%?
[4] Can Air Canada validly refuse to pay its tax deficiency on the ground that there is a pending tax
credit proceeding it has filed?
[5] Is Air Canada entitled to the tax refund claimed at more than 5 million pesos?

48
HELD:
[1] Yes, Air Canada is a resident foreign corporation. Although there is no one rule in determining
what "doing business in the Philippines" means, the appointment of an agent or an employee is a good
indicator. This is especially true when there is effective control, similar to that of employer-employee
relationship. This is true between Air Canada and Aerotel. Hence, Air Canada is a RFC.

[2] No, because the 2.5% tax on Gross Philippine Billings applies only to carriers maintaining flights
to and from the Philippines. Air Canada's appointment of a general sales agent, Aerotel, here is only
for the purpose of selling passage documents. However, this is not the complete answer since the treaty
is the latter law that prevails in this case.
3] Air Canada cannot avail of the elimination of double taxation in favor of Canada since the treaty
expressly excludes Canadian carriers with "permanent establishment." Through the appointment of
Aerotel as its local sales agent, petitioner is deemed to have created a "permanent establishment" in the
Philippines as defined under the Republic of the Philippines-Canada Tax Treaty.

This is especially true since Aerotel has no "independent status" beacuse Air Canada exercises
comprehensive control and detailed instructions over the means and results of the activities of the
former.

[4] No, it cannot. Even if Air Canada succeeds in claiming tax refund, the general rule prevails that
there can be not setting off of taxes since the Government and the taxpayer are not creditors and
debtors of each other.

Share
CASE DIGEST: AIR CANDA VS. CIR (G.R. NO. 169507; JANUARY 11, 2016)
CASE DIGEST: AIR CANADA, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
Respondent. (G.R. No. 169507; January 11, 2016)

FACTS: Air Canada is an offline air carrier selling passage tickets in the Philippines, through a general
sales agent, Aerotel. As an off-line carrier, [Air Canada] does not have flights originating from or
coming to the Philippines [and does not] operate any airplane [in] the Philippines[.]

Air Canada filed a claim for refund for more than 5 million pesos. It claims that there was
overpayment, saying that the applicable tax rate against it is 2.5% under the law on tax on Resident
Foreign Corporations (RFCs) for international carriers. It argues that, as an international carrier doing
business in the Philippines, it is not subject to tax at the regular rate of 32%.

Air Canada also claims that it is not taxable because its income is taxable only in Canada because of
the Philippines-Canada Treaty (treaty). According to it, even if taxable, the rate should not exceed
1.5% as stated in said treaty.

However, the CTA ruled that Air Canada was engaged in business in the Philippines through a local
agent that sells airline tickets on its behalf. As such, it should be taxed as a resident foreign corporation
at the regular rate of 32%.

The CTA also said that Air Canada cannot avail of the lower tax rate under the treaty because it has a
"permanent establishment" in the Philippines. Hence, Air Canada cannot avail of the tax exemption
under the treaty.

ISSUES:
[1] Is Air Canada, an offline international carrier selling passage documents through Aerotel, a RFC?
[2] As an offline international carrier selling passage documents, is Air Canada subject to 2.5% tax on
Gross Philippine Billings or to the regular 32% tax?

49
 [3] Can Air Canada benefit from the treaty's elimination of double taxation in favor of Canada or the
preferential rate of 1.5%?
[4] Can Air Canada validly refuse to pay its tax deficiency on the ground that there is a pending tax
credit proceeding it has filed?
[5] Is Air Canada entitled to the tax refund claimed at more than 5 million pesos?

HELD:
[1] Yes, Air Canada is a resident foreign corporation. Although there is no one rule in determining
what "doing business in the Philippines" means, the appointment of an agent or an employee is a good
indicator. This is especially true when there is effective control, similar to that of employer-employee
relationship. This is true between Air Canada and Aerotel. Hence, Air Canada is a RFC.

[2] No, because the 2.5% tax on Gross Philippine Billings applies only to carriers maintaining flights
to and from the Philippines. Air Canada's appointment of a general sales agent, Aerotel, here is only
for the purpose of selling passage documents. However, this is not the complete answer since the treaty
is the latter law that prevails in this case.

[3] Air Canada cannot avail of the elimination of double taxation in favor of Canada since the treaty
expressly excludes Canadian carriers with "permanent establishment." Through the appointment of
Aerotel as its local sales agent, petitioner is deemed to have created a "permanent establishment" in the
Philippines as defined under the Republic of the Philippines-Canada Tax Treaty.

This is especially true since Aerotel has no "independent status" beacuse Air Canada exercises
comprehensive control and detailed instructions over the means and results of the activities of the
former.

[4] No, it cannot. Even if Air Canada succeeds in claiming tax refund, the general rule prevails that
there can be not setting off of taxes since the Government and the taxpayer are not creditors and
debtors of each other.

[5] No, Air Canada is not entitled to refund. The P5,185,676.77 Gross Philippine Billings tax paid by
petitioner was computed at the rate of 1 ½% of its gross revenues amounting to P345,711,806.08149
from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable
under Section 28(A)(l) of the 1997 National Internal Revenue Code [32% of taxable income, that is,
gross income less deductions] will exceed the maximum ceiling of 1 ½% of gross revenues as decreed
in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.

3. National Development Company vs CIR

Art. 85 - Meal Periods

Facts:
GOCC NDC employed 4 shifts of work: a. 8am-4pm, b. 6am-2pm, c. 2pm-10pm, d. 10pm-6am. It
credited the workers the 1-hour mealtime with 8 hours of work for each shift and paid them for the
same number of hours. But since 1953, it credited those workers in one shift, who were required to

50
continue working until the next shift, only 6 hours of work for overtime work excluding the mealtime
periods in computing compensation.
The Union maintained the opposite view. The CIR held that mealtime should be counted in the
determination of overtime work.
Issue:
WoN the mealtime breaks should be considered working time.
Ruling:
Yes. Mealtime breaks should be counted as working time for purposes of overtime
compensation because work therein was continuous, and employees and laborers were not permitted to
rest completely.
Sec. 1, Com. Act No. 444, as amended, provides:
“The legal working day for any person employed by another shall be of not more than eight
hours daily. When the work is not continuous, the time during which the laborer is not working and
can leave his working place and can rest completely shall not be counted.”
In this case, the CIR’s finding that work in the petitioner company was continuous and did not
permit employees and laborers to rest completely has basis in evidence and is following our earlier
rulings.
Thus, the mealtime breaks are compensable.

NB – CIR has jurisdiction over claims for overtime compensation when the following requisites are
complied with:
a) there must exist between the parties an employer-employee relationship or the claimant must seek
his reinstatement; and
the controversy must relate to a case certified by the President to the CIR as one involving national
interest, or must arise either under the Eight-Hour Labor Law, or under the Minimum Wage Law.

FACTS: At the National Development Co., a government-owned and controlled corporation, there
were four shifts of work. One shift was from 8 a.m. to 4 p.m., while the three other shifts were from 6
a.m. to 2 p.m; then from 2 p.m. to 10 p.m. and, finally, from 10 p.m. to 6 a.m. In each shift, there was a
one-hour mealtime period, to wit: From (1) 11 a.m. to 12 noon for those working between 6 a.m. and 2
p.m. and from (2) 7 p.m. to 8 p.m. for those working between 2 p.m. and 10 p.m.

(Petitioner does not want to pay for the 1 hour lunch time) The records disclose that although there was
a one-hour mealtime, petitioner nevertheless credited the workers with eight hours of work for each
shift and paid them for the same number of hours. However, since 1953, whenever workers in one shift
were required to continue working until the next shift, petitioner instead of crediting them with eight
hours of overtime work, has been paying them for six hours only, petitioner that the two hours
corresponding to the mealtime periods should not be included in computing compensation.

CIR: Mealtime should be counted in the determination of overtime work

ISSUE: WON mealtime breaks should be considered working time

HELD: YES

The legal working day for any person employed by another shall be of not more than eight hours
daily.When the work is not continuous, the time during which the laborer is not working and can leave
his working place and can rest completely shall not be counted. (Sec. 1, Com. Act No. 444)

It will be noted that, under the law, the idle time that an employee may spend for resting and during
which he may leave the spot or place of work though not the premises of his employer, is not counted
as working time only where the work is broken or is not continuous.

51
 In this case, the CIR’s finding that work in the petitioner company was continuous and did not permit
employees and laborers to rest completely is not without basis in evidence and following our earlier
rulings, shall not disturb the same.

The time cards show that the work was continuous and without interruption. There is also the evidence
adduced by the petitioner that the pertinent employees can freely leave their working place nor rest
completely. There is furthermore the aspect that during the period covered the computation the work
was on a 24-hour basis and previously stated divided into shifts. (ang labo bakit “can freely leave their
working place nor rest completely” feeling ko typo yan sa scra or ganun talaga?)

From these facts, the CIR correctly concluded that work in petitioner company was continuous and
therefore the mealtime breaks should be counted as working time for purposes of overtime
compensation.

4. BIR vs First E-Bank Condominium

5. ASSOCIATION OF NON-PROFIT CLUBS, INC. (ANPC) V.

BUREAU OF INTERNAL REVENUE
G.R. No. 228531 | 2019 Jun 26

Facts:

• The BIR issued RMC No. 35-2012, entitled “Clarifying the

Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-
Profit Purposes”. Said RMC states that:
a. Income of recreational clubs from whatever source, including but
not limited to membership fees, assessment dues, rental income, and service fees are subject to income
tax
b. Gross receipts of recreational clubs, including but not limited to
membership fees, assessment dues, rental income, and service fee are subject to VAT
• ANPC submitted its position paper requesting the non-application
of income tax and VAT liability on membership fees, association dues, and similar collections
• The BIR did not act upon the request, thus ANPC filed a petition
for declaratory relief, which was denied by the RTC. ANPC appealed to the Supreme Court

Issues and Ratio:

1. Whether or not there was violation of the doctrine of the

hierarchy of courts

NO. A petition for review on certiorari is the sole remedy to appeal a decision of the RTC in cases
involving pure questions of law. In this case, no examination of the probative value of the evidence
presented by the litigants is involved. The doctrine of hierarchy of courts is violated only when relief
may be had through multiple fora having concurrent jurisdiction over the case.

2. Whether or not there was non-exhaustion of administrative

remedies

NO. The RMC in this case is an interpretative rule, not a legislative rule. A legislative rule
“implement[s] a primary legislation by providing the details thereof”; while an administrative rule is
only intended to “provide guidelines to the law which the administrative agency is in charge of
enforcing”. Given its nature, the RMC is subject to the administrative review of the Secretary of
Finance. However, the doctrine of exhaustion of administrative remedies may be relaxed when:
a. the issue involved is purely a legal question, such as in this case; or
b. there are circumstances indicating the urgency of judicial
intervention

52
3. Whether or not the income of recreational clubs are subject to
income tax

YES. The old tax exemption previously accorded under Section 27 of the 1977 NIRC to recreational
clubs was deleted in the 1997 NIRC. Applying the doctrine of casus omissus pro omisso habendus est
(the object omitted from an enumeration must be held to have been omitted intentionally), the income
derived by recreational clubs “from whatever source” is now subject to income tax under the
provisions of the 1997 NIRC.

Whether or not membership fees, assessment dues, and similar collections by recreational clubs
are subject to income tax

NO. Membership fees and similar collections are not sources of income but must be considered as
capital. An income tax is arbitrary and confiscatory if it taxes capital. The distinction between “capital”
and “income” is well-settled in our jurisdiction. Capital is a fund; income is a flow. Capital is wealth,
while income is the service of wealth.

In this case, the collections only constitute contributions to and replenishment of funds for the
maintenance and operations of the facilities offered by recreational clubs to their members. They
represent funds “held in trust” to defray general and operating costs; hence, they only constitute
infusion of capital.

In order to constitute “income”, there must be realized “gain”. In this case, there is nothing to gain
from the collections. This stands in contrast to fees received by recreational clubs from their income-
generating facilities and activities, wherein gain is already realized from the moment of their collection
regardless of their purpose because capital maintenance, preservation, or upkeep is not their pre-
determined purpose. Recreational clubs are free to use these fees for whatever purpose they desire, and
are thus considered unencumbered fruits of a business transaction.

4. Whether or not membership fees, assessment dues, and similar

collections by recreational clubs are subject to VAT

NO. It is a basic principle that before a transaction is imposed VAT, a sale, barter, or exchange of
goods or service is required. In collecting fees in this case, the club is not selling its service to its
members. There is no economic or commercial activity to speak of as these dues are devoted for the
operation/maintenance of the facilities of the organization.

Lessons Applicable: doctrine of hierarchy of courts, rule-making authority of BIR

Laws Applicable: RMC No. 35-2012

FACTS:
August 3, 2012: Bureau of Internal Revenue (BIR) issued issued Revenue Memorandum Circular
(RMC) No. 35-2012 entitled “"Clarifying the Taxability of Clubs Organized and Operated Exclusively
for Pleasure, Recreation, and Other Non-Profit Purposes” which was addressed to all revenue officials,
employees, and others concerned for their guidance regarding the income tax and Valued Added Tax
(VAT) liability of the said recreational clubs.
RMC No. 35-2012 states that "clubs which are organized and operated exclusively for pleasure,
recreation, and other non-profit purposes are subject to income tax under the National Internal
Revenue Code of 1997, as amended (1997 NIRC)." In justifying the interpration, the BIR raised the
doctrine of casus omissus pro omisso habendus est, a person, object, or thing omitted from an
enumeration must be held to have been omitted intentionally. The provision in the 1977 Tax Code
which granted income tax exemption to such recreational clubs was omitted in the 1997 NIRC, as
amended and Section 105, Chapter I, Title IV of the 1997 NIRC, which states that even a nonstock,

53
nonprofit private organization or government entity is liable to pay VAT on the sale of goods or
services.
October 25, 2012: During the meeting of ANPC and other club member representatives with Atty.
Elenita Quimosing (Atty. Quimosing), Chief of Staff and Operations Group of the BIR, Atty.
Quimosing suggested the attendees to submit a position paper to the BIR regarding their concerts about
the Circular.
September Since the BIR has not action upon NPC’s request on its position paper for the non-
application of RMC No. 35-2012, ANPC, filed before the RTC a petition for declaratory relief to
declare RMC no. 35-2012 invalid, unjust, oppressive, confiscatory, and in violation of the due process
clause of the Constitution for it is beyond the BIR’s rule-making authority.
RTC: Denied the petition for declaratory relief and upheld RMC No. 35-2012
ANPC filed a petition for review on certiorari raising pure questions of law

ISSUES:
1. W/N the doctrine of hierarchy of courts should apply and the matter should be first elevated
the matter to the Secretary of Finance for review pursuant to Section 4, Title I of the 1997 NIRC.
2. W/N RMC No. 35-2012 is constitutional.

HELD: Partly meritorious.

1. NO. The petition for review on certiorari, filed pursuant to Section 2 (c), Rule 41 in relation to
Rule 45 of the Rules of Court, is the sole remedy to appeal a decision of the RTC in cases involving
pure questions of law
The doctrine of hierarchy of courts is violated only when relief may be had through multiple fora
having concurrent jurisdiction over the case, such as in petitions for certiorari, mandamus, and
prohibition which are concurrently cognizable either by the Regional Trial Courts, the Court of
Appeals, or the Supreme Court.
Uy v. Contreras: This Court, the Court of Appeals, and the Regional Trial Courts have concurrent
original jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas
corpus, such concurrence does not accord litigants unrestrained freedom of choice of the court to
which application therefor may be directed. There is a hierarchy of courts determinative of the venue
of appeals which should also serve as a general determinant of the proper forum for the application for
the extraordinary writs.

2. Yes.
RMC No. 35-2012 erroneously foisted a sweeping interpretation that membership fees and assessment
dues are sources of income of recreational clubs from which income tax liability may accrue. As
correctly argued by ANPC, membership fees, assessment dues, and other fees of similar nature only
constitute contributions to and/or replenishment of the funds for the maintenance and operations of the
facilities offered by recreational clubs to their exclusive members. They represent funds "held in trust"
by these clubs to defray their operating and general costs and hence, only constitute infusion of capital.
Well-enshrined principle in our jurisdiction that the State cannot impose a tax on capital as it
constitutes an unconstitutional confiscation of property. An income tax is arbitrary and confiscatory if
it taxes capital because capital is not income.
Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary (G.R. No.
108524, November 10, 1994): Court held that "as a matter of power, a court, when confronted with an
interpretative rule, [such as RMC No. 35-2012] is free to (i) give the force of law to the rule; (ii) go to
the opposite extreme and substitute its judgment; or (iii) give some intermediate degree of authoritative
weight to the interpretative rule." By sweepingly including in RMC No. 35-2012 all membership fees
and assessment dues in its classification of "income of recreational clubs from whatever source'' that
are "subject to income tax,"the BIR exceeded its rule-making authority.
In the same way, the Court declares as invalid the BIR's interpretation in RMC No. 35-2012 that
membership fees, assessment dues, and the like are part of "the gross receipts of recreational clubs"
that are "subject to VAT. Basic principle that before a transaction is imposed VAT, a sale, barter or

54
 exchange of goods or properties, or sale of a service is required. This is true even if such sale is on a
cost-reimbursement basis.

b. Gross Income

1. Courage vs CIR
G.R. No. 213446 July 3, 2018
CONFEDERATION FOR UNITY, RECOGNITION AND ADVANCEMENT OF
GOVERNMENT EMPLOYEES, Petitioner VS. COMMISSIONER, BUREAU OF INTERNAL
REVENUE, Respondent
Taxation; National Internal Revenue Code; RR No. 2-98; Sec 2.78; Who may be subject to
withholding tax on compensation. Withholding tax on compensation 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. 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 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.

Same; same; Exemption to taxable compensation income. However, not all income payments to
employees are subject to withholding tax. These are the allowance, bonuses or benefits, excluded
by the NIRC. 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."

CAGUIOA, J.:
FACTS: The petitioners in the present case assail the validity of the provisions of RMO No. 23-
2014, specifically Secs. III and IV, for subjecting to withholding taxes non-taxable allowances,
bonuses and benefits received by government employees. The respondent, on the other hand,
argues that RMO No. 23-2014 that allowance, bonuses or benefits listed under Sec. III of the
assailed RMO are not fringe benefits within the purview of the Tax Code, hence, it may not be
subjected to withholding tax. The Court 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 until such time that a decision
is rendered in the instant consolidated cases. Hence, the present petition.

ISSUE: Whether or not Sec. III of the RMO is valid.

HELD: AFFIRMATIVE. Under the NIRC of 1997, every form of compensation for services,
whether paid in cash or in kind, is generally subject to income tax and consequently to
withholding tax. Sec 2.78 of RR No. 2-98 provides that withholding tax on compensation applies
to all employed individuals whether citizens or aliens, deriving income from compensation for

55
services rendered in the Philippines. The employer is constituted as the withholding agent. It
further provides 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 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. These are the
allowance, bonuses or benefits, excluded by the NIRC. 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 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 contrary with the provisions of the NIRC of 1997, as
amended, and its implementing rules.

FACTS:
On 2014, CIR issued RMO No. 23-2014, in furtherance on the "Reiteration of the Responsibilities
of the Officials and Employees of Government Offices for the Withholding of Applicable Taxes
on Certain Income Payments and the Imposition of Penalties for Non-Compliance Thereof," to
clarify and consolidate the responsibilities of the public sector to withhold taxes on its transactions
as a customer and as an employer under the NIRC. In sum, petitioners organizations/unions
including COURAGE and intervenors assailed and sought to nullify the order on the following
grounds:

1. 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;
2. RMO No. 23-2014 violates the equal protection clause as it
discriminates against government employees;
3. RMO No. 23-2014 violates fiscal autonomy enjoyed by
government agencies;
4. 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
5. 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:

1. The instant consolidated petitions are barred by the doctrine of
hierarchy of courts;
2. 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;

56
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
3. 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.

ISSUE:
Whether RMO No. 23-2014, particularly Sections III, IV, VI and VII thereof, is tainted with grave
abuse of discretion.

RULING:
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.

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.

Compensation income is the income of the individual taxpayer arising from services rendered
pursuant to an employer-employee relationship. 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. The name designated to the compensation income received
by an employee is immaterial. 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 income that are taxable and subject to withholding.

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 because NIRC of 1997 as amended
expressly excluded those.

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. 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,bunless specifically exempted or excluded by the Tax Code.

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. 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.

57
 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. 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.

2. PLDT vs CIR

PLDT vs. CIR

GR 157264 January 31, 2008
Carpio Morales;J.:

FACTS: PLDT terminated and compensated affected employees in compliance with labor
law requirements. It deducted from separation pay withholding taxes and remitted the same to
BIR. In 1997, it filed a claim for tax refund and CTA contended that petitioner failed to show
proof of payment of separation pay and remittance of the alleged with held taxes. CA dismissed
the same and PLDT^ assailed the decision arguing against the need for proof that the employees
received their separation pay and proffers actually received by terminated employees.

ISSUE: Whether or not the withholding taxes remitted to the BIR should be refunded for
having been erroneously withheld and paid to the latter.

RULING: Tax refunds, like tax exemptions, are considered strictly against the taxpayer
and liberally in favor of the taxing authority, and the taxpayer bears the burden of establishing the
factual basis of his claim for a refund.
A taxpayer must do two things to be able to successfully make a claim for tax refund: a)
declare the income payments it received as part of its gross income and b) establish the fact of
withholding.
At all events, the alleged newly discovered evidence that PLDT seeks to offer does not
suffice to established its claim for refund as it would still have to comply with Revenue
Regulation 6-85 by proving that the redundant employees on whose behalf it filed the claim for
refund, declared the separation pay received as part of their gross income. The same Revenue
Regulation required that the facts of withholding is established by a copy of the statement duly
issued by the payor to the payee showing the amount paid and the amount of tax withhold
therefrom.

A taxpayer must do two (2) things to be able to be able to successfully make a claim for the tax
refund:
1. Declare the income payment it received as part of its gross income.
2. Establish the fact of withholding.

On this score, the relevant revenue regulations provides as follows:

Sec. 10. Claims for tax credit or refund - claims for tax credit or refund of income tax deducted
and withheld on income payments shall be given due course only when it is shown on the return
that the income payment received was declared as part of the gross income and the fact of
withholding is established by a copy of the statement duly issued by the payer to the payee
showing the amount paid and the amount of tax withheld therefrom.

Tax exemption CIR vs. PLDT

58
1. From 1992-1994, PLDT paid taxes amounting to more than 164 M
pesos for equipment, machineries, and spare parts it imported for its business and also paid VAT
amounting to more than 116 M pesos for similar importations.
2. It then sought a confirmatory ruling on its tax exemption privileges
under S. 12, RA 7082- the law that granted its franchise.
3. BIR then responded by saying that the said company shall only be
subjected to 3% franchise tax on gross receipts “in lieu of all taxes”. Thus, it shall also be
exempted from VAT.
4. Armed by this ruling, PLDT claimed for tax refund amounting to
more
than 280 M pesosesoses representing the compensating taxes, advance sales taxes, VAT and other
internal revenue taxes alleged to have been erroneously paid on its importations.
5. Not having been acted upon by the BIR, it filed a petition for
review
before the CTA which ruled in its favour but reduced the total amount to 223M+ pesoses. CTA
associate judge Saga dissented and said that the phrase in lieu of all taxes in the aforementioned
provision only covers direct taxes.
6. On appeal, the CA affirmed the CTA decision. Hence, this
petition.

Issue: W/N the phrase “in lieu of all taxes” found in S. 12 of RA 7082 granting the tax exemption
to PLDT also covers indirect taxes and therefore exempts the company from paying VAT and
other indirect taxes.

Held:
The court started out by explaining the difference between direct and indirect taxes.
Direct taxes are those that are exacted from the very person who, it is intended or desired, should
pay them; they are impositions for which a taxpayer is directly liable on the transaction or
business he is engaged in.
On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are
paid by, one person in the expectation and intention that he can shift the burden to someone else.

It then went on by saying that VAT is an indirect tax- the amount of which may be shifted to the
buyer, transferee, or lessee of goods and is imposed on all taxpayers who import goods unless
under exempted transactions under S. 109 of the Revenue code.
It was also revealed that VAT on importation replaced advance sales tax paid by regular
importers. The court then explained the concepts of the following:
1. Advance sales tax- having attributes of indirect tax, laying the
economic burden on the purchaser;
2. Compensation tax- an excise tax to place, for tax purposes, persons
purchasing from merchants in the PH on a more or less equal basis withose who buy directly from
foreign countries.

It further ruled that the liability of indirect tax payment lies only with the seller who cannot invoke
the exemption privileges to avoid passing VAT to him by manufacturers or suppliers of goods
bought. Thus, it is important to determine if tax exemption includes indirect taxes. Otherwise, the
presumption is such exemption only includes direct taxes.
As a rule, exemption is the exception. Statutes granting it must be construed in strictissimi juris (in
the strictest letter of the law.) It must be interepreted strictly against the taxpayer and liberally in
favour of the taxing authority. The burden of justifying exemption lies on the one claiming for the
refund or exemption.
In this case, the phrase: “in lieu of all taxes” was immediately followed by: “on this franchise or
earnings thereof” which is considered as a limiting phrase.

59
 The SC also used the maxim: Redendo singular singulis which means: take the words
distributively and apply the reference; each word or phrase must be given its proper connection in
order to give it proper force and effect rendering none of them useless or superfluous.
Hence, the CTA and CA decisions’ practice of employing the literal meaning of the provision is
entirely fallacious. Tax exemption means a loss of revenue to the government and should not rest
on vague reference.
As for the refund of advance sales tax and compensating tax amounting to more than 94 M pesos,
it was granted by the SC since it was admitted by the BIR that VAT on importations already
replaced these taxes.

Thus, the petition was just partially granted.

3. Jaime N. Soriano vs SOF

FACTS:

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:

1. It increased the basic personal exemption from ₱20,000 for a single individual, ₱25,000 for the
head of the family, and ₱32,000 for a married individual to P50,000 for each individual.

2. It increased the additional exemption for each dependent not exceeding four from ₱8,000 to
₱25,000.

3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from 10% of gross
income to 40% of the gross receipts or gross sales.

4. It introduced the OSD to corporate taxpayers at no more than 40% of their gross income.

5. It granted MWEs exemption from payment of income tax on their minimum wage, holiday pay,
overtime pay, night shift differential pay and hazard pay.

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

60
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:

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 ₱30,000.00 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
₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the
₱30,000.00 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.

(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.

Comment of the OSG

The Office of the Solicitor General (OSG) filed a Consolidated Comment 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.

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.

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.

61
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 ₱30,000 19 is no longer
entitled to the exemption provided by R.A. 9504.

HELD:

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. Estanislao supports this Comi's stance that R.A. 9504 should be applied on a full-year
basis for the entire taxable year 2008. 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.

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. Respondents cannot amend, by mere regulation, the laws they administer.
To do so would violate the principle of non-delegability of legislative powers.

62
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. The
delegation would fail the two accepted tests for a valid delegation of legislative power; the
completeness test and the sufficient standard test. 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.
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.

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.

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 ₱34 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.

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 ₱30,000 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 ₱30,000 is no longer
entitled to the exemption provided by R.A. 9504.

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

63
 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.

CONCLUSION

The foregoing considered, we find that respondents committed grave abuse of 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 begin only on 6 July 2008; and (b)
the disqualification of MWEs who earn purely compensation income, whether in the private or
public sector, from the privilege of availing themselves of the MWE exemption in case they
receive compensation-related benefits exceeding the statutory ceiling of ₱30,000.

WHEREFORE, the Court resolves to

(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and

(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 10-2008:

(i) 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 ₱30,000;

(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.

4. Supreme Transliner, Inc vs BPI Family Bank

SUPREME TRANSLINER v. BPI

FACTS:

Supreme Transliner took out a loan from respondent and was unable to pay.

The respondent bank extrajudicially foreclosed the collateral and, before the expiration of the one-
year redemption period, the mortgagors notified the bank of its intention to redeem the property.
ISSUE:
Is the mortgagee-bank liable to pay the capital gains tax upon the execution of the certificate of
sale and before the expiry of the redemption period?
HELD:

NO. It is clear that in foreclosure sale there is no actual transfer of the mortgaged real property
until after the expiration of the one-year period and title is consolidated in the name of the
mortgagee in case of non-redemption.

This is because before the period expires there is yet no transfer of title and no profit or gain is
realized by the mortgagor.

64
DOCTRINES:

National Internal Revenue Code; capital gains tax; documentary stamp tax; if right of redemption
exercised.

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 the National Internal Revenue
Code (NIRC) shall be subject to 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 Nos. 16-88,
27-89 and 6-92, states that these conditional sales “necessarily includes mortgage foreclosure sales
(judicial and extrajudicial foreclosure sales).” F

urther, 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.

Under Section 63 of Presidential Decree No. 1529, or 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 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,
or An Act or Regulate the Sale of Property Under Special Powers Inserted In or Annexed to Real
Estate Mortgages, 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. RR No. 4-99 (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.

Under this RMO, 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 gain has
been derived by the mortgagor and no sale or transfer of real property was realized. Moreover, the
transaction will be subject to documentary stamp tax of only PhP 15 because no land or realty was
sold or transferred for a consideration.

National Internal Revenue Code; non-retroactivity of rulings; exception.

Section 246 of the National Internal Revenue Code sets out that rule on non-retroactivity of
rulings. In this case, the retroactive application of Revenue Regulations No. 4-99 [to the
transaction which took place before its effectivity is more consistent with the policy 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.”

65
 In his commentaries [Hector] 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 cannot give rise to a vested right that can be invoked
by a taxpayer. Supreme Transliner, Inc. vs BPI Family Savings Bank, Inc.

5. Republic vs Bunsay

Republic of the Philippines v. Sps. Marcelino

G.R. No. 205473, December 10, 2019
SC First Division
Caquioa, J

Lessons Applicable: Capital Gains Tax on Expropriation

Laws Applicable: Section 6 Rule 67

FACTS:
• RTC Order dated August 23, 2012 and Order dated January 10, 2013 directed the expropriation
of a 100 sqm. Lot in Valuenzuela City covered by Transfer Certificate of Title (TCT) No. V-
16548 issued in the name of Sps. Marcelino and Sps. Bunsay and orderining Department of Public
Works and Highways (DPWH) to pay Sps. Bunsay consequential damages equivalent to the value
of the capital gains tax (CGT) and other taxes necessary to transfer the Disputed Property in its
name.
• Department of Public Works and Highways (DPWH) filed a Motion for Partial
Reconsideration (MPR) praying for the deletion of the award for just compensation representing
replacement cost of improvements and equivalent value of CGT and other taxes necessary to
transfer
• RTC granted the MPR in part by excluding the replacement cost of improvements
• DPWH filed a Petition for review on certiorari filed under Rule 45 of the Rules of Court
against the Order dated August 23, 2012 and Order dated January 10, 2013

ISSUE:

W/N RTC award for consequential damages should include equivalent value of CGT and other
taxes necessary to transfer

HELD:

NO. While award of consequential damages equivalent value of CGT and other taxes necessary to
transfer must be struck down for being erroneous, it is just and equitable to direct Republic to
shoulder such taxes to preserve the compensation awarded as a consequence of the expropriation.
Compensation, to be just, must be of such value as to fully rehabilitate the affected owner; it must
be sufficient to make the affected owner whole.

• CGT, being a tax on passive income, is imposed by National Internal Revenue Code (NIRC)
on the seller as a consequence of the latter’s presumed income from the sale or exchange of real
property. However, the transfer of real property by way of expropriation is not an ordinary sale

66
contemplated under Art. 1458 of the Civil Code. It is akin to a “forced sale” or one which arises
not from consensual agreement of the vendor and vendee, but by compulsion of law. Unlike in an
ordinary sale wherein the vendor sets and agrees on the selling price, the compensation paid to the
affected owner in an expropriation proceeding comes in the form of just compensation determined
by the court. Just compensation is defined as the fair and full equivalent of the loss incurred by
the affected owner.
• Section 6 Rule 67 of the Rules of Court mandates that in no case shall xxx the owner be
deprived of the actual value of his property so taken. Since just compensation requires that real,
substantial, full and ample equivalent be given for the property taken, the loss incurred by the
affected owner necessarily includes all incidental costs to facilitate the transfer of the expropriated
property to the expropriating authority including the CGT, other taxes and fees due on the forced
sale.

CIR vs LUCIO CO

Supreme Court rules that no prior confirmatory ruling is required for tax exemption or refund
(CIR v. Co, et al.)
The Supreme Court recently affirmed that no prior confirmatory ruling from the Bureau of
Internal Revenue (“BIR”) is needed before a taxpayer can file a claim for tax exemption or refund.

In Commissioner of Internal Revenue v. Lucio L. Co, et al., G.R. No. 241424 (26 February 2020),
the respondents filed a claim for tax refund pursuant to an exchange of stocks entered into where
their stockholdings in Puregold Price Club, Inc. increased from 66.5720% to 75.8329%, alleging
that the transaction was a tax-free exchange under the National Internal Revenue Code (“NIRC”).

While the Supreme Court ultimately ruled that the transaction was a tax-free exchange under
Section 40(C)(2) of the NIRC, the Commissioner of Internal Revenue (“CIR”) insisted that the tax
refund claim filed by respondents should be denied because they failed to secure a prior
confirmatory ruling that the subject transaction qualifies as a tax-free exchange. According to the
CIR, the certification or ruling is important to confirm that the transaction satisfies the conditions
set by law, and the authority to do so is vested upon the BIR.

The Supreme Court, however, ruled that the CIR was mistaken as “there is nothing in Section
40(C)(2) of the NIRC of 1997, as amended, which requires the taxpayer to first secure a prior
confirmatory ruling before the transaction may be considered as a tax-free exchange. The BIR
should not impose additional requirements not provided by law, which would negate the availment
of the tax exemption. Instead of resorting to formalities and technicalities, the BIR should have
made its own determination of the merits of respondents’ claim for exemption in respondents’
administrative application for refund.”

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DEDUCTIONS FROM GROSS INCOME

1. CIR vs GENERAL FOODS

GR No. 143672| April 24, 2003 | J. Corona

Test of Reasonableness

Facts:

Respondent corporation General Foods (Phils), which is engaged in the manufacture of

“Tang”, “Calumet” and “Kool-Aid”, filed its income tax return for the fiscal year ending
February 1985 and claimed as deduction, among other business expenses, P9,461,246 for
media advertising for “Tang”.

The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income
taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which was
denied.

General Foods later on filed a petition for review at CA, which reversed and set aside an
earlier decision by CTA dismissing the company’s appeal.

Issue:

W/N the subject media advertising expense for “Tang” was ordinary and necessary expense
fully deductible under the NIRC

Held:

No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in
favor of the taxing authority, and he who claims an exemption must be able to justify his
claim by the clearest grant of organic or statute law. Deductions for income taxes partake of
the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions
must also be strictly construed.

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.

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 While the subject advertising expense was paid or incurred within the corresponding taxable
year and was incurred in carrying on a trade or business, hence necessary, the parties’ views
conflict as to whether or not it was ordinary. To be deductible, an advertising expense should
not only be necessary but also ordinary.

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.

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.

The Court finds 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.

The company’s media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the company’s entire claim for
marketing expenses for that year under review. Petition granted, judgment reversed and set
aside.

2. C.M. HOSKINS & CO vs CIR

C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue
Facts:
Hoskins, a domestic corporation engaged in the real estate business as broker, managing
agents and administrators, filed its income tax return (ITR) showing a net income of
P92,540.25 and a tax liability of P18,508 which it paid.

CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the
disallowance of an item which was paid to Mr. C. Hoskins representing 50% of supervision
fees earned and set aside the disallowance of the other 3 items.

Issue:
Whether or not the disallowance of the 4 items were proper.

Held:

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 NOT deductible. It did not pass the test of reasonableness which is:
General rule, bonuses to employees made in good faith and as additional compensation for
services actually rendered by the employees are deductible, provided such payments, when
added to the salaries do not exceed the compensation for services rendered.

The conditions precedent to the deduction of bonuses to employees are:

· Payment of bonuses is in fact compensation
· Must be for personal services actually rendered
· Bonuses when added to salaries are reasonable when measured by the amount and
quality of services performed with relation to the business of the particular taxpayer.
There is no fixed test for determining the reasonableness of a given bonus as compensation.
This depends upon many factors.

In the case, Hoskins fails to pass the test. CTA was correct in holding that the payment of the
company to Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees received by
the company was inordinately large and could not be treated as an ordinary and necessary
expenses allowed for deduction.

3.
CIR v Isabela Cultural Corporation (ICC)

G.R. No. 172231, February 12, 2007

http://www.lawphil.net/judjuris/juri2007/feb2007/gr_172231_2007.html

Ponente: YNARES-SANTIAGO, J.:

DOCTRINE: 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. The requisite that it must have
been paid or incurred during the taxable year is further qualified by Section 45 of the 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".

QUICK FACTS: BIR disallowed the following ICC expenses for years 1984-1986 to be included
in ICC’s 1986 tax expense deductions: (1) Expenses for auditing services for year ending 31
December 1985; (2) Expenses for legal services for years 1984 and 1985; and (3) Expense for
security services for months of April and May 1986. BIR thus charged ICC for deficiency income
taxes. ICC contested the assessment.

FACTS:
On Feb 23, 1990, ICC received from 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) BIR 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 auditing services of SGV & Co., for the year ending Dec 31, 1985
(b) Expenses for legal services [incl of retainer fees] of law firm Bengzon for 1984 and 1985
(c) Expense for security services of El Tigre Security for months of April and May 1986
(2) Understatement of ICC interest income on 3 promissory notes due from Realty Investment

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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.

On March 23, 1990, ICC sought for a reconsideration, but on Feb 9, 1995, it received a final
notice before seizure demanding payment of amounts stated in the said notices.

CTA held that petition is premature because final notice of assessment cannot be considered as a
final decision appealable to the tax court. CA reversed the 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, G.R. No. 135210. Case was remanded to CTA for further proceedings.

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 could not be determined
at that time. ICC did not understate its interest income on the subject promissory notes. 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. CTA also found that ICC in fact withheld 1% expanded withholding tax
on its claimed deduction for security services as shown by the various confirmation receipts it
presented as evidence.

CA affirmed CTA decision, holding that although the professional services (legal and auditing)
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.

BIR contention: 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.

Issue: Whether the deduction of the expenses for professional and security services of 1984-1986
are valid deductions from ICC’s gross income for 1986

Decision: NO for audit services from SGV and legal services from Bengzon; YES for security
services.

Held:
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.

The requisite that it must have been paid or incurred during the taxable year is further qualified by
Sec 45 of the 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".

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Accounting methods for tax purposes comprise a set of rules for determining when and how to
report income and deductions. 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.

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 facts present
themselves in such a manner that the taxpayer must recognize an income or expense? The accrual
of income and expense is permitted when the all-events test has been met. It requires: (1) the
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.

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. 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.

The expenses for professional fees for legal and auditing services pertain to 1984 and 1985 legal
and retainer fees of the law firm Bengzon. As testified by the ICC Treasurer, the firm has been its
counsel since the 1960’s. 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 cannot be attributed solely to the delayed billing of these liabilities by
the firm. ICC could have inquired into the amount of their obligation to the firm, especially since
it is using the accrual method of accounting. It could also have reasonably determined the amount
of legal and retainer fees owing to its familiarity with the rates charged by their long time legal
consultant.

SGV & Co. professional fees for auditing financial statements of ICC for 1985 cannot be validly
claimed as expense deductions in 1986. ICC failed to present evidence showing that even with
only "reasonable accuracy" as the standard to ascertain its liability to SGV & Co. in 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

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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 1986 and could therefore be properly claimed as deductions for 1986.

INCOME TAX ON CORPORATIONS

1. Air Canada vs CIR

2. CIR vs St. Lukes Medical Center
G.R. No. 195909 September 26, 2012

FACTS
St. Luke's is a hospital organized as a non-stock and non-profit corporation. The BIR assessed
St. Luke's deficiency taxes amounting toP76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded withholding tax.
The BIR reduced the amount to P63,935,351.57 during trial in the First Division of the CTA.
St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments.
The BIR argued that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on
the income of proprietary non-profit hospitals, should be applicable to St. Luke's. The former
claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers
and employees directly benefit from its profits and assets. St. Luke's maintained that it is a
non-stock and non-profit institution for charitable and social welfare purposes under Section
30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its
income tax exemption.

ISSUE
Whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.

RULING
Yes. There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes. This
only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a
charitable institution is not ipso facto tax exempt. To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution requires that a charitable institution use the
property "actually, directly and exclusively" for charitable purposes. To be exempt from
income taxes, Section 30(E) of the NIRC requires that a charitable institution must be
"organized and operated exclusively" for charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to
its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a
proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income
from its for-profit activities. St. Luke's is therefore liable for deficiency income tax in 1998
under Section 27(B) of the NIRC.

Commissioner of Internal Revenue vs. St. Luke’s Medical Center, Inc. (SLMC)
G.R. No 203514; February 13, 2017
Ponente: Del Castillo, J.

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Facts:

In 2007, SLMC received audit results/ assessment notices from the Bureau of Internal
Revenue which found the former deficient in paying income taxes for taxable years 2005 and
2006, in the amounts of P78,617,434.54 and P57,119,867.33, respectively.

In 2008, SLMC protested the assessments before the Commissioner of Internal Revenue
(CIR). It invoked Section 30 (E) and (G) of the 1997 NIRC and claimed that, as a non-stock,
non-profit charitable and social welfare organization, it is exempted from paying income tax.

The CIR ruled that SLMC was liable for paying incomes taxes for 2005 and 2006, and
increased the deficiency taxes for taxable year 2005 to P82,419,522.21, and for taxable year
2006 to P60,259,885.94.

Aggrieved, the SLMC elevated its case to the Court of Tax Appeals (CTA) via petition for
review. According to the CTA, SLMC is not liable to pay income tax under Section 30 (E)
and (G) of the 1997 NIRC.

The CIR filed a petition for review before the CTA En Banc which affirmed the cancellation
and setting aside of the audit results and assessment notices against SLMC.

The CIR filed a petition for review before the Supreme Court.

During the pendency of this case in 2012, the Supreme Court rendered a decision between the
same parties and involving the same issue – whether or not SLMC is entitled to tax exemption
under Section 30 (E) and (G) of the 1997 NIRC. It ruled that SLMC is not entitled to tax
exemption under Section 30 (E) and (G) of the 1997 NIRC because it does not operate
exclusively for charitable or social purposes insofar as its revenues from paying patients are
concerns. SLMC was ordered to pay the deficiency taxes in 1998 based on the 10 percent
preferential income tax under Section 27 (B) of the 1997 NIRC.

In April 2013, SLMC paid the amount of basic taxes due for taxable years 1998, 2000-2002,
and 2004-2007. It informed the Court of such payments through a Manifestation and Motion
and thereafter moved for the dismissal of the instant case on the ground of mootness.

The CIR, however, opposed the motion claiming that the payment confirmation submitted by
the SLMC is not a competent proof of payment.

Issue:

Whether or not SLMC is entitled to tax exemption under Section 30 (E) and (G) of the 1997
NIRC and whether or not it is liable to pay compromise penalty pursuant to Section 248 (A)
of the 1997 NIRC

Ruling:

The Supreme Court ruled that SLMC is not entitled to tax exemption under Section 30 (E)
and (G) of the 1997 NIRC and applied the doctrine of stare decisis - "absent any powerful
countervailing considerations, like cases ought to be decided alike."

Under Section 30 (E) and (G) of the 1997 NIRC, a charitable institution will be exempted
from tax if it has the following qualifications: a non-stock corporation or association;
organized exclusively for charitable purposes; operated exclusively for charitable purposes;
and no part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer, or any specific person.

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Although there is no question that SLMC is organized as a non-stock, non-profit charitable
institution, it is not automatically exempted from paying taxes. To be exempted from paying
real property taxes, Section 28 (3) of the 1987 Constitution requires that a charitable
institution use the property ‘actually, directly and exclusively for charitable purposes.’ To be
exempted from income taxes, Section 30 (E) of the 1997 NIRC requires that a charitable
institution must be ‘organized and operated exclusively’ for charitable purposes. Likewise to
qualify as exempted in income tax, Section 30 (G) of the 1997 NIRC requires that the
institution be ‘operated exclusively’ for social welfare.

The Court defined ‘exclusive’ as ‘possessed and enjoyed to the exclusion of others; debarred
from participation or enjoyment. Given that SLMC has an income of P1.73 billion, it cannot
be disputed that it is not an institution ’operated exclusively’ for charitable purposes.

The Court found that SLMC is a corporation that is not ‘operated exclusively’ for charitable
purposes or social welfare purposes insofar as its revenues from paying clients are concerned.
On the clear and plain text of Section 30 (E) and (G) of the 1997 NIRC, an institution must be
‘operated exclusively’ for charitable and social welfare purposes to be completely exempt
from tax. However, earning income from for-profit activities does not revoke or remove a
charitable institution’s tax exemption under the same provision. It merely subjects the
earnings for profit by the charitable institution to 10 percent income tax pursuant to section
27(B) of the 1997 NIRC. SLMC is liable for the deficiency income taxes.

With regard to whether or not SLMC is liable for surcharges, interest, and compromise
penalty, the Court ruled that: ‘good faith and honest belief, that one is not subject to tax on the
basis of previous interpretation of government agencies tasked to implement the tax law, are
sufficient justification to delete [such] imposition(s).’

The Court dismissed the petition by CIR since the case was rendered moot by the payments
made by SLMC of the basic taxes for the taxable years 2005 and 2006, in the amounts of
P49,919,496.40 and P41,525,608.40, respectively.

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE

BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his
capacity as Commissioner of the Bureau of Internal Revenue, and JOHN DOE and
JANE DOE, who are Promulgated: persons acting for, in behalf or under the authority
of respondent

G.R. No. 215427 December 10, 2014

FACTS:
FACTS: The Philippine Amusement and Gaming Corporation (PAGCOR) assailed the
validity of Section 1 of Republic Act 9337, amending Section 27(C) of the National Internal
Revenue Code (NIRC). The amendment omitted PAGCOR from the list of government
owned or controlled corporations, consequently eliminating its exemption from income taxes.

As such, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular
(RMC) No. 33-2013, subjecting PAGCOR to a corporate income tax which will be derived
from the income of its operations and licensing of gambling casinos, gaming clubs, gaming
pools, and other similar recreation and amusement parks.

The circular also subjected PAGCOR to a 5% franchise tax derived from the gross revenue
from its operations and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places.

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PAGCOR requested a consideration, but the BIR commissioner denied this. PAGCOR now
contends that RMC No. 33-2013 is an erroneous application of the law, because under their
charter (P.D. 1869 as amended by R.A. 9487), they can only be subjected to 5% franchise tax
from related services. The BIR however contends that P.D. 1869 is already deemed repealed
because of R.A. 9337.

ISSUE:
Whether or not PAGCOR’s charter (P.D. 1869 as amended) is deemed repealed or amended
because of R.A. 9337.

RULING:
No, PAGCOR’s charter is not deemed repealed or amended by R.A. 9337.

It is an established rule in statutory construction that every effort should be exerted to avoid
conflict between two statutes, and if possible, come up with a construction where the two laws
can be reconciled in a reasonable manner.

In this case, there is no real conflict between P.D. 1869 as amended and R.A. 9337. The
former lays down the taxes imposable upon petitioner, which includes a 5% franchise tax of
the gross revenues or earnings derived from its operations. The enactment of R.A. No. 9337,
which withdrew PAGCOR’s income tax exemption under R.A. No. 8424, only reinstated their
liability for such tax.

BLOOMBERRY RESORTS & HOTELS v. BIR

Aug 10, 2016 | PEREZ, J.| Special Corporations
PETITIONERS: BLOOMBERRY RESORTS AND HOTELS
RESPONDENTS: BIR, COMMISSIONER KIM HENARES
SUMMARY:
.
DOCTRINE:

FACTS:
1. Petition for Certiorari and Prohibition to annul Revenue Memo
Circular No. 33-2013 subjecting contractees and licensees of PAGCOR to income tax.
2. 04/08/09: PAGCOR granted to petitioner a provisional license to
operate a resort-casino complex at the Entertainment City project site of PAGCOR
(particularly, Solaire Resort and Casino). Pursuant to such license and to PAGCOR’s Charter
(PD 1869), Petitioner only paid license fees in lieu of taxes. PAGCOR’s charter provided for
exemptions in favour of entities contracting with it.
3. RA 9337 amended Sec. 27(c) of the NIRC, which excluded
PAGCOR from the GOCCs exempt from paying corporate income tax. In the case of
PAGCOR v. BIR, PAGCOR assailed the constitutionality of the amendment, but the Court
upheld its validity. Hence, PAGCOR’s exemption was removed.
4. BIR then issued the said RMC to implement RA 9337, which
provided that in addition to the 5% franchise tax on its gross revenue, PAGCOR will now
have to pay corporate income tax. The said law also provides that PAGCOR’s contractees and
licensees, including entities involving gambling/recreation, are also subject to income tax.
5. Petitioner (direct to SC): PD 1869 (PAGCOR Charter) as amended
by RA 9487, is a valid existing law, expressly exempting PAGCOR’s contractees and
licensees from all taxes except the 5% franchise tax; that such was not repealed by the
deletion of PAGCOR from the list of tax-exempt entities; that BIR acted with grave abuse of
discretion in issuing the RMC as it, in effect, repealed/amended the Charter; and that the
RMC will adversely affect an industry seeking to promote tourism and generate jobs.
6. Petitioner (justifications): this involves a pure question of law; the
gaming industry is one involving national interest; In essence, Petitioner contends that the

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CIR cannot issue RMCs that are inconsistent with law; and that since the RMC would affect
the exemption granted, it was issued by the CIR with grave abuse of discretion.
7. Henares: no grave abuse of discretion as the RMC did not alter,
modify, or amend the intent of the Charter. It merely clarified the taxability of PAGCOR and
its contractees and licensees for income tax purposes.

ISSUE: WN the RMC was issued with grave abuse of discretion: - YES
WN the RMC is valid and constitutional despite the exemption
granted by the Charter: - YES
WN Petitioner is liable for corporate income tax: - NO
HELD:
1. (As to WN the petition should have been brought directly to SC)
Asia International Auctioneers v. Parayno: RMCs are considered administrative rulings,
which are appealable to the CTA, and to no other Courts. Petitioner should not have brought
the petition to the SC directly as it has failed to have complied with the doctrine of exhaustion
of administrative remedies and the rule on hierarchy of courts. However, pursuant to its
jurisdictional prerogative, the SC took cognizance of the case.
2. The Court then referred to the case of PAGCOR v. BIR, wherein it
held that (1) RA 9337, which amended the NIRC and removed the exemption of PAGCOR
was valid; (2) PAGCOR’s income from gaming operations is subject only to the 5% franchise
tax; and PAGCOR’s income from other related services is subject to corporate income tax
only. RA 9337 merely reinstated the tax liability of PAGCOR from other related services
(shows, entertainment, etc.), without affecting its tax privilege (5% franchise tax only) on
gaming operations. The Court in that case held that the issuance of the RMC, subjecting
BOTH income from gaming operations AND related services to corporate income tax, as with
grave abuse of discretion.
3. (As to WN the provision applies to contractees and licensees of
PAGCOR) The Charter provides for the exemption of PAGCOR and its contractees and
licensees from payment of all other taxes aside from the franchise fee. This includes corporate
income tax. The said provision in the Charter was not amended or repealed, and is thus, still
in effect. Hence, the contractees and licensees are exempt from payment of corporate income
tax.
1. As the charter states in clear terms that the exemptions shall inure
to the benefit of and extend to the corporations, associations, agencies, or individuals with
whom PAGCOR has any contractual relationship in connection with the operations of casinos
authorized to be conducted under the franchise, so it must be that all contractees and licensees
of PAGCOR, upon payment of the franchise fee, shall likewise be exempted from payment of
all kinds of taxes, including corporate income tax, from the operation of casinos.
2. They shall be liable for corporate income tax for income derived
from other related services, similar to how PAGCOR is liable for such.

CONCLUSION: Petition Granted. BIR ordered to Cease and Desist.

CIR VS. PAL

FACTS:

PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been liable
for Minimum Corporate Income Tax based on its gross income. However, PHILIPPINE
AIRLINES, INC. did not pay the Minimum Corporate Income Tax using as basis its franchise
which exempts it from “all other taxes” upon payment of whichever is lower of either (a) the
basic corporate income tax based on the net taxable income or (b) a franchise tax of 2%.

ISSUE:
Is PAL liable for Minimum Corporate Income Tax?

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HELD:
NO. PHILIPPINE AIRLINES, INC.’s franchise clearly refers to "basic corporate income tax"
which refers to the general rate of 35% (now 30%). In addition, there is an apparent
distinction under the Tax Code between taxable income, which is the basis for basic corporate
income tax under Sec. 27 (A) and gross income, which is the basis for the Minimum
Corporate Income Tax under Section 27 (E). The two terms have their respective technical
meanings and cannot be used interchangeably. Not being covered by the Charter which makes
PAL liable only for basic corporate income tax, then Minimum Corporate Income Tax is
included in "all other taxes" from which PHILIPPINE AIRLINES, INC. is exempted.

The CIR also can not point to the “Substitution Theory” which states that Respondent may not
invoke the “in lieu of all other taxes” provision if it did not pay anything at all as basic
corporate income tax or franchise tax. The Court ruled that it is not the fact tax payment that
exempts Respondent but the exercise of its option. The Court even pointed out the fallacy of
the argument in that a measly sum of one peso would suffice to exempt PAL from other taxes
while a zero liability would not and said that there is really no substantial distinction between
a zero tax and a one-peso tax liability. Lastly, the Revenue Memorandum Circular stating the
applicability of the MCIT to PAL does more than just clarify a previous regulation and goes
beyond mere internal administration and thus cannot be given effect without previous notice
or publication to those who will be affected thereby.

COMMISSIONER OF INTERNAL REVENUE vs. INTERPUBLIC GROUP OF

COMPANIES, INC.
J.C. REYES, JR., J

FACTS: Interpublic Group of Companies, Inc. (IGC) is a non-resident foreign corporation

duly organized and existing under and by virtue of the laws of the State of Delaware, United
States of America.
The IGC owns 2,999,998 shares or 30% of the total outstanding and voting capital stock of
McCann Worldgroup Philippines, Inc. (McCann), a domestic corporation duly organized and
existing under the laws of the Philippines engaged in the general advertising business.

The IGC filed an administrative claim for refund or issuance of tax credit certificate (TCC),
representing the alleged overpaid FWT on dividends paid by McCann to IGC. In the said
administrative claim, the IGC averred that as a non-resident foreign corporation, it may avail
of the preferential FWT rate of 15% on dividends received from a domestic corporation under
Section 28 (B) (5) (b) of the Tax Code.

The IGC submitted to CIR additional documents in support of its administrative claim for
refund or issuance of TCC. The CIR failed to act on IGC's claim for refund or issuance of
TCC. This prompted the IGC to file a petition for review with the CTA.

ISSUE: Whether or not the IGC has the capacity to sue in Philippine courts. Otherwise stated,
can a non- resident foreign corporation which collects dividends from the Philippines sue here
to claim tax refund?

RULING: We agree with the CTA that the issue is not one of first impression. Section 133 of
the Corporation Code provides:

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SEC. 133. Doing business without a license. — No foreign corporation transacting business in
the Philippines without a license, or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of action recognized under Philippine laws.

The aforementioned provision bars a foreign corporation "transacting business" in the

Philippines without a license access to our courts. Thus, in order for a foreign corporation to
sue in Philippine courts, a license is
necessary only if it is "transacting or doing business" in the country. 5 Conversely, if an
unlicensed foreign corporation is not transacting or doing business in the Philippines, it can be
permitted to bring an action even without such license.

The general rule that a foreign corporation is the same juridical entity as its branch office in
the Philippines cannot apply here. This rule is based on the premise that the business of the
foreign corporation is conducted through its branch office, following the principal-agent
relationship theory. It is understood that the branch becomes its agent here. So that when the
foreign corporation transacts business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction becomes one of the

foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation,
not the branch or the resident foreign corporation.

Corollarily, if the business transaction is conducted through the branch office, the latter
becomes the taxpayer, and not the foreign corporation.

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