1. Commissioner of Internal Revenue v.

Javier, 199 SCRA 824, July 31, 1991

DOCTRINE/S: The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting
of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It
must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere
mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal
Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the
inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with
fraud and those of the respondent as made in good faith.

Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create only
suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion.

FACTS: On June 3, 1977, Victoria Javier, the wife of private respondent, received from the Prudential
Bank and Trust Company in Pasay City, the amount of US$999,973.70 remitted by her sister, through
some banks in the United States, among which is Mellon Bank, N.A.

The said amount turned out to be a clerical error and should have been US$1,000 only instead of the
remittance of US$1,000,000. Mellon Bank then filed a complaint praying for the return of the excess
amount on the ground that defendants are trustees of an implied trust for the benefit of Mellon Bank.

Later on, City Fiscal of Pasay City filed an information charging the respondent and his wife with the
crime of estafa, alleging that they misappropriated, misapplied, and converted to their own personal use
and benefit the amount of US$999,000 which they received as an implied trust as a result of the mistake
in the remittance.

On March 15, 1978, Melchor Javier filed his Income Tax Return showing the gross income of P53,053.38
and net income of P48,053.88 and stating in the footnote of the return that “Taxpayer was recipient of
some money received from abroad which he presumed to be a gift but turned out to be an error and is
now subject of litigation."

On December 15, 1980, the acting Commissioner of Internal Revenue sent a letter to Javier
demanding him to pay the amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the
years 1976 and 1977 respectively. On the same date, Javier wrote the BIR that he was paying the
deficiency for the year but denying that he had any undeclared income for the year 1977 and requested
that the assessment for 1977 be made to await final court decision on the case filed against him for filing
an allegedly fraudulent return.

Petitioner in reply stated that “the amount of Mellon Bank's erroneous remittance which you were
able to dispose, is definitely taxable." The Commissioner also imposed a 50% fraud penalty against
the private respondent. Javier then filed an appeal before the CTA which ruled in favour of Javier.

ISSUE/s: WON private respondent is liable for the 50% fraud penalty.

HELD: No. Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal
Revenue Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due
from him or of the deficiency tax in case payment has been made on the basis of the return filed before
the discovery of the falsity or fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the
filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his
income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad
which he presumed to be a gift but turned out to be an error and is now subject of litigation that it was an
"error or mistake of fact or law" not constituting fraud, that such notation was practically an
invitation for investigation and that Javier had literally "laid his cards on the table."

In Aznar v. Court of Tax Appeals, fraud in relation to the filing of income tax return was discussed in this
manner:

. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce another to
give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with
intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the
sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as
fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue
committed mistakes in making entries in the returns and in the assessment, respectively, under
the inventory method of determining tax liability, it would be unfair to treat the mistakes of the
petitioner as tainted with fraud and those of the respondent as made in good faith.

Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most,
create only suspicion and the mere understatement of a tax is not itself proof of fraud for the
purpose of tax evasion.

A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be,
Rick v. U.S., App. D.C., 161 F. 2d 897, 898.

In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the
herein petitioner. The government was not induced to give up some legal right and place itself at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier
did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to collect
taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the
fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling charges,
perhaps even for greed by spending most of the money he received, but the records lack a clear showing
of fraud committed because he did not conceal the fact that he had received an amount of money
although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge
imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment
should be deleted.

2. HERNANDO B. CONWI, et. al. vs. THE HONORABLE COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE | G.R. No. 48532 August 31, 1992

DOCTRINE: Income may be defined as an amount of money coming to a person or corporation

within a specified time, whether as payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as
flow of the fruits of one's labor. A citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the Philippines.

FACTS:

Petitioners are employees of Procter and Gamble (Philippines), a subsidiary of Procter & Gamble,
a foreign corporation based in Cincinnati, Ohio, U.S.A. In 1970 and 1971, petitioners were
assigned to other subsidiaries outside the country, during which petitioners were paid U.S. dollars
as compensation for services in their foreign assignments. When petitioners in filed their income
tax returns for the year 1970, they computed the tax due by applying the dollar-to-peso
conversion on the basis of the floating rate ordained under B.I.R. Ruling No. 70-027.

In 1973, petitioners filed cases with the office of the respondent Commissioner, amended income
tax returns for 1970-1971, and used the par value of the peso as prescribed in Section 48 of
Republic Act No. 265 in relation to Section 6 of Commonwealth Act No. 265 in relation to Section
6 of Commonwealth Act No. 699 which resulted in the alleged overpayments, refund and/or tax
credit.

Claims for refund were filed with respondent Commissioner. Without awaiting the resolution of the
Commissioner of the Internal Revenue on their claims, petitioners filed their petitioner for review.

Respondent Commissioner filed his Answer to petitioners' petitions for review and were heard
jointly as it involved common question of law and facts.

The respondent Court of Tax Appeals held that the proper conversion rate for the purpose of
reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates
prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. The claim for refund
and/or tax credit was denied and the petitions for review dismissed, with costs against petitioners.
Hence, this petition for review on certiorari.
ISSUE:

Whether or not the petitioners' dollar earnings are receipts derived from foreign exchange
transactions.

RULING:

No, dollar earnings are not receipts derived from foreign exchange transactions.

The court ruled that a foreign exchange transaction is simply that — a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of another." When petitioners were
assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned
nation's currency and were ALSO spending in said currency. There was no conversion, therefore,
from one currency to another. For the proper resolution of these cases, income may be defined
as an amount of money coming to a person or corporation within a specified time, whether as
payment for services, interest or profit from investment. Unless otherwise specified, it means
cash or its equivalent. Income can also be thought of as flow of the fruits of one's labor.
 The court further ruled that their earnings should be converted for income tax purposes using the
par value of the Philippine peso since there occurred no actual inward remittances, and,
therefore, they are not included in the coverage of Central Bank Circular No. 289. However,
respondent Commissioner countered that such circular speaks of receipts for export products,
sale of foreign exchange or foreign borrowings and investments but not income tax. He also
claims that he had to use the prevailing free market rate of exchange in these cases because of
the need to ascertain the true and correct amount of income in Philippine peso of dollar earners
for Philippine income tax purposes. But then, a careful reading of said circular shows that the
subject matters involved therein is export products, invisibles, receipts of foreign exchange,
foreign exchange payments, new foreign borrowing and investments — nothing by way of income
tax payments.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter
& Gamble. It was a definite amount of money which came to them within a specified period of
time of two years as payment for their services.

The Secretary of Finance is empowered to "promulgate all needful rules and regulations" to
effectively enforce its provisions. Pursuant to this authority, Revenue Memorandum Circular Nos.
7-71 and 41-71 were issued to prescribe a uniform rate of exchange from US dollars to
Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971,
respectively. Said revenue circulars were a valid exercise of the authority given to the Secretary
of Finance by the Legislature which enacted the Internal Revenue Code. And these are
presumed to be a valid interpretation of said code until revoked by the Secretary of Finance
himself.

The petitioners’ contention that they are exempt from the coverage of such circulars since no
remittances and acceptances of their salaries and wages in US dollars into the Philippines is
bereft of merit. As citizens of the Philippines, their income, within or without, and in these cases
wholly without, are still subject to income tax per Sec. 21, NIRC, as amended.

3. Obillos v. Commissioner of Internal Revenue, 139 SCRA 436, October 29, 1985
DOCTRINE/S:

● An unregistered partnership or joint venture is not formed simply because petitioners contributed
money to buy properties, resold the same and divided the profit among themselves.
● Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.”
●

FACTS:

1. Jose Obillos, Sr. bought two parcels of land from Ortigas & Co. Ltd., and thereafter, he
transferred his rights to his four children, the petitioners, to enable them to build their residences.
O&Co sold the lots to the children for P178,708.
2. A year later, the petitioners resold the lands to the Walled City Securities Corporation and
Olga Cruz Canda for P313,050. They had a total profit of P134,341.88 or P33,584 each. They
treated the total profit as a capital gain and paid an income tax on one-half (P16,792.) thereof.
 3. The Commissioner of Internal Revenue, acting on the theory that the four petitioners had formed
an unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the
Tax Code, assessed a corporate income tax on the total profit worth P37,018, as well as
P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, for a total of
P71,074.56.

He also considered the share of the profits of each petitioner in the sum of P33,584 as a "taxable
in full” (not a mere capital gain of which ½ is taxable) and required them to pay deficiency income
taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated
interest.

4. Petitioners were held liable for deficiency income taxes and penalties totalling P127,781.76 on
their profit of P134,336, in addition to the tax on capital gains already paid by them.
5. The petitioners contested the assessments; however, the two judges of the Tax Court sustained
the assessments while one dissented.

ISSUE/s:

A. Whether Petitioners Jose, Sarah, Romeo, and Remedios Obillos may be held liable for deficiency
income taxes and penalties. (NO)

HELD:

A. No, Petitioners Obillos cannot be held liable for deficiency income tax and penalties.
● It is an error to consider the petitioners as having formed a partnership under article 1767
of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two
lots, resold the same and divided the profit among themselves. To regard the
petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to
destroy.
● As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure
and simple. To consider them as partners would obliterate the distinction between a co-
ownership and a partnership. The petitioners were not engaged in any joint venture
by reason of that isolated transaction.
● Their original purpose was to divide the lots for residential purposes. If later on they
found it not feasible to build their residences on the lots because of the high cost of
construction, then they had no choice but to resell the same to dissolve the co-ownership.
The division of the profit was merely incidental to the dissolution of the co-
ownership which was in the nature of things a temporary state. It had to be
terminated sooner or later.
● Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not
of itself establish a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the returns are
derived". There must be an unmistakable intention to form a partnership or joint
venture.”
● In the instant case, what the Commissioner should have investigated was whether the
father donated the two lots to the petitioners and whether he paid the donor's tax.
 4. Baier-Nickel v. Commissioner of Internal Revenue, G.R. No. 156305, February 17, 2003

Doctrine: A non -resident alien is taxed only on her income for services rendered in the Philippines.

The important factor, therefore, which determines the source of income of personal services is not
the residence of the payor, or the place where the contract for service is entered into, or the place of
payment, but the place where the services were actually rendered.

Facts:

Baier -Nickel, a non -resident German citizen, is the President of Jubanitex, Inc., a domestic corporation
engaged in manufacturing, marketing, acquiring, importing and exporting and selling embroidered textile
products.

Through its General Manager, the corporation engaged the services of Baier -Nickel as commission
agent, who will receive 10% sales commission on all sales abroad actually concluded and collected
through her efforts. In 1995, Baier -Nickel received commission income, from which Jubanitex withheld
10% and remitted to the BIR. Baier -Nickel filed her income tax return on October 17, 1997.

On April 14, 1998, she filed a claim for refund, contending that her commission income is not taxable in
the Philippines because it was compensation for her marketing services rendered in Germany and not
compensation income as President of Jubanitex. After all, she came to and stayed in the Philippines only
for short periods.

Issue:

Whether or not petitioner's commision is taxable income subject to Philippine Income Tax;

Held:

No. Non -resident aliens, whether or not engaged in trade or business, are subject to Philippine income
tax on their income received from all sources within the Philippines. The underlying theory is that the
consideration for taxation is protection of life and property and that the income rightly to be levied upon to
defray the burdens of the Government is that income which is created by activities and property protected
by the Government or obtained by persons enjoying that protection.

The important factor, therefore, which determines the source of income of personal services is not the
residence of the payor, or the place where the contract for service is entered into, or the place of
payment, but the place where the services were actually rendered (Baier -Nickel vs. Commissioner, G.R.
No. 156305, Feb. 17,2003).

In another case, however, the appointment letter of Baier Nickel, as agent of Jubanitex, stipulated that the
activity or the service which would entitle her to 10% commission income are sales actually concluded
and collected through her efforts. What she presented as evidence to prove that she performed income
-producing activities abroad were copies of documents she allegedly faxed to Jubanitex and bearing
instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as
samples of sales orders purportedly relayed to her by clients. However, these documents do not show
whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very
least, these pieces of evidence show that while Baier -Nickel was in Germany, she sent instructions/
orders to Jubanitex in the Philippines. Thus, claim for refund was denied.

5. Commissioner of Internal Revenue v. Baier Nickel, G.R. No. 153793, August 29, 2006

DOCTRINES: "Source of income" relates to the property, activity or service that produced the income.
With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor
or service was performed that determines the source of the income. There is therefore no merit in
petitioner’s interpretation which equates source of income in labor or personal service with the residence
of the payor or the place of payment of the income.

Tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the
taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected
to tax is actually exempt from taxation.

FACTS:

1. POINT OF CONTENTION: Respondent, a non-resident German citizen, is the President of

JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing on wholesale only,
buying or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile
products." The corporation appointed and engaged the services of respondent as commission agent. It
was agreed that respondent will receive 10% sales commission on all sales actually concluded and
collected through her efforts. JUBANITEX withheld the corresponding 10% withholding tax of her sales
commission.

2. RESPONDENT’S CONTENTION: Respondent filed a claim to refund the amount of P170,777.26

alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended
that her sales commission income is not taxable in the Philippines because the same was a
compensation for her services rendered in Germany and therefore considered as income from sources
outside the Philippines. Source, according to respondent is the situs of the activity which produced the
income. And since the source of her income were her marketing activities in Germany, the income she
derived from said activities is not subject to Philippine income taxation.

3. RESPONDENT’S EVIDENCE: the appointment letter of respondent as agent of JUBANITEX

stipulated that the activity or the service which would entitle her to 10% commission income, are "sales
actually concluded and collected through [her] efforts." What she presented as evidence to prove that she
performed income producing activities abroad, were copies of documents she allegedly faxed to
JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished
products as well as samples of sales orders purportedly relayed to her by clients.

4. CTA: She filed a petition for review with the CTA contending that no action was taken by the BIR on
her claim for refund. The CTA DENIED her claim because the commissions received by respondent were
actually her remuneration in the performance of her duties as President of JUBANITEX and not as a mere
sales agent thereof. The income derived by respondent is therefore an income taxable in the Philippines
because JUBANITEX is a domestic corporation.

5. CA: Reversed the Decision of the CTA, holding that respondent received the commissions as sales
agent of JUBANITEX and not as President thereof. And since the "source" of income means the activity
or service that produce the income, the sales commission received by respondent is not taxable in the
Philippines because it arose from the marketing activities performed by respondent in Germany.

6. CIR’S CONTENTION: Implied that source of income means the physical source where the income
came from. It further argued that since respondent is the President of JUBANITEX, any remuneration she
received from said corporation should be construed as payment of her overall managerial services to the
company and should not be interpreted as a compensation for a distinct and separate service as a sales
commission agent.

ISSUE:

Whether the term “source” refers to the situs of the activity which produced the income, NOT the
physical source where the income came from (YES)

HELD: Petition is GRANTED. Respondent is correct that “source” refers to the situs of the activity which
produced the income; BUT failed to prove that it was in Germany where she performed the income-
producing service.

1. The decisive factual consideration here is not the capacity in which respondent received the income,
but the sufficiency of evidence to prove that the services she rendered were performed in Germany.

2. "Source of income" relates to the property, activity or service that produced the income. With
respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or
service was performed that determines the source of the income. There is therefore no merit in
petitioner’s interpretation which equates source of income in labor or personal service with the residence
of the payor or the place of payment of the income.

3. The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed
strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden of proving
that the transaction subjected to tax is actually exempt from taxation.

4. The documents presented by Respondent do not show whether the instructions or orders faxed
ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show
that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether these sales were truly concluded in
Germany, respondent presented no such evidence. Neither did she establish reasonable connection
between the orders/instructions faxed and the reported monthly sales purported to have transpired in
Germany.

5. Petitioner’s counsel pointed out that respondent presented no contracts or orders signed by the
customers in Germany to prove the sale transactions therein. The concern raised by petitioner’s counsel
as to the absence of substantial evidence that would constitute proof that the sale transactions for which
respondent was paid commission actually transpired outside the Philippines, is relevant because
respondent stayed in the Philippines for 89 days in 1995. Except for the months of July and September
1995, respondent was in the Philippines in the months of March, May, June, and August 1995, the same
months when she earned commission income for services allegedly performed abroad. Furthermore,
respondent presented no evidence to prove that JUBANITEX does not sell embroidered products in the
Philippines and that her appointment as commission agent is exclusively for Germany and other
European markets.
In sum, the Court finds that the faxed documents presented by respondent did NOT constitute
substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate
to support the conclusion that it was in Germany where she performed the income producing
service which gave rise to the reported monthly sales in the months of March and May to September of
1995. She thus failed to discharge the burden of proving that her income was from sources outside the
Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund should
be denied.

6. Commissioner of Internal Revenue v. St Luke’s Medical Center, G.R. No. 195909,

September 26, 2012
DOCTRINE/S:

“Non-profit” does not necessarily mean “charitable.” Charitable institutions, however, are not ipso facto
entitled to a tax exemption. The requirements for a tax exemption are specified by the law granting it. The
requirements for a tax exemption are strictly construed against the taxpayer because an exemption
restricts the collection of taxes necessary for the existence of the government.

FACTS:
1. St Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit corporation.
2. The BIR assessed St. Luke’s deficiency taxes amounting to P76,063,116.06 for 1998, comprised
of deficiency income tax, VAT, withholding tax on compensation and expanded withholding tax.
3. Luke’s filed an administrative protest with the BIR against the deficiency tax assessments.
4. The BIR argued before the CTA 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’
5. The BIR 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 had total revenues of
P1,730,367,965 or approximately P1.73 billion from patient services in 1998.
6. Luke’s contended that the BIR should not consider its total revenues, because its free services to
patients was P218,187,498 or 65.20% of its 1998 operating income of P334,642,615. St. Luke’s
also claimed that its income does not inure to the benefit of any individual.
7. 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.

HELD:

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B)
in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable and social
welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary
educational institutions and proprietary non-profit hospitals.
Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals
under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand,
can be construed together without the removal of such tax exemption.

The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions,
namely, proprietary non-profit educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

The only qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means
private, following the definition of a “proprietary educational institution” as “any private school maintained
and administered by private individuals or groups” with a government permit. “Non-profit” means no net
income or asset accrues to or benefits any member or specific person, with all the net income or asset
devoted to the institution’s purposes and all its activities conducted not for profit.

“Non-profit” does not necessarily mean “charitable.”

The Court defined “charity” in Lung Center of the Philippines v. Quezon City as “a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion, by assisting them to establish themselves
in life or by otherwise lessening the burden of government.”

To be a charitable institution, however, an organization must meet the substantive test of charity in Lung
Center. The issue in Lung Center concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction.

In other words, charitable institutions provide for free goods and services to the public which would
otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes
taxes which should have been spent to address public needs, because certain private entities already
assume a part of the burden. This is the rationale for the tax exemption of charitable institutions.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it. The requirements for a tax exemption are strictly construed
against the taxpayer because an exemption restricts the collection of taxes necessary for the existence of
the government.

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

For real property taxes, the incidental generation of income is permissible because the test of exemption
is the use of the property. The test of exemption is not strictly a requirement on the intrinsic nature or
character of the institution. The test requires that the institution use the property in a certain way, i.e. for a
charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its charitable
character when it used a portion of its lot for commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion of the property not devoted to charity.

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

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

A non-stock corporation or association;

Organized exclusively for charitable purposes;

Operated exclusively for charitable purposes;

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

Thus, both the organization and operations of the charitable institution must be devoted “exclusively” for
charitable purposes. The organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents.

Section 30(E) of the NIRC specifically requires that the corporation or association be non-stock, which is
defined by the Corporation Code as “one where no part of its income is distributable as dividends to its
members, trustees, or officers” and that any profit “obtained as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized.”

However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and operated
exclusively” by providing that: Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the disposition made of such income, shall
be subject to tax imposed under this Code.

In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately P1.73 billion from paying patients is not an
institution “operated exclusively” for charitable purposes. Clearly, revenues from paying patients are
income received from “activities conducted for profit.” Indeed, St. Luke’s admits that it derived profits from
its paying patients. St. Luke’s declared P1,730,367,965 as “Revenues from Services to Patients” in
contrast to its “Free Services” expenditure of P218,187,498. Services to paying patients are activities
conducted for profit. They cannot be considered any other way. There is a “purpose to make profit over
and above the cost” of services. The P1.73 billion total revenues from paying patients is not even
incidental to St. Luke’s charity expenditure of P218,187,498 for non-paying patients.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only
on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of
Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated
exclusively” for charitable or social welfare purposes to be completely exempt from income tax.

7. Commissioner of Internal Revenue v. St Luke’s Medical Center, G.R. No. 203514, February
13, 2017
DOCTRINE/S:
The doctrine of stare decisis dictates that "absent any powerful countervailing considerations, like
cases ought to be decided alike.

FACTS:
 St. Luke’s Medical Center, Inc. (SLMC) received from the Large Taxpayers Service-Documents
Processing and Quality Assurance Division of the Bureau of Internal Revenue (BIR) Audit an
assessment for deficiency income tax under Section 27(B) of the 1997 NIRC, as amended, for
taxable year 2005 in the amount of ₱78,617,434.54 and for taxable year 2006 in the amount of
₱57,119,867.33
 SLMC filed with Commissioner of Internal Revenue (CIR) an administrative protest assailing the
assessments, claiming that as a non-stock, non-profit charitable and social welfare organization
under Section 30(E) and (G) of the 1997 NIRC, as amended, it is exempt from paying income tax.
  CIR's Final Decision on the Disputed Assessment increased the deficiency income for the taxable
year 2005 tax to ₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94.
 SLMC elevated the matter to the CTA via a Petition for Review.
 CTA Ruling: SLMC not liable for deficiency income tax under Section 27(B) of the 1997
NIRC, as amended, since it is exempt from paying income tax under Section 30(E) and (G)
of the same Code.
 CIR moved for reconsideration but the CTA Division denied the same in its December 28, 2010
Resolution.
 CIR filed a Petition for Review before the CTA En Banc which affirmed the cancellation and
setting aside of the Audit Results/Assessment Notices issued against SLMC. It sustained
the findings of the CTA Division that SLMC complies with all the requisites under Section 30(E)
and (G) of the 1997 NIRC and thus, entitled to the tax exemption provided therein.

ISSUE: Whether or not SLMC is exempt from the payment of income tax.

HELD:
The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its
revenues from paying patients are concerned has been settled in G.R. Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.), where the Court ruled that:
We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E)
and (G) on the other hand, can be construed together without the removal of such tax exemption.
The effect of the introduction of Section 27(B) is to subject the taxable income of two specific
institutions, namely, proprietary non-profit educational institutions and proprietary non-profit
hospitals, among the institutions covered by Section 30, to the 10% preferential rate under
Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30
in relation to Section 27(A)(l).
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.
The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the
clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be 'operated exclusively' for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption
if it earns income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section 27(B).
.
A careful review of the pleadings reveals that there is no countervailing consideration for the Court to
revisit its afore quoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis, which states that "[o]nce a case
has been decided in one way, any other case involving exactly the same point at issue x x x should be
decided in the same manner," the Court finds that SLMC is subject to 10% income tax insofar as its
revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G) of the 1997
NIRC requires said institution to operate exclusively for charitable or social welfare purpose. But in case
an exempt institution under Section 30(E) or (G) of the said Code earns income from its for-profit
activities, it will not lose its tax exemption. However, its income from for-profit activities will be subject to
income tax at the preferential 10% rate pursuant to Section 27(B) thereof

8. Commissioner of Internal Revenue v. De La Salle University, Inc., G.R. No. 196596,

November 9, 2016
DOCTRINE/S:
The requisite for availing the tax exemption under Article XIV, Section 4(3), namely:
1. The taxpayer falls under the classification non-stock, non-profit, educational
institution; and
2. The income it seeks to be exempted from taxation is used actually, directly and
exclusively for educational purposes.
FACTS:
The case at bar is a consolidation of: (1) G.R. No. 196596 filed by the Commissioner of
Internal Revenue (Commissioner) to assail the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals (CTA) in En Banc Case No. 622; (2) G.R. No. 198841 filed
by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision and October 4, 2011
resolution in CTA En Banc Case No. 671; and (3) G.R. No. 198941 filed by the Commissioner to
assail the June 8, 2011 decision and October 4, 2011 resolution in CTA En Banc Case No. 671

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:

1. Income tax on rental earnings from restaurants/canteens and bookstores operating

within the campus;
2. Value-added tax (VAT) on business income; and
3. 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 load 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 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:
1. The entire assessment should have been cancelled because it was based on an invalid
LOA;
2. 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
3. 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.
4. 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

CTA DECISION: 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’s Contentions:
1. 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.
2. 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.
3. 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’s Contentions:
1. 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.
2. 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.“
3. that it complied with the requirements for the application of Article XIV, Section 4 (3) of
the Constitution.

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

HELD:
1. 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 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.
2. 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.

9. Commissioner of Internal Revenue v. Court of Appeals and YMCA, G.R. No. 124043,
October 14, 1998
DOCTRINE/S: While the income received by the organizations enumerated in Section 27 (now Section
26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to income received by them
as such," the exemption does not apply to income derived ". . . from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the disposition made of such
income. Rental income derived by a tax-exempt organization from the lease of its properties, real or
personal, IS NOT, therefore, exempt from income taxation, even if such income [is] exclusively used for
the accomplishment of its objectives.

FACTS:
Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs and
activities that are beneficial to the public, especially the young people.

YMCA earned an income of P676,829.80 from leasing out a portion of its premises to small shop owners,
like restaurants and canteen operators, and P44,259.00 from parking fees collected from non-members.

CIR issued an assessment to private respondent, in the total amount of P415,615.01 including surcharge
and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional
fees and deficiency withholding tax on wages.

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

YMCA filed a petition for review at the Court of Tax Appeals

CTA: Ruled in favor of YMCA and held that the 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

CA: Reversed and decided in favor of CIR.

ISSUE/S:

WON the Rental Income of YMCA is tax exempt

HELD:

NO. It is subject to tax.

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

Relevant provisions of NIRC

Sec. 27. Exemptions from tax on corporations. — The following organizations shall not be
taxed under this Title in respect to income received by them as such —

(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
 (h) Club organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, no part of the net income of which inures to the benefit of any private
stockholder or member;

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

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions. Furthermore, a claim of statutory exemption from taxation
should be manifest. and unmistakable from the language of the law on which it is based. Thus, the
claimed exemption "must expressly be granted in a statute stated in a language too clear to be mistaken."

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

While the income received by the organizations enumerated in Section 27 (now Section 26) of the NIRC
is, as a rule, exempted from the payment of tax "in respect to income received by them as such," the
exemption does not apply to income derived ". . . from any of their properties, real or personal, or from
any of their activities conducted for profit, regardless of the disposition made of such income. Rental
income derived by a tax-exempt organization from the lease of its properties, real or personal, IS NOT,
therefore, exempt from income taxation, even if such income [is] exclusively used for the accomplishment
of its objectives.

As to the argument that it was incidental to the operations and not collected for profit

The law does not make a distinction. The rental income is taxable regardless of whence such income is
derived and how it is used or disposed of. Where the law does not distinguish, neither should we.

As to the argument that Art. VI Sec 28 par 3 exempts charitable institutions from payment not only of
property tax but also income tax

The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers of the
Constitution reveal their intent that the exemption created by said provision pertained only to property
taxes. Indeed, the income tax exemption claimed by private respondent finds no basis in Article VI,
Section 26, par. 3 of the Constitution.

As to the argument that Article XIV, Section 4, par. 3 claiming that the YMCA "is a non-stock, non-profit
educational institution whose revenues and assets are used actually, directly and exclusively for
educational purposes so it is exempt from taxes on its properties and income."

We reiterate that private respondent is exempt from the payment of property tax, but not income tax on
the rentals from its property. The bare allegation alone that it is a non-stock, non-profit educational
institution is insufficient to justify its exemption from the payment of income tax.Laws allowing tax
exemption are construed strictissimi juris.
Hence, for the YMCA to be granted the exemption it claims under the aforecited provision, it must prove
with substantial evidence that (1) it falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes.

However, the Court notes that not a scintilla of evidence was submitted by private respondent to prove
that it met the said requisites.

As to WON YMCA is an educational institution within the purview of Article XIV, Section 4, par. 3 of the
Constitution?

We rule that it is not. The term "educational institution" or "institution of learning" has acquired a well-
known technical meaning, of which the members of the Constitutional Commission are deemed
cognizant. Under the Education Act of 1982, such term refers to schools. The school system is
synonymous with formal education, which "refers to the hierarchically structured and chronologically
graded learnings organized and provided by the formal school system and for which certification is
required in order for the learner to progress through the grades or move to the higher levels."

10. SMI-ED Philippine Technology, Inc. v. Commissioner of Internal Revenue, G.R. No. 175410,
November 12, 2014
DOCTRINE/S:
In an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may determine
whether there are taxes that should have been paid in lieu of the taxes paid. Determining the proper
category of tax that should have been paid is not an assessment. It is incidental to determining whether
there should be a refund.

A Philippine Economic Zone Authority (PEZA)-registered corporation that has never commenced
operations may not avail the tax incentives and preferential rates given to PEZA-registered enterprises.
Such corporation is subject to ordinary tax rates under the National Internal Revenue Code of 1997.

FACTS:
1. SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the business of
manufacturing ultra high-density microprocessor unit package."

2. SMI-Ed Philippines constructed buildings and purchased machineries and equipment. SMI-Ed
Philippines "failed to commence operations."

3. It sold its buildings and some of its installed machineries and equipment to Ibiden Philippines,
Inc., another PEZA-registered enterprise, for ¥2,100,000,000.00 (₱893,550,000.00). SMI-Ed
Philippines was dissolved.

4. In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire gross
sales of its properties to 5% final tax on PEZA registered corporations. SMI-Ed Philippines paid
taxes amounting to ₱44,677,500.00.

5. After requesting the cancellation of its PEZA registration and amending its articles of
incorporation to shorten its corporate term, SMI-Ed Philippines filed an administrative claim for
the refund with the Bureau of Internal Revenue (BIR). SMIEd Philippines alleged that the amount
was erroneously paid.
 6. The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a petition for
review before the Court of Tax Appeals.

7. The Court of Tax Appeals Second Division DENIED petition and found that SMI-Ed Philippines’
administrative claim for refund and the petition for review with the Court of Tax Appeals were filed
within the two-year prescriptive period. However, fiscal incentives given to PEZA-registered
enterprises may be availed only by PEZA-registered enterprises that had already commenced
operations. Since SMI-Ed Philippines had not commenced operations, it was not entitled to the
incentives.

8. After finding that SMI-Ed Philippines sold properties that were capital assets under Section 39(A)
(1) of the National Internal Revenue Code of 1997, the Court of Tax Appeals Second Division
subjected the sale of SMIEd Philippines’ assets to 6% capital gains tax under Section 27(D)
(5) of the same Code and Section 2 of Revenue Regulations No. 8-98.19 It was found liable for
capital gains tax amounting to ₱53,613,000.00.20 Therefore, SMIEd Philippines must still pay the
balance of ₱8,935,500.00 as deficiency tax.

9. Motion for Recon: DENIED.

10. SMI-Ed Philippines filed a petition for review before the Court of Tax Appeals En Banc an
argued that the Court of Tax Appeals Second Division erroneously assessed the 6% capital gains
tax on the sale of SMI-Ed Philippines’ equipment, machineries, and buildings. It also argued that
the Court of Tax Appeals Second Division cannot make an assessment at the first instance. Even
if the Court of Tax Appeals Second Division has such power, the period to make an assessment
had already prescribed. Petition for Review: DISMISSED.

ISSUE/s:

1. WON the CTA has the power to make assessments (NO)

2. WON petitioner can avail of fiscal incentives (NO)

3. WON CTA En Banc erred in finding that the machineries and equipment sold by the petitioner-
appellant is subject to the six percent (6%) capital gains tax under Section 27(D)(5) of the Tax
Code

HELD:

1. Jurisdiction of the Court of Tax Appeals

The term "assessment" refers to the determination of amounts due from a person obligated to make
payments.

The power and duty to assess national internal revenue taxes are lodged with the BIR. Section 2 of the
National Internal Revenue Code of 1997.

Court quoted:
SEC. 2, SEC. 6 (A), SEC. 222, —- NIRC

Thus, the BIR first has to make an assessment of the taxpayer’s liabilities. When the BIR makes the
assessment, the taxpayer is allowed to dispute that assessment before the BIR. If the BIR issues a
decision that is unfavorable to the taxpayer or if the BIR fails to act on a dispute brought by the taxpayer,
the BIR’s decision or inaction may be brought on appeal to the Court of Tax Appeals. The Court of Tax
Appeals then acquires jurisdiction over the case.

When the BIR’s unfavorable decision is brought on appeal to the Court of Tax Appeals, the Court of Tax
Appeals reviews the correctness of the BIR’s assessment and decision. In reviewing the BIR’s
assessment and decision, the Court of Tax Appeals had to make its own determination of the taxpayer’s
tax liabilities. The Court of Tax Appeals may not make such determination before the BIR makes its
assessment and before a dispute involving such assessment is brought to the Court of Tax Appeals on
appeal.

Taxes are generally self-assessed…

If the tax payments are correct, the BIR need not make an assessment.

The self-assessing and voluntarily paying taxpayer, however, may later find that he or she has
erroneously paid taxes. Erroneously paid taxes may come in the form of amounts that should not have
been paid. Erroneously paid taxes may also come in the form of tax payments for the wrong category of
tax.

In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the request for refund, the
taxpayer may bring the matter to the Court of Tax Appeals.

From the taxpayer’s self-assessment and tax payment up to his or her request for refund and the BIR’s
inaction,the BIR’s participation is limited to the receipt of the taxpayer’s payment. The BIR does not make
an assessment; the BIR issues no decision; and there is no dispute yet involved. Since there is no BIR
assessment yet, the Court of Tax Appeals may not determine the amount of taxes due from the taxpayer.
There is also no decision yet to review. However, there was inaction on the part of the BIR. That inaction
is within the Court of Tax Appeals’ jurisdiction.

In other words, the Court of Tax Appeals may acquire jurisdiction over cases even if they do not
involve BIR assessments or decisions.

In this case, the Court of Tax Appeals’ jurisdiction was acquired because petitioner brought the case on
appeal before the Court of Tax Appeals after the BIR had failed to act on petitioner’s claim for refund of
erroneously paid taxes.

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or
other taxes at the first instance. The Court of Tax Appeals has no power to make an assessment.

In stating that petitioner’s transactions are subject to capital gains tax, however, the Court of Tax
Appeals was not making an assessment. It was merely determining the proper category of tax that
petitioner should have paid, in view of its claim that it erroneously imposed upon itself and paid
the 5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund.

The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that are due
from petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct. If the
tax return filed was not proper, the correctness of the amount paid and, therefore, the claim for refund
become questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously
paid taxes is more properly liable for taxes other than that paid.

2. Petitioner’s entitlement to benefits given to PEZA-registered enterprises

Court cited Republic Act No. 7916 or the Special Economic Zone Act of 1995, SEC. 23 and 24.

Based on these provisions, the fiscal incentives and the 5% preferential tax rate are available only to
businesses operating within the Ecozone.60 A business is considered in operation when it starts entering
into commercial transactions that are not merely incidental to but are related to the purposes of the
business. It is similar to the definition of "doing business," as applied in actions involving the right of
foreign corporations to maintain court actions.

3. Imposition of capital gains tax

The properties involved in this case include petitioner’s buildings, equipment, and machineries. They are
not among the exclusions enumerated in Section 39(A)(1) of the National Internal Revenue Code of 1997.
None of the properties were used in petitioner’s trade or ordinary course of business because petitioner
never commenced operations. They were not part of the inventory. None of themwere stocks in trade.
Based on the definition of capital assets under Section 39 of the National Internal Revenue Code of 1997,
they are capital assets.

Respondent insists that since petitioner’s machineries and equipment are classified as capital assets,
their sales should be subject to capital gains tax. Respondent is mistaken.

Since petitioner had not started its operations, it was also not subject to the minimum corporate income
tax of 2% on gross income. Therefore, petitioner is not liable for any income tax.

11. Republic of the Philippines v. Arlene Soriano, G.R. No. 211666, February 25, 2015
DOCTRINE/S:

FACTS:

1. Petitioner Republic of the Philippines (hereinafter Republic), through the DPWH, filed a complaint for
expropriation against respondent Arlene R. Soriano (hereinafter Soriano), the registered owner of a
certain parcel of land.

2. The RTC issued a writ of possession after Soriano failed to appear despite notice. After Soriano failed
to appear yet again, the RTC considered her to have waived her right to adduce evidence and to object.
3. RTC then declared Republic to have a lawful right to acquire possession and ordering it to pay
Soriano just compensation in the amount of Php 2,000.00 per sq. m., based on the zonal value declared
by the BIR, as well as consequential damages, and the transfer tax necessary.

4. Pursuant to the order, Republic issued two Land Bank Manager’s Checks amounting to Php
400,000.00 and Php 20,000.00, respectively. However, it was already declared stale and the Republic
was ordered to issue another Manager’s Check.

5. Republic filed a Motion for Reconsideration with the RTC, alleging that the interest rate imposed by
the RTC should be lowered to 6% because the instant case falls under a loan or forbearance as provided
under Central Bank Circular No. 416. The RTC lowered the interest to 6% but on the grounds of legal
interest due to of delay under Article 2009 of the Civil Code, not the Central Bank Circular. RTC, relying
on NPC v. Angas, held that the said circular cannot apply because the transaction cannot be considered
a forbearance or loan, but expropriation for public purpose.

6. Republic filed this petition, arguing that it cannot be said to be in delay because it paid on time and
that the transfer taxes, in the nature of Capital Gains Tax and Documentary Stamp Tax, necessary for the
transfer of the subject property from the name of the respondent to that of the petitioner are liabilities of
respondent and not petitioner.

ISSUE/s:

1. Whether Republic was considered in delay and warranted the application of the 6% interest rate
under Article 2009.

2. Whether Republic should pay the consequential damages.

3. Whether Soriano should be the one to bear the transfer taxes enumerated.

HELD: Petition was partly meritorious. Interest rate deleted. No consequential damages. Respondent
bears capital gains tax. However, petitioner bears documentary stamp tax.

RATIO:

1. NO. The RTC erred in ruling that the Circular did not apply and that petitioner was in delay. The
interest imposed should be deleted.

The RTC’s reliance on National Power Corporation v. Angas is misplaced for the same has already been
overturned by the ruling in Republic v. Court of Appeals, wherein it was held that the payment of just
compensation for the expropriated property amounts to an effective forbearance on the part of the State.
Effectively, therefore, the debt incurred by the government on account of the taking of the property subject
of an expropriation constitutes a forbearance. Nevertheless, in line with the recent circular of the
Monetary Board of the Bangko Sentral ng Pilipinas (BSP-MB) No. 799, Series of 2013, effective July 1,
2013, the prevailing rate of interest for loans or forbearance of money is six percent (6%) per annum, in
the absence of an express contract as to such rate of interest.
Notwithstanding the foregoing, the Court held the imposition of interest in this case is unwarranted in view
of the fact that as evidenced by the acknowledgment receipt signed by the Branch Clerk of Court,
petitioner was able to deposit with the trial court the amount representing the zonal value of the property
before its taking. As often ruled by this Court, the award of interest is imposed in the nature of damages
for delay in payment which, in effect, makes the obligation on the part of the government one of
forbearance to ensure prompt payment of the value of the land and limit the opportunity loss of the owner.
However, when there is no delay in the payment of just compensation,

The records of this case reveal that petitioner did not delay in its payment of just compensation as it had
deposited the pertinent amount in full due to respondent on January 24, 2011, or four (4) months before
the taking thereof, which was when the RTC ordered the issuance of a Writ of Possession and a Writ of
Expropriation on May 27, 2011. The amount deposited was deemed by the trial court to be just, fair, and
equitable, taking into account the well-established factors in assessing the value of land, such as its size,
condition, location, tax declaration, and zonal valuation as determined by the BIR. Considering, therefore,
the prompt payment by the petitioner of the full amount of just compensation as determined by the RTC,
the imposition of interest thereon is unjustified and should be deleted.

2. NO. Consequential damages are awarded if as a result of the expropriation, the remaining property of
the owner suffers from an impairment or decrease in value. Considering that the subject property is being
expropriated in its entirety, there is no remaining portion which may suffer an impairment or decrease in
value as a result of the expropriation. Hence, the award of consequential damages is improper.

3. NO. It has been held that since capital gains is a tax on passive income, it is the seller, not the buyer,
who generally would shoulder the tax. Accordingly, the BIR, in its BIR Ruling No. 476-2013, dated
December 18, 2013, constituted the DPWH as a withholding agent to withhold the six percent (6%) final
withholding tax in the expropriation of real property for infrastructure projects. As far as the government is
concerned, therefore, the capital gains tax remains a liability of the seller since it is a tax on the seller's
gain from the sale of the real estate.

As to the documentary stamp tax, however, this Court finds inconsistent petitioner’s denial of liability to
the same. 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.

In this case, there is no agreement as to the party liable for the documentary stamp tax due on the sale of
the land to be expropriated. But while petitioner rejects any liability for the same, this Court must take
note of petitioner’s Citizen’s Charter, which functions as a guide for the procedure to be taken by the
DPWH in acquiring real property through expropriation under RA 8974. The Citizen’s Charter, issued by
petitioner DPWH itself on December 4, 2013, explicitly provides that the documentary stamp tax, transfer
tax, and registration fee due on the transfer of the title of land in the name of the Republic shall be
shouldered by the implementing agency of the DPWH, while the capital gains tax shall be paid by the
affected property owner. Thus, while there is no specific agreement between petitioner and respondent,
petitioner’s issuance of the Citizen’s Charter serves as its notice to the public as to the procedure it shall
generally take in cases of expropriation under RA 8974. Accordingly, it will be rather unjust for this Court
to blindly accede to petitioner’s vague rejection of liability in the face of its issuance of the Citizen’s
Charter, which contains a clear and unequivocal assumption of accountability for the documentary stamp
tax. Had petitioner provided this Court with more convincing basis, apart from a mere citation of an
indefinite provision of the 1997 NIRC, showing that it should be respondent-seller who shall be liable for
the documentary stamp tax due on the sale of the subject property, its rejection of the payment of the
same could have been sustained.

12. Supreme Transliner, Inc. v. BPI Family Savings Bank, G.R. No. 198756, February 25, 2011

DOCTRINE:

● Under Revenue Regulations (RR) No. 13-85, every sale or exchange or other disposition of real
property classified as capital asset under Section 34(a) of the Tax Code shall be subject to the
final capital gains tax.
● The term sale includes pacto de retro and other forms of conditional sale. Section 2.2 of
Revenue Memorandum Order (RMO) No. 29-86 (as amended by RMO No. 16-88 and as further
amended by RMO Nos. 27-89 and 6-92) states that these conditional sales "necessarily
include mortgage foreclosure sales (judicial and extrajudicial foreclosure sales)." Further, for
real property foreclosed by a bank on or after September 3, 1986, the capital gains tax and
documentary stamp tax must be paid before title to the property can be consolidated in
favor of the bank.
● In foreclosure sale, there is no actual transfer of the mortgaged real property until after the
expiration of the one-year redemption period as provided in Act No. 3135 and title thereto is
consolidated in the name of the mortgagee in case of non-redemption. In the interim, the
mortgagor is given the option whether or not to redeem the real property. T he issuance of the
Certificate of Sale does not by itself transfer ownership.

FACTS:

1. Supreme Transliner, Inc (STI) obtained a of ₱9,853,000 loan from BPI Family Savings Bank
with a 714-square meter lot as collateral.
2. Due to non-payment of the loan, the mortgage was extrajudicially foreclosed and the property
was sold to the bank for ₱10,372,711.35 in the public auction. A Certificate of Sale was issued
in favor of the bank and the same was registered.
3. STI decided to redeem the property within the 1-year redemption period. The bank prepared a
Statement of Account which included liquidated damages (P1.5m), attorney’s fees (P1.5m),
interest (P1.2m – 243 days/17.25% p.a.), as well as Documentary Stamp(P155,595) and
Capital Gains taxes (518,635.57)
4. BPI refused to eliminate Liquidated Damages and reduce Atty’s Fees so the mortgagors
redeemed the property by paying ₱15,704,249. A Certificate of Redemption was issued by the
bank.
5. STI filed a complaint against BPI to recover the allegedly unlawful and excessive charges totaling
₱5,331,237.77, with prayer for damages and attorney’s fees.
 a. BPI: the redemption price was valid in accordance with documents duly signed
by the mortgagors.

6. The Trial Court held that STI was bound by the terms of the mortgage loan documents which
clearly provided for the payment of the interest, charges and expenses.
7. On Appeal, CA reversed the TC ruling, saying that attorney’s fees and liquidated damages were
already included in the bid price of ₱10,372,711.35 The total redemption price thus should only
be ₱12,592,435.72 and the bank should return the amount of ₱3,111,813.40 representing
attorney’s fees and liquidated damages.

ISSUES:

A. Whether a foreclosing mortgagee should pay capital gains tax upon execution of the certificate of
sale. (NO)

RULING:

A. No, the foreclosing mortgagee does not need to pay CGT upon execution of the certificate of
Sale.
● Under Revenue Regulations (RR) No. 13-85, every sale or exchange or other disposition of real
property classified as capital asset under Section 34(a) of the Tax Code shall be subject to the
final capital gains tax.
● The term sale includes pacto de retro and other forms of conditional sale. Section 2.2 of
Revenue Memorandum Order (RMO) No. 29-86 (as amended by RMO No. 16-88 and as further
amended by RMO Nos. 27-89 and 6-92) states that these conditional sales "necessarily
include mortgage foreclosure sales (judicial and extrajudicial foreclosure sales)." Further, for
real property foreclosed by a bank on or after September 3, 1986, the capital gains tax and
documentary stamp tax must be paid before title to the property can be consolidated in
favor of the bank.
● In foreclosure sale, there is no actual transfer of the mortgaged real property until after the
expiration of the one-year redemption period as provided in Act No. 3135 and title thereto is
consolidated in the name of the mortgagee in case of non-redemption. In the interim, the
mortgagor is given the option whether or not to redeem the real property. T he issuance of the
Certificate of Sale does not by itself transfer ownership.
● RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the payment of
Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital assets
initiated by banks, finance and insurance companies.

SEC. 3. CAPITAL GAINS TAX. –

● In case the mortgagor exercises his right of redemption within one year from the issuance
of the certificate of sale, no capital gains tax shall be imposed because no capital gains
has been derived by the mortgagor and no sale or transfer of real property was realized.
xxx

SEC. 4. DOCUMENTARY STAMP TAX. –

 ● § In case the mortgagor exercises his right of redemption, the transaction shall only be
subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code
of 1997 because no land or realty was sold or transferred for a consideration.

● Although the subject foreclosure sale and redemption took place before the effectivity of
RR No. 4-99, its provisions may be given retroactive effect in this case.
● The retroactive application of RR No. 4-99 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."
● STI exercised its right of redemption before the expiration of the statutory one-year period,
petitioner bank is not liable to pay the capital gains tax due on the extrajudicial foreclosure
sale. There was no actual transfer of title from the owners-mortgagors to the foreclosing
bank. Hence, the inclusion of the said charge in the total redemption price was unwarranted and
the corresponding amount paid by the petitioners-mortgagors should be returned to them.

13. Banco de Oro, et al. v. Republic of the Philippines, G.R. No. 198756, January 13, 2015
DOCTRINE/S:
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACE Bonds are
deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue
Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20%final withholding tax on the
interest or discount from the PEACE Bonds.

FACTS:
A notice by the Bureau of Treasury (BTr) to all Government Securities Eligible Dealer (GSED) entitled
Public Offering of Treasury Bonds denominated as the Poverty Eradication and Alleviation Certificates or
the PEACE Bonds, announced that P30 Billion worth of 10-year Zero-Coupon Bonds will be auctioned on
Oct. 16, 2011. The notice stated that the Bonds “shall be issued to not more than 19 buyers/lenders.
Lastly, it stated that “while taxable shall not be subject to the 20% final withholding tax” pursuant to the
BIR Revenue Regulation No. 020 2001. After the auction, RCBC which participated on behalf of CODE-
NGO was declared as the winning bidder having tendered the lowest bids. On October 7, 2011, “the BIR
issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government Bonds and directing the
BTr to withhold said final tax at the maturity thereof. Furthermore the Bureau of Internal Revenue issued
BIR Ruling No. DA 378-201157 clarifying that the final withholding tax due on the discount or interest
earned on the PEACE Bonds should “be imposed and withheld not only on RCBC/CODE NGO but also
on all subsequent holders of the Bonds.

Banco de Oro, et al. filed a petition for Certiorari, Prohibition and Mandamus under Rule 65 to the
Supreme Court contending that the assailed 2011 BIR Ruling which ruled that “all treasury bonds are
‘deposit substitutes’ regardless of the number of lenders, in clear disregard of the requirement of twenty
(20) or more lenders mandated under the NIRC. Furthermore it will cause substantial impairment of their
vested rights under the Bonds since the ruling imposes new conditions by “subjecting the PEACE Bonds
to the twenty percent (20%) final withholding tax notwithstanding the fact that the terms and conditions
thereof as previously represented by the Government, through respondents BTr and BIR, expressly state
that it is not subject to final withholding tax upon their maturity.”

The Commissioner of the Internal Revenue countered that the BTr has no power to contractually grant a
tax exemption in favour of Banco de Oro, et al.. Moreover, they contend that the word “any” in Section
22(Y) of the National Internal Revenue Code plainly indicates that the period contemplated is the entire
term of the bond and not merely the point of origination or issuance.

ISSUE/s:
Whether or not the 10-year zero-coupon treasury bonds issued by the Bureau of Treasury subject to 20%
Final Withholding Tax

HELD:
Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue Code, a final
withholding tax at the rate of 20% is imposed on interest on any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements. Under
Section 22(Y), deposit substitute is an alternative form of obtaining funds from the public (the term 'public'
means borrowing from twenty (20) or more individual or corporate lenders at any one time).

Hence, the number of lenders is determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% final withholding tax. Furthermore, the phrase “at
any one time” for purposes of determining the “20 or more lenders” would mean every transaction
executed in the primary or secondary market in connection with the purchase or sale of securities.

In the case at bar, it may seem that there was only one lender — RCBC on behalf of CODE-NGO — to
whom the PEACE Bonds were issued at the time of origination. However, a reading of the underwriting
agreement and RCBC term sheet reveals that the settlement dates for the sale and distribution by RCBC
Capital (as underwriter for CODE-NGO) of the PEACE Bonds to various undisclosed investors.

At this point, however, we do not know as to how many investors the PEACE Bonds were sold to by
RCBC Capital. Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACE
Bonds are deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal
Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding
tax on the interest or discount from the PEACE Bonds. Further, the obligation to withhold the 20% final
tax on the corresponding interest from the PEACE Bonds would likewise be required of any
lender/investor had the latter turned around and sold said PEACE Bonds, whether in whole or part,
simultaneously to 20 or more lenders or investors.

14. Dumaguete Cathedral v. Commissioner of Internal Revenue, G.R. No 182722, January 22,
2010
DOCTRINE/S:

FACTS:

1. Dumaguete Credit Cooperative is a credit cooperative duly registered with and regulated by the
Cooperative Development Authority. Upon examination of the BIR of petitioner’s books of account and
other accounting records, it issued Pre-Assessment Notices for deficiency withholding taxes for the
taxable years 1999 and 2000. The deficiency withholding taxes cover the payments of the honorarium of
the Board of Directors, security and janitorial services, legal and professional fees, and interest on
savings and time deposits of its members.

2. On 2002, petitioner availed of Voluntary Assessment and Abatement Program (VAAP) of the BIR and
paid the amounts of P105,574.62 and P143,867.24 corresponding to the withholding taxes on the
payments for the compensation, honorarium of the Board of Directors, security and janitorial services, and
legal and professional services, for the years 1999 and 2000, respectively.

3. On 2003, petitioner received letters of demand and assessment notices ordering petitioner to pay the
deficiency withholding taxes, inclusive of penalties, for the years 1999 and 2000 in the amounts of
P1,489,065.30 and P1,462,644.90, respectively.

4. The petitioner filed protested with the CIR, but the latter failed to act on the protest within the
prescribed 180-day period, hence, petitioner filed a Petition for Review with the CTA.

5. The CTA ruled in against petitioner. The CTA first division modified the Assessment Notice and
cancelled the assessment for deficiency withholding taxes on the honorarium and per diems of
petitioner's Board of Directors, security and janitorial services, commissions and legal and professional
fees BUT affirmed the assessments for deficiency withholding taxes on interests.

6. The CTA En Banc affirmed the ruling of the first division elucidating that Section 57 of the NIRC
requires the withholding of tax at source. According to the CTA En Banc, petitioner's business falls under
the phrase "similar arrangements;" as such, it should have withheld the corresponding 20% final tax on
the interest from the deposits of its members.

7. Petitioners argument: Section 24(B) (1) of the NIRC which states : “B(1) Interests, Royalties, Prizes,
and Other Winnings. -- A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount
of interest from any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements” applied only to banks and not to cooperatives,
since the phrase "similar arrangements" is preceded by terms referring to banking transactions that have
deposit peculiarities.

Respondents argument: Pespondent invokes the legal maxim "Ubi lex non distinguit nec nos distinguere
debemos" (where the law does not distinguish, the courts should not distinguish). Respondent maintains
that Section 24(B)(1) of the NIRC applies to cooperatives as the phrase "similar arrangements" is not
limited to banks, but includes cooperatives that are depositaries of their members.

ISSUE: Whether or not Dumaguete Credit Cooperative is liable to pay the deficiency withholding taxes on
interest from savings and time deposits of its members for the taxable years 1999 and 2000, as well as
the delinquency interest of 20% per annum. NO

RULING:

On November 16, 1988, the BIR declared in BIR Ruling No. 551-888 that cooperatives are not required to
withhold taxes on interest from savings and time deposits of their members. The pertinent BIR Ruling
reads:
Under Section 50(a) of the Tax Code, as amended, the tax imposed or prescribed by Section 21(c) of the
same Code on specified items of income shall be withheld by payor-corporation and/or person and paid in
the same manner and subject to the same conditions as provided in Section 51 of the Tax Code, as
amended. Such being the case, and since interest from any Philippine currency bank deposit and yield or
any other monetary benefit from deposit substitutes are paid by banks, you are not the party required to
withhold the corresponding tax on the aforesaid savings account and time deposits of your members.

The CTA First Division, however, disregarded the above quoted ruling in determining whether petitioner is
liable to pay the deficiency withholding taxes on interest from the deposits of its members. It ratiocinated
in this wise:

This Court does not agree. As correctly pointed out by respondent in his Memorandum, nothing in the
above quoted resolution will give the conclusion that savings account and time deposits of members of a
cooperative are tax-exempt. What is entirely clear is the opinion of the Commissioner that the proper
party to withhold the corresponding taxes on certain specified items of income is the payor-corporation
and/or person. In the same way, in the case of interests earned from Philippine currency deposits made in
a bank, then it is the bank which is liable to withhold the corresponding taxes considering that the bank is
the payor-corporation. Thus, the ruling that a cooperative is not the proper party to withhold the
corresponding taxes on the aforementioned accounts is correct. However, this ruling does not hold true if
the savings and time deposits are being maintained in the cooperative, for in this case, it is the
cooperative which becomes the payor-corporation, a separate entity acting no more than an agent of the
government for the collection of taxes, liable to withhold the corresponding taxes on the interests earned.

The CTA En Banc affirmed the above-quoted Decision and found petitioner's invocation of BIR
Ruling No. 551-88 misplaced. According to the CTA En Banc, the BIR Ruling was based on the premise
that the savings and time deposits were placed by the members of the cooperative in the bank.
Consequently, it ruled that the BIR Ruling does not apply when the deposits are maintained in the
cooperative such as the instant case.

We disagree.

There is nothing in the ruling to suggest that it applies only when deposits are maintained in a
bank. Rather, the ruling clearly states, without any qualification, that since interest from any Philippine
currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks,
cooperatives are not required to withhold the corresponding tax on the interest from savings and time
deposits of their members. This interpretation was reiterated in BIR Ruling [DA-591-2006] dated October
5, 2006, which was issued by Assistant Commissioner James H. Roldan upon the request of the
cooperatives for a confirmatory ruling on several issues, among which is the alleged exemption of interest
income on members' deposit (over and above the share capital holdings) from the 20% final withholding
tax. In the said ruling, the BIR ratiocinated in part saying “Considering the members' deposits with the
cooperatives are not currency bank deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)
(1), therefore, do not apply to members of cooperatives and to deposits of primaries with federations,
respectively.”
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for promoting self-reliance and harnessing
people power towards the attainment of economic development and social justice. Thus, to encourage the
formation of cooperatives and to create an atmosphere conducive to their growth and development, the
State extends all forms of assistance to them, one of which is providing cooperatives a preferential tax
treatment.

This exemption extends to members of cooperatives. It must be emphasized that cooperatives

exist for the benefit of their members. In fact, the primary objective of every cooperative is to provide
goods and services to its members to enable them to attain increased income, savings, investments, and
productivity. Therefore, limiting the application of the tax exemption to cooperatives would go against the
very purpose of a credit cooperative. Extending the exemption to members of cooperatives, on the other
hand, would be consistent with the intent of the legislature. Thus, although the tax exemption only
mentions cooperatives, this should be construed to include the members, pursuant to Article 126 of RA
6938, which provides:
ART. 126. Interpretation and Construction. - In case of doubt as to the meaning of any provision
of this Code or the regulations issued in pursuance thereof, the same shall be resolved liberally in
favor of the cooperatives and their members.

Moreover, no less than our Constitution guarantees the protection of cooperatives. Section 15,
Article XII of the Constitution considers cooperatives as instruments for social justice and economic
development. At the same time, Section 10 of Article II of the Constitution declares that it is a policy of the
State to promote social justice in all phases of national development. In relation thereto, Section 2 of
Article XIII of the Constitution states that the promotion of social justice shall include the commitment to
create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the
foregoing provisions, we find that an interpretation exempting the members of cooperatives from the
imposition of the final tax under Section 24(B)(1) of the NIRC is more in keeping with the letter and spirit
of our Constitution.