· CIR v.

BOAC, 149 SCRA 395

COMMISSIONER OF INTERNAL REVENUE, Petitioner, -versus - BRITISH OVERSEAS AIRWAYS

CORPORATION and COURT OF TAX APPEALS, Respondents.
G.R. No. L-65773-74, EN BANC, April 30, 1987, MELENCIO-HERRERA, J.
The source of an income is the property, activity or service that produced the income. For such source to
be considered as coming from the Philippines, it is sufficient that the income is derived from activity within
the Philippines.

FACTS:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review of the Court of Tax Appeals’ decision
setting aside petitioner's assessment of deficiency income taxes against respondent British Overseas
Airways Corporation (BOAC) for the fiscal years 1959 to 1971.

BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom, and is engaged in the international airline business. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the
Philippines. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although
during the period covered by the assessments, it maintained a general sales agent in the Philippines —
Wamer Barnes and Company, Ltd., and later Qantas Airways — which was responsible for selling BOAC
tickets covering passengers and cargoes.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied
by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with
the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount
paid.

The CTA ruled in favor of BOAC citing that the proceeds of sales of BOAC tickets do not constitute BOAC
income from Philippine sources since no service of carriage of passengers or freight was performed by
BOAC within the Philippines and, therefore, said income is not subject to Philippine income tax. The CTA
position was that income from transportation is income from services so that the place where services are
rendered determines the source.

ISSUE:
Whether or not revenues derived by BOAC from sales of ticket for air transportation, while having no
landing rights here, constitute income of BOAC from Philippine sources, and accordingly, taxable.

RULING: YES.
The source of an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the burden of supporting
the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the
ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the
terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in
general embraces within its terms all the elements to constitute it a valid contract, binding upon the
parties entering into the relationship.
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from sources within the Philippines. A cursory
reading of the section will show that it does not state that it is an all- inclusive enumeration, and that no
other kind of income may be so considered.
The absence of flight operations to and from the Philippines is not determinative of the source of income
or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent
to this case. The test of taxability is the "source"; and the source of an income is that activity ... which
produced the income. Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a activity regularly pursued within the
Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and
cargo to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived
from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the
income herein is the Philippines.

· CIR v. St. Luke's Medical Center, Inc., 682 SCRA 66

COMMISSIONER OF INTERNAL REVENUE, Petitioner, -versus- ST. LUKE'S MEDICAL CENTER,

INC., Respondent
G.R. No. 195909, SECOND DIVISION, September 26, 2012, CARPIO, J.
The last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity
for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This
paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or association
[must be] organized and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies
the requirement in Section 30(G) that the civic organization must be "operated exclusively" for the
promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind
and character" of a charitable institution "from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(B), the
tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A).
With the introduction of Section 27(B), the tax rate is now 10%.
FACTS:
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to ₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding
tax on compensation and expanded withholding tax. The BIR reduced the amount to ₱63,935,351.57
during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.
St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating
expenses) of ₱334,642,615. St. Luke's also claimed that its income does not inure to the benefit of any
individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
ISSUE:
Whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which
imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals. (YES)
RULING:
The Court partly grants the petition of the BIR but on a different ground. 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)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non- profit
educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are
that they must be proprietary and non-profit. "Proprietary" means private, following the definition of a
"proprietary educational institution" as "any private school maintained and administered by private
individuals or groups" with a government permit. "Non-profit" means no net income or asset accrues to or
benefits any member or specific person, with all the net income or asset devoted to the institution's
purposes and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc.
de Cebu, this Court considered as non-profit a sports club organized for recreation and entertainment of
its stockholders and members. The club was primarily funded by membership fees and dues. If it had
profits, they were used for overhead expenses and improving its golf course. 38 The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-making enterprise.
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it. The power of Congress to tax implies the power to exempt
from tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o law
granting any tax exemption shall be passed without the concurrence of a majority of all the Members of
Congress." The requirements for a tax exemption are strictly construed against the taxpayer because an
exemption restricts the collection of taxes necessary for the existence of the government.
As a general principle, a charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution.
For real property taxes, the incidental generation of income is permissible because the test of exemption
is the use of the property. The Constitution provides that "[c]haritable institutions, churches and
personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings,
and improvements, actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation." The test of exemption is not strictly a requirement on the
intrinsic nature or character of the institution. The test requires that the institution use 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.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of
the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the
NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution
"actually, directly and exclusively" use the property for a charitable purpose.
The last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity
for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This
paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or association
[must be] organized and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies
the requirement in Section 30(G) that the civic organization must be "operated exclusively" for the
promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind
and character" of a charitable institution "from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(B), the
tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A).
With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately ₱1.73 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 ₱1,730,367,965 as "Revenues from Services to Patients" in
contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R. No. 195909, St.
Luke's showed the following "calculation" to support its claim that 65.20% of its "income after expenses
was allocated to free or charitable services" in 1998.

· Air Canada v. CIR, 778 SCRA 131

AIR CANADA, Petitioner, -versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. G.R.

No. 169507, SECOND DIVISION, January 11, 2016, LEONEN, J.
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent,
is a resident foreign corporation doing business in the Philippines. As such, it is taxable under Section
28(A)(l), and not Section 28(A)(3) of the Tax Code, subject to any applicable tax treaty to which the
Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air
Canada may only be imposed a maximum tax of 1 1⁄2% of its gross revenues earned from the sale of its
tickets in the Philippines.
FACTS:
Air Canada is a foreign corporation organized and existing under the laws of Canada. It was granted an
authority to operate as an offline carrier by the Civil Aeronautics Board. As an off-line carrier, Air Canada
does not have flights originating from or coming to the Philippines and does not operate any airplane in
the Philippines. Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales
agent in the Philippines. Aerotel sells Air Canada’s passage documents in the Philippines.
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through
Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings
in the total amount of ₱5,185,676.77. On November 28, 2002, Air Canada filed a written claim for refund
of alleged erroneously paid income taxes. It found basis from the revised definition of Gross Philippine
Billings under Section 28(A)(3)(a) of the Tax Code.
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court
of Tax Appeals on November 29, 2002. On December 22, 2004, the Court of Tax Appeals First Division
rendered its Decision denying the Petition for Review and, hence, the claim for refund. Air Canada
seasonably filed a Motion for Reconsideration, but the Motion was denied. On May 9, 2005, Air Canada
appealed to the Court of Tax Appeals En Banc. In the Decision dated August 26, 2005, the Court of Tax
Appeals En Banc affirmed the findings of the First Division. Hence, this Petition for Review.
ISSUE:
Whether Air Canada is subject to the 21⁄2% tax on Gross Philippine Billings pursuant to Section 28(A)(3)
of the Tax Code.
RULING:
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent,
is a resident foreign corporation doing business in the Philippines. As such, it is taxable under Section
28(A)(l), and not Section 28(A)(3) of the Tax Code, subject to any applicable tax treaty to which the
Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air
Canada may only be imposed a maximum tax of 1 1⁄2% of its gross revenues earned from the sale of its
tickets in the Philippines.
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines. Aerotel
performs acts or works or exercises functions that are incidental and beneficial to the purpose of
petitioner’s business. The activities of Aerotel bring direct receipts or profits to petitioner. There is nothing
on record to show that Aerotel solicited orders alone and for its own account and without interference
from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any contract on behalf of
[petitioner Air Canada] without the express written consent of [the latter,]" and it must perform its functions
according to the standards required by petitioner. Through Aerotel, petitioner is able to engage in an
economic activity in the Philippines.
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources
within the Philippines. International air carrier[s] maintaining flights to and from the Philippines shall be
taxed at the rate of 21⁄2% of its Gross Philippine Billings while international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from other activities in the country [like
sale of airline tickets] will be taxed at the regular income tax rate.
However, the application of the regular tax rate under Section 28(A)(1) of the Tax Code must consider the
existence of an effective tax treaty between the Philippines and the home country of the foreign air carrier.
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the Tax Code on its
taxable income from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 11⁄2%
of gross revenues, pursuant to Article VIII of the Republic of the Philippines- Canada Tax Treaty that
applies to petitioner as a "foreign corporation organized and existing under the laws of Canada.
The P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1 1⁄2% of
its gross revenues amounting to P345,711,806.08. It is quite apparent that the tax imposable under
Section 28(A)(l) of the Tax Code will exceed the maximum ceiling of 1 1⁄2% of gross revenues as decreed
in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED.

· Oña v. CIR, 45 SCRA 74

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES vs. THE COMMISSIONER OF INTERNAL
REVENUE
FACTS
Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and
her five children. A case was filed for the settlement of her estate. Later, Lorenzo T. Oña the surviving
spouse was appointed administrator of the estate. Oña then submitted the project of partition, which was
approved by the Court. The Court appointed Oña to be guardian of the persons and property of the 3
minor children. No attempt was made to divide the properties which remained under the management of
Oña who used said properties in business by leasing or selling them and investing the income derived
from them. As a result, petitioners' properties and investments gradually increased. The children usually
comes back to Oña for payment of the taxes.
Respondent CIR decided that the petitioners formed an unregistered partnership and therefore,
subject to the corporate income tax and was assessed. Petitioners protested against the assessment and
asked for reconsideration which was denied. They then filed a Petition for review of the decision of the
Court of Tax Appeals
ISSUE
W/N the petitioners formed an unregistered partnership and thus subject to corporate taxes.
RULING
Yes. The petitioners formed an unregistered partnership.
The project of partition was approved in 1949 yet, the properties remained under the
management of Oña who used said properties in business by leasing or selling them and investing the
income derived from it which increased the value of the properties.
The corporate tax law states that in cases of inheritance, there should be a period when the heirs
can be considered as co-owners rather than unregistered co-partners.
For tax purposes, the co-ownership of inherited properties is automatically converted into an
unregistered partnership the moment the said common properties and/or the incomes derived therefrom
are used as a common fund with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly executed in an extrajudicial
settlement or approved by the court in the corresponding testate or intestate proceeding.
From the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively
his own without the intervention of the other heirs, therefore he becomes liable individually for all taxes in
connection with his share. If after such partition, he allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit, even if no document or
instrument were executed for that purpose, an unregistered partnership is formed.
· Obillos, Sr. v. CIR, 139 SCRA 436

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS
G.R. No. L-68118, October 29, 1985

PRINCIPLE
The sharing of gross returns does not 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. [Art.
1769(3), NCC] There must be an unmistakable intention to form a partnership or joint venture.
FACTS
On March 2, 1973, Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square meters located at
Greenhills, San Juan, Rizal. The next day, he transferred his rights to his four children, the petitioners, to
enable them to build their residences. The Torrens titles were issued to them showing that they were co-
owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled
City Securities Corporation and Olga Cruz Canada for the total sum of P313,050. They derived from the
sale a total profit of P134,341.88 or P22,584 for each of them. They treated the profit as a capital gain
and paid an income tax on one-half thereof or of P16,792.
In April 1980, the Commissioner of Internal Revenue required the four petitioners to pay corporate income
tax on the total profit of P134,336 in addition to individual income tax on their shares thereof. The
petitioners are being held liable for deficiency income taxes and penalties totaling P127,781.76 on their
profit of P134, 336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or
joint venture. The petitioners contested the assessments. Two judges of the Tax Court sustained the
same. Hence, this instant appeal.
ISSUE
Whether or not the petitioners had indeed formed a partnership or joint venture and thus liable for
corporate tax.
RULING
NO. The Court ruled that 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 so would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That eventually
should be obviated.
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.
WHEREFORE, the judgment of the Tax Court is reversed and set aside.

· Deutsche Ban AG Manila Branch v. CIR, 704 SCRA 216

FACTS

Deutsche Bank remitted to the CIR an amount representing 15% of its branch profit remittance tax for
2002 and prior taxable years. Believing it made an overpayment, it filed an administrative claim for refund
and requested a confirmation of its entitlement to a preferential tax rate of 10% under the RP-Germany
Tax Treaty.

The CTA denied this claim based on RMO No. 1-2000 saying that Deutsche Bank violated the 15-day rule
for tax treaty relief application. It also cited Mirant which stated that before the benefits of the tax treaty
may be extended to a foreign corporation wishing to avail itself thereof, the latter should first invoke the
provisions of the tax treaty and prove that they indeed apply to the corporation.
ISSUE
This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-2000
will deprive persons or corporations of the benefit of a tax treaty.

RULING

The Supreme Court ruled in favor of Deustche Bank.

Laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional requirements that would negate the availment of the
reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty does not
provide for any pre-requisite for the availment of the benefits under said agreement.

The time-honored international principle of pacta sunt servanda demands the performance in good faith of
treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding
upon the parties, and obligations under the treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this jurisdiction.

Laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties
entitled thereto.

· CIR v. De La Salle University, 808 SCRA 156

CIR vs DE LA SALLE

G.R. No. 196596 - COMMISSIONER OF INTERNAL REVENUE v. DE LA SALLE UNIVERSITY, INC.

G.R. No. 198841 - DE LA SALLE UNIVERSITY INC v. COMMISSIONER OF INTERNAL REVENUE
G.R. No. 198941 - COMMISSIONER OF INTERNAL REVENUE v. DE LA SALLE UNIVERSITY, INC.
DATE: November 09, 2016
PONENTE: Brion, J.
TOPIC: Exemption of non-stock, non-profit educational institutions; and Defective Letter of Authority

FACTS:
• BIR issued to DLSU Letter of Authority (LOA) No. 2794 authorizing its revenue officers to
examine the latter's books of accounts and other accounting records for all internal revenue
taxes for the period Fiscal Year Ending 2003 and Unverified Prior Years
• May 19, 2004, BIR issued a Preliminary Assessment Notice (PAN) to DLSU.
• August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the following
deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and bookstores
operating within the campus;
(2) value-added tax (VAT) on business income; and
(3) documentary stamp tax (DST) on loans and lease contracts.
• The BIR demanded the payment of P17,303,001.12, inclusive of surcharge, interest and penalty
for taxable years 2001, 2002 and 2003.
 • DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU
filed petition for review with the CTA Division

CTA Division and CTA En Banc: DST assessment on the loan transactions but retained other deficiency
taxes. CTA En Banc ruled the ff:

Tax on rental income

DLSU was able to prove that a portion of the assessed rental income was used actually, directly and
exclusively for educational purposes; hence, exempt from tax. Rental income had indeed been used to
pay the loan it obtained to build the university's Physical Education - Sports Complex.
However, other unsubstantiated claim for exemption must be subjected to income tax and VAT.

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU proved its remittance of the DST due on its loan and
mortgage documents, evidenced by the stamp on the documents made by a DST imprinting machine.

Admissibility of DLSU's supplemental evidence

Supplemental pieces of documentary evidence were admissible even if DLSU formally offered them upon
MR. Law creating the CTA provides that proceedings before it shall not be governed strictly by the
technical rules of evidence. (Affirmed by SC)

On the validity of the Letter of Authority

LOA should cover only one taxable period and that the practice of issuing a LOA covering audit of
unverified prior years is prohibited. If the audit includes more than one taxable period, the other periods or
years shall be specifically indicated in the LOA.
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years.
Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001 and 2002 are
void, but the assessment for taxable year 2003 is valid.

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It held that while DLSU
successfully proved that a portion of its rental income was transmitted and used to pay the loan obtained
to fund the construction of the Sports Complex, the rental income from other sources were not shown to
have been actually, directly and exclusively used for educational purposes. (Affirmed by SC)

ISSUE #1: Whether DLSU's income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes
CIR’s Arguments:
DLSU's rental income is taxable regardless of how such income is derived, used or disposed of. 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. Commissioner posits that a tax-exempt organization like DLSU is exempt only from property tax but
not from income tax on the rentals earned from property.
DLSU’s Arguments:
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.

HELD: Article XIV, Section 4 (3) of the Constitution refers to 2 kinds of institutions; (1) non-stock, non-
profit educational institutions and (2) proprietary educational institutions. DLSU falls on the first category.
The difference is that The tax exemption granted to non-stock, non-profit educational institutions is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational
purposes. While tax exemptions may also be granted to proprietary educational institutions, these
exemptions may be subject to limitations imposed by Congress.

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions, unlike the
exemption that may be availed of by proprietary educational institutions, is not subject to limitations
imposed by law.

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.

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

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

ISSUE #2: Whether the entire assessment should be voided because of the defective LOA
DLSU’s Argument:
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior years.
An assessment issued based on such defective LOA must also be void.
CIR’s Argument:
Commissioner submits that DLSU is estopped from questioning the LOA's validity because it failed to
raise this issue in both the administrative and judicial proceedings.

HELD: The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and other
accounting records of the taxpayer in order to determine the taxpayer's correct internal revenue liabilities
and for the purpose of collecting the correct amount of tax, in accordance with Section 5 of the Tax Code,
which gives the CIR the power to obtain information, to summon/examine, and take testimony of persons.
The LOA commences the audit process and informs the taxpayer that it is under audit for possible
deficiency tax assessment.

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior
years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It merely
prescribes that if the audit includes more than one taxable period, the other periods or years must be
specified.

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years.
The LOA does not strictly comply with RMO 43-90 because it includes unverified prior years. This does
not mean, however, that the entire LOA is void. As the CTA correctly held, 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. Corollarily, the assessments for taxable years 2001 and 2002 are
void for having been unspecified on separate LOAs as required under RMO No. 43-90.

Wherefore, SC denied the petition of CIR and affirmed the ruling of CTA En Banc.

· PAGCOR v. CIR, 744 SCRA 712

G.R. No. 215427 December 10, 2014

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,
vs.
THE BUREAU OF INTERNAL REVENUE
Facts:
Petitioner filed seeking the declaration of nullity of Section 1of Republic Act (R.A.)No. 9337 insofar as it
amends Section 27(C) of R.A. No. 8424, otherwise known as the National Internal Revenue Code (NIRC)
by excluding petitioner from the enumeration of government-owned or controlled corporations (GOCCs)
exempted from liability for corporate income tax.
Petition is PARTLY GRANTED. Respondent issued RMC No. 33-2013 which clarifies the "Income Tax
and Franchise Tax Due from the Philippine Amusement and Gaming Corporation (PAGCOR). Which
provided that:
Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended, PAGCOR
is no longer exempt from corporate income tax as it has been effectively omitted from the list of
government-owned or controlled corporations (GOCCs) that are exempt from income tax.
Pursuant to Section 13(2) (a) of P.D. No. 1869, 9 PAGCOR is subject to a franchise tax of five
percent (5%) of the gross revenue or earnings it derives from its operations and licensing of
gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools,
and other related operations
Petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an erroneous interpretation and
application of the aforesaid Decision
Issues:
Whether PAGCOR’s tax privilege of paying 5% franchise tax in lieu of all other taxes with respect toits
gaming income, pursuant to its Charter – P.D. 1869, as amended by R.A. 9487, is deemed repealed or
amended by Section 1 (c) of R.A. 9337.
Ruling:
We sustain petitioner’s contention that its income from gaming operations is subject only to five percent
(5%) franchise tax under P.D. 1869, as amended, while its income from other related services is subject
to corporate income tax pursuant to P.D. 1869, as amended, as well as R.A. No. 9337.
First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its operation
of related services. Accordingly, the income tax exemption ordained under Section 27(c) of R.A. No. 8424
clearly pertains only to petitioner’s income from operation of related services. Such income tax exemption
could not have been applicable to petitioner’s income from gaming operations as it is already exempt
therefrom under P.D. 1869, as amended.
there was no need for Congress to grant tax exemption to petitioner with respect to its income from
gaming operations as the same is already exempted from all taxes of any kind or form, income or
otherwise, whether national or local, under its Charter, save only for the five percent (5%) franchise tax.
Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable
construction is possible, the laws must be reconciled in that manner. With the enactment of R.A. No.
9337, which withdrew the income tax exemption under R.A. No. 8424, petitioner’s tax liability on income
from other related services was merely reinstated.
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly provides the
tax treatment of petitioner’s income prevails over R.A. No. 9337, which is a general law.

· Atlas Consolidated Mining v. CIR, 102 SCRA 246

ATLAS CONSOLIDATED MINING DEVT CORP vs. CIR

524 SCRA 73, 103
GR Nos. 141104 & 148763, June 8, 2007

"The taxpayer must justify his claim for tax exemption or refund by the clearest grant of organic or statute
law and should not be permitted to stand on vague implications."

"Export processing zones (EPZA) are effectively considered as foreign territory for tax purposes."

FACTS: Petitioner corporation, a VAT-registered taxpayer engaged in mining, production, and sale of
various mineral products, filed claims with the BIR for refund/credit of input VAT on its purchases of
capital goods and on its zero-rated sales in the taxable quarters of the years 1990 and 1992. BIR did not
immediately act on the matter prompting the petitioner to file a petition for review before the CTA. The
latter denied the claims on the grounds that for zero-rating to apply, 70% of the company's sales must
consists of exports, that the same were not filed within the 2-year prescriptive period (the claim for 1992
quarterly returns were judicially filed only on April 20, 1994), and that petitioner failed to submit substantial
evidence to support its claim for refund/credit.
The petitioner, on the other hand, contends that CTA failed to consider the following: sales to PASAR
and PHILPOS within the EPZA as zero-rated export sales; the 2-year prescriptive period should be
counted from the date of filing of the last adjustment return which was April 15, 1993, and not on every
end of the applicable quarters; and that the certification of the independent CPA attesting to the
correctness of the contents of the summary of suppliers’ invoices or receipts examined, evaluated and
audited by said CPA should substantiate its claims.

ISSUE: Did the petitioner corporation sufficiently establish the factual bases for its applications for
refund/credit of input VAT?
HELD: No. Although the Court agreed with the petitioner corporation that the two-year prescriptive period
for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the quarterly
VAT return, and that sales to PASAR and PHILPOS inside the EPZA are taxed as exports because these
export processing zones are to be managed as a separate customs territory from the rest of the
Philippines, and thus, for tax purposes, are effectively considered as foreign territory, it still denies the
claims of petitioner corporation for refund of its input VAT on its purchases of capital goods and effectively
zero-rated sales during the period claimed for not being established and substantiated by appropriate and
sufficient evidence.
Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the sovereign
authority, and should be construed in strictissimi juris against the person or entity claiming the exemption.
The taxpayer who claims for exemption must justify his claim by the clearest grant of organic or statute
law and should not be permitted to stand on vague implications.

· Smi-ed Phil Technology v. CIR, 739 SCRA 691

SMI-ED PHILIPPINES VS. CIR

G.R. NO. 175410
NOVERMBER 14, 2016
FACTS:
SMI-ED Philippines, a PEZA-registered corporation, constructed buildings and purchased machineries
and equipment after its registration; however, it failed to commence operations. Its factory closed and
later on sold its buildings and some machineries and equipment. In November 2000, it was dissolved. In
its quarterly income tax return for year 2000, it subjected the entire gross sales of its properties to 5% final
tax on PEZA registered corporations and paid taxes amounting to more than 44 million pesos. SMI-Ed
then filed an administrative claim for the refund of more than 44 million pesos with the BIR which did not
act on said claim. Hence, SMI-Ed filed a petition for review before the CTA which denied the claim for
refund and instead even subjected the sales of SMI-Ed’s assets to 6% capital gains tax under Sec. 27(D)
(5) of NIRC and Sec. 2 of Revenue Regulations No. 8-98.

ISSUES:
1. WON SMI-Ed’s sale of properties is subject to capital gains tax
2. WON SMI-Ed Philippines is entitled to its claim for refund
3. WON the BIR can still assess SMI-Ed for deficiency capital gains taxes
HELD:
1. Only the presumed gain from the sale of petitioner’s land and/or building may be subjected to
the 6% capital gains tax. The income from the sale of petitioner’s machineries and equipment
is subject to the provisions on normal corporate income tax.
SEC. 39. Capital Gains and Losses. -
(A) Definitions.- As used in this Title -
(1) Capital Assets.- the term ‘capital assets’ means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other property
of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade orbusiness, or property used in the trade or business, of a character which is subject to the
allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or
business of the taxpayer.
The properties involved in this case include petitioner’s buildings, equipment, and machineries. 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. For
corporations, the National Internal Revenue Code of 1997 treats the sale of land and buildings, and the
sale of machineries and equipment, differently. Domestic corporations are imposed a 6% capital gains tax
only on the presumed gain realized from the sale of lands and/or buildings. The National Internal
Revenue Code of 1997 does not impose the 6% capital gains tax on the gains realized from the sale of
machineries and equipment.
2. The Bureau of Internal Revenue is ordered to refund petitioner SMI-Ed Philippines
Technology, Inc. the amount of 5% final tax paid to the BIR, less the 6% capital gains tax on
the sale of petitioner SMI-Ed Philippines Technology, Inc.'s land and building.

To determine, therefore, if petitioner is entitled to refund, the amount of capital gains tax for the sold land
and/or building of petitioner and the amount of corporate income tax for the sale of petitioner’s
machineries and equipment should be deducted from the total final tax paid. Petitioner indicated,
however, in its March 1, 2001 income tax return for the 11-month period ending on November 30, 2000
that it suffered a net loss of ₱2,233,464,538.00. This declaration was made under the pain of perjury.
Section 267 of the National Internal Revenue Code of 1997 provides:
SEC. 267. Declaration under Penalties of Perjury. - Any declaration, return and other statement
required under this Code, shall, in lieu of an oath, contain a written statement that they are made
under the penalties of perjury. Any person who willfully files a declaration, return or statement
containing information which is not true and correct as to every material matter shall, upon conviction,
be subject to the penalties prescribed for perjury under the Revised Penal Code. Moreover, Rule 131,
Section 3(ff) of the Rules of Court provides for the presumption that the law has been obeyed unless
contradicted or overcome by other evidence, thus:
SEC. 3. Disputable presumptions.— The following presumptions are satisfactory if uncontradicted,
but may be contradicted and overcome by other evidence:
....
(ff) That the law has been obeyed;
The BIR did not make a deficiency assessment for this declaration. Neither did the BIR dispute this
statement in its pleadings filed before this court. There is, therefore, no reason to doubt the truth that
petitioner indeed suffered a net loss in 2000.
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.

3. No. Section 203 of the National Internal Revenue Code of 1997 provides that as a general
rule, the BIR has three (3) years from the last day prescribed by law for the filing of a return to
make an assessment. The BIR did not initiate any assessment for deficiency capital gains
tax.78 Since more than a decade have lapsed from the filing of petitioner's return, the BIR can
no longer assess petitioner for deficiency capital gains taxes, if petitioner is later found to
have capital gains tax liabilities in excess of the amount claimed for refund.

· CIR v. Isabela Cultural Corporation

COMMISSIONER OF INTERNAL REVENUE vs ISABELA CULTURAL CORPORATION

G.R. No. 172231, February 12, 2007
Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for
deficiency income tax and expanded withholding tax from BIR. It arose from the disallowance of ICC’s
claimed expense for professional and security services paid by ICC; as well as the alleged
understatement of interest income on the three promissory notes due from Realty Investment Inc. The
deficiency expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-withholding
tax on its claimed deduction for security services.
ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it
brought the case to CTA, which held that it is unappealable, since the final notice is not a decision. CTA’s
ruling was reversed by CA, which was sustained by SC, and case was remanded to CTA. CTA rendered
a decision in favor of ICC. It ruled that the deductions for professional and security services were properly
claimed, it said that even if services were rendered in 1984 or 1985, the amount is not yet determined at
that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which overstate the
interest income, when it applied compounding absent any stipulation.
Petitioner appealed to CA, which affirmed CTA, hence the petition.
Issue: Whether or not the expenses for professional and security services are deductible.
Held: No.
One of the requisites for the deductibility of ordinary and necessary expenses is that it must have been
paid or incurred during the taxable year. This requisite is dependent on the method of accounting of the
taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, under this method, an
expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the method of
accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed in the succeeding year.
The accrual of income and expense is permitted when the all-events test has been met. This test
requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate
determination of such income or liability. The all-events test requires the right to income or liability be
fixed, and the amount of such income or liability be determined with reasonable accuracy. The test does
not demand that the amount of income or liability be known absolutely, only that a taxpayer has at its
disposal the information necessary to compute the amount with reasonable accuracy. The all-events test
is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a
computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an exact or completely accurate
amount.[
In the instant case, the expenses for professional fees consist of expenses for legal and auditing services.
The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of
said firm in connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC, the
firm has been its counsel since the 1960’s. From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for its legal services. The failure to determine the exact
amount of the expense during the taxable year when they could have been claimed as deductions cannot
thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise
of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is
using the accrual method of accounting. For another, it could have reasonably determined the amount of
legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant.

· CIR v. Marubeni Corporation G.R. No. 137377, December 18, 2001

COMMISSIONER OF INTERNAL REVENUE vs. MARUBENI CORP.

FACTS:

The contract price was Y12, 790 389,000 and Y44,327,940. The price in Japanese currency was
broke down into two portions: the Japanese Yen Portion I and the Japanese Yen Portion II, while the
price in Philippine currency was referred to as the Philippine Peso Portion. The Japanese Yen Portions I
and II were financed in two years: (a) by Yen credit loan provided by the Overseas Economic Cooperation
Fund (OECF); and (b) by supplier’s credit in favor of Marubeni from the Export-Import Bank of Japan. The
OECF is a fund under the Ministry of Finance of Japan extended by the Japanese Government as
assistance to foreign government to promote economic development.

The price was broken down into the corresponding materials, equipment and services required
for the project and their individual prices. Under the Philippine Onshore Portion, Marubeni does not deny
its liability for the contractor’s tax on the income from the two projects. On the Foreign Offshore Portion,
the Commissioner argues that since the agreement was turnkey, it calls for the supply of both materials
and services to the client; it is contract for a piece of work and is indivisible. The situs of the project is in
the Philippines, and the materials provided and services rendered were all done and completed within the
territorial jurisdiction of the Philippines; hence, the entire receipts from the contracts including the receipts
from the Offshore Portion, constitute income from Philippine sources.

On the other hand, Marubeni argues that the works therein were not all performed in the
Philippines. Machines and equipment were manufactured in Japan. They were designed, engineered and
fabricated by Japanese firms in Japan sub-contracted to Marubeni.

ISSUE:

Whether or not respondent is liable to pay the income and contractor’s taxes assessed by
petitioner?

HELD:

The court ruled that while the construction and installation work were completed within the
Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed
and engineered in Japan. The two sets of ship unloader and loader, the boats and the mobile equipment
for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in
Japan. They were already finished products when shipped to the Philippines. The other construction
supplies listed under the Offshore portion such as the still sheets, pipes and structures, electrical and
instrument apparatus, were not finished products when shipped to the Philippines. They, however, were
likewise fabricated and manufactured by the sub-contractors in Japan.

· Soriano vs. Secretary of Finance, 815 SCRA 316, G.R. No. 184450, G.R. No. 184508, G.R.
No. 184538, G.R. No. 185234, January 24, 2017, En Banc Decision, C.J. Peralta
Soriano vs. Secretary of Finance:
Issue: Assails the validity of the Revenue Regulations of the BIR on the newly enacted law RA 9504
(Minimum Wage Earners).
Effectivity of Law: July 6, 2008
Salient Feature of the Law:
· It increased the basic personal exemption from ₱20,000 for a single individual, ₱25,000 for
the head of the family, and ₱32,000 for a married individual to P50,000 for each individual.
· It increased the additional exemption for each dependent not exceeding four from ₱8,000 to
₱25,000
· It granted MWEs exemption from payment of income tax on their minimum wage, holiday
pay, overtime pay, night shift differential pay and hazard pay.
ISSUES:
1. How much is to be deducted as personal and additional Exemption?
BIR Petitioners

1. Tax Payers should claim only a 1. Full deductions of the Personal and
proportionate share (prorated additional exemptions and not
application) of the exemption (in this proportionate share. (Relying on the
case only ½ of Personal Exemption Umali vs. Estanislao case)
and ½ of the Additional Exemption)
since the law took effect only on July
6, 2008. (Relying on the Pansacola
vs CIR case)

2. Whether or not MWE who receives other benefits in excess of the statutory limit of ₱30,000 is
no longer entitled to the exemption provided by R.A. 9504, is consistent with the law.?

RULING:
1. There is, of course, nothing to prevent Congress from again adopting a policy that prorates
the effectivity of basic personal and additional exemptions. This policy, however, must be
explicitly provided for by law - to amend the prevailing law, which provides for full-year
treatment. As already pointed out, R.A. 9504 is totally silent on the matter. This silence
cannot be presumed by the BIR as providing for a half-year application of the new exemption
levels. Such presumption is unjust, as incomes do not remain the same from month to month,
especially for the MWEs.

Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new personal and
additional exemptions. In so doing, respondents overstepped the bounds of their rule-making
power. It is an established rule that administrative regulations are valid only when these are
consistent with the law. Respondents cannot amend, by mere regulation, the laws they
administer. To do so would violate the principle of non-delegability of legislative powers.

The prorated application of the new set of personal and additional exemptions for the year 2008,
which was introduced by respondents, cannot even be justified under the exception to the canon
of non-delegability; that is, when Congress makes a delegation to the executive branch. The
delegation would fail the two accepted tests for a valid delegation of legislative power; the
completeness test and the sufficient standard test. The first test requires the law to be complete
in all its terms and conditions, such that the only thing the delegate will have to do is to enforce it.
The sufficient standard test requires adequate guidelines or limitations in the law that map out the
boundaries of the delegate's authority and canalize the delegation.

In this case, respondents went beyond enforcement of the law, given the absence of a provision
in R.A. 9504 mandating the prorated application of the new amounts of personal and additional
exemptions for 2008. Further, even assuming that the law intended a prorated application, there
are no parameters set forth in R.A. 9504 that would delimit the legislative power surrendered by
Congress to the delegate. In contrast, Section 23(d) of the 1939 Tax Code authorized not only the
prorating of the exemptions in case of change of status of the taxpayer, but also authorized the
Secretary of Finance to prescribe the corresponding rules and regulations.
2. NO.

Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed by the
assailed provisions of RR 10-2008. The provisions of the law are clear and precise; they leave no
room for interpretation - they do not provide or require any other qualification as to who are
MWEs.

To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says he/she
must be one who is paid the statutory minimum wage if he/she works in the private sector, or not
more than the statutory minimum wage in the non-agricultural sector where he/she is assigned, if
he/she is a government employee. Thus, one is either an MWE or he/she is not. Simply put,
MWE is the status acquired upon passing the litmus test - whether one receives wages not
exceeding the prescribed minimum wage.
In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable
income received in excess of the minimum wage, but the MWEs will not lose their
exemption as such. Workers who receive the statutory minimum wage their basic pay
remain MWEs. The receipt of any other income during the year does not disqualify them as
MWEs. They remain MWEs, entitled to exemption as such, but the taxable income they
receive other than as MWEs may be subjected to appropriate taxes.