(INCOME TAX ON CORPORATIONS) 2.

WON they should pay the tax collectively or whether it

G.R. No. L-45425             April 29, 1939 should be prorated among them and paid individually
JOSE GATCHALIAN, ET AL., plaintiffs-appellants,
vs. THE COLLECTOR OF INTERNAL REVENUE, defendant- RULING
appellee.
(1) IT WAS A PARTNERSHIP
FACTS
 There is no doubt that if Jose & Company merely formed
 Prior Dec 15, 1934 = JOSE GATCHALIAN, ET AL. in order to
a community of property the latter is exempt from the
enable them to purchase one sweepstakes ticket valued
payment of income tax under the law
at two pesos (P2), subscribed and paid therefor the
amounts
 BUT, according to the stipulation facts Jose & Company
o NOTE: 15 individuals in total.
organized a partnership of a civil nature because each of
them put up money to buy a sweepstakes ticket for the
 Dec 15, 1934 = the ticket they bought won one of the 3rd
sole purpose of dividing equally the prize which they may
prizes in the amount of P50,000. The same was encashed
win, as they did in fact in the amount of P50,000
in PNB on the latter part of December.

 The partnership was not only formed, but upon the

 Dec 29, 1934 = Jose Gatchalian was required by tax
organization thereof and the winning of the prize, Jose
examiner the corresponding income tax return covering
Gatchalian personally appeared in the office of the
the prize won by Jose Gatchalian & Company, which was
Philippines Charity Sweepstakes, in his capacity as co-
subsequently signed by Jose Gatchalian
partner, as such collection the prize, the office issued the
check for P50,000 in favor of Jose Gatchalian and
 Jan 8, 1935 = CIR made an assessment against Jose
company, and the said partner, in the same capacity,
Gatchalian & Company requesting the payment of the
collected the said check.
sum of P1,499.94 to the deputy provincial treasurer
 All these circumstances repel the idea that the plaintiffs
of Bulacan
organized and formed a community of property only

 Jan 20, 1935 = Jose Gatchalian & Company in their reply,

requested an exemption from payment of the income tax,
they also attached 15 separate individual income tax
returns filed separately by each of them.
 CIR denied the claim for exemption. Thereafter, upon
failure to pay the amount of tax demanded, CIR issued a
warrant of distraint and levy against the property of Jose
Gatchalian & Company
 Jose Gatchalian & Company paid under protest to avoid
embarrassment and annoyance arising from the levy of
their properties
ISSUES
1. WON Jose Gatchalian & Company formed a partnership,
or merely a community of property without a personality
of its own
(2) THE SAX SHOULD BE PAID COLLECTIVELY
 Having organized and constituted a partnership of a civil
nature, the said entity is the one bound to pay the
income tax which the defendant collected under the
aforesaid section 10 (a) of Act No. 2833, as amended by
section 2 of Act No. 3761.
 There is no merit in plaintiff's contention that the tax
should be prorated among them and paid individually,
resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed,
with the costs of this instance to the plaintiffs appellants. So
ordered
(INCOME TAX ON CORPORATIONS)
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS
and REMEDIOS P. OBILLOS, brothers and sisters, petitioners
vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF
TAX APPEALS, respondents
FACTS
 March 2, 1973 = Jose Obillos, Sr. completed payment to
Ortigas & Co., Ltd. on two lots located at Greenhills, Rizal.
 The next day he transferred his rights to his four children:
JOSE, SARAH, ROMEO, REMEDIOS (PETITIONERS) to
enable them to build their residences
 1974 = PETITIONERS resold the lots to the Walled City
Securities Corporation and Olga Cruz Canda.
 They derived from the sale a total profit of P134, 341.88
or P33,584 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.
 April 1980 = CIR required the 4 PETITIONERS to
pay corporate income tax on the total profit of P134,336
in addition to individual income tax on their shares
thereof.
 Thus, the petitioners are being 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
 CIR acted on the theory that the 4 PETITIONERS had
formed an unregistered partnership or joint venture
within the meaning of sections 24(a) and 84(b) of the Tax
Code
 The petitioners contested the assessments. Two Judges of
the Tax Court sustained the same. Hence, the instant
appeal.
ISSUE
WON the 4 Petitioners formed a partnership or joint venture
(NO, thus they are not liable for corporate income tax)
RULING
 We hold that it is ERROR to consider the petitioners as
having formed a partnership under article 1767 of the
Civil Code simply because they allegedly contributed 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. That eventuality 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. The assessments are cancelled. No costs. SO
ORDERED
(INCOME TAX ON CORPORATIONS)
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs. THE COMMISSIONER OF INTERNAL REVENUE and COURT
OF TAX APPEALS, respondents
FACTS
 June 22, 1965 MARIANO P. PASCUAL and RENATO P.
DRAGON bought 2 parcels of land from Santiago
Bernardino, et al and on May 28, 1966, they bought
another 3 parcels of land from Juan Roque
 Subsequently, Mariano and Renato sold the first 2 lots to
Marenir Development Corp. while the 3 parcels of land
were sold to Erlinda Reyes and Maria Samson.
 Mariano and Renato realized a net profit in both sales,
and thereafter paid the corresponding capital gains taxes
by availing of the tax amnesties
 March 31, 1979 = CIR assessed and required Mariano and
Renato to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes
 Mariano and Renato protested the said assessment
asserting that they had availed of tax amnesties
 CIR, in its reply, contends that Mariano and Renato as co-
owners in the real estate transactions formed an
unregistered partnership or joint venture taxable as a
corporation and its income was subject to the taxes
 Mariano and Renato filed a petition for review with the
CTA
 CTA = affirmed the action of the CIR. It ruled based on the
principle enunciated in Evangelista that: an unregistered
partnership was in fact formed by petitioners which like a
corporation was subject to corporate income tax distinct
from that imposed on the partners
ISSUE
WON an unregistered partnership was in fact formed (NO)
RULING
 The sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein
have a joint or common right or interest in the property.
 There must be a clear intent to form a partnership, the
existence of a juridical personality different from the
individual partners, and the freedom of each party to
transfer or assign the whole property
 IN THIS CASE, there is clear evidence of co-ownership
between Mariano and Renato. There is no adequate basis
to support the proposition that they thereby formed an
unregistered partnership
 The two isolated transactions whereby they purchased
properties and sold the same a few years thereafter did
not thereby make them partners
 They shared in the gross profits as co- owners and paid
their capital gains taxes on their net profits and availed of
the tax amnesty thereby
 Under the circumstances, they cannot be considered to
have formed an unregistered partnership which is thereby
liable for corporate income tax
 And even assuming for the sake of argument that such
unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership
with a distinct personality nor with assets that can be held
liable for said deficiency corporate income tax, then
petitioners can be held individually liable as partners for
this unpaid obligation of the partnership
 However, as petitioners have availed of the benefits of tax
amnesty as individual taxpayers in these transactions,
they are thereby relieved of any further tax liability arising
therefrom
WHEREFROM, the petition is hereby GRANTED and the
decision of the respondent Court of Tax Appeals of March 30,
1987 is hereby REVERSED and SET ASIDE and another decision
is hereby rendered relieving petitioners of the corporate
income tax liability in this case, without pronouncement as to
costs. SO ORDERED
(INCOME TAX ON CORPORATIONS)
G.R. No. L-9996           October 15, 1957
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and
FRANCISCA EVANGELISTA, petitioners, vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF
TAX APPEALS, respondents.
FACTS
 Eufemia Evangelista, Manuela Evangelista and Francisca
Evangelista (PETITIONERS) borrowed from their father the
sum of P59,1400.00 to buy real properties
 Feb 2, 1943 = PETITIONERS bought a lot from Mrs.
Josefina Florentino
 April 3, 1944 = PETITIONERS purchased from Mrs. Josefa
Oppus 21 parcels of land
 April 28, 1944 = PETITIONERS purchased a lot from the
Insular Investments Inc.
 April 28, 1944 = PETITIONERS bought a lot from Mrs.
Valentina Afable
 August 16, 1945 = PETITIONERS appointed their brother
Simeon Evangelista to 'manage their properties with full
power to lease; to collect and receive rents; to issue
receipts. And PETITIONERS had the same rented or leases
to various tenants
 September 24, 1954 = CIR demanded from PETITIONERS,
the payment of income tax on corporations, real estate
dealer's fixed tax and corporation residence tax for the
years 1945-1949
 PETITIONERS instituted a case with the CTA to reverse the
decision of the CIR and that they be absolved from the
payment of the taxes
 CTA held petitioners liable for tax. Hence, this appeal.
ISSUE
WON the petitioners are subject to the tax on corporations
(YES)
RULING
 Pursuant to Article 1767 the essential elements of a
partnership are two, namely:
o (a) an agreement to contribute money, property
or industry to a common fund; and
o (b) intent to divide the profits among the
contracting parties
 The first element is undoubtedly present in the case at
bar, for, admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund
 Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for
monetary gain and then divide the same among
themselves, because:
1. common fund was not something they found
already in existence. They created it purposely.
they jointly borrowed to establish common fund.
2. They invested the same, not merely not merely in
one transaction, but in a series of transactions. In
other words, one cannot but perceive a character
of habitually peculiar to business transactions
engaged in the purpose of gain
3. The aforesaid lots were not devoted to residential
purposes, or to other personal uses, of petitioners
herein
4. the properties have been under the management
of one person, namely Simeon Evangelista. Thus,
the affairs relative to said properties have been
handled as if the same belonged to a corporation
or business and enterprise operated for profit
5. The foregoing conditions have existed for 15 years
and over 12 years, since Simeon Evangelista
became the manager
6. No evidence either on their purpose in creating
the set up already adverted to, or on the causes
for its continued existence
 Also, petitioners’ argument that their being mere co-
owners did not create a separate legal entity was rejected
because, according to the Court, the tax in question is one
imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships".
 When the NIRC includes "partnerships" among the
entities subject to the tax on "corporations", said Code
must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the
 term

 The qualifying expression found in Section 24 and 84(b)

clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in conformity
with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes
of the tax on corporations

 Accordingly, the lawmaker could not have regarded that

personality as a condition essential to the existence of the
partnerships therein referred to

 For purposes of the tax on corporations, NIRC includes

these partnerships - with the exception only of duly
registered general co partnerships - within the purview of
the term "corporation."

 It is, therefore, clear that petitioners herein constitute a

partnership, insofar as said Code is concerned and are
subject to the income tax for corporations

**Residence of tax for corporations**

 As regards the residence of tax for corporations (Section 2

of CA No. 465), it is analogous to that of section 24 and 84
(b) of the NIRC. It is apparent that the terms "corporation"
and "partnership" are used in both statutes with
substantially the same meaning. Consequently,
petitioners are subject, also, to the residence tax for
corporations.

**Real Estate Dealer’s tax**

 Finally, on the issues of being liable for real estate dealer’s

tax, they are also liable for the same because the records
show that they have habitually engaged in leasing said
properties whose yearly gross rentals exceeds P3,000.00 a
year.

Wherefore, the appealed decision of the Court of Tax appeals

is hereby affirmed with costs against the petitioners herein. It
is so ordered.
(INCOME TAX ON CORPORATIONS)
G.R. No. L-19342 May 25, 1972
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely:
RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B.
OÑA and LORENZO B. OÑA, JR., petitioners, vs. THE
COMMISSIONER OF INTERNAL REVENUE, respondent.
FACTS
 Julia Buñales died on March 23, 1944, leaving as heirs her
surviving spouse, Lorenzo T. Oña and her five children
 Lorenzo T. Oña was appointed administrator of the estate,
then later on submitted a project for partition. Thereafter he
was also appointed as Guardian of the 3 heirs who were still
minors.
 The project of partition shows that the heirs have undivided
½ interest in 10 parcels of land, 6 houses and P50,000.00
from the War Damage Commission
 Although the project of partition was approved by the Court
no attempt was made to divide the properties therein listed.
 Instead, the properties remained under the management of
Lorenzo T. Oña who used said properties in business by
leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real
properties and securities
 Every year, petitioners returned for income tax purposes
their shares in the net income derived from said properties
and securities and/or from transactions involving them
 However, petitioners did not actually receive their shares in
the yearly income. The income was always left in the hands
of Lorenzo T. Oña
 CIR decided that petitioners formed an unregistered
partnership and therefore, subject to the corporate income
tax. Accordingly, he assessed against the petitioners the
amounts of P8,092.00 and P13,899.00 as corporate income
taxes for 1955 and 1956, respectively.
ISSUE
WON the petitioners formed an unregistered partnership (YES,
thus they are subject to corporate tax)
RULING
 It is but logical that in cases of inheritance, there should be a
period when the heirs can be considered as co-owners
rather than unregistered co-partners within the
contemplation of our corporate tax laws aforementioned.
 Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to
all the heirs, obviously, without them becoming thereby
unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the
inheritance is actually and physically distributed among the
heirs, for it is easily conceivable that after knowing their
respective shares in the partition, they might decide to
continue holding said shares under the common
management of the administrator or executor or of anyone
chosen by them and engage in business on that basis
 It is true that in Evangelista vs. Collector, 102 Phil. 140, it was
stated, among the reasons for holding the appellants therein
to be unregistered co-partners for tax purposes, that their
common fund "was not something they found already in
existence" and that "it was not a property inherited by
them pro indiviso,"
 BUT it is certainly far fetched to argue therefrom, as
petitioners are doing here, that ergo, in all instances where
an inheritance is not actually divided, there can be no
unregistered co-partnership
 As already indicated, 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
 The reason for this is simple. 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, and,
accordingly he becomes liable individually for all taxes in
connection therewith
 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 thereby in proportion
to his share, there can be no doubt that, even if no
document or instrument were executed for the purpose, for
tax purposes, at least, an unregistered partnership is formed

o This is exactly what happened to petitioners in this

case

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of

Tax Appeals appealed from is affirm with costs against
petitioners.
(INCOME TAX ON CORPORATIONS)
REYES VS. COMMISSIONER OF INTERNAL REVENUE
NOS. L-24020-21. JULY 29, 1968.
Facts:
Petitioners, father and son, purchased a lot and building,
entrusted the administration of the building to an
administrator and Petitioners divided equally the income of
operation and maintenance.
Commissioner of Internal Revenue assessed petitioners the
sum of P37,528.00. as income tax, surcharge and compromise
for the years 1951 to 1954,
Thereafter, another assessment was made against petitioners,
this time for back income taxes plus surcharge and
compromise in the total sum of P25,973.75, covering the
years 1955 and 1956.
Matter was taken to CTA, wherein CTA held that applying the
appropriate provisions of the National Internal Revenue Code,
the first of which imposes an income tax on corporations
"organized in, or existing under the laws of the Philippines, no
matter how created or organized but not including duly
registered general co-partnerships (compañias colectivas), x x
x," a term, which according to the second provision cited,
includes partnerships "no matter how created or organized, x
x x," and applying the leading case of Evangelista v. Collector
of Internal Reyenue, sustained the action of respondent
Commissioner of Internal Revenue,
CONTENTION OF PETITIONERS: Evangelista ruling does not
apply;
ISSUE: whether petitioners are subject to the tax on
corporations
RULING: YES.
National Internal Revenue Code, which explicitly provides that
the term corporation "includes partnerships"
In the Evangelista case the following circumstances were
found to exist: a common fund created purposely, the
investment of the same not merely in one transaction but in a
series of transactions, the lots not being devoted to
residential purposes or to other personal purposes, the
properties being under the management of one person with
full power to lease, collect rents, issue receipts, bring suits—
and that all these conditions existed for over 10 years.
In the case at bar, petitioners could claim that this was only
one transaction, that: their intention was to house in that
building acquired by them the respective enterprises and to
effect a division in 10 years. But while the purchase was made
in 1950, as late as 1965, or almost 15 years later, there was no
allegation of such division and the facts show that the building
continued to be leased by other parties with petitioners
dividing equally the income after deducting operational
expenses.
Differences of such slight significance do not call for a
different ruling, they do not suffice to preclude the
applicability of the Evangelista decision.
contention of petitioners in acquiring the Gibbs Building,
established a partnership subject to income tax as a
corporation UNTENABLE.
EXPLANATION WHY (cj): tax in question is one imposed upon
'corporations', which, strictly speaking, are distinct and
different from 'partnerships'. Wben our Internal Revenue
Code includes 'partnerships' among the entities subject to the
tax on 'corporations', said Code must allude, therefore, to
organizations which are not necessarily 'partnerships', in the
technical sense of the term. Thus, for instance, section 24 of
said Code exempts from the aforementioned tax 'duly
registered general partnerships', which constitute precisely
one of the most typical forms of partnerships in this
jurisdiction.
Likewise, as defined in section 84 (b) of said Code, 'the term
corporation includes partnerships, no matter how created or
organized.' This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the
law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations.
Again, pursuant to said section 84 (b), the term 'corporation'
includes, among others, 'joint accounts, (cuentas en
participacion)' and 'associations', none of which has a legal
personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, 'duly
registered general copartnerships'—which are possessed of
the aforementioned personality—have been expressly
excluded by Iaw(sections24and84[b]) from the connotation of
the term 'corporation'."15 The opinion went on to summarize
the matter aptly:

"For purposes of the tax on corporations, our National

Internal Revenue Code, include these partnerships—with the
exception only of duly registered general copartnerships—
within the purview of the term 'corporation.' It is, therefore,
clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject
to the income tax for corporations."

wherefore, income tax due from the partnership formed by

herein petitioners for the years 1951 to 1954 and P20,-619.00
for the years 1955 and 1956 within thirty days from the date
this decision becomes final, plus the corresponding surcharge
and interest in case of delinquency," is affirmed. With costs
against petitioners.
(INCOME TAX ON DOMESTIC CORPORATIONS AND RESIDENT
FOREIGN CORPORATIONS)
MARUBENI CORPORATION V. CIR, G.R. NO. 76573,
1989
FACTS:
Marubeni Corporation of Japan has equity investments in
AG&P of Manila.
AG&P declared and paid cash dividends to petitioner
(marubeni japan) and withheld 10% final dividend tax.
AG&P directly remitted the cash dividends to petitioner’s
head office in Tokyo, Japan, the 10% final dividend tax in the
amounts of P764,748 and withheld 15% profit remittance tax
based on the remittable amount after deducting the final
withholding tax of 10%.
The 10% final dividend tax and AG&P as withholding agent
paid 15% branch profit remittance on cash dividends declared
and remitted to petitioner at its head office in Tokyo.
Petitioner Marubeni sent a letter to the Commissioner of
Internal Revenue claimed for the refund or issuance of a tax
credit of P229,424.40 “representing profit tax remittance
erroneously paid on the dividends remitted by Atlantic Gulf
and Pacific Co. of Manila
CIR: denied claim for refund. while it is true that said
dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a
Philippine Branch of Marubeni Corporation of Japan; the cash
dividends remitted by AG&P to Marubeni Corporation, Japan
is subject to 25% tax, and that the taxes withheld of 10% as
intercorporate dividend tax and 15% as profit remittance tax
totals (sic) 25%, the amount refundable offsets the liability,
hence, nothing is left to be refunded.”
CTA: denied its claim for refund or tax credit in the amount of
P229,424.40 representing alleged overpayment of branch
profit remittance tax withheld from dividends by Atlantic Gulf
and Pacific Co. of Manila (AG&P).
CONTENTION OF PETITIONER: that following the principal-
agent relationship theory, Marubeni, Japan is likewise a
resident foreign corporation subject only to the 10%
intercorporate final tax on dividends received from a domestic
corporation in accordance with Section 24(c) (1) of the Tax
Code of 1977 which states:
“Dividends received by a domestic or resident foreign
corporation liable to tax under this Code—(1) Shall be subject
to a final tax of 10% on the total amount thereof, which shall
be collected and paid as provided in Sections 53 and 54 of this
Code x x x.”
CONTENTION OF RESPONDENT: Marubeni, Japan, being a
non-resident foreign corporation and not engaged in trade or
business in the Philippines, is subject to tax on income earned
from Philippine sources at the rate of 35% of its gross income
under Section 24 (b) (1) of the same Code which reads:
“(b) Tax on foreign corporations—(1) Nonresident
corporations.—A foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to thirty-five
per cent of the gross income received during each taxable
year from all sources within the Philippines as x x x dividends x
x x.”
but expressly made subject to the special rate of 25% under
Article 10(2) (b) of the Tax Treaty of 1980 concluded between
the Philippines and Japan.
ISSUE: won marubeni is a resident or a non-resident foreign
corporation?
RULING:
Resident foreign corporation defined; Marubeni Corporation is
a resident foreign corporation; Reason.—Under the Tax Code,
a resident foreign corporation is one that is “engaged in
trade or business” within the Philippines.
Petitioner contends - because it is engaged in business in the
Philippines through its Philippine branch that it must be
considered as a resident foreign corporation. the Philippine
branch and the Tokyo head office are one and the same
entity, whoever made the investment in AG&P, Manila does
not matter at all. They are one corporate entity, the Marubeni
Corporation, which, under both Philippine tax and corporate
laws, is a resident foreign corporation because it is transacting
business in the Philippines.
COURT HELD THAT: the alleged overpaid taxes were incurred
for the remittance of dividend income to the head office in
Japan which is a separate and distinct income taxpayer from
the branch in the Philippines. the investment (totalling
283,260 shares including that of nominee) was made for
purposes peculiarly germane to the conduct of the corporate
affairs of Marubeni, Japan, but certainly not of the branch in
the Philippines. It is thus clear that petitioner, having made
this independent investment attributable only to the head
office, cannot now claim the increments as ordinary
consequences of its trade or business in the Philippines and
avail itself of the lower tax rate of 10%
However, a discounted rate of 15% is given to petitioner on
dividends received from a domestic corporation (AG&P) on
the condition that its domicile state (Japan) extends in favor
of petitioner, a tax credit of not less than 20% of the dividends
received. This 20% represents the difference between the
regular tax of 35% on non-resident foreign corporations which
petitioner would have ordinarily paid, and the 15% special
rate on dividends received from a domestic corporation.

Tax refund; While public respondents correctly concluded that
dividends in dispute were neither subject to the 15% profit
remittance tax nor to the 10% intercorporate dividend tax,
they grossly erred in holding that no refund was forthcoming
to the petitioner; Reason.—because the taxes thus withheld
totalled the 25% rate imposed by the Philippine- Japan Tax
Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25% tax rate is
to disregard a basic rule that each tax has a different basis;
While the tax on dividends is directly levied on the dividends
received, “the tax base upon which the 15% branch profit
remittance tax is imposed is the profit actually remitted
abroad.”
Same; Tax Remedies; Court of Tax Appeals; The instant appeal
was perfected within the 30-day period provided under R.A.
1125; Reasons.— Records show that petitioner received
notice of the Court of Tax Appeals’s decision denying its claim
for refund on April 15, 1986. On the 30th day, or on May 15,
1986 (the last day for appeal), petitioner filed a motion for
reconsideration which respondent court subsequently denied
on November 17, 1986, and notice of which was received by
petitioner on November 26, 1986. Two days later, or on
November 28, 1986, petitioner simultaneously filed a notice
of appeal with the Court of Tax Appeals and a petition for
review with the Supreme Court. From the foregoing, it is
evident that the instant appeal was perfected well within the
30-day period provided under R.A. No. 1125, the whole 30-
day period to appeal having begun to run again from notice of
the denial of petitioner’s motion for reconsideration.

Same; Tax Treaty; Public respondent erred in automatically

imposing the 25% rate under Article 10 (2) (b) of the Tax
Treaty; Reasons A closer look at the Treaty reveals that the
tax rates fixed by Article 10 are the maximum rates as
reflected in the phrase “shall not exceed.” This means that
any tax imposable by the contracting state concerned should
not exceed the 25% limitation and that said rate would apply
only if the tax imposed by our laws exceeds the same. In other
words, by reason of our bilateral negotiations with Japan, we
have agreed to have our right to tax limited to a certain
extent to attain the goals set forth in the Treaty.

Same; Petitioner being a non-resident foreign corporation

with respect to the transaction in question, as a general rule is
taxed 35% of its gross income from all sources within the
Philippines.—Petitioner, being a non- resident foreign
corporation with respect to the transaction in question, the
applicable provision of the Tax Code is Section 24 (b) (1) (iii)
in conjunction with the Philippine-Japan Treaty of 1980. xxx
Proceeding to apply the above section to the case at bar,
petitioner, being a non-resident foreign corporation, as a
general rule, is taxed 35% of its gross income from all sources
within the Philippines. [Section 24 (b) (1)].
(INCOME TAX ON DOMESTIC CORPORATIONS AND RESIDENT
FOREIGN CORPORATIONS)
BANK OF AMERICA NT & SA VS. COURT OF APPEALS
FACTS:
“Petitioner is a foreign corporation duly licensed to engage in
business in the Philippines with Philippine branch office.
In 1982 it paid 15% branch profit remittance tax in the
amount of P7,538,460.72 on profit from its regular banking
unit operations and P445,790.25 on profit from its foreign
currency deposit unit operations or a total of P7,984,250.97.
The tax was based on net profits after income tax without
deducting the amount corresponding to the 15% tax.
“Petitioner filed a claim for refund with the BIR of that portion
of the payment which corresponds to the 15% branch profit
remittance tax, on the ground that the tax should have been
computed on the basis of profits actually remitted, which is
P45,244,088.85, and not on the amount before profit
remittance tax, which is P53,228,339.82.
CTA: upheld petitioner bank in its claim for refund.
ISSUE: WON the 15% branch profit remittance tax on the basis
Section 24(b) (2) (ii) of the National Internal Revenue Code
should be assessed on the amount actually remitted abroad.
(NO)
RULING: NO.
There is absolutely nothing in Section 24(b) (2) (ii), supra,
which indicates that the 15% tax on branch profit remittance
is on the total amount of profit to be remitted abroad which
shall be collected and paid in accordance with the tax
withholding device provided in Sections 53 and 54 of the Tax
Code.
The term "any profit remitted abroad" can only mean such
profit as is "forwarded, sent, or transmitted abroad" as the
word "remitted" is commonly and popularly accepted and
understood.
Withholding Tax System-—The Solicitor General correctly
points out that almost invariably in an ad valorem tax, the
tax paid or withheld is not deducted from the tax base. Such
impositions as the ordinary income tax, estate and gift taxes,
and the value added tax are generally computed in like
manner. In these cases, however, it is so because the law, in
defining the tax base and in providing for tax withholding,
clearly spells it out to be such.
Section 24(b) (2) (ii) of the National Internal Revenue Code, in
the language it was worded in 1982 (the taxable period
relevant to the case at bench), provided, in part, thusly:
“Sec.24. Rates of tax on corporations. x x x
“(b) Tax on foreign corporations. x x x
“(2) (ii) Tax on branch profit and remittances.—
“Any profit remitted abroad by a branch to its head office shall
be subject to a tax of fifteen per cent (15%) x x x.”
The statute employs ‘Any profit remitted abroad by a branch
to its head office shall be subject to a tax of fifteen per cent
(15%)’—without more.
Remittance Tax; The tax is imposed on the amount sent
abroad and the law (then in force) calls for nothing further.—
In the 15% remittance tax, the law specifies its own tax base
to be on the “profit remitted abroad.” There is absolutely
nothing equivocal or uncertain about the language of the
provision. The tax is imposed on the amount sent abroad, and
the law (then in force) calls for nothing further. The taxpayer
is a single entity, and it should be understand-able if, such as
in this case, it is the local branch of the corporation, using its
own local funds, which remits the tax to the Philippine
Government.
Background of the remittance tax.—The remittance tax was
conceived in an attempt to equalize the income tax burden
on foreign corporations maintaining, on the one hand, local
branch offices and organizing, on the other hand, subsidiary
domestic corporations where at least a majority of all the
latter’s shares of stock are owned by such foreign
corporations.
Prior to the amendatory provisions of the Revenue Code, local
branches were made to pay only the usual corporate income
tax of 25%-35% on net income (now a uniform 35%)
applicable to resident foreign corporations (foreign
corporations doing business in the Philippines).
While Philippine subsidiaries of foreign corporations were
subject to the same rate of 25%-35% (now also a uniform
35%) on their net income, dividend payments, however, were
additionally subjected to a 15% (withholding) tax (reduced
conditionally from 35%).

In order to avert what would otherwise appear to be an

unequal tax treatment on such subsidiaries vis-a-vis local
branch offices, a 20%, later reduced to 15%, profit remittance
tax was imposed on local branches on their remittances of
profits abroad. But this is where the tax pari-passu ends
between domestic branches and subsidiaries of foreign
corporations.

Withholding tax system and constructive remittance concept,

explained.—The Solicitor General suggests that the analogy
should extend to the ordinary application of the withholding
tax system and so with the rule on constructive remittance
concept as well. It is difficult to accept the proposition. In the
operation of the withholding tax system, the payee is the
taxpayer, the person on whom the tax is imposed, while the
payor, a separate entity, acts no more than an agent of the
government for the collection of the tax in order to ensure
its payment. Obviously, the amount thereby used to settle the
tax liability is deemed sourced from the proceeds constitutive
of the tax base. Since the payee, not the payor, is the real
taxpayer, the rule on constructive remittance (or receipt) can
be easily rationalized, if not indeed, made clearly manifest.

Concept of constructive remittance not applicable to the

imposition of the 15% remittance tax; Sound logic does not
defy but must concede to facts.—It is hardly the case,
however, in the imposition of the 15% remittance tax where
there is but one taxpayer using its own domestic funds in the
payment of the tax. To say that there is constructive
remittance even of such funds would be stretching far too
much that imaginary rule. Sound logic does not defy but must
concede to facts
(NOTE: TAKEN FROM SCRIBD)
(GROSS PHILIPPINE BILLINGS)
G.R. No. 180356               February 16, 2010
SOUTH AFRICAN AIRWAYS, Petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, Respondent
Summary:
Petitioner paid a tax of PhP1,727,766.38 (2.5% of the Gross
Philippine Billings). Thereafter, believing it was erroneously
paid, it filed a claim for refund. CTA denied the claim for
refund and ruled that while petitioner was not liable to pay
tax on its GPB under Section 28(A)(3)(a) NIRC of 1997,
petitioner is, however, liable to pay a tax of 32% on its income
derived from the sales of passage documents in the
Philippines. (In other words, CTA was off-setting petitioner’s
liability under Sec. 28(A)(1) with its payment of the tax under
Sec. 28(A)(3)(a) a.k.a legal compensation). WON the claim for
refund should be granted, the SC ruled in the negative. It
agreed that petitioner was not liable to pay tax on its GPB
under Section 28(A)(3)(a) NIRC of 1997, and petitioner was
liable to pay a tax of 32% on its income derived from the sales
of passage documents in the Philippines. However, tax cannot
be subject to legal compensation because the government
and taxpayers are not creditors and debtors of each other.
Also, the SC remanded the case to the CTA en banc because
there is a need to make a determination of petitioner’s
liability under Sec. 28(A)(1) to establish whether a tax refund
is forthcoming or that a tax deficiency exists as the tax under
Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based
on taxable income.
Doctrines:
Taxes cannot be subject to compensation for the simple
reason that the government and the taxpayer are not
creditors and debtors of each other. There is a material
distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to
the Government in its sovereign capacity (Philex Mining Corp.
v. CIR).
There can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot
refuse to pay a tax on the ground that the government owes
him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a
lawsuit against the government (Francia v. IAC).
A taxpayer may not offset taxes due from the claims that he
may have against the government. Taxes cannot be the
subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other
and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off (Caltex Philippines, Inc. v.
Commission on Audit).
Facts:
 Petitioner is a foreign corporation organized under the
laws of the Republic of South Africa. It is not licensed to
do business in the Philippines. Petitioner has no landing
rights in the country.
 However, petitioner has a general sales agent in the
Philippines, Aerotel Limited Corporation (Aerotel). Aerotel
sells passage documents for compensation or commission
for petitioner’s off-line flights for the carriage of
passengers and cargo between ports or points outside the
territorial jurisdiction of the Philippines.
 For the taxable year 2000, petitioner filed separate
quarterly and annual income tax returns for its off-line
flights which had a total amount of PhP1,727,766.38
(2.5% of the Gross Philippine Billings or GPB).
 Thereafter, claiming that petitioner erroneously paid the
PhP1,727,766.38 tax on GPB for the taxable year 2000, it
filed a claim for the refund of the said amount with the
Bureau of Internal Revenue.
BIR = BIR did not act upon the claim for refund.
CTA
 Petitioner filed a Petition for Review with the CTA for the
refund. The CTA First Division denied petitioner’s claim for
a refund.
 CTA ruled that:
o Petitioner was not liable to pay tax on its GPB
under Section 28(A)(3)(a)1 of the National
Internal Revenue Code (NIRC) of 1997. However,
petitioner is liable to pay a tax of 32%2 on its
income derived from the sales of passage
documents in the Philippines. (In other words,
CTA was off-setting petitioner’s liability under Sec.
28(A)(1) with its payment of the tax under Sec.
28(A)(3)(a) a.k.a legal compensation).
CTA en Banc
 Petitioner filed a Petition for Review before the CTA En
Banc which was denied.
 MR was also denied. Hence, petitioner went to us.
Issue/s:
1. WON petitioner is subject to the 32% income tax imposed
by Section 28(A)(1) of the 1997 NIRC. (YES)
2. WON the income derived by petitioner from the sale of
passage documents covering petitioner’s off-line flights is
Philippine-source income subject to Philippine income tax.
(YES)
3. WON petitioner is entitled to a refund or a tax credit of
erroneously paid tax on Gross Philippine Billings for the
taxable year 2000 in the amount of P1,727,766.38.5.
(NO)
Ratio:
YES– Petitioner is subject to Income Tax at the Rate of 32% of
its taxable income.
Petitioner argues that with the new definition of GPB, it is no
longer liable under Sec. 28(A)(3)(a). Further, petitioner argues
that because the 2 1/2% tax on GPB is inapplicable to it, it is
thereby excluded from the imposition of any income tax.
 Prior to the 1997 NIRC, GPB referred to revenues from
uplifts anywhere in the world, provided that the passage
documents were sold in the Philippines. In the 1997 NIRC,
GPB is now defined under Sec. 28(A)(3)(a):
o “Gross Philippine Billings” refers to the amount of
gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from
the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and
the place of payment of the ticket or passage
document.”
 Now, as long as the uplifts of passengers and cargo occur
to or from the Philippines, income is included in GPB.
o Petitioner does not maintain flights to or from the
Philippines, it is not taxable under Sec. 28(A)(3)
(a)3 of the 1997 NIRC.
o However, petitioner is taxable under Sec. 28(A)(1)
YES– the income derived by petitioner from the sale of
passage documents covering petitioner’s off-line flights is
Philippine-source income subject to Philippine income tax.
 Off-line air carriers having general sales agents in the
Philippines are engaged in or doing business in the
Philippines and that their income from sales of passage
documents here is income from within the Philippines.
Thus, off-line air carriers are liable for the 32% tax on its
taxable income (Commissioner of Internal Revenue v.
British Overseas Airways Corporation).
o Petitioner is an off-line air carrier with has Aerotel
as its general sales agent in the Philippines. Their
inform from sales of passage document is income
within this country subject to a 32% income tax
NO– The claim for refund cannot be granted.
Petitioner argues that offsetting its payment of the tax under
Sec. 28(A)(3)(a) with their liability under Sec. 28(A)(1) is in the
nature of legal compensation, which cannot be applied under
the circumstances present in this case.
 Art. 1279 of the Civil Code contains the elements of legal
compensation, to wit: “Art. 1279. In order that
compensation may be proper, it is necessary:
(1) That each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money,
or if the things due are consumable, they be of
the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be
any retention or controversy,
commenced by third persons and
communicated in due time to the
debtor.
 Taxes cannot be subject to compensation for the
simple reason that the government and the taxpayer
are not creditors and debtors of each other. There is a
material distinction between a tax and debt. Debts are
due to the Government in its corporate capacity, while
taxes are due to the Government in its sovereign
capacity (Philex Mining Corp. v. CIR).
 There can be no off-setting of taxes against the claims
 that the taxpayer may have against the government. A October 30, 2007 Resolution of the CTA En Banc in CTA
person cannot refuse to pay a tax on the ground that E.B. Case No. 210 are SET ASIDE. The instant case is
the government owes him an amount equal to or REMANDED to the CTA En Banc for further proceedings
greater than the tax being collected. The collection of a and appropriate action, more particularly, the reception
tax cannot await the results of a lawsuit against the of evidence for both parties and the corresponding
government (Francia v. IAC). disposition of CTA E.B. Case No. 210 not otherwise
 A taxpayer may not offset taxes due from the inconsistent with our judgment in this Decision.
claims that he may have against the
government. Taxes cannot be the subject of
compensation because the government and
taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is
not such a debt, demand, contract or
judgment as is allowed to be set-off (Caltex
Philippines, Inc. v. Commission on Audit).

o In this case, petitioner’s argument is correct that

the offsetting of its tax refund with its alleged tax
deficiency is unavailing under Art. 1279 of the
Civil Code.

o Although not liable under Sec. 28(A)(3)(a) of the

1997 NIRC, petitioner is liable under Sec. 28(A)(1),
the correctness of the return filed by petitioner is
now put in doubt. There is a need to make a

o determination of petitioner’s liability under Sec.

28(A)(1) to establish whether a tax refund is
forthcoming or that a tax deficiency exists.

o The tax under Sec. 28(A)(3)(a) is based on GPB,

while Sec. 28(A)(1) is based on taxable income,
that is, gross income less deductions and
exemptions, if any. It cannot be assumed that
petitioner’s liabilities under the two provisions
would be the same.

o The assailed decision fails to mention having

computed for the tax due under Sec. 28(A)(1) and
the records are bereft of any evidence sufficient
to establish petitioner’s taxable income.

o There is a necessity to receive evidence to

establish such amount vis-à- vis the claim for
refund.

o It is only after such amount is established that a

tax refund or deficiency may be correctly
pronounced

Wherefore, the assailed July 19, 2007 Decision and

(NOTE: TAKEN FROM SCRIBD)
(GROSS PHILIPPINE BILLINGS)
G.R. No. 169507 January 11, 2016
AIR CANADA, Petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, Respondent.
FACTS:
Air Canada is a foreign corporation organized and existing
under the laws of Canada. On April 24, 2000, it was granted
an authority to operate as an offline carrier by the Civil
Aeronautics Board, subject to certain conditions, which
authority would expire on April 24, 2005. As an off-line
carrier, Air Canada does not have flights originating from or
coming to the Philippines and does not operate any airplane
in the Philippines.
On July 1, 1999, Air Canada engaged the services of Aerotel
Ltd., Corp. (Aerotel) as its general sales agent in the
Philippines. Aerotel sells Air Canada’s passage documents in
the Philippines.
For the period ranging from the third quarter of 2000 to the
second quarter of 2002, Air Canada, through Aerotel, filed
quarterly and annual income tax returns and paid the
income tax on Gross Philippine Billings in the total amount
of ₱5,185,676.77.
On November 28, 2002, Air Canada filed a written claim for
refund of alleged erroneously paid income taxes amounting
to ₱5,185,676.77 before the Bureau of Internal Revenue
(BIR). It’s basis was found in the revised definition of Gross
Philippine Billings under Section 28(A)(3)(a) of the 1997
National Internal Revenue Code (NIRC)1.
To prevent the running of the prescriptive period, Air
Canada filed a Petition for Review before the Court of Tax
Appeals (CTA).
The CTA denied the petition. It found that Air Canada was
engaged in business in the Philippines through a local agent
that sells airline tickets on its behalf. As such, it held that
while Air Canada was not liable for tax on its Gross
Philippine Billings under Section 28(A)(3), it was
nevertheless liable to pay the 32% corporate income tax on
income derived from the sale of airline tickets within the
Philippines pursuant to Section 28(A)(1). On appeal, the CTA
En Banc affirmed the ruling of the CTA First Division.
ISSUES & HELD:
1) Whether Air Canada is subject to the 2½% tax on
Gross Philippine Billings pursuant to Section 28(A)(3).
NO. Air Canada is not is not liable to tax on Gross Philippine
Billings under Section 28(A)(3). The tax attaches only when
the carriage of persons, excess baggage, cargo, and mail
originated from the Philippines in a continuous and
uninterrupted flight, regardless of where the passage
documents were sold. Not having flights to and from the
Philippines, petitioner is clearly not liable for the Gross
Philippine Billings tax.
2) If not, whether Air Canada is a resident foreign
corporation engaged in trade or business and thus, can be
subject to the regular corporate income tax of 32%
pursuant to Section 28(A)(1);
YES. Petitioner falls within the definition of resident foreign
corporation under Section 28(A)(1)2, thus, it may be subject
to 32% tax on its taxable income.
The Court in Commissioner of Internal Revenue v. British
Overseas Airways Corporation declared British Overseas
Airways Corporation, an international air carrier with no
landing rights in the Philippines, as a resident foreign
corporation engaged in business in the Philippines through
its local sales agent that sold and issued tickets for the
airline company. According to said case, there is no specific
criterion as to what constitutes “doing” or “engaging in” or
“transacting” business. Each case must be judged in the light
of its peculiar environmental circumstances. The term
implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose and
object of the business organization.
An offline carrier is “any foreign air carrier not certificated
by the Civil Aeronautics Board, but who maintains office or
who has designated or appointed agents or employees in
the Philippines, who sells or offers for sale any air
transportation in behalf of said foreign air carrier and/or
others, or negotiate for, or holds itself out by solicitation,
advertisement, or otherwise sells, provides, furnishes,
contracts, or arranges for such transportation.”
Petitioner is undoubtedly “doing business” or “engaged in
trade or business” in the Philippines. In the case at hand,
Aerotel performs acts or works or exercises functions that
are incidental and beneficial to the purpose of petitioner’s
business. The activities of Aerotel bring direct receipts or
profits to petitioner. Further, petitioner was issued by the
Civil Aeronautics Board an authority to operate as an offline
carrier in the Philippines for a period of five years. Petitioner
is, therefore, a resident foreign corporation that is taxable
on its income derived from sources within the Philippines
3) Whether the Republic of the Philippines-Canada
Tax Treaty is enforceable;
YES. While petitioner is taxable as a resident foreign
corporation under Section 28(A)(1) on its taxable income
from sale of airline tickets in the Philippines, it could only be
taxed at a maximum of 1½% of gross revenues, pursuant to
Article VIII of the Republic of the Philippines-Canada Tax
Treaty that applies to petitioner as a “foreign corporation
organized and existing under the laws of Canada.”
The second paragraph of Article VIII states that “profits from
sources within a Contracting State derived by an enterprise
of the other Contracting State from the operation of ships
or aircraft in international traffic may be taxed in the first-
mentioned State but the tax so charged shall not exceed the
lesser of a) one and one-half per cent of the gross revenues
derived from sources in that State; and b) the lowest rate of
Philippine tax imposed on such profits derived by an
enterprise of a third State.”
“By reason of our bilateral negotiations with Canada, we
have agreed to have our right to tax limited to a certain
extent.” Thus, we are bound to extend to a Canadian air
carrier doing business in the Philippines through a local
sales agent the benefit of a lower tax equivalent to 1½% on
business profits derived from sale of international air
transportation.
Our Constitution provides for adherence to the general
principles of international law as part of the law of the land.
The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty
obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties,
and obligations under the treaty must be performed by
them in good faith. More importantly, treaties have the
force and effect of law in this jurisdiction. (Deutsche Bank
AG Manila Branch v. Commissioner of Internal Revenue).
4) Whether the appointment of a local general sales
agent in the Philippines falls under the definition of
“permanent establishment” under Article V(2)(i) of the
Republic of the Philippines-Canada Tax Treaty;
Article V of the Republic of the Philippines-Canada Tax
Treaty defines “permanent establishment” as a “fixed place
of business in which the business of the enterprise is wholly
or partly carried on.” Specifically, Article V(4) of the Republic
of the Philippines-Canada Tax Treaty states that “a person
acting in a Contracting State on behalf of an enterprise of
the other Contracting State shall be deemed to be a
permanent establishment in the first-mentioned State if . . .
he has and habitually exercises in that State an authority to
conclude contracts on behalf of the enterprise, unless his
activities are limited to the purchase of goods or
merchandise for that enterprise.”
Section 3 of The Civil Aeronautics Act of the Philippines,
defines a general sales agent as “a person, not a bonafide
employee of an air carrier, who pursuant to an authority
from an airline, by itself or through an agent, sells or offers
for sale any air transportation, or negotiates for, or holds
himself out by solicitation, advertisement or otherwise as
one who sells, provides, furnishes, contracts or arranges for,
such air transportation.”
Through the appointment of Aerotel as its local sales agent,
petitioner is deemed to have created a “permanent
establishment” in the Philippines as defined under the
Republic of the Philippines-Canada Tax Treaty. Aerotel is a
dependent agent of petitioner pursuant to the terms of the
Passenger General Sales Agency Agreement executed
between the parties. It has the authority or power to
conclude contracts or bind petitioner to contracts entered
into in the Philippines. A third-party liability on contracts of
Aerotel is to petitioner as the principal, and not to Aerotel,
and liability to such third party is enforceable against
petitioner. While Aerotel maintains a certain independence
and its activities may not be devoted wholly to petitioner,
nonetheless, when representing petitioner pursuant to the
Agreement, it must carry out its functions solely for the
benefit of petitioner and according to the latter’s Manual
and written instructions. Aerotel is required to submit its
annual sales plan for petitioner’s approval.
In essence, Aerotel extends to the Philippines the
transportation business of petitioner. It is a conduit or
outlet through which petitioner’s airline tickets are sold.
Under Article VII of the Republic of the Philippines-Canada
Tax Treaty, the “business profits” of an enterprise of a
Contracting State is “taxable only in that State, unless the
enterprise carries on business in the other Contracting State
through a permanent establishment.” Thus, income
attributable to Aerotel or from business activities effected
by petitioner through Aerotel may be taxed in the
Philippines

5) Whether petitioner Air Canada is entitled to the

refund.

NO. As discussed in South African Airways, the grant of a

refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct.
The deficiency assessment, although not yet final, created a
doubt as to and constitutes a challenge against the truth
and accuracy of the facts stated in said return which, by
itself and without unquestionable evidence, cannot be the
basis for the grant of the refund.

In this case, the P5,185,676.77 Gross Philippine Billings tax

paid by petitioner was computed at the rate of 1 ½% of its
gross revenues amounting to P345,711,806.08149 from the
third quarter of 2000 to the second quarter of 2002. It is
quite apparent that the tax imposable under Section 28(A)(l)
of the 1997 NIRC 32% of taxable income, that is, gross
income less deductions will exceed the maximum ceiling of
1 ½% of gross revenues as decreed in Article VIII of the
Republic of the Philippines-Canada Tax Treaty. Hence, no
refund is forthcoming.
(NOTE: TAKEN FROM UST DIGEST)
(INCOME TAX ON NON-RESIDENT FOREIGN CORPORATIONS)
CIR v. Procter & Gamble PMC, 160 SCRA 560, 204 SCRA 377
NOTE: 2 cases. decided in 1988 and on 1991
This is the 1991 case.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax
rate will be applied to dividend remittances to non-resident
corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF the country of domicile of the
foreign stockholder corporation “shall allow” such
foreign corporation a tax credit for “taxes deemed paid
in the Philippines,” applicable against the tax payable to
the domiciliary country by the foreign stockholder
corporation.
FACTS:
rate will be applied to dividend remittances to non-resident
corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF the country of domicile of the
foreign stockholder corporation “shall allow” such foreign
corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation.
However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount
equivalent to 20% points which represents the difference
between the regular 35% dividend tax rate and the reduced
15% tax rate. Thus, the test is if USA “shall allow” P&G USA
a tax credit for ”taxes deemed paid in the Philippines”
applicable against the US taxes of P&G USA, and such tax
credit must reach at least 20 percentage points.
Requirements were met

For the taxable year 1974 ending on 30 June 1974, and the
taxable year 1975 ending 30 June 1975, private respondent
Procter and Gamble Philippine Manufacturing Corporation
("P&G-Phil.") declared dividends payable to its parent
company and sole stockholder, Procter and Gamble Co., Inc.
(USA) ("P&G-USA"), amounting to P24,164,946.30, from
which dividends the amount of P8,457,731.21 representing
the thirty-five percent (35%) withholding tax at source was
deducted. On 5 January 1977, private respondent P&G-Phil.
filed with petitioner Commissioner of Internal Revenue a
claim for refund or tax credit in the amount of
P4,832,989.26 claiming, among other things, that pursuant
to Section 24 (b) (1) of the National Internal Revenue Code
("NITC"), as amended by Presidential Decree No. 369, the
applicable rate of withholding tax on the dividends remitted
was only fifteen percent (15%) (and not thirty-five percent
[35%]) of the dividends. There being no responsive action
on the part of the Commissioner, P&G-Phil., on 13 July
1977, filed a petition for review with public respondent
Court of Tax Appeals ("CTA"). On 31 January 1984, the CTA
rendered a decision ordering petitioner Commissioner to
refund or grant the tax credit in the amount of
P4,832,989.00.

ISSUE:

Whether or not P&G Philippines is entitled to the refund or

tax credit. (YES)

RULING:

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax
(NOTE: TAKEN FROM NET)
(INCOME TAX ON NON-RESIDENT FOREIGN
CORPORATIONS)
FACTS:
Private respondents Wander Philippines, Inc. (wander) is a
domestic corporation organized under Philippine laws. It is
wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss
corporation not engaged in trade for business in the
Philippines.
Wander filed it's witholding tax return for 1975 and 1976 and
remitted to its parent company Glaro dividends from which
35% withholding tax was withheld and paid to the BIR.
In 1977, Wander filed with the Appellate Division of the
Internal Revenue a claim for reimbursement, contending that
it is liable only to 15% withholding tax in accordance with sec.
24 (b) (1) of the Tax code, as amended by PD nos. 369 and
778, and not on the basis of 35% which was withheld ad paid
to and collected by the government. petitioner failed to act on
the said claim for refund, hence Wander filed a petition with
Court of Tax Appeals who in turn ordered to grant a refund
and/or tax credit. CIR's petition for reconsideration was
denied hence the instant petition to the Supreme Court.
ISSUE:
Whether or not Wander is entitled to the preferential rate of
15% withholding tax on dividends declared and to remitted to
its parent corporation.
HELD:
Section 24 (b) (1) of the Tax code, as amended by PD 369 and
778, the law involved in this case, reads:
sec. 1. The first paragraph of subsection (b) of section 24 of
the NIRC, as amended is hreby further amended to read as
follows:
(b) Tax on foreign corporations - (1) Non resident corporation
-- A foreign corporation not engaged in trade or business in
the Philippines, including a foreign life insurance company not
engaged in life insurance business in the Philippines, shall pay
a tax equal to 35% of the gross income received during its
taxable year from all sources within the Philippines, as
interest (except interest on a foreign loans which shall be
subject to 15% tax), dividends, premiums, annuities,
compensation, remuneration for technical services or
otherwise emolument, or other fixed determinable annual,
periodical ot casual gains, profits and income, and capital
gains: xxx Provided, still further that on dividends received
from a domestic corporation liable to tax under this chapter,
the tax shall be 15% of the dividends received, which shall be
collected and paid as provided in sec 53 (d) of this code,
subject to the condition that the country in which the non-
resident foreign corporation is domiciled shall allow a credit
against tax due from the non-resident foreign corporation
taxes deemed to have been paid in the Philippines equivalent
to 20% which represents the difference between the regular
tax (35%) on corporation and the tax (15%) dividends as
provided in this section: xxx."
From the above-quoted provision, the dividends received
from a domestic corporation liable to tax, the tax shall be 15%
of the dividends received, subject to the condition that the
country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to have been
paid in the Philippines equivakent to 20%  which represents
the difference betqween the regular tax (35%) on
corpoorations and the tax (15%) on dividends.
While it may be true that claims for refund construed strictly
against the claimant, nevertheless, the fact that Switzerland
did not impose any tax on the dividends received by Glaro
from  the Philippines should be considered as a full
satisfaction if the given condition. For, as aptly stated by
respondent Court, to deny private respondent the privilege to
withhold only 15% tax provided for under PD No. 369
amending section 24 (b) (1) of the Tax Code, would run
counter to the very spirit and intent of said law and definitely
will adversely affect foreign corporations interest here and
discourage them for investing capital in our country
(NOTE: TAKEN FROM NET)
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
Case Title: CIR vs. Ayala Securities Corp.
G.R. No. L-29485 November 21, 1980
Author: Maranan, Roland D.
Ponente: TEEHANKEE, J.:
DOCTRINE:
It is well settled limitations upon the right of the government
to assess and col-lect taxes will not be presumed in the
absence of clear legislation to the contrary. The existence of a
time limit beyond which the government may recover unpaid
taxes is purely dependent upon some express statutory
provision. It follows that in the absence of express statutory
provision, the right of the government to assess unpaid taxes
is imprescriptible. Since there is no express statutory provision
limiting the right of the Commissioner of Internal Revenue to
assess the tax on unreasonable accumulation of surplus
provided in Section 25 of the Revenue Code, said tax may be
assessed at any time.
Name of the parties:
Petitioner: COMMISSIONER OF INTERNAL REVENUE
Respondent: AYALA SECURITIES CORPORATION and THE
HONORABLE COURT OF TAX AP-PEALS
FACTS:
 Before the Court is petitioner Commissioner of Internal
Revenue's motion for reconsid-eration of the Court's
decision of April 8, 1976 wherein the Court affirmed in
toto the appealed decision of respondent Court of Tax
Appeals;
 This Court's decision under reconsideration held that the
assessment made on Febru-ary 21, 1961 by petitioner
against respondent corporation (and received by the
latter on March 22, 1961) in the sum of P758,687.04 on its
surplus of P2,758,442.37 for its fiscal year ending
September 30, 1955 fell under the five-year prescriptive
period provided in section 331 of the National Internal
Revenue Code and that the assessment had, therefore,
been made after the expiration of the said five-year
prescriptive period and was of no binding force and effect;
 Petitioner has urged that a perusal of Sections 331 and
332(a) will reveal that they refer to a tax, the basis of
which is required by law to be reported in a return such as
for example, income tax or sales tax. However, the surtax
imposed by Section 25 of the Tax Code is not one such
tax. Accumulated surplus are never returned for tax
purposes, as there is no law requiring that such surplus be
reported in a return for pur-poses of the 25% surtax;
 In fact, taxpayers resort to all means and devices to cover
up the fact that they have unreasonably accumulated
surplus.
Contentions of the Petitioner (CIR):
 Petitioner submits that, as there is no law requiring
taxpayers to file returns of their ac-cumulated surplus, it is
obvious that neither Section 33 nor Section 332(a) of the
Tax Code applies in a case involving the 25% surtax
imposed by Section 25 of the Tax Code. …
 Petitioner cites the Court of Tax Appeals' ruling in the
earlier case of United Equipment & Supply Company vs.
Commissioner of Internal Revenue , the tax court squarely
ruled that the provisions of sections 331 and 332 of the
National Internal Revenue Code for prescriptive periods of
five 5 and ten (10) years after the filing of the return do
not apply to the tax on the taxpayer's unreasonably
accumulated surplus under section 25 of the Tax Code
since no return is required to be filed by law or by
regulation on such unduly ac cumulated surplus on
earnings
o SEC. 331. Period of limitation upon assessment
and collection. — Except as provided in the
succeeding section, internal revenue taxes shall
be as-sessed within five years after the return was
filed, and no proceeding in court without
assessment for the collection of such taxes shall
be begun after the expiration of such period. For
the purpose of this section a return filed before
the last day prescribed by law for the filing
thereof shall be con-sidered as filed on such last
day; Provided, That this limitation shall not apply
to cases already investigated prior to the approval
of this Code.
ISSUE:
Whether the assessment made on Feb 21, 1961 by CIR against
Ayala Securities Corp for its fiscal year ending Sept 30, 1955
has already prescribed and thus invalid and of no binding
effect in view of Sec 331 and Sec 332 - NO
Ruling+Ratio:
Obviously, Section 331 applies to, assessment of National
Internal Revenue Taxes which requires the filing of returns. A
return, the filing of which is necessary to start the running of
tile five-year period for making an assessment, must be one
which is required for the par-ticular tax. Consequently, it has
been held that the filing of an income tax return does not
start the running of the statute of limitation for assessment of
the sales tax. (Butuan Sawmill, Inc. v. Court of Tax Appeals,
G.R. No. L-20601, Feb. 28, 1966, 16 SCRA 277).
Although petitioner filed an income tax return, no return was
filed covering its surplus profits which were improperly
accumulated. In fact, no return could have been filed, and the
law could not possibly require, for obvious reasons, the filing
of a return covering unreason-able accumulation of corporate
surplus profits. A tax imposed upon unreasonable accu-
mulation of surplus is in the nature of a penalty. (Helvering v.
National Grocery Co., 304 U.S. 282). It would not be proper for
the law to compel a corporation to report improper accu-
mulation of surplus. Accordingly, Section 331 limiting the right
to assess internal revenue taxes within five years from the
date the return was filed or was due does not apply.
Neither does Section 332 apply. Said Section provides:
SEC. 332 Exceptions as to period of limitation of assessment
and collection of taxes.—
(a) In the case of a false or fraudulent return with intent to
evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such
tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud, or omission.
(b) Where before the expiration of the time prescribed in the
preceding section for the assessment of the tax, both the
Commissioner of Internal Revenue and the taxpayer have
consented in writing to its assessment after such time, the tax
may be assessed at any time prior to the expiration of the
period agreed upon. The period so agreed upon may be
extended by subsequent agreements in writing made before
the expiration of the period previously agreed upon.
(c) Where the assessment of any internal revenue tax has
been made within the period of limitation above-prescribed
such tax may be collected by distraint or levy by a proceed-ing
in court, but only if begun (1) within five years after the
assessment of the tax, or (2) prior to the expiration of any
period for collection agreed upon in writing by the Commis-
sioner of Internal Revenue and the taxpayer before the
expiration of such five-year period. The period so agreed upon
may be extended by subsequent agreements in writing made
before the expiration of the period previously agreed upon.
It will be noted that Section 332 has reference to national
internal revenue taxes which require the filing of returns. This
is implied, from the provision that the ten-year period for
assessment specified therein treats of the filing of a false or
fraudulent return or of a failure to file a return. There can be
no failure or omission to file a return where no return is
required to be filed by law or by regulation. It is, therefore,
our opinion that the ten-year period for making in assessment
under Section 332 does not apply to internal revenue taxes
which do not require the filing of a return.
It is well settled limitations upon the right of the government
to assess and collect taxes will not be presumed in the
absence of clear legislation to the contrary. The existence of a
time limit beyond which the government may recover unpaid
taxes is purely dependent upon some express statutory
provision, (51 Am. Jur. 867; 10 Mertens Law of Federal
Income Taxation, par. 57. 02.). It follows that in the absence
of express statutory provision, the right of the government to
assess unpaid taxes is imprescriptible. Since there is no
express stat-utory provision limiting the right of the
Commissioner of Internal Revenue to assess the tax on
unreasonable accumulation of surplus provided in Section 25
of the Revenue Code, said tax may be assessed at any time.
(Emphasis supplied)
Such ruling was in effect upheld by this Court en banc upon its
dismissal of the taxpayer's appeal for lack of merit as above
stated.
The Court is persuaded by the fundamental principle invoked
by petitioner that limitations upon the right of the
government to assess and collect taxes will not be presumed
in the absence of clear legislation to the contrary and that
where the government has not by express statutory provision
provided a limitation upon its right to assess unpaid taxes,
such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its decision
under reconsideration that the right to assess and collect the
assessment in question had prescribed after five years, and in-
stead rules that there is no such time limit on the right of the
Commissioner of Internal Rev-enue to assess the 25% tax on
unreasonably accumulated surplus provided in section 25 of
the Tax Code, since there is no express statutory provision
limiting such right or providing for its prescription. The
underlying purpose of the additional tax in question on a
corpora-tion's improperly accumulated profits or surplus is as
set forth in the text of section 25 of the Tax Code itself to
avoid the situation where a corporation unduly retains its
surplus instead of declaring and paving dividends to its
shareholders or members who would then have to pay the
income tax due on such dividends received by them.
Petitioner commissioner's plausible alternative contention is
that even if the 25% surtax were to be deemed subject to
prescription, computed from the filing of the income tax
return in 1955, the intent to evade payment of the surtax is an
inherent quality of the violation and the return filed must
necessarily partake of a false and/or fraudulent character
which would make applicable the 10-year prescriptive period
provided in section 332(a) of the Tax Code and since the
assessment was made in 1961 (the sixth year), the assessment
was clearly within the 10-year prescriptive period. The Court
sees no necessity, however, for ruling on this point in view of
its adherence to the ruling in the earlier raise of United Equip-
ment & Supply Co., supra, holding that the 25% surtax is not
subject to any statutory pre-scriptive period.

DISPOSITIVE PORTION: ACCORDINGLY, the Court's decision of

April 8, 1976 is set aside and in lieu thereof, judgment is
hereby rendered ordering respondent corporation to pay the
assessment in the sum of P758,687.04 as 25% surtax on its
unreasonably accumulated sur-plus, plus the 5% surcharge
and 1% monthly interest thereon, pursuant to section 51 (e)
of the National Internal Revenue Code, as amended by R. A.
2343.